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Maharao Raja Kamlaker Singh vs Commissioner Of Income-Tax, U. P. ...

High Court Of Judicature at Allahabad|18 November, 1966

JUDGMENT / ORDER

JUDGMENT The judgment of the court was delivery by MANCHANDA J. - This is a case stated under section 66 (2) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The question of law referred is :
"Whether, on the facts and in the circumstances of the case, the income from the quarries of Rs. 20,360 was includible in the assessment of the assessee under the provisions of section 16 (3) (iii) of the Act ?"
The material facts are these : The relevant assessment year is 1948-49, the previous year being the financial year 1947-48. By a registered lease deed dated 16th April, 1947, the assessee made a lease of certain quarries in favour of his wife in perpetuity. Paragraph 3 of the deed reads :
"That the lessee is highly educated and accomplished daughter of Ruling Chief of Alas State in Kathiawar, famous for its industry and business instinct.
In consideration of the royalty and lessees convenient hereafter reserved and contained the lessor hereby transfers to the lessee the quarries of stone, ballasts, kankar morum and sand, etc., described in the schedule A hereto mentioned with the said quarries subject to the restrictions and conditions as to the exercise and enjoyment of the said liabilities, powers and privileges which are specified hereafter."
In clause 8 of the covenant is mentioned royalty which the lessee was to pay to the assessee. This reads :
"8. During the term of this demise, the lessee shall pay a royalty at the rate of Rs. 4,000, four thousand only, annually in two equal installments, the first installment to be due on the 1st June, and the second installment on the 1st December, every year whether the lessee quarries or carries on any operations or not."
Paragraph 9 of the convenant provides :
"9. The lessee will not be entitled to any remission in the royalty hereby reserved or revision of the term of this lease by reason of any quarry or quarries hereby demised becoming exhausted or not being worked for any reason."
In schedule A the names of the 46 villages in which the quarries are situated and which were being leased out under this indenture are set out. There was no mention in this lease deed, which was duly registered, of any other consideration which might have necessitated the execution of the lease. It is not at all clear as to at what stage of the assessment proceedings the assessee set up the case for the first time that, in addition to the royalty mentioned under the lease deed, there was an earlier agreement entered into, two years or so, before the marriage of the lessee to the assessee, whereunder the assessee is said to have promised to give the lessee Rs. 500 per mensem in cash and transfer certain quarries to her. It would seem that this case was put up after the Income-tax Officer had made the assessment and included the sum of Rs. 20,360 and only when the matter was remained by the tribunal to determine whether the transaction of the lease of quarries was a genuine transaction or not. We will however revert to this aspect a little later. After the remand, the assessment order, which was passed on the 5th March, 1951, shows that no real attempt was made to establish that there was in fact any earlier contract between the assessee and his future wife or her father to provide her with Rs. 500 in cash and the transfer of certain quarries. Only some letters at that stage appear to have been produced. There are letters exchanged between the secretary of the assessee and the Dewan of Bara Raj, during the period 2nd June, 1945, and 11th June, 1945. At best, they go to show that some kind of assurance was given by the secretary of the assessee to the Dewan of Dewan of Bara Raj; but certainly no enforceable contract came into existence between the assessee and the lessee or anyone authorised on her behalf to enter into any such contract.
The order of the Income-tax Officer also shows that no one on behalf of the assessee after the remand went into the witness box to give any evidence to prove these letters and the stress throughout, before him, was only on certain legal aspects of the matter. The assessment order further shows that, at the very outset, the ruling of the Bombay High court in D. R. Shahapure v. Commissioner of Income-tax was relied upon for the proposition that the case of the assessee would fall under section 16 (1) (c) and not under section 16 (3) (a) (iii) of the Act; that the lease deed itself did not amount to the transfer of any asset within the meaning of section 16 (3) (a) (iii) of the Act, and, lastly, that there was adequate consideration for the transfer of the quarries which, according to the assessee, was proved by the production of the aforesaid letters, and constituted an ante-nuptial contract.
The Income-tax Officer held that section 16 (3) (a) (iii) of the act applied, that the lease constituted a transfer of assets and that consideration of the paltry sum of Rs. 4,000 annually as royalty under the lease deed, against the yearly income in the relevant year of account for those quarries of Rs. 20,360 and in the succeeding year of Rs. 58,436 was wholly inadequate. He further expressed the view that the transfer was not in consideration of any marriage to the lessee but to safeguard the quarries from lapsing to the U. P. Government under the U. P. Zamindari abolition and land reforms Act.
On appeal, the Appellate Assistant Commissioner took the view that the lease was an irrevocable settlement upon the wife for a period of more than six years and, therefore, fell within the proviso to section 16 (1) (c) and as such the income therefrom was not includible in the assessment of the assessee.
