{"id":40700,"date":"1989-04-26T00:00:00","date_gmt":"1989-04-25T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-prahaladrai-agarwala-on-26-april-1989"},"modified":"2018-07-27T08:34:54","modified_gmt":"2018-07-27T03:04:54","slug":"commissioner-of-income-tax-vs-prahaladrai-agarwala-on-26-april-1989","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-prahaladrai-agarwala-on-26-april-1989","title":{"rendered":"Commissioner Of Income Tax, … vs Prahaladrai Agarwala on 26 April, 1989"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income Tax, … vs Prahaladrai Agarwala on 26 April, 1989<\/div>\n
Equivalent citations: 1990 AIR 270, \t\t 1989 SCR (2) 737<\/div>\n
Author: R Pathak<\/div>\n
Bench: Pathak, R.S. (Cj)<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME TAX, CALCUTTA\n\n\tVs.\n\nRESPONDENT:\nPRAHALADRAI AGARWALA\n\nDATE OF JUDGMENT26\/04\/1989\n\nBENCH:\nPATHAK, R.S. (CJ)\nBENCH:\nPATHAK, R.S. (CJ)\nKANIA, M.H.\n\nCITATION:\n 1990 AIR  270\t\t  1989 SCR  (2) 737\n 1989 SCC  Supl.  (2) 279 JT 1989  Supl.    139\n\n\nACT:\n    Income  Tax Act, 1961: Section 64(1)(iii)--Wife  partner\nin  firm alongwith husband--Capital contributed by wife\t out\nof  amount gifted by the husband--Share of profit of  asses-\nsee's  wife--Whether includible in total income of the\thus-\nband--There must be proximate connection between the accrual\nof income and assets transferred.\n\n\n\nHEADNOTE:\n    The\t respondent-assessee  was one of the partners  In  a\nfirm in which the five other partners were his wife, mother,\ngrand-father, brother, and a stranger. His wife had contrib-\nuted Rs.51,000 as capital in the firm, which amount came out\nof  two gifts made to her by the assessee. in the course  of\nassessment  proceedings for the assessment year\t 1962-63  in\nrespect of the assessee, the Income Tax Officer included the\nprofits\t of  the  assessee's wife from the  firm,  under  s.\n64(1)(iii)  of\tthe  Income Tax\t Act,  1961.  The.assessee's\nappeal was dismissed by the Appellate Assistant Commissioner\nwho  observed that the wife would not have become a  partner\nof  the\t firm unless he had contributed\t capital  which\t was\nprovided  by  the  husband. The\t Appellate  Tribunal,  while\ndismissing the second appeal of the assessee, found that the\nadmission  of the assessee's wife as a partner in  the\tfirm\nwas solely on account of her contribution of capital to\t the\nfirm.  It was conceded by the assessee before  the  Tribunal\nthat  the  interest received by the assessee's wife  on\t her\ncapital contribution to the firm was includible in the total\nincome of the assessee.\n    The High Court, while answering the question referred to\nit in favour of the assessee, took the view that the  income\narose  from  the  share of profits only\t because  the  other\npartners  agreed to take the assessee's wife as partner\t and\nshe  was allowed to contribute to the partnership firm,\t and\nthat the admission of the assessee's wife to the partnership\nwas not in consequence of the gift.\nDismissing the Revenue's appeal, it was\n    HELD:  (1) The income may arise directly or\t indirectly,\nbut for application of the provisions of section  64(1)(iii)\nof the Income Tax Act,\n738\n1961 there must be a proximate connection between the accru-\nal of the income and the assets transferred by the assessee.\n[741D]\n    Commissioner of Income-tax, West Bengal 111 v. Prem Bhai\nParekh, [1970] 77 ITR 27 followed.\n    (2)\t The  mere contribution of the capital by  the\twife\ninto  the firm would not automatically have entitled her  to\npartnership in the firm. The partnership was based on agree-\nment, and it is the event of agreement between the  partners\nthat  brought the assessee's wife into the firm as  partner.\n[742E]\n    Commissioner  of  Income-tax, Bangalore v.\tJ.H.  Gotla,<\/a>\n[1985]\t156  ITR  323; Commissioner  of\t Income-tax,  Assam,\nTripura and Manipur v. Jwalaprasad Agarwala,<\/a>  [1967] 66\t ITR\n154;  V.D. Dhanwatey v. Commissioner of\t Income-tax,  Madhya\nPradesh, Nagpur and Bhandara,<\/a> [1968] 68 ITR 365; Smt. Mohini\nThapar\tv. Commissioner of Income-tax  (Central),  Calcutta,<\/a>\n[1972] 83 ITR 208; Potti Veerayya Sresty v. Commissioner  of\nIncome-tax, A.P., [1972] 85 ITR I94 distinguished.\n\n\n\nJUDGMENT:\n<\/pre>\n
     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 575 (NT)
\nof 1975.\n<\/p>\n
    From  the Judgment and Order dated the 24.4.1973 of\t the
\nCalcutta High Court in Income Tax Reference No. 202 of 1969.
