JUDGMENT
Srinivasan, J.
1. The assessee, who died during the pendency of these tax cases, was the managing director of M/s. Sri Hari Mills Private Limited. He gifted certain agricultural lands to his wife, who has been brought on record in these cases as the third respondent, under a document dated May 8, 1954. She sold the lands in 1959 for a sum of Rs. 65,000 and deposited the sale proceeds with the company M/s. Sri Hari Mills Private Limited. She received a sum of Rs. 5,790 by way of interest on the deposit from the company during the accounting year ending with March 31, 1965. While making assessment for the year 1965-66, the Income-tax Officer held that the aforesaid sum of Rs. 5,790 was income received from an asset transferred by the assessee to his wife and, therefore, it was liable to be assessed in the hands of the assessee under section 64(1)(iii) of the Income-tax Act, 1961.
2. In the assessment of M/s. Sri Hari Mills Private Limited, for the assessment years 1965-66 and 1967-68 to 1971-72, certain amounts were disallowed as attributable to the personal user by the managing director, the assessee, of the cars and telephone provided by the company. Those amounts were included in the assessment of the assessee as perquisites received by him from the company. The value of the perquisites was fixed at the same amounts as were disallowed in the company’s assessment. Thus, a sum of Rs. 11,007 was included in the assessment of the assessee for the year 1965-66 as value of the perquisites received by him. Similarly, sums of Rs. 22,692, Rs. 20,870, Rs. 10,598, Rs. 20,500 and Rs. 20,500 were included in the hands of the assessee as value of perquisites received by him from the company for the assessment years 1967-68, 1968-69, 1969-70, 1970-71 and 1971-72 respectively.
3. The assessee preferred appeals to the Appellate Assistant Commissioner against the said orders of assessment. The Appellate Assistant Commissioner accepted the contention of the assessee regarding the inclusion of the interest income for the year 1965-66 and directed deletion thereof. As regards the value of the perquisites, the Appellate Assistant Commissioner held that whatever had been disallowed in the assessment of the company could not be automatically treated as the value of the perquisites in the hands of the assessee. Taking note of the facts that the assessee had owned a car in the previous year relevant to the assessment year 1965-66 and that his wife had owned a car in the previous years relevant to the assessment years 1968-69, 1969-70 and 1970-71, the Appellate Assistant Commissioner concluded that the value of the perquisites enjoyed by the assessee by the use of the company’s car could be fixed at Rs. 250 per mensem for the assessment years 1965-66, 1968-69, 1969-70 and 1970-71 and at the rate of Rs. 500 for the other assessment years. Accordingly, he directed deletion of the excess amounts for the respective assessment years.
4. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue took the matter to the Tribunal on appeal. The Tribunal held that there was no nexus between the interest income and the gift of the agricultural lands by the assessee in favour of his wife. The Tribunal also opined that if the assessee’s wife had retained the agricultural lands, the income therefrom could not have been assessed either in her hands or in the assessee’s hands and, therefore, the income received by way of interest from the company on deposit of the sale proceeds of the lands could not be treated as income arising indirectly from the transferred assets within the meaning of section 64(1)(iii) of the Income-tax Act. As regards the value of the perquisites, the Tribunal approved of the reasoning of the Appellate Assistant Commissioner and upheld his conclusion in that regard.
5. At the instance of the Revenue, under section 256(1) of the Income-tax Act, the Tribunal forwarded a statement of the case and referred the following questions for consideration by this court :
“1. Whether, on the facts and in the circumstances of the case, Rs. 5,790 being the interest received by the assessee’s wife from M/s. Sri Hari Mills Limited, on the deposit of sale proceeds of the agricultural lands that had been earlier gifted to her by the assessee can be considered as his income arising indirectly from such transferred assets and hence has to be included in the assessment of the assessee for the assessment year 1965-66 under section 64(1)(iii) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the entirety of the amount disallowed in the assessment of M/s. Sri Hari Mills Private Ltd. for the assessment years 1965-66, 1967-68 to 1971-72 as attributable to the user by the assessee of the cars, telephones, etc., should be considered as perquisites and brought to tax in the assessments made on the assessee for the above-mentioned assessment years ?”
