COMMISSIONER OF INCOME-TAX, WEST BENGAL, CALCUTTA versus SHRI PREM BHAI PAREKH AND ORS.

Citation: [1971] 1 S.C.R. 308 · Decided: 20-04-1970 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Dismissed

Judgment (excerpt)

30$ 
COMMISSIONER 
OF INCOME·TAX, 
WEST BENGAL, 
CALCUITA 
v. 
SHRI PREM BHAI PAREKH AND ORS. 
April 20, 1970 
[J. c. SHAH; K. s. HBGDE AND A. N. GROVER, JJ.] 
Indian Income-tax Act ( lJ of 1922), s. 16(3 )(a)(iv)-Lncome arising 
as a result of transfer-What is. 
The assessee was a partner in a firm. 
On the last day of the account-
B 
ing year of the ftrin, namely, lst July 1954 he retired 'from the firm and 
C 
gifted to each of his four so~1s Rs. 75,000. The firm was reconstituted 
and the first son, who was a major, became a partner in the firm. 
The 
other sons who were minors, 
became entitled to the benefits of the 
partnership, because, they invested in the firm the amounts received by 
them as gifts from their father. 
In the assessment year 
1956-57 the 
Income-tax Officer held that the income arising to the minors by virtue 
of their admission to the benefits of the partnership came within the pu.r-
D 
view of s. 16 ( 3 )(a)( iv) of the Income-tax Act, 1922, and included that. 
income in the total income of the assessee. 
The order was confirmed by 
the Appellate Assistant Commissioner and 
the Tribunal, but the High 
Court on a reference, held in favour of the assessee. 
In appeal to this Court, 
f 
HELD : Tile section 
creates an artificial income- and must be cons-
E 
trued strictly, that is. before an income can be held to come within the 
ambit of s. 16(3) it must be proved to have arisen-directly or indirect-
ly-from a transfer of assets made by the assessee in ifa.vour of the minor 
children. The connection between the transfer and the income must be 
proximate. It must arise as a result of the transfer and not in some manner 
connected with it. (31~ H; 311 A-B] 
In the present case, the income of the minors arose as a result of their 
F 
admission to the benefits of partnership, and there is no proximate ne:tus 
between the transfer and 1he income. [31 0 G J 
C.I.T., Gujarat v. Keshavlal LallubluJi Patel, 55 I.T.R. 637, 
(S.C.) 
1ollowed. 
CtVIL APPELLATE JURISDICTION: Civil Appeal No. 2272 of 
G 
1966. 
Appeal from the judgment and order dated January 6. 1966 of 
Calcutta High Court in Income-tax Reference No. 211 c.f 1961. 
S. Mitra, A. S. Nambiar, R. N. Sachthey and B. D. Sharma, 
H 
for the appellant. 
M. C. Chagla and P. K. Chatterjee1 for the respondents. 
A 
B 
c 
E 
C.L.T .• W, BENGAL v. P. &. PAREKH (Hegde, J.) 
:109 
The Judgment of the Court was delivered by 
Hegde, J. This is an appeal by certificate, granted by the 
High Court of Calcutta under s. 66A(2) of the Indian Inc<Jme 
Tax Act, 1922 (to be hereinafter referred to as the Act) against 
the decision of that Court in a reference under s. 66 ( 1 ) of that 
Act. 
The two questions of law referred to the High Court by the · 
tribunal are : ( I ) Whether s. 16 ( 3) of the Act was ultra vires the 
Central Legislature and (2) Whether on the. facts and in the cir· 
cumstances of the case, the income arisin~ to the three minor 
sons of the assessee by virtue of their adm1ssion to the benefits of 
lhe partnership of Messrs. Ajitmal Kanhaiy~lal was 
rightly 
in· 
eluded in the total income of the assessee under ~o. J6 ( 3) (a) ( iv) 
of the Act. 
The assessee at whose instance those ql!.'!stiom were referred 
did not press for an answer in respect of question No. I. There-
fore lhat question was not dealt with by the High Court. Hence 
we need not go into that question. 
The High Court 
~mc;wered 
the second question in favour of the assessee. 
. 
The facts necessary for the purpose of deciding the point in . 
dispute as set out in the statement of the case submitted by the 
tribunal are as follows : 
The assessee Shri Ajitmal Parekh was a partner of the finn 
M/s. Ajitmal Kanhaiyalal having 7 annas share therein.' He con-
tmuedto be a partner of that firm till July 1, 1954 which was the 
last date of the accounting year of- the firm, relevant for the 
F 
assessment year 1955·56. On July 1, 1954, the assessee retired 
from the firm. 
Thereafter he gifted to each of his four sons 
Rs. 75,000/ •. 
Out of his four sons, three were minors at that 
time. 
There was a reconstitution of i'he firm with effect from . 
July 2, 1954 as evidenced by the partnership deed dated July 5, 
1954. The major son of the assessee became a partner of the· 
reconstituted firm and his minor sons were admitted to the bene-
G 
fits of that partnership in the _reconstituted finn. 
The major son 
had 2 annas share. His three minor brothers were admitted to 
the benefits

Excerpt shown. Read the full judgment & AI analysis in Lexace.