\nB. Ahuja and Ms. A. Subhashini for the Appellant.
\n    K.P. Bhatnagar, S.P. Mittal and B.P. Maheshwari for\t the
\nRespondent.\n<\/p>\n
    The Judgment of the Court was delivered by
\n    PATHAK,  CJ.  This appeal by special leave\tis  directed
\nagainst the judgment of the High Court at Calcutta answering
\nthe following question in favour of the assessee and against
\nthe Revenue:\n<\/p>\n
\t      “Whether,\t on  the facts and  in\tthe  circum-
\n\t      stances  of the case, the share of  profit  of
\n\t      the  assessee’s  wife was\t includable  in\t the
\n\t      total  income  of the assessee  under  section
\n\t      64(1)(iii) of the Income Tax Act, 1961?”<\/p><\/blockquote>\n
739<\/span><\/p>\n
    The assessee was assessed in the status of an individual
\nfor the assessement year 1962-63 corresponding to the previ-
\nous  year 26 March, 1961 to 13 April, 1962. At the  material
\ntime the assessee was a partner in a firm, Messrs Ramesh and
\nCo.,  with a share of eight annas therein. The\tbalance\t was
\nshared\tby  three  other partners,  the\t assessee’s  father,
\nKunjilal Agarwala, the assessee’s brother, Hariram  Agarwala
\nand a stranger, Jagdish Prasad. On 10 November, 1960 and  on
\n28  November, 1960 the assessee made two gifts of  Rs.21,000
\nand Rs.30,000 respectively to his wife, Kaushalya Devi, from
\nhis account in the firm. On 28 November, 1960 he made anoth-
\ner  gift  of Rs. 11,000 to his mother Chili  Bai  from\tthat
\naccount. It may be observed that Chili Bai received  another
\ngift  of Rs.20,000 from her husband, Kunjilal,\teffected  by
\nsimilarly drawing from his account with the firm.
\n    The\t assessee’s  wife, Kaushalya Devi, as  well  as\t his
\nmother Chili Bai became partners with three other persons in
\na newly constituted firm, Messrs Kunjilal Hariram & Co.\t The
\nthree  other  partners\twere the  assessee’s  grand  father,
\nMoharilal Agarwala, the assessee’s brother, Hariram Agarwala
\nand  the stranger, Jagdish Prasad Gup. ta.  The\t Partnership
\nDeed dated 10 November, 1960 provided that the business\t was
\nto commence from 12 November, 1960. The preamble to the deed
\nstated:\n<\/p>\n
\t      “Whereas the partner of the Fifth Part who has
\n\t      extensive experience and outstanding talent of
\n\t      organisation  in Jagree and Grains  Trade\t but
\n\t      little  finance requested the partners of\t the
\n\t      First four Parts to enter into  co-partnership
\n\t      with him on contributing the necessary finance
\n\t      to carry on business in Jagree and Grains\t and
\n\t      also act as Commission Agents in Jagree Grains
\n\t      and  allied commodities to which request\tthey
\n\t      acceded.”\n<\/p><\/blockquote>\n
\t      Clause 4 of the Partnership Deed stipulated:
\n\t      “That  the  partners of the First\t Four  Parts
\n\t      shall  initially contribute Rs.25,000 each  to
\n\t      be put in within six months from the commence-
\n\t      ment  of the partnership. The  said  contribu-
\n\t      tions augmented by further deposits and  prof-
\n\t      its  or  depleted by  withdrawals\t and  tosses
\n\t      shall  carry  interest at the rate of  6%\t per
\n\t      annum.  The  amount if any,  standing  to\t the
\n\t      credit of the partner of the Fifth Part  shall
\n\t      carry interest at the same rate.”<\/p><\/blockquote>\n
740<\/span><\/p>\n
    On\t 12  November,\t1960  Kaushalya\t  Devi\t contributed
\nRs.21,000 as capital, which came out of the gift made by the
\nassessee   on  10  November,  1960.  She  also\t contributed
\nRs.30,000 as capital, which amount came out of the gift made
\non 28 November, 1960.\n<\/p>\n
    In the course of assessment proceedings for the  assess-
\nment year 1962-63 in respect of the assessee the Income\t Tax
\nOfficer included the profits of the assessee’s wife from the
\nfirm, Messrs. Kunjilal Hariram & Co., under s. 64(1)(iii) of
\nthe Income Tax Act, 1961.\n<\/p>\n
    An appeal by the assessee was dismissed by the Appellate
\nAssistant Commissioner of Income Tax, who observed that\t the
\nwife would not have become a partner of the firm unless\t she
\nhad contributed capital, and as the capital was provided  by
\nthe  husband the inclusion of the wife’s share of income  in
\nthe assessment of the assessee was justified.
