Transferred quarry income and inadequate consideration under tax-avoidance rules led to inclusion in the transferor's income

Section 16(3)(a)(iii) was designed to prevent tax avoidance through transfers of assets to a wife or minor child without adequate consideration. A lease in perpetuity was treated as a transfer within the ordinary meaning of property transfer, so income arising from the quarries fell within the provision if the transfer was not supported by real consideration. The registered deed showed only annual royalty, and the finding that the royalty was inadequate, together with the failure to prove any binding prenuptial arrangement or enforceable marriage settlement, supported inclusion of the quarry income in the transferor's total income.

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Issues: Whether the income from quarries leased by the assessee to his wife was includible in the assessee's total income under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922.

Analysis: Section 16 was enacted to prevent tax avoidance by transfers of assets to a wife or minor child otherwise than for adequate consideration. A lease in perpetuity is a transfer within the ordinary legal meaning of transfer of property, and section 16(3)(a)(iii) is concerned with income arising from such transferred assets. The only consideration shown in the registered lease deed was royalty of Rs. 4,000 annually, while the Tribunal found that the quarries yielded substantially higher income and that the royalty was inadequate. The alleged prior arrangement was not proved as a binding prenuptial contract or marriage settlement, and the belated letters did not establish enforceable consideration.

Conclusion: The transfer fell within section 16(3)(a)(iii), the consideration was inadequate, and the income from the quarries was rightly includible in the assessee's income.

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