P. Narendranath vs Commissioner of Income Tax

P. Venkatarama Reddi, J.—On hearing counsel for both the parties, we are of the view that an arguable question of law does arise for consideration of the High Court. The Income Tax Appellate Tribunal refused to refer the question on the ground that the conclusion that the transaction involving the sale of shares by the Hindu undivided family to its karta was not valid and made only with a view to reduce the tax burden further was a question of fact and inference was drawn on the basis of the consideration of relevant facts. While disposing of the appeal, the Tribunal having regard to certain circumstances such as the receipt of consideration being deferred and non-charging of interest held that :

"The transaction on hand is shown to have taken place only for the purpose of lightening the tax burden."

So holding, the Tribunal applied the ratio laid down in McDowell and Co. Ltd. Vs. Commercial Tax Officer, and observed as follows :

"Device chosen by the assessee in transferring shares with all possible clumsy conditions, we are of the view, was only with an intention to reduce tax liability. The same is colourable and cannot be approved."

Learned counsel for the petitioner submits that even on the findings recorded by the Tribunal, at best, it would be a tax planning measure and if it is so, it is wrong to describe it as a colourable device and is liable to be ignored. It is also pointed out that the dividend income received by the individual for the transfer was being credited to the Hindu undivided family and it gives an indication of the transaction having been given effect to. It is further pointed that there is no finding to the effect that the transaction was sham or not acted upon.

We are of the view that in the face of the material on record, whether the legal inference drawn by the tribunal is correct and whether the Tribunal is justified in applying the ratio of the decision of the Supreme Court in McDowell and Co. Ltd. Vs. Commercial Tax Officer, is a question of law which is fit to be decided. Accordingly, we direct the tribunal to draw up a statement of case and refer the following question of law for the consideration of this court :

"Whether, on the facts and circumstances of the case, the transaction relating to transfer of shares from the assessee-Hindu undivided family to the karta of the Hindu undivided family is a valid transaction or whether it is liable to be ignored in the light of the principle laid down by the Supreme Court in McDowell and Co. Ltd. Vs. Commercial Tax Officer, as held by the Income Tax Appellate Tribunal ?"

Though the petitioner has sought reference of four questions, the question as framed by us would be comprehensive enough to cover the controversial issue.

The Income Tax case is accordingly allowed. No costs.