\n    In second appeal, it was conceded by the assessee before
\nthe Income Tax Appellate Tribunal that the interest received
\nby  the assessee’s wife on her capital contribution  to\t the
\nfirm was includible in the total income of the assessee, but
\nit was contended that the balance of the share of profit was
\nnot so includable as the assessee’s wife had become a  part-
\nner in the firm in her own right, and it was immaterial that
\nthe  capital invested by her had been provided as a gift  by
\nthe  assessee. The Appellate Tribunal found that the  admis-
\nsion  of  the  assessee’s wife as partner in  the  firm\t was
\nsolely\ton  account of her contribution of  capital  to\t the
\nfirm,  that the assets in the form of cash were\t transferred
\ndirectly  by  the assessee to his wife\totherwise  than\t for
\nadequate consideration, and that the income must be said  to
\nhave  arisen  indirectly from the  assets  transferred.\t The
\nsecond appeal was dismissed. At the instance of the assessee
\nthe  question of law set forth earlier was referred  to\t the
\nHigh Court at Calcutta for its opinion.\n<\/p>\n
    The\t High  Court has taken the view that  the  share  of
\nprofits\t arose to the assessee’s wife primarily because\t the
\npartnership  made  a profit and although it  had  connection
\nwith the gift it did not arise as a result of the gift, that
\nthe income arose from the share of profits only because\t the
\nother partners agreed to take the assessee’s wife as partner
\nand was allowed to contribute to the partnership firm,\tthat
\nthe admission of the assessee’s wife to the partnership\t was
\nnot  in consequence of the gift, and that,  therefore,\tupon
\nall  those circumstances, the connection between the  income
\nof the share of profits and the gifts by the assessee to his
\nwife was too remote to be included within the provisions  of
\ns. 64(1)(iii) of the Income Tax Act.\n<\/p>\n
741<\/span><\/p>\n
    S.64(1)(iii) of the Income Tax Act, 1961, as it stood at
\nthe relevant time, provides:\n<\/p>\n
\t      “64(1)  In computing the total income  of\t any
\n\t      individual,  there shall be included all\tsuch
\n\t      income as arises directly or indirectly–<\/p><\/blockquote>\n
\n\t      (i) xx\t  xx\t  xx\n\t      (ii) xx\t   xx\t   xx\n\t\t    (iii)  subject to the provisions of\t cl.\n<\/pre>\n
\t      (i) of s. 27, to the spouse of such individual
\n\t      from assets transferred directly or indirectly
\n\t      to  the  spouse by such  individual  otherwise
\n\t      than for adequate consideration or in  connec-
\n\t      tion with an agreement to live apart.”\n<\/p><\/blockquote>\n
The income may arise directly or indirectly, but there\tmust
\nbe a proximate connection between the accrual of the  income
\nand the assets transferred by the assessee. In\tCommissioner
\nof  Income-tax,\t West  Bengal 111 v. Prem  Bhai\t Parekh\t and
\nOthers, [1970] 77 ITR 27 this Court held that the income  of
\nminor  sons,  who had invested capital in the  firm  out  of
\nmoneys\tgifted to them by their father (the assessee)  could
\nnot be included in the assessment of the assessee. The Court
\nobserved:\n<\/p>\n
\t      “Before  any  income of a minor child  can  be
\n\t      brought  within the scope of section  16(3)(a)\n<\/p><\/blockquote>\n
\t      (iv),  it\t must be established that  the\tsaid
\n\t      income  arose  directly  or  indirectly\tfrom
\n\t      assets  transferred directly or indirectly  by
\n\t      his  father.  There  is no  dispute  that\t the
\n\t      assessee had transferred to each of his  minor
\n\t      sons, a sum of Rs.75,000. It may also be\tthat
\n\t      the  amount  contributed by  those  minors  as
\n\t      their  share  in\tthe  firm  came\t from  those
\n\t      amounts. But the question still remains wheth-
\n\t      er  it can be said that the income with  which
\n\t      we are concerned in this case arises  directly
\n\t      or  indirectly from the assets transferred  by
\n\t      the  assessee to those minors. The  connection
\n\t      between  the gifts mentioned earlier  and\t the
\n\t      income in question is a remote one. The income
\n\t      of  the  minors  arose as a  result  of  their
\n\t      admission to the benefits of the\tpartnership.