6. Taking up the second question for consideration, it is seen that the Appellate Assistant Commissioner made the correct approach in assessing the value of the perquisites in the hands of the assessee. The principles relevant therefor have been laid down in CIT v. P. R. Ramakrishnan . It was held in that case that what was chargeable as perquisites in the hands of a director of a company would depend on the extent of benefit derived by him. In other words, how much it would have cost the assessee to keep a car or a telephone on his own for his exclusive use or for the use of his family would alone be the criterion and that it would not be proper to take into account the amount disallowed in the hands of the company as the perquisite. The same principle was reiterated in CIT v. S. S. M. Lingappan [1981] 129 ITR 597 (Mad), wherein it was held that there was a distinction between the approach to be made in the case of disallowance of an item of expenditure in the hands of the company on the ground of its being excessive or unreasonable and in the case of assessment as perquisites in the hands of the recipient of the benefit. It was pointed out that merely because there was a disallowance in the hands of the company, it would not follow that the whole of the same should be taken as a benefit in the hands of the recipient of the benefit. In this case, the Appellate Assistant Commissioner had borne in mind the aforesaid principles and assessed the value of the perquisites in the hands of the assessee. The Tribunal has rightly confirmed the order of the Appellate Assistant Commissioner. Hence, the second question is answered in the negative and against the Revenue.
7. As regards the first question, learned counsel for the Revenue vehemently argued that the Tribunal was in error in holding that there was no nexus between the income in question and the transfer of assets by the assessee to his wife. It was also submitted by him that the view of the Tribunal that the transferred assets being agricultural lands, the income from the sale proceeds thereof could not be taxed as an indirect income from the transferred assets inasmuch as agricultural income was not taxable, was wrong. Learned counsel urged that the provisions of section 64(1)(iii) of the Act would be attracted even if the assets transferred by the assessee to his spouse were converted into another form and the income derived from the assets in such converted form would be indirect income from the transferred assets within the meaning of the section. In support of his contentions, learned counsel placed reliance on the following decisions :
(1) CIT v. C. M. Kothari , (2) Janab K. T. M. S. Mahamood v. CIT [1966] 61 ITR 63 (Mad), (3) Sevantilal Maneklal Sheth v. CIT and (4) Mohini Thapar v. CIT .
8. As against this, learned counsel for the assessee supported the order of the Tribunal on the ground that the object of the section is to prevent evasion of tax by means of transfer of assets and in this case there could be no such evasion as the assets transferred were agricultural lands and the income therefrom was not liable to tax. Learned counsel contended that when the income from the agricultural lands transferred to his wife by the assessee could not be taxed as such, the income from the sale proceeds of such lands would not be liable to tax. According to him, what cannot be done directly by the Revenue cannot be done indirectly. Learned counsel submitted that, on the facts of this case, there could be no nexus between the income in question and the assets transferred, in view of the long lapse of time between the date of transfer and the conversion of the assets into money. Learned counsel submitted that the relevant test to be applied has been laid down by the Supreme Court in CIT v. Prem Bhai Parekh and that in the present case, the same has not been satisfied. Learned counsel also invited our attention to the decision of the Andhra Pradesh High Court in CIT v. Smt. Pelleti Sridevamma [1976] 105 ITR 887 in which the time lag between he date of transfer of assets and the date of conversion thereof has been held to be a relevant factor in deciding the question as to whether there is nexus between the income under consideration and the transferred assets.
9. Before referring to the decided cases, it will be necessary to advert to the section as it stood at the relevant period. Section 64(1) of the Act, in so far as it is relevant for our purpose, reads thus :
” (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly -…
(iii) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.”
10. It is significant to note that the words “directly or indirectly” occur in two places, one relating to the income and the other relating to the transfer. The two kinds of transfers which are excepted under this section are (1) transfer for adequate consideration, and (2) where the transfer is in connection with an agreement to live apart. On a plain reading of the section, the income sought to be taxed shall arise directly or indirectly from assets transferred. In this case, the transfer being a direct transfer to the wife of the assessee, and there being no dispute that the income from the sale proceeds is not a direct income from the transferred assets, the only question that arises for consideration is whether the income sought to be taxed arises indirectly from the transferred assets.
