1940 (11) TMI 29 - HC - Income Tax

Court rules transfers between spouses without adequate consideration subject to taxation under Section 16(3)

The court held that Section 16(3) of the Indian Income-tax Act applies to transfers made before its enactment, including those between spouses. Transfers ... - Issues Involved:1. Applicability of Section 16(3) of the Indian Income-tax Act to transfers made before the enactment of the sub-section.2. Whether transfers made to the wife were for adequate consideration under Section 16(3)(a)(iii).Issue-wise Detailed Analysis:1. Applicability of Section 16(3) of the Indian Income-tax Act to transfers made before the enactment of the sub-section:The primary issue was whether Section 16(3) of the Indian Income-tax Act, 1922, which was added by Act IV of 1937, applies to transfers made before the enactment of the sub-section. The assessee contended that the sub-section should not apply retrospectively to transfers made before its enactment. However, the court held that Section 16(3) is not directed at transactions between husband and wife and does not invalidate such transactions. Instead, it assumes the transactions are valid and provides a method for taxing the income arising from the transferred assets. The court emphasized that the sub-section is applicable to income chargeable for any year subsequent to April 1, 1937, and thus, it applies to the assessment year 1937-38. The court concluded that the sub-section is wide enough to cover income from assets transferred before the passing of the Act.2. Whether transfers made to the wife were for adequate consideration under Section 16(3)(a)(iii):The second issue was whether the transfers made by the assessee to his wife were for adequate consideration. The assessee argued that the transfers were made out of natural love and affection, which should be considered adequate consideration. However, the court held that 'consideration' in this context must be understood in its legal sense, as defined in the Indian Contract Act. Natural love and affection do not constitute legal consideration. The court further noted that even if natural love and affection were considered good consideration, it would not be adequate consideration. Adequate consideration must be equal or nearly equal in value to the assets transferred. The court concluded that the transfers in question were not for adequate consideration, and thus, the income arising from these assets should be included in the husband's total income for tax purposes.Judgment:The court answered the reference by stating that Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, applies to income from assets transferred by a husband to a wife otherwise than for adequate consideration, even if such transfers were made before the sub-section came into force. The income of Rs. 15,622 was rightly included in computing the total income of the assessee. The assessee was ordered to pay the costs of the proceeding, assessed at five gold mohurs, with the sum of one hundred rupees in deposit to be retained by the Income-tax authorities.Separate Judgments:FAZL ALI, J.: Agreed with the judgment.MANOHAR LALL, J.: Provided additional reasoning supporting the inclusion of the wife's income in the husband's total income. He emphasized that the term 'adequate consideration' means equal or proportionate consideration and not merely good consideration. He also agreed that the provisions of Section 16(3)(a)(iii) are not retrospective and apply to assessments for years subsequent to April 1, 1937. He concurred with the decision to include the wife's income in the husband's total income and supported the order for the assessee to pay the costs.