Appeals Nos
34 to 36 of 1962
Appeals from the judgment and order dated March 25 1958 of the Madras High Court in Case Referred No 12 of 1954
K N Rajagopal Sastri and R N Sachthey for the appellant
R Gopalakrishnan for the respondent
March 26
The judgment of the Court was delivered by HIDAYATULLAH J
The High Court of Madras in a Reference under s66 1 of the Indian Income Tax Act answered in the negative the following question Whether there was material for the Appellate Tribunal to hold that the income arising to Mrs CM Kothari and Mrs D C Kothari from the property arose indirectly out of the 533 assests transferred indirectly by their husbands so as to attract the provisions of s16 3aiii
 In our opinion these appeals by the Commissioner of Income tax
 Madras must be allowed
Messrs Kothari and Sons is a firm of stock brokers
In 1947 the firm consisted of CM Kothari and his two sons D C Kothari and H C Kothari Their respective shares were 6  5  5
On October 7 1947 the firm entered into an agreement for the purchase of a house in Sterling Road Madras for Rs90000 and the same day paid an advance of s5000
This sum was debited in the books of the firm to the accountsof the three partners as follows C M Kothari Rs1800 D C Kothari Rs1600 H C Kothari Rs1600 Total
Rs5000 The transaction was completed on October 24 1947
The sale deed however was taken in the names of Mrs CM Kothari Mrs DC Kothari and HC Kothari
The balance of the consideration was paid to the vendors by the firm
Each of the two ladies paid to the firm a cheque of Rs28333 5 4
Mrs CM Kothari further paid a cheque of Rs 1800 and Mrs DC Kothari paid another cheque of Rs 1600 Thus the two ladies paid one third share of Rs85000 and the amounts which were respectively paid by their husbands as part of the earnest money
HC Kothari was debited with a further sum of Rs283335 4
In this way Mrs C M Kothari pad Rs200 more than the other two because her husband had previously paid Rs200 more than his sons
The share of the three vendees was however Shown to be one third each
534 The ladies issued the cheques on their accounts into which were paid by the firm certain amounts by cheques
Into Mrs CM Kothari s account was paid an amount of Rs27000 which was debited on October 24 1947 to DC Kothari
It was stated to be a birthday gift by him to his mother
On November 13 1947 another amount of Rs 3000 was paid into Mrs C M Kothari s account which was debited to the account of D C Kothari as a gift by him to his mother for Dewali
Similarly on November 13 1947 Mrs D C Kothari s account with the bank was credited with a sum of Rs30000 by a cheque issued by the firm
This was debited to the account of C M Kothari and was shown as a gift by him to his daughter in law
In this way both the ladies received from the firm Rs 30000 which was the exact one third share of the consideration of Rs90000 but the amount was not paid by their respective husbands but by the son in one case and the father in law in the other
In the assessment years 1948 49 1950 51 and 1951 1952 the Income Tax Officer assessed the incomefrom the one third share of the house received by Mrs CMKothari as the income of her husband
Similarlyin the four assessment years 1948 49 to 1951 52 the income of Mrs D C Kothari from this house was assessed as the income of her husband
This was on the ground that because of the interchange of the money in the family either the purchases were made by the donors benami in the names of the donees or alternatively from assets transferred indirectly by the husband to the wife in each case
The Income Tax Officer pointed out that the birthday of Mrs C M Kothari had taken place earlier in the year and there was no occasion to give a birthday present to her several months later and on a date coinciding with the purchase of this property
The Income Tax Officer also found that in the past the father in law bad never given 535 such a big present to his daughter in law on Dewali and this time there was no special circumstance to justify it
The appeals of the assessee to the appellate Assistant Commissioner failed as also those filed before the Tribunal
The Tribunal however did not hold that the transaction was benami but confirmed the other finding that the two ladies bad acquired their share in the house out of assets of the husbands indirectly transferred to them
The Tribunal how ever stated a case for the opinion of the High Court and the High Court answered the question in the negative
As the question whether the two transactions were benami does not fall to be considered the only question that survives is whether this case is covered Sy s16 3 a iii
This section reads as follows 163
In computing the total income of any individual for the purpose of assessment there shall be included aSo much of the income of a wife of such individual as arises directly or indirectly iiiFrom assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart The section takes into account not only transference of assets made directly but also made indirectly
It is impossible to state here what sorts are covered by the word indirectly  because such transfers may be made in different ways
It is argued that the first requisite of the section is that the assets must be those of the husband and 536 that is not the case here
It is true that the section says that the assets must be those of the husband but it does not mean that the same assets should reach the wife
It may be that the assets in the course of being transferred may be changed deliberately into assets of a like value of another person as has happened in the present case
A chain of transfers if not comprehended by the word Indirectly  would easily defeat the object of the law which is to tax the income of the wife in the hands of the husband if the income of the wife arises to her from assets transferred by the husband
