1991 (11) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee individual had transferred the assets to his spouse.
2. Whether the income arose to the spouse from the assets transferred by the assessee.
3. Whether the requirements of section 64(1)(iii) of the Income-tax Act are satisfied.

Issue-wise Detailed Analysis:

1. Whether the assessee individual had transferred the assets to his spouse:
The Tribunal found that the firm "Good Morning Stores," consisting only of the two assessees, transferred the business "Bright Dry Cleaners" to their wives. The assessees argued that the transfer was by the firm and not by them as individuals. However, the court held that a firm under the Indian Partnership Act is not a distinct legal entity apart from its partners. Thus, the transfer by the firm is essentially a transfer by the partners. Therefore, the transfer of the business to the spouses was considered a transfer by the individual partners.

2. Whether the income arose to the spouse from the assets transferred by the assessee:
The Tribunal held that the income arising to the spouses was from the assets transferred by the assessees. The business, including its machinery and equipment, was transferred to the spouses, who then continued the business in the same premises with the same employees. The court found that the income generated by the spouses was directly attributable to the transferred assets. Thus, the income arose to the spouse from the assets transferred by the assessee.

3. Whether the requirements of section 64(1)(iii) of the Income-tax Act are satisfied:
Section 64(1)(iii) includes in the total income of an individual any income arising directly or indirectly to the spouse from assets transferred by the individual otherwise than for adequate consideration. The court found that the firm, consisting of the two assessees, transferred the business to their wives for inadequate consideration. This transfer was considered an indirect transfer by the individual partners to their spouses. The court emphasized that the legislative intent of section 64(1)(iii) is to prevent tax evasion through such transfers. Consequently, the income arising from the transferred assets was to be included in the total income of the assessees.

Separate Judgments:
- T. Kochu Thommen J.: Held that the requirements of section 64(1)(iii) were satisfied, and the income arising from the transferred assets should be included in the total income of the assessees. Answered question No. 3 in the affirmative, in favor of the Revenue, and found it unnecessary to answer questions Nos. 1 and 2.
- Radhakrishna Menon J.: Held that the assets transferred belonged to the partnership and not exclusively to the assessees. Thus, section 64(1)(iii) was not applicable. Answered all questions in the negative, in favor of the assessees.
- K. A. Nayar J.: Agreed with T. Kochu Thommen J., holding that the transfer by the firm was an indirect transfer by the partners, satisfying section 64(1)(iii). Answered question No. 3 in the affirmative, in favor of the Revenue, and found it unnecessary to answer questions Nos. 1 and 2.

Conclusion:
According to the majority view, question No. 3 is answered in the affirmative, in favor of the Revenue, leaving questions Nos. 1 and 2 unanswered as unnecessary in light of the answer to question No. 3.