Commissioner Of Income-Tax, Madras vs C.M. Kothari, Madras (Dead), And After

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 34 to 36 of 1962

Decision Date: 26 March, 1963

Coram: M. Hidayatullah, S.K. Das, A.K. Sarkar

The case titled Commissioner of Income Tax, Madras versus C. M. Kothari, Madras (deceased) and after him, was decided on 26 March 1963 by the Supreme Court of India. The judgment was authored by Justice M. Hidayatullah and the bench comprised Justices M. Hidayatullah, S. K. Das and A. K. Sarkar.

The petitioner in the appeal was the Commissioner of Income Tax, Madras. The respondent was the estate of the late C. M. Kothari of Madras, represented by those succeeding to his rights. The decision was rendered on 26 March 1963. The case is reported in the 1964 All India Reporter at page 331 and in the 1964 Supreme Court Reporter (Second Series) at page 531. It is also cited in D 1965 SC 866 at paragraphs 10 and 11.

The statutory provision involved was Section 16(3)(a)(iii) of the Indian Income‑Tax Act of 1922, which deals with income from property held in the name of a wife and the question of whether income that reaches the wife indirectly from her husband must be treated as part of the husband’s income.

Messrs Kotbari and Sons, a firm of stock‑brokers, consisted of the deceased C. M. Kothari and his two sons, D. C. Kothari and H. C. Kothari. The firm entered into an agreement to purchase a house and paid the earnest money. Subsequently, the house was bought for a total price of ninety thousand rupees in the names of Mrs. C. M. Kothari, Mrs. D. C. Kothari and Shri H. C. Kotliari. Each of the two women received thirty thousand rupees from the firm. The amount received by Mrs. C. M. Kothari was described as a birthday gift and a Diwali present from her son, D. C. Kothari. The amount received by Mrs. D. C. Kothari was described as a gift from her father‑in‑law, Shri C. M. Kothari. The Income‑Tax Officer assessed the amounts received by the two women as income of their husbands. Their appeals against this assessment were dismissed by the Appellate Assistant Commissioner and by the Tribunal. The Tribunal affirmed the officer’s finding that the women had acquired their shares in the house through assets of their husbands that had been indirectly transferred to them, but it did not hold the transaction to be benami. Consequently, the Tribunal referred the matter to the Madras High Court for an opinion on whether the income arising to the two women from the property had arisen out of assets transferred indirectly by their husbands such that Section 16(3)(a)(iii) would apply. The High Court answered the reference in the negative. The Commissioner of Income‑Tax, Madras, then appealed to this Court.

The Court held that the High Court’s answer must be set aside and the Tribunal’s reference must be answered affirmatively. The object of the law is to tax the income of a wife in the hands of the husband when the income to the wife originates from assets transferred to her by her husband.

The Court explained that when a wife’s income is derived from assets that have been transferred to her by her husband, the law treats those assets as if they were still owned by the husband for tax purposes. In the case before the Court, the son transferred assets to his mother and the father‑in‑law transferred assets to his daughter‑in‑law. The word “indirectly” was intended by the statute to cover such arrangements. The Court observed that when two transfers are linked and form parts of a single transaction, and when the overall effect is a circuitous method designed to avoid the operation of section 16 (3) (a) (iii), the transaction falls within that provision. In the present facts, the Court found that the device was clearly evident and that the two transferors were so closely connected that they must be regarded as participants in a single, coordinated transaction. The Court also noted that the parties had not provided a satisfactory explanation for why the father‑in‑law made a substantial gift to his daughter‑in‑law while the son made an equally large gift to his mother.