11. While upholding the constitutional validity of section 16(3) of the Income-tax Act, 1922, corresponding to the present section 64(1), the Supreme Court in Balaji v. ITO , pointed out that the object of the legislation was to prevent evasion of tax and to put an end to perpetration of fraud on taxation. In Sevantilal Maneklal Sheth v. CIT , the Supreme Court observed that the section should be interpreted in such a manner as to prevent the mischief and to advance the remedy according to the true intentions of the makers of the statute. It was pointed out once again in that case that the object of the section was to prevent avoidance of tax or reducing the incidence of tax on the part of the assessee by transfer of his assets to his wife or minor child.
12. In CIT v. Prem Bhai Parekh , the Supreme Court laid down the requirements of section 16(3) of the Act for deciding that a particular income arises directly or indirectly from the transferred assets. The following passage in the judgment is relevant (p. 30) :
“That section must receive strict construction as observed by this court in CIT v. Keshavlal Lallubhai Patel . In our judgment, before an income can be held to come within the ambit of section 16(3), it must be proved to have arisen-directly or indirectly-from a transfer of assets made by the assessee in favour of his wife or minor children. The connection between the transfer of assets and the income must be proximate. The income in question must arise as a result of the transfer and not in some manner connected with it.”
13. The significance of the word “proximate” used by the Supreme Court in the above passage cannot be lost sight of. It is clear therefrom that the income sought to be taxed and the transfer of assets must be connected with each other by proximity in every respect. That would take in the time limit also. The two must be so near to each other that it would form one chain of causation. What has to be really considered is whether the income in question can be linked with the transfer of assets as a direct or indirect consequence. The facts of the case should be scanned for the purpose of finding out the aforesaid connection with the object of the section in the background. If, on the facts of the case, it is possible to discover the inner thread whereby the tax liability is sought to be evaded or reduced, it is to be held in such cases that there is a nexus between the transfer of assets and the income in question.
14. Learned counsel for the respondents relied on the following passage in the Law of Income Tax by Sampath Iyengar, seventh edition, at page 2395, in Vol. 3 :
” The provisions of sections 60 to 65 do not extend to assets of an agricultural character. The includibility of income arising to a transferee of agricultural lands in the agricultural income of the transferor is a matter depending upon the specific provisions relating thereto in the agricultural income-tax of a particular State.”
15. There is a reference in the footnote to the case of Ramdas Dossa & Co. v. CIT [1956] 29 ITR 1001 (Bom). That case has nothing to do with transfer of agricultural assets or sections 60 to 65 of the Act. In our view, the proposition has been too widely stated by the author in the above passage. No doubt, transfer of agricultural lands does not by itself bring about evasion of tax. It cannot be laid down as a proposition of law that income arising from a transfer of assets yielding non-taxable income will always be outside the purview of section 64 of the Act. The Tribunal is not right in its reasoning that the income in question falls outside section 64 of the Act as it is indirect income from agricultural lands. That is a wrong approach. If, in a given case, an asset yielding non-taxable income is transferred by the assessee to his or her spouse with the object of converting it into another asset which would yield taxable income and evading payment of tax by keeping it in the name of the transferee, the assessee cannot escape the net cast by section 64 of the Act. That object is brought to light by the nexus or proximate connection between the transfer of assets and the income sought to be taxed. The facts and circumstances have to be analysed in each case to ascertain whether such a nexus exists or not.