Against that order the department went up in appeal to the Tribunal. The Tribunal allowed the appeal, set aside the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. In so doing it held that the lease in perpetuity was a transfer of an asset within the meaning of section 16 (3) (a) (iii) of the Act, that there was no consideration at all for entering into the lease deed which was between the assessee-husband and wife, and that the consideration of Rs. 4,000 under the agreement was wholly inadequate. Hence, this reference at the instance of the assessee.
Learned counsel for the assessee has before us contended that a pre-nuptial arrangement would be an adequate consideration for the lease when taken along with the royalty of Rs. 4,000 per annum under the lease deed. It was also contended that a lease would only amount to a transfer, not of an asset, but only of an interest therein. On the other hand, learned standing counsel urged that, for the purpose of taxation, a pre-nuptial agreement cannot be taken into consideration and it is only the adequacy of the pecuniary consideration mentioned in the deed which falls to be considered, and that having been found to be inadequate by the tribunal is a finding of fact which is binding on this court.
In order to determine the question referred, it is necessary to keep in the foreground the scheme of section 16 of the Act. The object of enacting the provisions contained in section 16 of the Act, as has often been said, is to prevent a husband or father from making revocable settlements divesting himself of the income and yet retaining indirect control over the property and the income thereunder or by transferring assets to his wife or minor children, other than for adequate consideration and thus lessening the burden of tax upon himself. This was counteracted by the legislature by enacting section 16 of the Act. Although such transactions may be genuine and valid under the general law, yet, the income therefrom for purpose of tax alone was directed to be assessed in the hands of the husband or father, and the case may be.
The applicability of section 16 (1) (c) of the Act was, very properly, not canvassed by the learned counsel for the assessee. Therefore, what has to be considered is whether the transaction of the lease in the instant case fell within the mischief of section 16 (3) (a) (iii) of the Act. The relevant part of section 16 (3) (a) (iii) of the Act runs :
"(3) In computing the total income of any individual for the purpose of assessment, there shall be included - (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly - ...
(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart."
The requirements of this sub-section, therefore, are (1) assets must have been transferred directly or indirectly by the husband to his wife; and (2) such transfer must be for adequate consideration. That a lease in perpetuity is a transfer within the meaning of section 105, Transfer of property Act, is not doubted but what is contended for the assessee is that under the Income-tax Act such a transfer will not do and only an out and out sale will avail the revenue. There is no force in this contention. There is no warrant for giving the word "transferred" any meaning different from its well-recognised meaning in law as embodied in section 105, Transfer of Property Act. That reads :
"105. A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.
The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent."
In any event, section 16 (3) (a) (iii) of the act is not concerned with assets but only the income therefrom. The transfer is accepted as genuine and valid under the general law and the income therefrom is the income of the wife for all purposes except for taxation when the income therefrom has to be included in the total income of the husband. We are supported in the view we are taking that a lease, as in the present case, is a transfer within the meaning of section 16 (3) (a) (iii) of the Act, by a decision of the Patna High Court in Kali Prasad Singh v. Commissioner of Income-tax.
The next condition which has to be satisfied is that the transfer was not for any consideration, or, if there was some consideration, it was inadequate. It has been held by the Supreme Court in Tulsi Das Kilachand v. Commissioner of Income-tax, "that when the law insists that there should be adequate consideration and not good consideration it excludes mere love and affection. They may be consideration to support a contract; but adequate consideration to avoid tax is quite a different thing. To insist on the other meaning is really to say that consideration must only be looked for, when love and affection cease to exist."
Whether the consideration is adequate or not, must, in the ultimate analysis, be a question of fact in each case. The finding in the present case is that Rs. 4,000 per annum royalty which is the only consideration mentioned in the lease deed is inadequate. That is a finding of fact which this court is bound to accept : see Guru Estate v. Commissioner of Income-tax. Therefore, the next question to be considered is whether there was any other consideration which the Tribunal was bound to consider but had failed to do so. In this connection, firstly, it will have to be determined whether there was any pre-nuptial agreement, and, if so, whether such an agreement could have been taken into consideration when no mention of it was made in the registered lease deed in determining the adequacy of the consideration. The paucity of material on the record for determining these questions is a great handicap. The only material consists of the letters aforesaid. It is not possible therefrom to spell out any agreement enforceable at law. To begin with, it is not even known as to who the parties are who the parties are who could possibly be held bound by the agreement, if