Sevantilal Maneklal Sheth versus Commissioner of Lncome-Tax (Central), Bombay

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SEVANTILAL MANEKLAL SHETH

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COMMISSIONER OF l!'iCOME-TAX (CENTRAL), BOMBAY

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NO\·ember 22, 1967

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(J.C. SHAH AND V. RAMASWAMI, JJ.J

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Income Tax Act, 1922, "'" 128, 16(3) (a)(iii)-Appellant transferrinR shares /() wife-profit made 011 sale of shares by way of capital goiru-if liable to be included as appellan(s 'income.

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The appellant made a gift in 1951 of certain ordinary and preference shares in a company to his wife and on fhe date of uansfer the value of the shares was Rs. 69,730. After the <ompany had convened the preference shares into ordinary shares the appellant's wife sold most of the shares held by her for Rs. 1,54,800, resulting in a capital ain of Rs. 70,860 as ccmputed under s. 12B of the Income Tax Act. 1922. She deposited the entire amount realised from the sale of shares with a firm and fhereby earned an interest of Rs. 9,288 per year. Jn the appellant'• assessment for 1957-58, the Income Tax Officer included the amount of Rs. 70,860 on the view that the gain resulting from the sale of tbc shares was the income of the appellant's wife which arose directly or indirectly from assets transferred by him within the meaning of s. 16 (3)(a)(iii) of the Income Tax Act, 1922. Similarly, in the appellant's assessment for the year )958-59 and 1959-60, the interest amount of Rs. 9.288 was also included as income '-"'ithin the mcaninj! of "· 16 (3) (a)(iii). In appeals made against the three ascssmcnt orders, v..·hilc the Appellate Assistant Com.1 •• is.sioner dismissed the appeal in respect of the as<essment year 1957-58. he prtly allowed the other two appeah takin the ,·iew that only that part of the interest which was atlributahle to the monetary value of 1h~ sharec; ;.it 1hc lime of rhc eift \1.·ac; li:ihlc to he in- cluded in the appellant's total income under s. 16 (3)(a)(iiil; since thr monetary value of the shares gifted to the wife at the time when the gift was made w:is on1v Re;. 6?.730, the interest attributable to it v.·orkcd out at Rs. 4, I 3R and onlv this amount could be included in the appellant's income. The Appellate Tribunal dismissed the appellant's further appeal and also allowed cross appeals filed by the Depanment. · The High Court. upon a reference. held that the sum of Rs. 70.860 was prope·lv included in the apne11ant's income. in t 957-58 but that the interCSt amount in excess of Rs. 4.138 was not liahlc to be included in his income for 195859 and 1959·60.

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In the appeal to this Court the onlv question for c.onsideration was whether the amount of Rs. 70,860 was the aopellant's inccmc under s. 16 (3) (a)(iii). It was contended on his behalf (i) that what come< within the ambit of s, 16(3)(a) (iii) is the income from the transferred assel8. which is different from the profits or Jr.tins arising from the sale of the transferred assets. or in other words "the capital gains" from the trans- ferred asset<; and (ii) thats. 16(3)(a)(iii) was enacted in 1937 when the word 'income' did not include 'capital gains' and income from the property w"5 understood to be income falling under that head in s. 6 of the Act.

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HELD : The Hioh Court had ri•htlv decided that the amount 1'f R<. 70.860 was properly included in the as.essee's income under s. 16 0) (a) (iii).

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MANEKLAL v. c.J.T. (Ramaswami, J.)

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361

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(i) There is no logical distinction between income arising from the

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asset transferred to the wife and arising from the sale of the asset~ so transferred. The profits or gains which arise from the sale of the asset would arise or spring from the asset, although the operation by which the profits or gain is made to arise out of the asset is the operation of "1le. [364 G-H]

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(ii) Although at the time whens. 16(3)(a)(iii) was enacted the defi-

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B nition of 'income' did not include 'capital gains', capital gains having been brought within the meaning of 'income' in s. 2( 6C), the expression 'income' as used in s. 16(3) (a)(iii) must be construed according to the amended definition of the word and would, therefore, include capital gains. There is nothing in the context or language of s. 16(3) (a) (iii) of the Act to suggest that capital gains ·are. excluded from its scope and there is no reason why a restricted interpretation should be giYen to the provision' of s. 16(3) (a) (iii). [365 C-E]

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c CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2454 of

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Appeal from the judgment and order dated February 19..-22, 1965 of the Bombay High Court in Income-tax Reference No. 2 of 1962.

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Sa11ar P. Mehta, and J. HI. Dadacha11ii, for th:! appellant.

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Niren De, Solicitor-General, B. R. L. Iyengar, and R. N. Sachthey, for the respondent.

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The Judgment of the Court was. delivered by

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E Ramaswami, J.. This appeal is brought by certific.ate from the judgment of the Bombay High Court dated .the 22nd Febnia1y, 1965 in Income-tax Reference No. 2 of 1962.

