Ratilal Khushaldas Patel vs Commissioner of Income Tax, Gujarat

P.N. Bhagwati, J.—This is a reference u/s 66(1) of the Income Tax Act at the instance of the assessee. The assessee is one Ratilal

Khushaldas Patel, who has been assessed as an individual. The assessment year with which we are concerned is the assessment year 1957-58 for

which the corresponding previous year is the financial year ending 31st March, 1957. Prior to the 1st April, 1958, the assessee was a partner in

the firm of Messrs. Yogendra (P.) and Co. The partnership consisted of the assessee and one other person with three minors admitted to the

benefits of the partnership and it was constituted under a deed of partnership dated 8th April, 1954. The assessee had a five annas share in the

partnership. This share was held by him as an individual, and up to and including the assessment year 1956-57, the assessee was assessed as an

individual in respect of this five annas share. On 1st April, 1956, the assessee got the partnership to transfer a sum of Rs. 25,000 from the account

of the assessee to the account of the Hindu undivided family of the assessee. Entries in connection with the transfer were made in the books of

account of the partnership on 1st April, 1956, and corresponding entries were also similarly made in the books of account of the assessee as an

individual and in the books of account of the Hindu undivided family of the assessee. The assessee also at the same time threw his five annas share

in the partnership into the common hotchpot of the Hindu undivided family and impressed the same with the character of joint family property. On

7th April, 1956, a new deed of partnership was made between the assessee and his other partner in which it was made clear that the assessee held

five annas share in the partnership as representing the Hindu undivided family as from 1st April, 1956, and that as from that date he was a partner

in the partnership as representing the Hindu undivided family. The assessee also made a declaration on 2nd July, 1956, affirming that as from 1st

April, 1956, the Hindu undivided family was the absolute owner of the five annas share held by the assessee in the partnership as also of the

amount of Rs. 25,000 transferred from the account of the assessee to the account of the Hindu undivided family in the books of account of the

partnership. In the course of the assessment of the assessee for the assessment year 1957-58, the Income Tax Officer sought to include the five

annas share standing in the name of the assessee in the partnership in his individual assessment. The assessee contended that the five annas share

was held by him as representing the Hindu undivided family as from 1st April, 1956, and that the income from the partnership in respect of the five

annas share was, therefore, not liable to be included in his individual assessment but could be included only in the assessment of the Hindu

undivided family. The Income Tax Officer took the view that the transfer of the five annas share by the assessee to the Hindu undivided family was

hit by section 16(3) (b) and that the income arising from that share was, therefore, liable to be included in the individual assessment of the assessee.

The Income Tax Officer was also of the view that, in any event, section 16(1) (c) applied, since the partnership was a partnership at will and the

assessee had, therefore, a right to reassume power directly or indirectly over the income of the partnership and that the income arising from the five

annas share was, therefore, includible in the individual assessment of the assessment of the assessee u/s 16(1) (c). The Income Tax Officer

accordingly included the income arising from the five annas share in the partnership in the individual assessment of the assessee. The assessee,

being aggrieved by the order of the Income Tax Officer, carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate

Assistant Commissioner took an entirely erroneous view of the case and held that the assessee had ceased to be a partner and in his place

introduced the Hindu undivided family as a partner in the partnership for the purpose of diverting the legitimate income belonging to him and that

the said alleged change of partner was a sham transaction and that the assessee had, therefore, in his view not ceased to be a partner in the

partnership. The Appellate Assistant Commissioner thought that there was a change so far as the partner was concerned, namely, that the assessee

had ceased to be a partner in the place of the assessee, and this, in the opinion of the Appellate Assistant Commissioner, was a sham transaction

which he was entitled to ignore and, in this view of the matter, he treated the income arising from the five annas share in the partnership as income

belonging to the assessee as an individual. The Appellate Assistant Commissioner accordingly held that this income was rightly included in the

assessable income of the assessee. The assessee thereupon preferred an appeal before the Tribunal. The Tribunal, it appears, completely

overlooked the deed of partnership dated 7th April, 1956, and thought that the first declaration of the intention of the assessee to convert his five

annas share in the partnership into joint family property was made on 2nd July, 1956, when he made the declaration of that date and that such

declaration of intention could not be given a retrospective effect so as to convert the five annas share from his separate and self-acquired property

into joint family property with effect from 1st April, 1956, and that consequently he was a partner in his individual capacity on 1st April, 1956. The

Tribunal took the view that if the assessee was a partner in the partnership in the individual capacity on 1st April, 1956, which was the

commencement of the year of account, the income arising from the five annas share was liable to be regarded as the individual income of the

assessee and could not be treated as the income of the Hindu undivided family. The Tribunal accordingly confirmed, though on different grounds,

the inclusion of the income arising from the five annas share in the partnership in the individual assessment of the assessee. The assessee thereupon

applied to the Tribunal u/s 66(1) for referring to this court the question of law arising out of the order of the Tribunal and, on such application, the

Tribunal referred to us for our opinion the following question of law :

Whether the assessment of five annas share in the firm of Yogendra (P.) and Co., in the hands of the assessee, individual, for the previous year

ended March 31, 1957, is valid ?

