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

CIVIL APPEAL No. 2272/1966Supreme Court[1971] 1 S.C.R. 30820 April 1970Bench: 3 JudgesAuthor: J.C. SHAH, K.S. HEGDE, A.N. GROVER COMMISSIONER OF4 pages
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What were the facts?

The assessee, Shri Ajitmal Parekh, was a partner in a firm. On July 1, 1954, he retired and gifted Rs. 75,000 to each of his four sons. Subsequently, the firm was reconstituted. The assessee's major son became a partner, and his three minor sons were admitted to the benefits of the partnership, investing the gifted amounts. For the assessment year 1956-57, the Income-tax Officer included the income arising to the minors from the partnership in the assessee's total income under Section 16(3)(a)(iv) of the Income-tax Act, 1922. This was upheld by the Appellate Assistant Commissioner and the Tribunal. However, the High Court, on a reference, ruled in favour of the assessee.

What did the Supreme Court hold?

The Supreme Court held that Section 16(3)(a)(iv) of the Income-tax Act, 1922, which deals with the aggregation of income of minor children in the hands of the assessee, must be construed strictly. For income to be included under this section, it must be proven to have arisen directly or indirectly from a transfer of assets made by the assessee in favour of the minor child. The connection between the transfer of assets and the income must be proximate; the income must arise as a result of the transfer and not merely in a manner connected with it. In this case, the income of the minors arose from their admission to the benefits of the partnership, and while the capital for their investment came from the gifts, there was no proximate nexus between the transfer of assets and the income generated by the partnership. The Court followed its earlier decision in Commissioner of Income Tax, Gujarat v. Keshavlal Lallubhai Patel. Therefore, the income was not includible in the assessee's total income.

What were the issues?

1. Whether Section 16(3) of the Income-tax Act, 1922, was ultra vires the Central Legislature? (This question was not pressed by the assessee and therefore not decided by the High Court). 2. Whether, on the facts and in the circumstances of the case, the income arising to the three minor sons of the assessee by virtue of their admission to the benefits of the partnership was rightly included in the total income of the assessee under Section 16(3)(a)(iv) of the Income-tax Act, 1922? Assessee's Contention: The assessee argued that the income of the minors arose from their admission to the benefits of the partnership, and there was no proximate nexus between the transfer of assets (gifts) and this income. The connection was remote, and the income did not arise directly or indirectly from the transferred assets as required by Section 16(3)(a)(iv). Revenue's Contention: The revenue contended that the income arising to the minors was includible in the assessee's total income under Section 16(3)(a)(iv) because the capital invested by the minors in the firm originated from the gifts made by the assessee, thus establishing a direct or indirect link.

Which sections of the Income-tax Act were involved?

Section 16(3)(a)(iv),Section 66A(2),Section 66(1)

AI-generated summary — verify with the full judgment below

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.

The order continues below.

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