16. On the facts of this case, admittedly, the assessee was not liable to pay income-tax when he held those assets which were agricultural lands. By merely transferring those agricultural lands, it cannot be said that the assessee wanted to evade payment of income-tax. The liability to pay tax arose only when the lands were sold by the wife and the sale proceeds were deposited with the company, thereby giving rise to the interest income. There can be no doubt that such interest cannot be treated as agricultural income. Unless it is shown that the transfer of agricultural lands by the assessee to his wife was itself with a view to convert the lands into money or other assets yielding income and such income should be kept out of the assessment of the assessee, it cannot be held that there is a nexus between the transferred assets and the income. For deciding whether the object of the transfer was evasion of tax, the time gap between the transfer of assets and the conversion thereof will be an important factor to be taken into account. In this case, the transfer of agricultural lands was in 1954. It was only five years later in 1959, that they were sold by the wife. In view of the lapse of time between the date of transfer and the date of conversion of the assets into money, it is not possible to say that the connection between the transfer of assets and the income is proximate.
17. The Andhra Pradesh High Court had to deal with a similar situation in CIT v. Smt. Pellet Sridevamma [1976] 105 ITR 887. In that case, a sum of Rs. 90,000 was gifted in cash by the assessee to her minor son in the financial year 1956-57. That amount was utilised for purchasing a house property which was used by the assessee for the purpose of her business. It was sold by her in July, 1965, for a sum of Rs. 1,48,000. The Income-tax Officer assessed the capital gain of Rs. 58,000 derived from the sale of the house in the hands of the assessee invoking section 64(1)(iv) of the Income-tax Act. While the Appellate Assistant Commissioner confirmed the assessment, the Tribunal reversed it holding that there was no proximate connection between the cash gift and the capital gain derived by the sale of the house. When the matter was referred to the High Court under section 256(2) of the Act, the order of the Tribunal was upheld. After referring to the three decisions of the Supreme Court in Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503, Smt. Mohini Thapar v. CIT [1972] 83 ITR 208 and CIT v. Prem Bhai Parekh [1970] 77 ITR 27, the Andhra Pradesh High Court observed thus (p. 891) :
” In view of the time lag between the dates of cash gift of Rs. 90,000, the purchase of the house property and the subsequent sale eight years later to Tirupathi Devasthanam, we are unable to say that there is proximate connection between the income derived by sale of the house and the cash gift made by the assessee. Therefore having regard to the ratio in CIT v. Prem Bhai Parekh , we uphold the order of the Tribunal and answer the question in the negative and against the Commissioner of Income-tax, but in the circumstances without costs.”
18. We agree with the ratio of the said decision that the time gap between the transfer of assets and the accrual of the income in question is a relevant factor in deciding whether there is a nexus between the income sought to be taxed and the transferred assets.
19. We shall now consider the decisions relied on by learned counsel for the Revenue. In CIT v. C. M. Kothari , a firm of stockbrokers comprised three partners who were father and two sons. The firm entered into an agreement for purchase of a house in Madras for Rs. 90,000 and paid an advance of Rs. 5,000. 17 days thereafter, the transaction was completed and the sale deed was taken in the names of one of the sons and the wives of the father and the other son. The two ladies paid 1/3rd share of Rs. 85,000 and the amounts which were paid respectively by their husbands as part of the earnest money. Actually, the amounts paid by the ladies were remitted to their bank accounts by the firm. While the amount credited to the mother’s account was debited to the son in the firm’s accounts, the amount paid to the daughter-in-law was debited to the account of the father in that firm. These were really cross-gifts. Though the purchases were not treated as benami purchases by the Tribunal, it is clear from the facts of the case that the transfer of funds were made by the father and one son for the purpose of the purchase of the property and the entire transaction was a single continuous one. In those circumstances, the income from the house was treated by the Revenue as income in the hands of the partners, who were the assessees, under section 16(3) of the Act of 1922. That was affirmed by the Tribunal. But, on a reference to the High Court, the question was answered against the Revenue. On appeal to the Supreme Court, the view urged by the Revenue was upheld and the decision of the High Court was reversed. The observations made by the Supreme Court and relied on by learned counsel for the Revenue are as follows (p. 110) :
” The section takes into account not only transference of assets made directly but also made indirectly. It is impossible to state here what sorts are covered by the word ‘indirectly’, because such transfers may be made in different ways.
