Commissioner of Income Tax vs Ramprasad Mehra and Others

Kantawala, C.J.—This is a reference u/s 66(1) of the Indian Income Tax Act, 1922 (hereinafter referred to as " the Act "), at the instance of the revenue.

One Balmukchand has five sons. Two of them are Ramgopal and Ramprasad. The five sons of Balmukchand and a son of one of the sons carry on business in partnership under the name and style of Kishanchand Bros. This firm is registered u/s 26A of the Act. Ramgopal has a minor son, an unmarried minor daughter and a wife and they form a joint Hindu undivided family. So also Ramprasad has a minor son, an unmarried daughter and a wife and they form a joint Hindu undivided family. Both Ramgopal and Ramprasad are possessed of individual and separate properties. By two separate declarations made on March 26, 1959, Ramgopal and Ramprasad declared that 500 fully paid up shares of a limited company by name Messrs. Ramgopal Ramprasad Private Ltd. are thrown into the common hotchpot of the joint Hindu undivided family and from the date of the said declaration the said 500 shares belonged to the joint Hindu undivided families and they shall not have any interest or title therein in their individual capacity. The questions referred to us relate to whether the income of the shares can be assessable in the hands of Ramgopal and Ramprasad either under the provisions of Section 16(1)(c) or Section 16(3)(b) of the Act and whether the two undivided Hindu families of Ramgopal and Ramprasad are entitled to refund of tax deducted at source on the dividend income of the said 500 shares. The two questions framed by the Tribunal are as under :

" 1. Whether, in the facts and circumstances of this case, the income arising from 500 shares of Ramgopal Ramprasad Private Ltd. is assessable in the hands of Ramgopal Mehra and Ramprasad Mehra under the provisions of Section 16(1)(c)or Section 16(3)(b)of the Income Tax Act ?

Whether the two Hindu undivided families of Ramgopal Mehra and Ramprasad Mehra are entitled to the refunds of tax deducted at source on the dividend income in respect of 500 shares of Ramgopal Ramprasad Private Ltd."

When an application for refund was made by the two Hindu undivided families, the same was rejected by the Income Tax Officer as he took the view that the income earned out of the shares was includible in the assessment of Ramgopal and Ramprasad under the provisions of Section 16 of the Act. While assessing these two individuals, Ramgopal and Ramprasad, for Income Tax the Income Tax Officer took the view that the dividend income of these 500 shares was assessable in their hands under the first proviso to Section 16(1)(c) of the Act. Against these orders passed by the Income Tax Officers both the Hindu undivided families as well as the individuals, Ramgopal and Ramprasad, preferred appeals to the Appellate Assistant Commissioner. These appeals were heard by the two Appellate Assistant Commissioners and they were rejected by them. In one of the appeals an alternative finding was given that in any event the dividend income of these 500 shares was includible in the income of these two assessees as individuals under the provisions of Section 16(3)(b). On appeal by the Hindu undivided families and by Ramgopal and Ramprasad the Tribunal allowed the appeals and held that the two Hindu undivided families were entitled to the refund applied for and the income in respect of the 500 shares was not liable to be includible in the income of the two individuals, Ramgopal and Ramprasad, either under the provisions of Section 16(1)(c) or u/s 16(3)(b) of the Act. It is from this order passed by the Tribunal that the two questions are referred for our determination.

For the purpose of this reference it cannot be disputed that if the dividend income of these 500 shares is not assessable in the hands of Ramgopal and Ramprasad under the provisions of either Section 16(1)(c) or Section 16(3)(b) of the Act, then, undoubtedly, the two Hindu undivided families will be entitled to the refund claimed by them. The question whether such income should be included in the income of Ramgopal and Ramprasad either under the provisions of Section 16(1)(c) or Section 16(3)(b) of the Act is concluded by decisions which are binding on us and we, therefore, do not think it necessary to discuss the question in greater detail. Section 16(1)(c) provides as under :

" 16. (1) In computing the total income of an assessee--...