The judgment recorded that this appeal was filed under civil appellate jurisdiction, identified as Civil Appeals Nos. 34 to 36 of 1962, and arose from the judgment and order dated 25 March 1958 of the Madras High Court in Case Referred No. 12 of 1954. Counsel for the appellant and counsel for the respondent were mentioned. The judgment, delivered on 26 March 1963 by Justice Hidayatullah, noted that the High Court of Madras, in a reference made under section 66 (1) of the Indian Income‑Tax Act, had answered the question in the negative: whether there was material for the Appellate Tribunal to hold that the income accruing to Mrs C. M. Kothari and Mrs D. C. Kothari from the property arose indirectly out of assets transferred indirectly by their husbands so as to attract the provisions of section 16 (3) (a) (iii). The Court concluded that the appeals by the Commissioner of Income‑Tax, Madras, must be allowed. The Court then described the factual background: Messrs Kothari and Sons was a stock‑broking firm in 1947 composed of C. M. Kothari and his two sons, D. C. Kothari and H. C. Kothari, holding shares in the ratio 6 : 5 : 5. On 7 October 1947 the firm entered into an agreement to purchase a house on Sterling Road, Madras, for rupees 90,000, and on that same day paid an advance of rupees 5,000. The advance was debited in the firm’s books to the partners’ accounts as follows: C. M. Kothari – rupees 1,800; D. C. Kothari – rupees 1,600; H. C. Kothari – rupees 1,600, totaling rupees 5,000. The transaction was completed on 24 October 1947, but the sale deed was taken in the names of Mrs C. M. Kothari, Mrs D. C. Kothari and H. C. Kothari. The balance of the consideration was paid to the vendors by the firm. Each of the two ladies issued a cheque of rupees 28,333‑5‑4 to the firm; additionally Mrs C. M. Kothari paid a cheque of rupees 1,800 and Mrs D. C. Kothari paid a cheque of rupees 1,600. Consequently the two ladies each contributed one‑third of the rupees 85,000 purchase price, while the amounts paid by their husbands were accounted for as part of the earnest money. H. C. Kothari’s account was debited accordingly.

In further detail, the firm credited the account of Mrs C M Kothari with a sum of Rs 27,000, which was debited on 24 October 1947 to the account of D C Kothari and described as a birthday gift from him to his mother. Subsequently, on 13 November 1947, an additional amount of Rs 3,000 was credited to Mrs C M Kothari’s account and again debited to D C Kothari’s account, this time presented as a Diwali gift to his mother. On the same day, the firm issued a cheque for Rs 30,000 that was deposited into the bank account of Mrs D C Kothari; this amount was debited to the account of C M Kothari and shown as a gift from him to his daughter‑in‑law. As a result, each of the two women ultimately received Rs 30,000 from the firm, which corresponded exactly to one‑third of the total consideration of Rs 90,000 for the property. However, the source of those funds was not the respective husbands. In one instance the money originated from the son, and in the other it came from the father‑in‑law. Earlier, the advance payment for the purchase had been recorded as Rs 5,000, divided among the three partners as Rs 1,800 to C M Kothari, Rs 1,600 to D C Kothari, and Rs 1,600 to H C Kothari. The remaining balance was paid to the vendors by the firm, after which the two ladies each issued cheques for Rs 28,333‑5‑4 (with Mrs C M Kothari also paying an extra Rs 200 because her husband had previously contributed Rs 200 more than his sons). The share of the three vendees was shown to be one‑third each, and the ladies’ cheques were credited to their accounts in the manner described.

During the assessment years 1948‑49, 1950‑51 and 1951‑52, the Income Tax Officer treated the one‑third share of the house received by Mrs C M Kothari as income belonging to her husband. Likewise, for the four assessment years from 1948‑49 to 1951‑52, the income attributable to Mrs D C Kothari’s share of the house was also assessed as her husband’s income. The officer’s basis for this assessment was the view that, because of the intra‑family transfer of money, either the purchase had been carried out on a benami basis—donors buying in the names of donees—or the assets had been transferred indirectly by the husbands to their wives. The officer further observed that Mrs C M Kothari’s birthday had occurred earlier in the year, rendering the alleged birthday gift given several months later, on the same date as the property purchase, implausible. In addition, the officer noted that the father‑in‑law had never previously presented such a substantial Diwali gift to his daughter‑in‑law, and no special circumstance justified the present in this case. The assessee’s appeals to the appellate Assistant Commissioner and subsequently to the Tribunal were dismissed. Although the Tribunal did not declare the transaction benami, it affirmed the finding that the women acquired their one‑third shares through assets that had been indirectly transferred from their husbands. The Tribunal therefore referred the matter to the High Court for opinion, and the High Court responded negatively to the question of whether the two transactions were benami.

