Commissioner Of Income-Tax, Culcutta vs Keshavlal Lallubhai Patel

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 1022 of 1963

Decision Date: 9 November 1964

Coram: M. Hidayatullah, P.B. Gajendragadkar, K.N. Wanchoo

In the matter titled Commissioner of Income‑Tax, Calcutta v. Keshavlal Lallubhai Patel, decided on 9 November 1964, the Supreme Court of India heard the petition filed by the Commissioner of Income‑Tax, Calcutta against the respondent, Keshavlal Lallubhai Patel. The judgment was authored by Justice M. Hidayatullah and was delivered by a bench comprising Justice M. Hidayatullah, Justice P. B. Gajendragadkar and Justice K. N. Wanchoo. The case is reported in 1965 AIR 1392 and 1965 SCR (2) 139, with later citations including RF 1972 SC2178 (16) and RF 1983 SC 109 (8,12). The operative provision under consideration was Section 16(3) of the Income‑Tax Act, 1922 (11 of 1922).

Until the assessment year 1952‑53, the respondent had been assessed as an individual taxpayer. On 18 April 1951 he executed an affidavit declaring that he was placing all of his self‑acquired property into the common hotchpotch of the Hindu undivided family (HUF) which consisted of himself and his two sons, one adult and one minor. Subsequently, on 12 June 1951 the members of that HUF effected an oral partition, resulting in the transfer of certain properties to the respondent’s wife and to his minor son. For the assessment year 1952‑53 the respondent contended that his tax liability should be computed on the basis that his self‑acquired assets had been converted into joint family property and that the subsequent partition had taken place, thereby seeking relief from the earlier assessment.

The Appellate Tribunal affirmed the decisions of the Income‑Tax Officer and the Assistant Appellate Commissioner, rejecting the respondent’s claim on the ground that the act of throwing self‑acquired property into the HUF hotchpotch followed by partition among HUF members constituted an indirect transfer of property within the meaning of Section 16(3) of the 1922 Income‑Tax Act. Upon a reference, the High Court held that the transactions described did not amount to a direct or indirect transfer as contemplated by Section 16(3)(a)(iii) and (iv) of the Act.

The Supreme Court articulated that two conditions must be satisfied before Section 16(3)(a)(iii) or (iv) can be invoked: first, the assets must be transferred by the husband to his wife or to his minor child; second, such transfer must be either direct or indirect. The Court observed that the term “transfer” appears expressly in Sections 16(3)(a)(iii) and (iv), and a comparison with the language of Section 16(3)(c) shows that “transfer” is employed in a strict sense, not in the broader sense of “including every means by which property may be passed from one to another.” Referring to the precedent Philip John Plasket Thomas v. C.I.T., Calcutta, [1964] 2 S.C.R. 480, the Court noted that although the phrase “directly or indirectly” is intended to capture indirect transfers, a transfer must still exist; the qualifier “indirectly” does not nullify the essential requirement of a transfer. Consequently, even if the act of placing self‑acquired property into the hotchpotch were regarded as a transfer, the subsequent partition of Joint Hindu family property does not constitute a transfer in the strict legal sense, and therefore the provisions of Section 16(3)(a)(iii) and (iv) are not attracted.

The Court observed that family property does not constitute a transfer in the strict sense, and consequently the provisions of section 16(3)(a)(iii) and section 16(3)(a)(iv) were not attracted. The Court referred to the authorities cited in paragraphs 104 A, G and 105 C‑D and distinguished the decision in C.I.T. v. C. M. Kothari, [1964] 2 S.C.R. 531. It approved the earlier rulings in Gutta Radhakrishna v. Gutta Sarasamma, I.L.R. (1951) Mad. 607, M. K. Streman v. C.I.T. Madras, 41 I.T.R. 297 and Jagan Nath v. State of Punjab, (1962) 64 P.L.R. 22, and referred to Potts’ Executors v. Commissioners of Inland Revenue, 32 T.C. 211.

In the present civil appeal, numbered 1022 of 1963, the appellant challenged the judgment and order dated 28 April 1961 of the Gujarat High Court in Income‑Tax Reference No. 16. The appellant was represented by counsel for the revenue, while the respondent, Keshavlal Lallubhai Patel, was represented by counsel for the assessee. The judgment was delivered by Justice Sikri. The appeal arose on a certificate granted by the Gujarat High Court under section 66A(2) of the Indian Income‑Tax Act, 1922, and it concerned the interpretation of sections 16(3)(a)(iii) and 16(3)(a)(iv) of that Act.