We may point out that the Tribunal in the statement of case submitted to this court fairly admitted that there was the deed of partnership dated

7th April, 1956, and that the reference made to the deed of partnership in its order was to that deed of partnership, though it was observed by it in

the order that it was ""drawn up much later"" which was obviously incorrect.

The short question which, therefore, arises for consideration in this reference is whether the income arising from the five annas share standing in

the name of the assessee in the partnership is the income of the assessee as an individual or the income of the Hindu undivided family of the

assessee. Now it is clear that a person can impress his self-acquired or separate property in whole or in part with joint family character. He can

throw it into the hotchpot or blend it with joint family property or by a declaration of clear intention convert it into joint family property. By a clear

expression of intention he can alter the character of self-acquired or separate property into joint family property. This proposition is well-

established and it is not necessary to cite any authority in support of it but if authority were needed, it is to be found in Duggirala Sadasiva Vittal v.

Bolla Rattain, a case which was accepted as laying down the correct law on this point by this court in Keshavlal Lallubhai Patel v. Commissioner

of Income Tax. This being the position, what we have to consider is whether the five annas share which until 31st March, 1956, the assessee held

as his separate property was impressed with the character of joint family property by any unequivocal declaration of intention on the part of the

assessee. It is evident from the deed of partnership dated 7th April, 1956, and the declaration dated 2nd July, 1956, that such unequivocal

declaration of intention was made by the assessee and the five annas share held by the assessee in the partnership was converted into joint family

property from 1st April, 1956. It is no doubt true that even after 1st April, 1956, it was the assessee who continued to be a partner in the

partnership so far as his other partner was concerned but the five annas share which he held thereafter was held by him as representing the Hindu

undivided family and the income arising from that share was the income of the Hindu undivided family. The Tribunal was clearly in error in taking

the view that the declaration dated 2nd July, 1956, was the first declaration of the intention on the part of the assessee to impress his five annas

share with the character of joint family property and that it could not have retrospective effect so as to attribute the character of joint family

property to the five annas share from 1st April, 1956. The Tribunal, as we have pointed out above, completely overlooked the deed of partnership

dated 7th April, 1956, which clearly contained an unequivocal declaration of intention on the part of the assessee to treat the five annas share as

joint family property from 1st April, 1956. We are, therefore, of the view that the five annas share in the partnership standing in the name of the

assessee acquired the character of joint family property from 1st April, 1956, and that the income arising from the said five annas share was the

income of the Hindu undivided family and not the income of the assessee as an individual. We may also point out that even if the even if the five

annas share in the partnership standing in the name of the assessee were regarded as impressed with the character of joint family property from 7th

April, 1956, or even from 2nd July, 1956, the position would be no different, for the income in respect of the said five annas share for the

accounting year 1st April, 1956, to 31st March, 1957, accrued at the close of the year, that is, on 31st March, 1957, and on that date the said five

annas share belonged to the Hindu undivided family and the income arising from it was, therefore, the income of the Hindu undivided family and not

the personal income of the assessee (vide Bhogilal Laherchand v. Commissioner of Income Tax and Ashokbhai Chimanbhai v. Commissioner of

income tax).

But the learned Advocate-General contended that, even if the five annas share in the partnership was impressed by the assessee with the

character of joint family property, it was still hit by section 16(3) (b) and the income arising from the said five annas share was liable to be included

in the individual assessment of the assessee. Section 16(3) (b) is in the following terms :

(3) In computing the total income of any individual for the purpose of assessment, there shall be included.........

(b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to

the person or association by such individual for the benefit of his wife or a minor child or both.

Founded on this section, the contention of the learned Advocate-General was that when the five annas share in the partnership was impressed

by the assessee with the character of joint family property, there was a transfer of the said five annas share by the assessee to the Hindu undivided

family otherwise than for adequate consideration and that, since the assessee''s wife and minor son were members of Hindu undivided family, such

transfer was for the benefit of the assessee''s wife and minor child and the income arising from the said five annas share was, therefore, liable to be

treated as the income of the assessee as an individual. This argument, as we have set out, rested on two limbs. The first limb was that when the

character of the five annas share was altered by the assessee from separate property into joint family property, there was a transfer of the said five

annas share from the assessee to the Hindu undivided family and the second limb was that such transfer was for the benefit of the assessee''s wife

and minor child within the meaning of section 16(3) (b). We shall examine both these limbs of the arguments of the learned Advocate-General.

