Civil Appeal No 2272 of 1966 Appeal from the judgment and order dated January 6 1966 of Calcutta High Court in Income tax Reference No 211 of 1961
section Mitra A section Nambiar R N Sachthey and B D Sharma for the appellant
M C Chagla and P K Chatterjee for the respondents 309 The Judgment of the Court was delivered by Hegde J
This is an appeal by certificate granted by the High Court of Calcutta under section 66A2 of the Indian Income Tax Act 1922 to be hereinafter referred to as the Act against the decision of that Court in a reference under section 66 1 of that Act
The two questions of law referred to the High Court by the tribunal are  1 Whether section 163 of the Act was ultra vires the Central Legislature and 2 Whether on the facts and in the circumstances of the case the income arising to the three minor sons of the assessee by virtue of their admission to the benefits of the partnership of Messrs Ajitmal Kanhaiyalal was rightly included in the total income of the assessee under section 16 3 a iv of the Act
The assessee at whose instance those question were referred did not press for an answer in respect of question No 1
Therefore that question was not dealt with by the High Court
Hence we need not go into that question
The High Court answered the second question in favour of the assessee
The facts necessary for the purpose of deciding the point in dispute as set out in the statement of the case submitted by the tribunal are as follows  The assessee Shri Ajitmal Parekh was a partner of the firma Ms Ajitmal Kanhaiyalal having annas share therein
He continued to be a partner of that firm till July 1 1954 which was the last date of the accounting year of the firm relevant for the assessment year 1955 56
On July 1 1954 the assessee retired from the firm
Thereafter he gifted to each of his four sons Rs 75000 
Out of his four sons three were minors at that time
There was a reconstitution of the firm with effect from July 2 1954 as evidenced by the partnership deed dated July 5 1954
The major son of the assessee became a partner of the reconstituted firm and his minor sons were admitted to the benefits of that partnership in the reconstituted firm
The major son had 2 annas share
His three minor brothers were admitted to the benefits of the partnership each one of them having 2 annas share
In the assessment year 1956 57 the Income tax Officer held that the income arising to the minors by virtue of their admission to the benefits of the partnership came within the purview of section 163 a iv of the Act
He included that income in the total income of the assessee for that year
In appeal the Appellate Assistant Commissioner substantially upheld the order of assessment made by the Income tax Officer but he held that the 2Supe Cl7C 6 310 minors were entitled to only 1 9 pies share in the firm
The assessee took up the matter in appeal to the Income tax Appellate Tribunal
The tribunal upheld the decision of the Appellate Assistant Commissioner
On the facts found by the tribunal the High Court came to the conclusion that answer to question No 2 should be in the negative and in favour of the assessee
The tribunal found that the capital invested by the minors in the firm came from the gift made in their favour by their father the assessee
That finding was not open to question before the High Court nor did the High Court depart from that finding
But on an interpretation of section 163 a iv the High Court opined that the answer to the question must be in favour of the assessee
Section 163 a iv reads In computing the total income of any individual for the purpose of assessment there shall be included a so much of the income of a wife or minor child of such individual as arises directly or indirectly
iv from assets transferred directly or indirectly to the minor child not being a married daughter by such individual otherwise than for adequate consideration
 Before any income of a minor child can be brought within the scope of section 163 iv it must be established that the said income arose directly or indirectly from assets transferred directly or indirectly by its father
There is no dispute that the assessee had transferred to each of his minor sons a sum of Rs 75000 
It may also be that the amount contributed by those minors as their share in the firm came from those amounts
But the question still remains whether it can be said that the income with which we are concerned in this case arises directly or indirectly from the assets transferred by the assessee to those minors
The connection between the gifts mentioned earlier and the income in question is a remote one
The income of the minors arose as a result of their admission to the benefits of the partnership
It is true that they were admitted to the benefits of the partnership because of he contribution made by them
But there is no nexus between the transfer of the assets and the income in question
it cannot be said that that income arose directly or indirectly from the transfer of the assets referred to earlier
Section 163 of the Act created an artificial income
That section must receive strict construction as observed by this Court in Commissioner of Income Tax Gujarat vs Keshavlal Lallubhai Patel1
In our 1 311 judgment before an income can be held to come within the ambit of section 163 it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of his wife or minor children
The connection between the transfer of assets and the income must be proximate
The income in question must arise as a result of the transfer and not in some manner connected with it
VPS Appeal dismissed


Summary:
The assessee was a partner in a firm
On the last day of the accounting year of the firm namely 1st July 1954 he retired from the firm and gifted to each of his four sons Rs 75000
The firm was reconstituted and the first son who was a major became a partner in the firm
The other sons who were minors became entitled to the benefits of the partnership because they invested in the firm the amounts received by them as gifts from their father
In the assessment year 1956 57 the Income tax Officer held that the income arising to the minors by virtue of their admission to the benefits of the partnership came within the purview of section 163 a iv of the Income tax Act 1922 and included that income in the total income of the assessee
The order was confirmed by the Appellate Assistant Commissioner and the Tribunal but the High Court on a reference held in favour of the assessee
In appeal to this Court HELD  The section creates an artificial income and must be construed strictly that is
before an income can be held to come within the ambit of section 163 it must be proved to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of the minor children
The connection between the transfer and the income must be proximate
It must arise as a result of the transfer and not in some manner connected with it
310 H 311 A E In the present case the income of the minors arose as a result of their admission to the benefits of partnershiip and there is no proximate nexus between the transfer and the income
310 G CIT Gujarat vs Keshavlal Lallubhai Patel followed