The Court observed that, having determined that the transactions were not benami, the sole remaining issue was whether the present case fell within the ambit of section 16 (3) (a) (iii) of the Income‑Tax Act. The provision states: “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 … as arises directly or indirectly … (iii) from 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 Court noted that the section expressly contemplated both direct and indirect transfers of assets from husband to wife. It further explained that it is impossible to enumerate every situation that the word “indirectly” might encompass, because such transfers can be effected in a variety of manners. One contention advanced before the Court was that, for the first limb of the provision to be satisfied, the assets must be those owned by the husband, and that this condition was not met in the present facts. The Court rejected that view, holding that although the statute refers to assets of the husband, it does not require that the identical assets actually reach the wife. It is possible for the assets, in the course of being transferred, to be transformed into assets of equivalent value belonging to another person, which is precisely what occurred in the case under consideration. The Court stressed that a chain of transfers, if excluded from the meaning of “indirectly,” would frustrate the purpose of the legislation, which is to bring within the tax net any income of the wife that derives from assets transferred by the husband. The present case, the Court said, vividly illustrated how indirect transfers can be orchestrated by substituting the assets of a third party who, in effect, received the same benefit as the wife from the husband’s original assets. The next argument put forward was that, even if such chain transactions were covered, each transfer would have to be considered independent unless there was consideration passing between them, and that the Revenue had not demonstrated any consideration linking the son’s transfer to his mother with the father‑in‑law’s transfer to his daughter‑in‑law. The Court disagreed with that submission. It held that a strict technical requirement of consideration was not essential. When two transfers are closely inter‑connected and form parts of a single orchestrated scheme designed to evade the operation of section 16 (3), the entire arrangement falls within the provision. In the present matter, the Court found the device to be evident; the two gifts were so intimately linked that they could only be regarded as components of one transaction. Finally, the Court noted that no satisfactory explanation had been offered as to why the father‑in‑law chose to make a substantial Diwali gift to his daughter‑in‑law, nor why the son later presented an equally sizable birthday gift to his mother several months after her birthday, thereby reinforcing the conclusion that the transactions were designed to circumvent the statutory provision.

In this case the two gifts were equal in amount, yet the High Court failed to give effect to the obvious implication of that fact. The Court also ignored the implication that, although the three purchasers were each to obtain one‑third of the property, Mrs C M Kothari contributed Rs 200 more than the other two purchasers and that each of the women subsequently repaid the portion of earnest money that had originally been paid by their respective husbands. These circumstances create a close link between the two transactions, which on their face appeared separate, and that link brings the transactions within the language of the statutory provision that bars property “transferred directly or indirectly to the wife.” In the Court’s view the High Court was wrong to disregard these material points. The High Court further overlooked that the house was initially intended to be bought in the names of three partners of the firm, and no evidence was offered to explain the abrupt change in names. It is difficult to understand why the women were named as purchasers if they lacked sufficient personal funds; they could acquire the property only with money supplied by another person. From the facts it is reasonable to infer that, before the husbands made their payments, they examined the law and discovered that the income from the property would still be treated as their own even after transferring assets to their wives. Accordingly they devised a scheme whereby the son transferred assets to his mother and the father‑in‑law transferred assets to his daughter‑in‑law, apparently failing to appreciate that the term “indirectly” was intended to cover such arrangements. Consequently the appeals must succeed. The decision of the High Court is set aside, the question is answered in the affirmative, and the respondent is ordered to pay the costs of these appeals as well as the costs incurred in the High Court, together with a single hearing fee. The appeals are therefore allowed.