Capital gains arising from the sale of assets transferred to the wife are income arising from the assets and hence includible in the husband's income under Section 16 (3) (a) (iii) of the Income-tax Act, 1922.

Headnote:
INCOME TAX - S. 16 (3) (a) (iii) - Capital gains arising from sale of shares transferred to wife - Whether income of wife or husband - Held, capital gains are income arising from assets and hence includible in husband's income.
Fact of the Case:

The assessee, Maneklal Ujamshi, transferred 1184 ordinary and 155 preference shares in Changdeo Sugar Mills Ltd. to his wife, Bai Laxmibai, in 1951. The total value of the shares on the date of transfer was Rs. 69,730. The preference shares were later converted into ordinary shares, resulting in Bai Laxmibai holding 2,424 ordinary shares. She sold 2,400 shares on August 1, 1956, for Rs. 1,54,800, resulting in a capital gain of Rs. 70,860. The sale proceeds were deposited with M/s. A. H. Bhivandiwalla and Co., in which Maneklal and his son were partners, and earned an annual interest of Rs. 9,288.
Finding of the Court:

The Income-tax Officer included the capital gain of Rs. 70,860 and the interest earned on the sale proceeds, Rs. 9,288, in Maneklal's income for the assessment years 1957-58, 1958-59, and 1959-60, respectively, under Section 16 (3) (a) (iii) of the Income-tax Act, 1922. The Appellate Assistant Commissioner upheld the inclusion of the capital gain but allowed the exemption of a portion of the interest income attributable to the monetary value of the shares at the time of the gift. The Appellate Tribunal dismissed the assessee's appeal for the assessment year 1957-58 and allowed the Department's appeals for the assessment years 1958-59 and 1959-60.
Issues: 1. Whether the capital gain of Rs. 70,860 arising from the sale of shares transferred to the wife is includible in the husband's income under Section 16 (3) (a) (iii) of the Income-tax Act, 1922? 2. Whether the interest earned on the sale proceeds deposited with the husband's firm is includible in the husband's income under Section 16 (3) (a) (iii) of the Income-tax Act, 1922?
Ratio Decidendi: 1. Section 16 (3) (a) (iii) of the Income-tax Act, 1922 includes in the total income of an individual the income of the wife arising directly or indirectly from assets transferred to her by the husband otherwise than for adequate consideration. 2. Capital gains arising from the sale of assets transferred to the wife are income arising from the assets and hence includible in the husband's income under Section 16 (3) (a) (iii). 3. The interest earned on the sale proceeds deposited with the husband's firm is also includible in the husband's income under Section 16 (3) (a) (iii) as it arises indirectly from the assets transferred to the wife.
Final Decision: The Supreme Court dismissed the assessee's appeal and upheld the High Court's decision that the capital gain of Rs. 70,860 and the entire interest earned on the sale proceeds, Rs. 9,288, were includible in Maneklal's income for the assessment years 1957-58, 1958-59, and 1959-60, respectively.

Judgement

RAMASWAMI, J. :- This appeal is brought by certificate from the judgment of the Bombay High Court dated the 22nd February, 1965 in Income-tax Reference No. 2 of 1962.

2. In the year 1951 the assessee Maneklal Ujamshi (hereinafter referred to as the assessee made a gift of 1184 ordinary and 155 preference shares in Changdeo Sugar Mills Ltd. to his wife Bai Laxmibai. The total value of these transferred shares on the date of the transfer was Rs. 69,730. Subsequent to the transfer the company converted the preference shares into ordinary shares giving the shareholders 8 ordinary shares for each preference share with the result that on December 31, 1954, Bai Laxmibai held in all 2,424 ordinary shares of the mills. Out of these 2,424 shares, Bai Laxmibai sold 2,400 shares on August 1, 1956, for the sum of Rs. 1,54,800 resulting in capital gain of Rs. 70,860 as computed under S. 12-B of the Income-tax Act. The whole amount realised by the sale of the shares was deposited by Bai Laxmibai with M/s. A. H. Bhivandiwalla and Co., in which Maneklal as well as his son, Sevantilal, happened to be partners. The amount deposited by Bai Laxmibai fetched a yearly interest of Rs. 9,288. In the assessment of Maneklal for the assess ment year 1957-58 the Income-tax Officer included the amount of Rs. 70,860 which we, the profit made by Bai Laxmibai on the sale of the shares, as income of Maneklal under S. 16 (3) (a) (iii) of the Indian Income-tax Act. Similarly, in the assessment of Maneklal for the assessment years 1958-59 and 1959-60, the Income-tax Officer included in each year the amount of Rs. 9,288 which was the interest earned by Bai Laxmibai on the deposit of the sale proceeds with M/s. Bhivandiwalla and Co. as the income of Maneklal under S. 16 (3) (a) (iii). According to the Income-tax Officer the gain which had resulted from the sale of the shares was the income of the wife of the assessee which arose directly or indirectly from the assets transferred by the assessee to his wife otherwise than for adequate consideration and therefore was required to be included in the computation of the total income of Maneklal. The income-tax Officer also took the view that the amount of interest which Bai Laxmibai had received from the sale proceeds deposited by her with M/s. Bhivandiwalla and Co. was also income of the wife of Maneklal which arose directly or indirectly from the assets transferred by Maneklal to her. Accordingly, in the assessment order for the first year, the Income tax Officer included the amount of Rs. 70,860 and in the assessment orders for the next two years, he included the amount of Rupees 9,288 in the total taxable income of Maneklal. Appeals against all these three assessment orders were filed before the Appellate Assistant Commissioner. In the appeal against the first assessment order for the assessment year l957-58 the Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer and dismissed the appeal. In the other two appeals he partly allowed the appeals taking he view that only that part of the interest which was attributable to the monetary value of the shares covered by the shares at the time of the gift was liable to be included in the total income of Maneklal in accordance with the provisions of S. 16 (3) (a) (iii) and the balance could not be included under the said provision. Since the monetary value of the shares gifted to Bai Laxmibai at the time when the gift was made was only Rs. 69,730 the interest attributable to it worked out at Rs. 4,183. Out of the total interest of Rs. 9,288 which was received by Bai Laxmibai in each of those years, he directed that only an amount of Rs. 4,183 should be included in the total income of Maneklal in each of those two years and the balance of Rs. 5,105 should be deleted. Against the orders of the Appellate Assistant Commissioner on these appeals the assessee appealed to the Appellate Tribunal. The Department. on the other hand, appealed agai

Click Here to Read the rest of this document