The word "indirectly" in S. 16 (3) (a) (iii) of the Income Tax Act, 1922, is meant to cover cases where the assets are transferred through a chain of transactions, and that it is not necessary that there should be consideration for each transfer in the chain.

Headnote:
INCOME TAX - S. 16 (3) (a) (iii) - Indirect transfer of assets - Income arising to wife from assets transferred indirectly by husband - Whether taxable in husband's hands.
Fact of the Case:

The assessee, Mrs. C. M. Kothari and Mrs. D. C. Kothari, acquired a one-third share each in a house purchased by their respective husbands, C. M. Kothari and D. C. Kothari. The Income Tax Officer assessed the income from the house as the income of the husbands, holding that the purchases were made benami in the names of the donees, or alternatively, from assets transferred indirectly by the husband to the wife in each case.
Finding of the Court:

The Supreme Court held that the income from the house was taxable in the hands of the husbands under S. 16 (3) (a) (iii) of the Income Tax Act, 1922, as the assets were transferred indirectly by the husbands to the wives.
Issues: Whether the income arising to Mrs. C. M. Kothari and Mrs. D. C. Kothari from the property arose indirectly out of the assets transferred indirectly by their husbands so as to attract the provisions of S. 16 (3) (a) (iii).
Ratio Decidendi: The court held that the word "indirectly" in S. 16 (3) (a) (iii) is meant to cover cases where the assets are transferred through a chain of transactions, and that it is not necessary that there should be consideration for each transfer in the chain. The court also held that the two transfers in the present case were so intimately connected that they could not but be regarded as parts of a single transaction.
Final Decision: The appeals were allowed, and the question referred to the High Court was answered in the affirmative.

Judgment

HIDAYATULLAH, J.: The High Court of Madras in a Reference under S. 66 (i) of the Indian Income Tax Act, answered in the negative the following question :

"Whether there was material for the Appellate Tribunal to hold that the income arising to Mrs. C. M. Kothari and Mrs. D. C. Kothari from the property arose indirectly out of the assets transferred indirectly by their husbands so as to attract the provisions of S. 16 (3) (a) (iii)."

In our opinion, these appeals by the Commissioner of Income-tax, Madras must be allowed.

2. Messrs. Kothari and Sons is a firm of stock brokers. In 1947, the firm consisted of C. M. Kothari and his two sons, D. C. Kothari and H. C. Kothari. Their respective shares were 6 : 5 : 5. On October 7, 1947, the firm entered into an agreement for the purchase of a house in Sterling Road, Madras, for Rs. 90,000, and the same day paid an advance of Rs. 5,000. This sum was debited in the books of the firm to the accounts of the three partners as follows :-

C. M. Kothari Rs. 1,800

D. C. Kothari Rs. 1,600

H. C. Kothari Rs. 1,600

Total : Rs. 5,000

3. The transaction was completed on October, 24, 1947. The sale deed, however, 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 paid to the firm a cheque of Rs. 28,333,-5-4. Mrs. C. M. Kothari further paid a cheque of Rs. 1,800, and Mrs. D. C. Kothari paid another cheque of Rs. 1,600. Thus, the two ladies paid one-third share of Rs. 85,000 and the amounts which were respectively paid by their husbands as part of the earnest money. H. C. Kothari was debited with a further sum of Rs. 28,333-5-4. In this way, Mrs. C. M. Kothari paid Rs. 200 more than the other two, because her husband had previously paid Rs. 200 more than his sons. The share of the three vendees was, however, shown to be one-third each.

4. The ladies issued the cheques on their accounts into which were paid by the firm certain amounts by cheques. Into Mrs. C. M. Kothari s account was paid an amount of Rs. 27,000 which was debited on October 24, 1947, to D. C. Kothari. It was stated to be birth-day gift by him to his mother. On Noveber 13, 1947, another amount of Rs. 3,000 was paid into Mrs. C. M. Kothari s account which was debited to the account of D. C. Kothari as a gift by him to his mother for Diwali. Similarly, on November 13, 1947 Mrs. D. C. Kothari s account with the Bank was credited with a sum of Rs. 30,000 by a cheque issued by the firm. This was debited to the account of C. M. Kothari and was shown as a gift by him to his daughter-in-law. In this way, both the ladies received from the firm Rs. 30,000 which was the exact one-third share of the consideration of Rs. 90,000 but the amount was not paid by their respective husbands, but by the son in one case, and the father-in-law, in the other.

5. In the assessment years 1948-49, 1950-51 and 1951-52, the Income Tax Officer assessed the income from the one-third share of the house received by Mrs. C. M. Kothari as the income of her husband. Similarly, in the four assessment years 1948-49 to 1951-52, the income of Mrs. D. C. Kothari from this house was assessed as the income of her husband. This was on the ground that because of the interchange of the money in the family, either the purchases were made by the donors benami in the names of the donees, or alternatively, from assets transferred indirectly by the husband to the wife in each case. The Income Tax Officer pointed out that the birth-day of Mrs. C. M. Kothari had taken place earlier in the year and there was no occasion to give a birth-day present to her several months later and on a date coinciding with the purchase of this property. The Income Tax Officer also found that in the past, the father-in-law had never given such a big present to his daughter-in-law on Diwali and this time there was no special circumstance to justify it. The appeals of the assessee to the

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