The factual background, which the Court found undisputed, involved the assessment of the respondent for the assessment year 1952‑53 (accounting year ending 31 March 1952) as an individual. On 18 April 1951, the assessee executed an affidavit before the Deputy Nazir of the District Court in Ahmedabad, in which he declared that he was throwing all of his self‑acquired properties, as listed in the affidavit, into the common hotchpotch of his Hindu undivided family. The family at that time consisted of the assessee, his wife, and two sons—one adult and one minor. No entries reflecting this act were made in the family books at that stage.

Subsequently, on 12 June 1951, an oral partition of the Hindu undivided family was effected among the members, and entries consistent with that partition were then made in the books. A joint declaration concerning the partition was executed by the assessee, his wife, and the adult son on 26 June 1951 before the District Court. Later, on 5 December 1951, a joint statement was filed before the Revenue Court. Following these declarations, the properties were transferred in accordance with the partition arrangement to the names of the various family members.

For the assessment year 1952‑53, the assessee contended that the assessment should be made on the basis that his self‑acquired property had been converted into joint family property and that the subsequent partition should be taken into account. The Appellate Tribunal upheld the orders of the Income‑Tax Officer and the Assistant Appellate Commissioner, disallowing the assessee’s claim. The Tribunal held that “throwing into the hotchpotch one’s self‑acquired property and a subsequent partition among the members of the Hindu undivided family constitute an indirect transfer of the property within the meaning of section 16(3).”

The Court noted that the Appellate Tribunal, after hearing the assessee, had posed a specific question to the High Court. The question asked whether, given the facts and circumstances of the present case, the act of throwing the applicant’s self‑acquired property into the hotchpotch of the Hindu undivided family and the later partition of that property among the family members amounted to an indirect transfer of property with respect to the wife and the minor son, as defined by Section sixteen three (a) (iii) and (iv) of the Income Tax Act. The High Court answered this question affirmatively in favour of the assessee and, as a consequence, issued a certificate under Section sixty‑six A two of the Act.

Representing the Revenue, the counsel argued that the facts clearly demonstrated an indirect transfer within the meaning of Section sixteen three (a) (iii) and (iv). He emphasized that he did not dispute the authenticity of the transactions. He directed attention to the situation before the affidavit dated April eighteenth, 1951, when the disputed property was owned by the assessee. He then pointed to the situation after the partition, when the same properties were held by the wife and the minor son. According to this argument, those two circumstances indicated that a transfer had taken place, and that the transfer was indirect because the Hindu joint family had been used merely as a conduit through which the assessee moved the properties to his wife and minor son.

The counsel then recited the exact wording of Section sixteen three (a) (iii) and (iv), which provides that, for the purpose of computing an individual’s total income, the income of a wife or minor child must be included when it arises directly or indirectly from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration, or from assets transferred directly or indirectly to a minor child (who is not a married daughter) by the individual otherwise than for adequate consideration.

For the assessee, the opposing counsel contended that no transfer, in the strict sense required by the statute, had occurred. He maintained that because the provision is a taxing one, it must be interpreted narrowly. He argued that neither the act of throwing the self‑acquired property into the hotchpotch nor the subsequent partition of the joint family property could be characterised as a transfer under Section sixteen three (a) (iii) or (iv). He suggested that, had the legislature intended to bring such acts within the ambit of the provision, it would have employed a different term such as “arrangement.” He further observed that, based on the language of Section sixteen three (a) (iii), two conditions must be fulfilled before the provision can apply: first, the assets must be transferred by the husband to the wife; second, the assets must be transferred either directly or indirectly. From these conditions, two questions emerged: whether the word “transfer” is employed in a technical legal sense or in an ordinary popular sense, and what the term “indirectly” is intended to encompass.