So far as the first limb of the argument is concerned, it is clear that the contention of the learned Advocate-General is correct. It is supported by

the decision of this court in Keshavlal Lallubhai Patel v. Commissioner of Income Tax. In that case it was held by a Division Bench of this court

consisting of K. T. Desai C.J. (as he then was) and myself that, where an individual voluntarily throws his self-acquired property into the hotchpot

of a Hindu undivided family by expressing his clear intention to convert such property into joint family property, there is a transfer of such property

by the individual to the Hindu family. In taking that view this court did not agree with the decision of the Madras High Court in Stremann v.

Commissioner of Income Tax. We find that the view taken by this court has subsequently been followed by the Bombay High Court in Damodar

Krishnaji Nirgude v. Commissioner of Income Tax. Having regard to the aforesaid decision of this court, it is clear that the learned Advocate-

General is right in his contention that there was a transfer of the five annas share in the partnership by the assessee to the Hindu undivided family

when he impressed it with the character of joint family property.

That takes us to the second limb of the argument of the learned Advocate-General. The learned Advocate-General contended that the transfer

of the five annas share in the partnership by the assessee to the Hindu undivided family was for the benefit of the assessee''s wife and minor son

within the meaning of section 16(3) (b) and income arising from the said five annas share was, therefore, liable to be included in the individual

assessment of the assessee. We cannot agree with this contention of the learned Advocate-General. It is obvious that section 16(3) (b) is a

counter-part of sub-clauses (iii) and (iv) of section 16(3) (a). Where assets are transferred by an assessee directly or indirectly to his wife

otherwise than for adequate consideration or in connection with an agreement to live apart, sub-clause (iii) of section 16(3) (a) applies and the

income arising from the assets directly or indirectly is taxed in the hands of the assessee notwithstanding that in law such income of the wife.

Similarly, where assets are transferred by an assessee directly or indirectly to his minor child, not being a married daughter, otherwise than for

adequate consideration, sub-clause (iv) of section 16(3) (a) is attracted and the income arising directly or indirectly from the assets transferred is

brought to tax in the hands of the assessee, notwithstanding that in law such income is the income of the minor child. But an assessee may not

transfer assets to his wife or minor child directly or indirectly but may transfer them to some other person for the benefit of his wife or minor child

and thus achieve the object by remaining outside the provisions of clauses (iii) and (iv) of section 16(3) (a). Section 16(3) (b), however, says that

the assessee shall even then be liable to pay tax on the income arising from such assets and so much of the income as arises from such assets shall

be includible in the individual assessment. Section 16(3) (b) is intended to hit the transfer of assets by an assessee to another person with a view to

benefiting his wife or minor child as distinguished from such other person. Where a transfer is made by an assessee not for the benefit of the person

to whom the assets are transferred but for the benefit of his wife or minor child so that the person to whom the assets are transferred merely

remains the legal owner of the assets, the benefit of such transfer being really given to the wife or minor child, section 16(3) (b) is called into play

and, in such a case, the income arising from the assets transferred is liable to be included in the individual assessment of the assessee. Where, on

the other hand, a transfer of assets is made and by the transfer benefit is sought to be conferred on the person to whom the assets are transferred,

section 16(3) (b) can have no application. Now u/s 2(9) the expression ""person"", unless there is anything repugunant to the subject or context,

includes a Hindu undivided family otherwise than for adequate consideration, the first part of section 16(3) (b) would be satisfied but the question

would be whether such transfer can be said to be transfer for the benefit of the wife or minor child of the assessee who happens to be a member of

the Hindu undivided family. Having regard to what we have stated above, it is clear that in such a case the transfer of the assets cannot be said to

be a transfer made by the assessee for the benefit of his wife or minor child. The transfer would be a transfer for the benefit of the Hindu undivided

family which would acquire not only legal ownership over assets transferred but also beneficial ownership over the same. It is no doubt true that

when assets are transferred would be created in favour of the wife and minor child of the assessee who happen to be members of the Hindu

undivided family but for that reason alone the transfer cannot be said to be a transfer for the benefit of the wife or minor child of the assessee. The

wife and minor child of the assessee would incidentally derive a benefit from the transfer of the assets since they happen to be members of the

Hindu undivided family but the person for whose benefit the transfer is made would be the Hindu undivided family and not the wife or minor child.

It is significant that the word ""directly or indirectly"", which occur in section 16(3) (a), do not find a place in section 16(3) (b). It is, therefore,

apparent that, merely because some incidental benefit may be derived by the wife or minor child of the assessee by reason of her or its being a

member of the Hindu undivided family to whom and for whose benefit the assets are transferred, the transfer cannot be said to be a transfer for the

benefit of the wife or the minor child. The present contention of the learned Advocate-General must, therefore, fail.

In this view of the matter, our answer to the question referred to us will be in the negative. The Commissioner will pay to the assessee the costs

of the reference.

Question answered in the negative.