any, or between whom there can be said to have been a consensus ad idem. At best, the letters show that some kind of a pious wish was expressed by the secretary of the assessee to the Dewan of the State to which the lessee belonged that some assets would be transferred. The marriage of the lessee, however, was not conditional upon the transfer being made. There was no marriage settlement made. Nor was any attempt made even after two years of the marriage to give effect to the promise, if any, made by the assessee. Such an agreement can hardly be described as a pre-nuptial agreement and much less a marriage settlement enforceable at law. As already observed, neither the assessee, nor anyone else on his behalf, has given evidence to prove that there was any such binding agreement. The Income-tax Officer, therefore, had rightly not seriously taken the so called belated pre-nuptial agreement as a part of the consideration for the transfer of the quarries to the wife. The Tribunal also was not prepared to consider this so called pre-nuptial arrangement to be of any consideration at all in the eye of law, and that is why it was mentioned, though somewhat enigmatically, that there was no consideration at all for the lease deed and then that the consideration of Rs. 4,000 under the deed was inadequate.
It is also a matter of some doubt, as pointed out by the Calcutta High Court in P. J. P. Thomas v. Commissioner of Income-tax, as to whether a pre-nuptial agreement is something which can be measured in terms of money and which could be binding on the income-tax authorities. It was there observed : "Therefore, as an ante-nuptial arrangement of this nature where marriage is put forward as valuable and financial consideration itself, it is not possible to determine the adequacy of such consideration, and, hence, in the context of the expression adequate consideration in section 16 (3) (a) (iii) of the Income-tax Act, it is not possible to include marriage within the expression adequate consideration." This case went up to the Supreme court, and was reversed on another ground, but the Supreme Court did not express any opinion as to whether a pre-nuptial agreement would constitute an adequate consideration or not within the meaning of section 16 (3) of the Act. It is, however, not also necessary for us to express any concluded opinion on this aspect as, in our judgment, the existence of a pre-nuptial agreement has not been proved in this case and the Tribunal has found that there was no consideration at all for the agreement.
In this view of the matter, it is also not necessary to consider whether, if there had been a pre-nuptial agreement but which was not mentioned in the registered deed of transfer as consideration for the lease, the provisions of section 91 and 92 of the Indian Evidence Act would have stood in the way of its being taken into consideration. Arguments that were addressed on the scope of sections 91 and 92 of the Indian Evidence Act need not, therefore, be adverted to. It may be observed, however, that the Evidence Act itself does not apply to the income-tax authorities or proceedings.
Lastly, it was contended that some kind of double assessment would result in this case inasmuch as the royalty of Rs. 4,000 would be assessed in the hands of the assessee, though this payment would have been made by his wife to him under the lease and in addition the income from quarries determined at Rs. 20,360 would also be included in his hands by virtue of section 16 (3) (a) (iii) of the Act. To that there is a complete answer in the decision of the Supreme Court in Income-tax Officer v. Bachu Lal Kapoor, where their Lordships repelled a similar argument, though in a somewhat different context, observing :
"None the less, if, under some mistake, such income was assessed to tax in the hands of the individual members, which should not have been done, when a proper assessment was made on the Hindu undivided family in respect of that income, the revenue had to make appropriate adjustments; otherwise, the assessment made in respect of that income on the Hindu undivided family would be contrary to the provisions of the Act, particularly section 14 (1) of the Act. We, therefore, hold that if the assessment proceedings initiated under section 34 of the Act culminates in the assessment of the Hindu undivided family, appropriate adjustments have to be made by the Income-tax Officer in respect of the tax realised by the revenue, in respect of that part of the income of the family assessed on the individuals of the said family. To do so is not to reopen the final orders of assessment, but in reality to arrive at the correct figure of tax payable by the Hindu undivided family."
Though no such point was against or raised before the Tribunal, nevertheless, we have no doubt that the department will not accept the sum of Rs. 4,000 if paid by the wife to the assessee as royalty under the lease deed in addition to the sum of Rs. 20,360,... her income from quarries but includible in the assessees income under the provisions of section 16 (3)(a) (iii) of the Act, and that some suitable adjustment in this regard will be made, provided, of course, the sum of Rs. 4,000 has not already been allowed in the assessment of the wife as an expense or outgoing in determining her income from the said quarries.
For the reasons given above the question is answered in the affirmative and against the assessee. The assessee will pay the costs of this reference which we assess at Rs. 300. Counsels fee is also assessed at Rs. 300. The reference is answered accordingly.
Question answered in the affirmative.
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Title

Maharao Raja Kamlaker Singh vs Commissioner Of Income-Tax, U. P. ...

Court

High Court Of Judicature at Allahabad

JudgmentDate
18 November, 1966