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Jn the year 1951 the assessee ManeJ>lal Ujamshi (hereinafter

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referred to as the assessee J made a gift of 1.184 ordinary and 155 preferncc shares in Changdeo Sugar Mills Ltd. to his wifo B:ii

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F Laxmibai. The total value of these transferred stiare.s on the date. of the iransfer was Rs. 68,730/ ~· Subsequent to the transfex the company converted the prefer.ence shares into ordinary . shares giving the shareholders 8 ordinary shares for each preference share with the result that on December 31, .. 1954, Bai Laxmibii held in all 2.424 ordinary shares of the mills. Ou• of these • 2.424 shares, Bai Laxmibai sold 2.400 shares on August 1. 1956. for

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G the sum of Rs. 1,54,800/resulting. in a capital gain of Rs.- 70,860/- as computed under s. 12B of the Income-tax Act. The whol.e amount realised by·the sale of the· shares was deposited by Ba; Laxmibai with M.!s. A. H. Bhivandiwalla & Co., in which Maneklal as well as his son, Sevantilal, happened to be partne.rs. The amoun·: deposited by Bai Laxmibai fetched a yeady interest

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II of Rs. 9.288/-. In the assessment of Maneklal for the .assessment year 1957-58 the Income Tax Officer included the amount of Rs. 7().860/· which was the profit made by Bai Umnibai on the

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(1968] 2 S.C.R.

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362

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SUPREME COURT REPORTS

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sale of the shares, as income of Maneldal 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 Laxm;bai on the deposit of the sale proceeds with M/s. Bhiv~~diwalla and Co. as the income of Maneklal under s. 16(3) (a) (iiif. 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 h;s wile oti.Jrwise than for adequate consider.1tion 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 proceedt deposited by her with M. ·s. Bhivandiwalla & Co. was also income of the wife of Maneklal which arose directly or indir.:ctly from the assets transferred by Maneklal to her. Accordingly, in the assessment order for the first year, the Income Tax Officer included t!:ie amount uf Rs. 70.860i- and in the assessment orders for the next two years, . h.z included the amount of Rs. 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 I 957-58 the Appellate Assistant Commissioner agreed with the view taken by the Income Tax Officer and dismissed th.z appeal. In, the other two appeals, he partly allowed the appeals taking the view that only that part of the interest which was attributable to the monetary value of the shares covered by the shares at th" time of the gift was liable to be included in the total income of Maneklal in accordance wi!h the provisiom of s. 1613)(a)(iii) and the balance could not be included under the said provisiqn. Since the monetary value of the shares gifted to Bai Laxmibai at the time when the ift was mad. was only Rs. 69,730/-. the intere.-t at!ributable to it worked out at Rs. 4, I 38/-. 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 ordrs of the Appellate Assistant Commissioner on these appeals the assessec appealed to the Appellate Tribunal. The Department, on the other hand, appealed against the orders of the Appellate Assistant Commissioner for the years 1958-59 and 1959-60 insofar as they allowed exemption in respect of Rs. 4,183/- out of the total amount of Rs. 9,288/- for each yeJr. The Appellate Tribunal dismissed the appeal of !he assessce with regard to the assessment year l 95'7-58. For the assessment years

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MANEKLAL v .. C.J.T. (Ramaswami, J.)

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363

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A 1958-59 and 1959-60, the Appellate Tribunal allowed the appeals of the Department and dismissed the appeal of the assessee for the assessment year 1959-60. According to these decisions of. the Appellate Tribunal the result was that for the assessment year 1957-58 the order of the Income Tax Officer that the amount of Rs, 70,860/- which was the profit or gain on the sale of the

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B shares by Bai Laxmibai was liab!.~ to be included in the total income of Maneklal was upheld and for the later two years the entire amount of interest viz., Rs. 9,288/- was held to be liable to be included in the total income of Maneklal in each of those two years. Thereafter, at the instance of the assessee, the Appella!e Tribunal stated a case to the High Court on the following questions of iaw :

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"I. Whether in computing the total income of Maneklal for the assessment year 1957-58, the sum of Rs. 70,860/- has been properly included therein in accordance with the provisions of s. 16 ( 3) (a) (iii) of the Income-tax Act, 1922 ?

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Whether in computing the total income of Maneklal for the assessment year 1958-59 the sum of Rs. 5,104/- has been properly included therein in accordance with provisions of s. 16 ( 3) (a)( iii) of the Income-tax Act, 1922 ? ·

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Whether in computing the total income of Maneklal for the assessment year 1959-60, the sum of Rs. 4,183/- has been properly included therein in accorc\ance with the provisions of s. 16 ( 3 )(a)( iii) of the Income-tax Act, 1922 ?

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Whether in computing the total income of Man.F eklal for the assessment year 1959-60, the sum of Rs. 5 ,105 I - has been properly included therein in accordance with the provisions of s. 16(3)(a)(iii) of the Income-tax Ac!, 1922 ?"

