1982 (7) TMI 103 - AT - Income Tax

Daughters-in-law's Share Income Included in Assessee's Total Income under Income-tax Act

The Tribunal upheld the inclusion of daughters-in-law's share income in the assessee's total income under section 64(1)(vi) of the Income-tax Act, 1961. ... Attribution of income under section 64(1)(vi) of the Income-tax Act, 1961 - nexus between gifted funds and income arising directly or indirectly from transferred assets - treatment of withdrawals from partnership capital accounts in relation to previously gifted capitalAttribution of income under section 64(1)(vi) of the Income-tax Act, 1961 - nexus between gifted funds and income arising directly or indirectly from transferred assets - treatment of withdrawals from partnership capital accounts in relation to previously gifted capital - Whether the share of profit of two daughtersinlaw who became partners with the aid of gifts made by the assessee could be included in the assessee's total income under section 64(1)(vi) for assessment year 1978-79 notwithstanding that each partner subsequently withdrew an amount equal to the original gift and deposited it in bank fixed deposits. - HELD THAT: - The two ladies became partners by utilising amounts earlier received by way of gift from the assessee; their share of profits was credited to their capital accounts in the firm. Although each withdrew an amount equal to the original gift in the relevant accounting year and deposited it in bank fixed deposits, the withdrawal could not be conclusively treated as the identical gifted money because funds in partnership accounts are not earmarked and comprise initial capital and accumulated profits. Section 64(1)(vi) covers income arising directly or indirectly from assets transferred; where the partnership position and profit share have a direct connection with the gifted amounts, the share income remains attributable to the transferor. The decision in Popatlal (distinguishable on its facts concerning accretions to transferred shares) does not assist the assessee. On a plain reading of section 64(1)(vi) and applying the facts, the incometax authorities were justified in including the partners' share in the assessee's total income. [Paras 6, 7]The Tribunal upheld the inclusion of the two partners' share of profit in the assessee's total income under section 64(1)(vi) and dismissed the appeal.Final Conclusion: The appeal is dismissed; the inclusion of the partners' share of profit in the assessee's total income for assessment year 1978-79 under section 64(1)(vi) is sustained. Issues:Applicability of section 64(1)(vi) of the Income-tax Act, 1961.Detailed Analysis:The judgment involves a dispute regarding the applicability of section 64(1)(vi) of the Income-tax Act, 1961. The assessee, an individual, had gifted a sum of Rs. 7,500 each to his daughters-in-law, who subsequently became partners in a firm. The income tax authorities included the share income of the daughters-in-law in the total income of the assessee, invoking the provisions of section 64(1)(vi). The assessee contended that since the daughters-in-law had withdrawn the gifted amounts from the firm and deposited them in a bank, the provisions of section 64(1)(vi) should not apply. However, both the Income Tax Officer (ITO) and the Appellate Authority Commissioner (AAC) upheld the inclusion of the share income in the assessee's total income.The AAC, in his order, emphasized that the share income had a direct connection with the gifted amounts as the daughters-in-law became partners using the gifted money. Despite the withdrawal of funds from the firm, the AAC concluded that the share income continued to have a nexus with the initial gift. The AAC approved the inclusion of the share income in the assessee's total income, citing the provisions of section 64(1)(vi) and the direct link between the gifted amounts and the share income.The assessee appealed the AAC's decision before the Tribunal, reiterating his arguments against the applicability of section 64(1)(vi). The Tribunal considered the submissions of both parties, including the assessee's reliance on a Bombay High Court decision. However, the Tribunal found no merit in the assessee's contentions and upheld the order of the AAC. The Tribunal highlighted the factual distinctions between the Bombay High Court case and the present appeal, emphasizing that the daughters-in-law's share income was directly linked to the gifted amounts.Ultimately, the Tribunal dismissed the appeal, affirming the inclusion of the daughters-in-law's share income in the assessee's total income. The Tribunal held that the income tax authorities had correctly applied the provisions of section 64(1)(vi) based on the direct connection between the gifted amounts and the share income, despite the withdrawal and deposit of funds by the daughters-in-law. The Tribunal underscored the need to interpret the tax laws objectively, without being swayed by considerations of hardship, and upheld the order of the AAC.