(c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income Tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor :

Provided that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settlor, disponer or transferor a right to reassume power directly or indirectly over the income or assets:...... "

Besides this proviso, there are two other provisos, but it is unnecessary to refer to the same as neither of them is relied upon by counsel for the revenue.

The provisions of this sub-section came up for consideration before the Supreme Court in Commissioner of Income Tax, Punjab, Jammu and Kashmir, Himachal Pradesh, Patiala Vs. Raghbir Singh, The Supreme Court points out that Clause (c) of Section 16(1) was intended, while seeking to protect a genuine settlement by which the taxpayer intends to part with control over property and its income, to circumvent attempts made by him to reduce his liability to pay Income Tax by the expedient of so arranging a settlement or disposition of property that the income does not accrue to him, but he reserves a power over or interest in the property settled or disposed of, or in the income thereof. By Clause (c) income arising to any person by virtue of a settlement or disposition whether revocable or not is deemed to be income of the settlor or disponer if the assets remain the property of the latter. Again, income arising to any person by virtue of a revocable transfer of assets is deemed to be the income of the transferor. The first proviso then deems a settlement statutorily revocable, if it contains any provision for retransfer directly or indirectly of the income or assets settled, to the settlor, or where it gives to the settlor a right to reassume power directly or indirectly over the income or assets.

The declarations respectively made by Ramgopal and Ramprasad consist of only six paragraphs. In the first paragraph he recites that he constitutes a joint Hindu family consisting of himself, his wife, his son and his daughter. The second paragraph states that the members of his family are joint in food and worship. The third paragraph recites that he is individually possessed of 500 shares of the limited company of Messrs. Ramgopal Ramprasad Private Ltd. By paragraph 4 he says that out of the said shares of Messrs. Ramgopal Ramprasad Private Ltd. he on March 26, 1959, gifted 500 fully paid up ordinary shares to the said joint Hindu family. By paragraph 5 he has declared that he has thrown into the common hotchpot of the joint Hindu family the said 500 shares of his own free will and that he shall not have any interest or title thereto in his individual capacity. The sixth paragraph is a formal paragraph stating that the facts in the declaration are true to his own knowledge. A mere reading of this declaration makes it clear that with effect from March 26, 1959, the 500 shares of the limited company ceased to be the property of either Ramgopal or Ramprasad, but they became the property of the respective joint Hindu families of the two brothers. Thus, it cannot be said that the income in this case arose from assets remaining the property of the settlor or disponer. Further, there is nothing in the recitals of the declaration to indicate that the income of those 500 shares or the shares which are thrown into the common hotchpot can be retransferred to him directly or indirectly.

u/s 16(3)(b) so much of the income of any person as arises from assets transferred otherwise than for adequate consideration to the person by such individual for the benefit of his wife or a minor child or both, shall be included in computing the total income of an individual. The provisions of this sub-clause can only be attracted if there is a transfer of the 500 shares within the meaning of this sub-section. Such a question is concluded both by a decision of this court as well as by a decision of the Supreme Court. In Damodar Krishnaji Nirgude v. Commissioner of Income Tax, [1952] 46 ITR 1252 a Division Bench of this court has taken the view that throwing of his self-acquired property into the hotchpot of the family does not amount to any transfer of such property to the assessee''s wife or son. In view of this decision it is not possible to take the view that there is a transfer within the meaning of Section 16(3)(b). Even while interpreting the word " transfer " under the provisions of the Gift-tax Act, 1958, in Goli Eswariah Vs. Commissioner of Gift Tax, Andhra Pradesh, the Supreme Court has taken the view that the unilateral declaration of a Hindu coparcener, whereby he throws his self-acquired property into the common stock of the joint family property, does not amount to a transfer so as to attract the provisions of the Gift-tax Act, 1958.

In view of these decisions, the questions that arise for consideration in the present reference are concluded by the decisions which are binding on us, and we, accordingly, answer the questions as under :

Question No. 1 is answered in the negative.

Question No. 2 is answered in the affirmative.

The revenue shall pay the costs of the assessees.