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By its judgment dated February 19, 1965 the High Court answered the first question in the affirmative and against the assessee. It G answered questions Nos. 2 & 4 in favour of the assessee and against the Department. As regards question No. 3, the High Court answered· it in the affirmative and in favour of the Department. The reason was that Counsel for the assessee did noi press it or challenge the correctness of the view taken by the Appellate Tribu~al .and accep'.ed as correct the conclusion of the Tribunal H with regard to the point involved iii that question.

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Section 16(3)(a)(iii) of the Income Tax Act, 1922 provides as follows : ·

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(1968j 2 S.CR.

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5UPREME CQ\JKT REPORTS

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"In computing the total income of any individua! for the purpose of assessment, there shall be included :-

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(a) so much of :he income of a wife ...... of. .. . . . . . . . . . . . such individual as arises directly or indirectly ......... .

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(iii) frori1 assets transkrrcd directly or indirect!) to th.~ wife by the husband otherwise than for :idcquate consideration or in connection with an agreement to live apart ...

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Section 2(6CJ of the Income-tax Act. 1922 stales:

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" 'Income· includes ........... .

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(vi) any capital gain chargeable under section I 2B:

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Section 128 of the Income Tax Act enact; :

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"(I) The tax shail be payable by an a;,cs"·'e under the head 'capital g .. ins' in respect of any profits or gains arising from the sale. exchange. rdin4uishmcnt or transfer of a capital asset effected after the '.l l st day of March. 1956. and such profi:s and gains shall be deemed to be income of the previous year in wh,ch !he sale. exchange. relinquishment or transfer took place: ...... ··

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With regard to the first question Mr. Mehta put forward the Jrgument that wha'. comes within the ambit of s. 16 (3) ( :i )(iii) is the income from the tran<fcrred assets, which is different from the profit or gain arising from the sale of the transferred assets. or in other words, "the capital gains" from the transfencd asset~. It was argued in the first place that what comes within the ambit of s. 16 ( 3) (a) (iii) was 'the income from the assets' i.e., the income which the ase'. produces while it continues to remain in the hands of the assessee and does not include the gain which the assessee makes by selling the asset and parting v.:ith. posse'sion of it. We see no justification for this argument. In our opinion there is no logical distinction between income ans1r..e from the asset transferred to the wife and income arising from the sale of the assets so transferred. The profits or )!ains which arise from the sale of the asset would arise or sprin)! from the asset, although the operation by which the profits or 11ains is mad to arise out of the asset is the operation of the sale. If the asset ;s employed, say by way of investment and produces income, the income arises or springs from the asset; the operation. which causes the income to spring from the asset, is the OJ?eration of the investment. In the operation of th~ investment. mcome is producal.

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MANEKLAL V. c.r.T. (Ramaswami, J.)

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365

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A while the asset continues to belong to the assessee, while in the operation of a sale, gain is produced, which is still income but in the process the title to the asset is parted with. Although the processes involved in the two cases are different, the gain which has resul'.ed to the owner of the asset, in each case, is the gain, which has sprung up or arisen from the asset. There is hence no s· warrant for the argument that the capital gain is not income arising from the assets but it is income which arises from a source which is different from the asset itself. It was argued in the second place that S; 16(3)(a) (iii) was enacted in 1937 wh.en the word 'income' did not include 'capital gains' and income from property was understood to be income falling under that c head in s. 6 of the Act. The inclusion of 'capital gains' in the definition of 'income' was for the first time enacted in 194 7. It is true that at the time when s. 16(3)(a)(iii) was enacted, the definition of 'income' did not include 'capital gains' but capital gains having been brought within the meaning of 'income' in s. 2(6C) the expression 'income' as used ins. 16(3) (a) (iii) D must be construed according to the amended definition of the word and would, therefore,. include capital gains. There is nothing in the context or language of s. 16(3)(a)(iii) of the Act to suggest that capital gains are excluded from its scope. We see no reason why a restricted interpretaiion should be given to the provisions of s. 16(3) (a) (iii) as contended for the appellant. On the contrary, the object of the enactmenl of the section is to E prevent avoidance of tax or reducing the incidence of tax on the part of the assess.ee by transfer of his assets to his wife or minor. child. It is a sound rule of interpretation that a ·statute should be so construed as to prevent the mischief and to advance the remedy according to the true intention of the makers of the statute. . We are, therefore, unable to accept Mr. Mehta's argµF ment on this asp.o..,ct of the case.

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For the reasons given we hold that. the High Court has rightly answered the first question against the assessee and this appeal is accordingly dismissed with costs. ·

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R.K.P.S.

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Appeal dismissed.

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:USup.Cl/687 9

Sevantilal Maneklal Sheth v. Commissioner of Lncome-Tax (Central), Bombay

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Sevantilal Maneklal Sheth v. Commissioner of Lncome-Tax (Central), Bombay

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