The present case is an admirable instance of how indirect transfers can be made by substituting the assets of another person who has benefited to the same or nearly the same extent from assests transferred to him by the husband
It is next contended that even if chain transactions be included then unless there is consideration for the transfer by the husband each transfer must be regarded as independent and in the present case the Department has not proved that the transfers by the son to the mother and by the father in law to his daughter in law were made as consideration for each other
We do not agree
It is not necessary that there should be consideration in the technical sense
If the two transfers are inter connected and are parts of the same transaction in such a way that it can be said that the circuitous method has been adopted as a device to evade implications of this section the case will fall within the section
In this case the device is palpable and the two transfers are so intimately connected that they cannot but be regarded as parts of single transaction
It has not been successfully explained why the father in law made such a big gift to his daughter in law on the occasion of Diwali and why the son made a belated gift equally big to his mother on the occasion of her birthday which took place several months before
These two gifts match each other as regards the amount The 537 High Court overlooked the clear implication of these fact as also the Implication of the fact that though the three purchasers were to get one third share each Mrs C M Kothari paid Rs 200 more than the other two and that each of the ladies re paid the share of earnest money borne by their respective husbands
An intimate connection between the two transactions which were primafacie separate is thus clearly established and they attract the words of the section namely transferred directly or indirectly to the wife
In our opinion the High Court was in error in ignoring these pertinent matters
The High Court also overlooked the fact that the purchase of the house at first was intended to be in the names of three partners of the firm
No evidence was tendered why there was a sudden change
It is difficult to see why the ladies were named as the vendees if they did not have sufficient funds of their own
They could only buy the property if some one gave them the money
It is reasonable to infer from the facts that before the respective husbands paid the amounts they looked up the law and found that the income of the property would still be regarded as their own income if they transferred any assets to their wives
They hit upon the expedient that the son should transfer the assets to his mother and the father in law to the daughterin law obviously failing to appreciate that the word indirectly  is meant to cover such tricks
The appeals must therefore succeed
The answer of the High Court is vacated and the question answered in the affirmative
The respondent shall bear the costs of these appeals as also the costs in the High Court
One hearing fee


Summary:
Messrs Kotbari and Sons is a firm of stock brokers
The firm consisted of Shri C M Kothari and his two sons Shri D C Kothari and Shri H C Kothari
The firm entered into an agreement for the purchase of a house and the earnest money was paid by it
Later on the house was bought in the name of Mrs C M Kothari Mrs D C Kothari and Shri H C Kotliari
The house was bought for Rs 90000 and both Mrs C M Kothari and Mrs D C Kothari received Rs 30000 each from the firm
In the case of Mrs C M Kothari she got that amount in the form of birthday gift and Diwali gift from her son D C Kothari
Mrs D C Kothari also received Rs 30000 from the firm as a gift from Shri C M Kothari her father in law
The Income tax Officer assessed the income of Mrs C M Kothari and Mrs 1
C Kotliari from the said house as the income of their husbands
The appeals of the assessees were dismissed by the Appellate Assistant Commissioner and the Tribunal
The Tribunal confirmed the finding of the Income Tax Officer that the two ladies had acquired their shares in the house out of the assets of their husbands indirectly transferred to them
However the Tribunal did not hold that the transaction was benami
The Tribunal referred the case to the High Court for opinion whether the income arising to Mrs C M Kotbari and Mrs D C Kothari from the property arose out of the assets transferred indirectly by their husbands so as to attract the provisions of section 16 3 a iii of the Income tax Act 1922The High Court answered the reference in the negative
The Commissioner of Income tax Madras came to this Court in appeal
532 Held that the answer given by the High Court must be set aside and the reference made by the Tribunal must be answered in the affirmative
The object of law is to tax the income of the wife in the hands of the husband if the income of the wife arises to her from assets transferred to her by her husband
In the present case the son transferred the assets to his mother and the father in law transferred his assets to his daughter in law
The term indirectly is intended to cover such tricks
If two transfers are inter connected and are parts of the same transaction in such a way that it can be said that a circuitous method has been adopted as a device to evade the implications of section 16 3 a iii the case will fall within this section
In the present case the device is palpable and the two transferrers are so intimately connected that they cannot but be regarded as a part of a single transaction
It was not successfully explained why the father in law made a big gift to his daughter in law and the son made an equally big gift to his mother