It is argued that the first requisite of the section is that the assets must be those of the husband and that is not the case here. It is true that the section says that the assets must be those of the husband, but it does not mean that the same assets should reach the wife. It may be that the assets, in the course of being transferred, may be changed deliberately into assets of like value of another person, as has happened in the present case. A chain of transfers, if not comprehended by the word ‘indirectly’ would easily defeat the object of the law which is to tax the income of the wife in the hands of the husband, if the income of the wife arises to her from assets transferred by the husband. The present case is a admirable instance of how indirect transfers can be made by substituting the assets of another person who has benefited to the same or nearly the same extent from assets transferred to him by the husband.”
20. Learned counsel for the Revenue places strong reliance on the sentence underlined. No doubt, a conversion of the transferred asset would not by itself take the income outside the purview of section 64 of the Act, but the Supreme Court has guardedly observed that in the course of being transferred, the assets may be changed deliberately into assets of like value. The observations made by the Supreme Court as extracted above have to be understood in the context and with reference to the facts of the case. Those observations do not help the Revenue in the present case.
21. The said decision of the Supreme Court is followed by this court in Janab K. T. M. S. Mahamood v. CIT [1966] 61 ITR 63. Though there is no discussion in the judgment of this court, it is seen from the statement of the case that a sum of Rs. 45,000 gifted by the assessee to his wife was utilised for the purchase of a house on the very same day in her name. The only contention urged before this court that the income from house property could not be referred to the cash gift made by the husband to the wife, was, therefore, negatived as the ruling of the Supreme Court in CIT v. C. M. Kothari applied directly to the facts of that case.
22. In Sevantilal Maneklal Sheth v. CIT [1968] 68 ITR 503, the only question argued before the Supreme Court was that capital gains arising from sale of the transferred assets would not fall within the ambit of section 16(3)(a)(iii) of the Act as it was not income from the transferred asset. That contention was negatived by the Supreme Court, and it was held that income would include capital gains also. The Supreme Court observed thus (p. 507) :
“There is nothing in the context or language of section 16(3)(a)(iii) of the Act to suggest that capital gains are excluded from its scope. We see no reason why a restricted interpretation should be given to the provisions of section 16(3)(a)(iii) as contended for the appellant. On the contrary, the object of the enactment of the section is to prevent avoidance of tax or reducing the incidence of tax on the part of the assessee 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.”
23. We have earlier referred to the rule of interpretation laid down in the above case and invoked the same in the present case.
24. The only other case cited by learned counsel for the Revenue which has to be considered is the decision of the Supreme Court in Mohini Thapar v. CIT [1972] 83 ITR 208. In that case, certain cash gifts were made by the assessee to his wife with the aid of which she purchased certain shares and invested the balance amount. The shares earned dividends and the investments yielded interest. The interest realised and the dividends earned were included in the income of the assessee for the purpose of assessment under section 16(3) of the Act of 1922. The Supreme Court held that there was a nexus between the transferred assets and the income in question. Reliance was placed by the assessee on the decision of the Supreme Court in CIT v. Prema Bhai Parekh [1970] 77 ITR 27. After referring to the facts in that case and extracting a passage from the judgment in that case, the Supreme Court observed that the ratio of the decision in Prem Bhai Parekh’s case was inapplicable to the facts of the case which was being considered by them. The Supreme Court observed thus (p. 211) :
“Here we are dealing with an income which has proximate connection with the transfer of the assets made by assessee.”
25. Obviously, the Supreme Court rested its conclusion on the facts of that case. It is not clear from the report of the judgment whether there was any time gap between the date on which the cash gifts were made and the date on which the shares were purchased by the wife and investments were made. Hence, the decision in Mohini Thapar’s case cannot help the Revenue in the present case.
26. In the result, we agree with the contentions urged by learned counsel for the assessee and hold that there is no proximate connection between the transfer of agricultural lands by the assessee to his wife and the income from the sale proceeds thereof, when the wife sold that land after five years. Consequently, question No. 1 is answered in the negative and against the Revenue. Thus, both the questions having been answered against the Revenue, they are directed to pay the costs of the respondent.