The Court then addressed the second sub‑issue, namely the scope of the term “indirectly”. To clarify the meaning of “transfer”, it examined Section 16(1)(c), where the legislature employs the words “settlement”, “disposition” and “transfer”. The statutory phrase “settlement or disposition” is defined to include “any disposition, trust, covenant, agreement or arrangement”. This definition shows that the word “transfer” in that clause is employed in a narrow, technical sense. The Court observed that, had the legislature intended to bring an arrangement or agreement that does not amount to a transfer within the ambit of Section 16(3)(a)(iii), it would have expressly used those words. Accordingly, the Court concluded that “transfer” must be understood in its strict legal sense and not in the broader popular sense of “any possible way of passing property from one person to another”. The Court supported this view by citing its earlier decision in Philip John Plasket Thomas v. Commissioner of Income‑Tax, Calcutta, where it held that Section 16(3) creates an artificial income and therefore must be construed strictly (1964 2 SCR 480). Turning to the phrase “directly or indirectly”, the Court found no doubt that the legislature intended to capture indirect transfers as well. It noted that the case of Commissioner of Income Tax v. C. M. Kothari provides an illustration of an indirect transfer, but emphasized that a transfer of assets must still exist; the adjective “indirectly” does not eliminate the requirement of a transfer. The Court observed that counsel for the assessee relied heavily on the Kothari decision, yet it considered that case distinguishable and not applicable here. In Kothari, the father and his sons wanted to place Rs 30,000 in the hands of their wives to enable the wives to purchase a house share. Rather than gifting the sum directly, they devised a scheme in which the father transferred Rs 30,000 to the daughter‑in‑law and the son transferred Rs 30,000 to the mother. The Court described this arrangement as a palpable device, describing the two reciprocal gifts as an “indirect transfer” under Section 16(3)(a)(iii). It explained that the father used his son as a conduit and the son used his father as a conduit, thereby effecting the transfer. Counsel also cited the phrase “chain of transfers” used by Justice Hidayatullah, who warned that if the word “indirectly” did not cover a chain of transfers, the purpose of the provision—taxing the wife’s income that ultimately derives from the husband's assets—would be defeated. The Court clarified that the context of that remark concerned the reciprocal gifts of Rs 30,000 each, which are transfers in the strict sense. In the present matter, however, the Court found that no such reciprocal gifts or similar chain of transfers existed.

In the matter before the Court, the first question was whether the act of throwing self‑acquired property into a common pool and the subsequent partition of joint Hindu family (JHF) property could be treated as a transfer of assets within the meaning of the statute. The Court first observed that the partition of JHF property, as will be explained later, does not in any event constitute a transfer. The factual record then required an examination of whether any transfer of assets occurred in the strict sense. There exists divergent opinion on whether placing self‑acquired property into a common pool amounts to a transfer. The Court indicated that it need not resolve this controversy for the present case and, for the sake of argument, assumed that such an act could be treated as a transfer. The remaining issue was whether the partition of JHF property itself could be characterised as a transfer. The Court held that it was not a transfer. This view was supported by the decision in Gutta Radhadristnayya v. Gutta Saravamma, where Subba Rao, J., then of the Madras High Court, after reviewing several authorities, concluded that partition is a process by which a joint enjoyment is converted into several individual enjoyments, each co‑sharer already possessing an antecedent title, and therefore no conveyance or conferment of a new title occurs. The Madras High Court reaffirmed this principle in M. K. Stremann v. Commissioner of Income Tax, Madras, interpreting section 16(3)(a)(iv), observing that the mere separation of status does not create a transfer of assets, even though the property formerly held by the coparcenary later becomes held by the separate members as tenants‑in‑common, and that any subsequent partition among those tenants‑in‑common does not amount to a transfer of assets from the body of tenants‑in‑common to the individual tenants. The Punjab High Court reached the same conclusion in Jagan Nath v. State of Punjab. Accordingly, the Court agreed with these authorities that the partition of the joint Hindu family property did not give rise to a transfer of assets within sections 16(3)(a)(iii) and (iv) of the Income‑Tax Act to either the wife or the minor son. Counsel for the respondent, Mr. Rajagopala Sastri, urged that the substance of the transaction should be examined. However, the Court cited Lord Normand’s observation in Potts’ Executors v. Commissioners of Inland Revenue, stating that the Court is not entitled to disregard the actual transaction as mere “machinery” and to consider only the substance or equivalent financial result for taxation purposes, warning that a liberal application of such principles might facilitate tax evasion and reduce the need for parliamentary intervention. In view of the foregoing reasoning, the Court dismissed the appeal, ordered it to be dismissed with costs, and entered a final order of dismissal.

The citation refers to volume three of the Supreme Court Reports, pages sixty‑five to sixty‑eight.