\n\t      It is true that they were admitted to the
\n\t      742<\/span>
\n\t      benefits\tof  the partnership because  of\t the
\n\t      contribution  made  by them. But there  is  no
\n\t      nexus  between the transfer of the assets\t and
\n\t      the income in question. It cannot be said that
\n\t      income  arose directly or indirectly from\t the
\n\t      transferor  the  assets referred\tto  earlier.
\n\t      Section 16(3) of the Act created an artificial
\n\t      income.  That  section  must  receive   strict
\n\t      construction  as\tobserved by  this  court  in
\n\t      Commissioner  of Income-tax v. Keshavlal\tLal-
\n\t      lubhai Patel, [1965] 55 ITR 637 (S.C.). In our
\n\t      judgment before an income can be held to\tcome
\n\t      within the ambit of section 16(3), it must  be
\n\t      proved\tto    have    arisen-directly\t  or
\n\t      indirectly–from a transfer of assets made  by
\n\t      the  assessee in favour of his wife  or  minor
\n\t      children. The connection between the  transfer
\n\t      of  assets and the income must  be  proximate.
\n\t      The income in question must arise as a  result
\n\t      of  the transfer and not in some\tmanner\tcon-
\n\t      nected with it.”\n<\/p><\/blockquote>\n
It  seems to us that the observations of this Court in\tthat
\ncase fully cover the case before us. There is no doubt\tthat
\nthe wife became a partner because of the capital contributed
\nby  her in the firm, but, as observed by the High Court,  in
\nthe  judgment  under appeal, it was upon  agreement  by\t the
\nremaining partners that she became a member of the  partner-
\nship. The mere contribution of the capital by the wife\tinto
\nthe firm would not automatically have entitled her to  part-
\nnership in the firm. The partnership was based on agreement,
\nand  it is the event of agreement between the partners\tthat
\nbrought\t the  assessee’s  wife into  the  firm\tas  partner.
\nLearned\t counsel for the Revenue relies on  Commissioner  of
\nIncome-tax,  Bangalore\tv. J.H. Gotla,<\/a> [1985] 156  ITR\t323;
\nCommissioner  of  Income-tax, Assam Tripurn and\t Manipur  v.
\nJwalaprasad  Agarwala,<\/a> [1967] 66 ITR 154; V.D. Dhanwatey  v.
\nCommissioner  of  Income-tax,  Madhya  Pradesh,\t Nagpur\t and
\nBhandara,<\/a>  [1968] 68 ITR 365 and Smt. Mohini Thapar v.\tCom-
\nmissioner  of’ Income-tax (Central), Calcutta,\tand  Others,
\n[1972] 83 ITR 208 but we are not satisfied that those  cases
\nare  of\t assistance to the Revenue. Reliance was  placed  on
\nPotti  Veerayya Sresty v. Commissioner of Income-Tax,  A.P.,
\n[1972] 85 ITR 194 where the Andhra Pradesh High Court upheld
\nthe  inclusion\tof  the wife’s income  from  cloth  business
\ncarried on by her, into which cloth business she had invest-
\ned  a portion of the assets transferred by the assessee.  It
\nis sufficient to observe that the cloth business was her own
\nbusiness  and, as the High Court pointed out, there  was  no
\nnecessity  to depend upon the agreement of others. It is  on
\nthat  basis  that  the High Court  distinguished  Prem\tBhai
\nParekh’s case (supra).\n<\/p>\n
743<\/span><\/p>\n
    We\tare  of\t the view that the High Court  is  right  in
\nanswering. the . question referred to it in the negative, in
\nfavour of the assessee and against the Revenue.\n<\/p>\n
      In  the result the appeal fails and is dismissed\twith
\ncosts.\n<\/p>\n
R.S.S.\t\t\t\t\t  Appeal dismissed.\n744<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income Tax, … vs Prahaladrai Agarwala on 26 April, 1989 Equivalent citations: 1990 AIR 270, 1989 SCR (2) 737 Author: R Pathak Bench: Pathak, R.S. (Cj) PETITIONER: COMMISSIONER OF INCOME TAX, CALCUTTA Vs. RESPONDENT: PRAHALADRAI AGARWALA DATE OF JUDGMENT26\/04\/1989 BENCH: PATHAK, R.S. (CJ) BENCH: PATHAK, R.S. (CJ) KANIA, M.H. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-40700","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income Tax, ... vs Prahaladrai Agarwala on 26 April, 1989 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-prahaladrai-agarwala-on-26-april-1989\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Commissioner Of Income Tax, ... vs Prahaladrai Agarwala on 26 April, 1989 - 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