The Judgment of the Court was delivered by

Banerjee, J.:— This is a reference under section 66(1) of the Indian Income-tax Act, 1922.

2. The assessment year involved is the year 1960–61, corresponding to the previous year ended on September 30, 1959

3. The reference has been made in the circumstances hereinafter stated in brief. The assessee, Abhijit Sen, during the relevant period was a director of a private company known as Messrs. Sen and Pandit Private Ltd. He used to receive a sum of money by way of salary and a further sum by way of house allowance. The assessee himself, his brother, Sanjoy, and his father, Sudhir Kumar, were also shareholders in the private company and used to receive dividends declared by the company on their respective shares. On February 5, 1958, Sudhir Kumar transferred, by way of gift, 10,000 shares in the private limited company to the wives of his two sons, namely, the assessee and Sanjoy, each getting 5,000 shares. On the same day, the assessee and Sanjoy each made a gift of 5,000 shares in the private company to their mother, wife of Sudhir Kumar. Also on the same day, the assessee and Sanjoy each made a gift of 5,000 shares in the private company to the wife of the other brother and a further 5,000 shares in the same company to a married sister of theirs. Thus the wife of the assessee, the wife of his brother, Sanjoy, and the mother of the assessee and Sanjoy each came to possess 10,000 shares in the private limited company. We are not concerned, in this reference, with the transfer of shares made to the sister of the assessee and of Sanjoy. The transfer of shares were all registered, in the names of the transferees, in the share register of the private company. In the return filed for the assessment year 1960–61, the assessee excluded the dividend income derived from the 10,000 shares which he had transferred to his mother and brother's wife, namely, 5,000 shares to his mother and 5,000 shares to his brother's wife. The Income-tax Officer, however, included the dividend income in the hands of the assessee with the following observations:

“It was found that the assessee, by collateral and associated operation with his brother, Sri Abhijit Sen (mistake for Sanjoy Sen), and father, Sri S.K Sen, gifted 10,000 shares of Messrs. Sen & Pandit Private Ltd. to his wife… The net result of the above transactions on 5th February, 1958, i.e, on the same date, was that 10,000 shares were transferred from Sarbasree S.K Sen, Sanjoy Sen and Abhijit Sen to their wives, Mrs. Mira Sen, Mrs. Ratna Sen and Mrs. Amiya Sen.

Section 16(3) speaks not only of the direct transfer of assets to the wife but also speaks of indirect transfer and since these transactions were done on the same date, this is obviously the case of indirect transfer of assets, which attracts the provisions of clause (iii) of sub-section (a) of section 16(3) of the Indian Income-tax Act. There is no question of agreement to live apart in this case and, in spite of specific opportunity given to the assessee, the assessee has not come forward with any consideration adequate or otherwise for which the transfer was made. It was, however, contended by the assessee that he gifted not only 10,000 shares but actually 15,000 shares, 5,000 of which were gifted to his sister. This does not, however, in any way change the position of law in so far as the transfer of 10,000 shares indirectly to the wife are concerned.”

4. The assessee appealed against the assessment order before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the appeal, relying on a decision of the Madras High Court in C.M. Kothari v. Commissioner Of Income-Tax [1958] 34 I.T.R 317.. The reasons which weighed with the Appellate Assistant Commissioner are quoted hereinbelow:

“The Income-tax Officer has not attempted to establish that one transfer is the consideration for another in this case. He has not even bothered to ascertain what were the reasons for the gifts made and whether there was any understanding before the gifts were made. In response to my question, Sri Maitra submits that the motive for the gifts made by the assessee were natural love and affection and an intention to gift to his mother and other ladies income producing assets. It is also submitted that the same Income-tax Officer has assessed the assessee to gift-tax on these gifts. If the Income-tax Officer holds that the transfers were to his own wife, then under the Gift-tax Act gift to one's wife is exempt up to the extent of Rs. 1,00,000. It is verified that the Gift-tax Officer has not allowed this relief in the gift-tax assessment. All these facts go to show that the stand taken by the Income-tax Officer in the present assessment cannot be sustained. There is no material whatsoever to hold that the assessee indirectly transferred his own shares to his wife. In this connection an additional factor to be noted is that the distinctive number of the shares gifted by the assessee to his mother and other ladies is different from the distinctive numbers of shares received by the assessee's wife. It is well-settled that in the case of shares the rights are attached to the particular shares. In this case the shares belonging to the assessee were not as such transferred to the assessee's wife. Therefore, in this particular case it cannot be held that the assets have been transferred to the wife.”

5. The revenue, thereupon, appealed before the Appellate Tribunal, which dismissed the appeal with the observation:

“The only contention raised in this departmental appeal is that the Appellate Assistant Commissioner is wrong in excluding from the total income of the assessee the dividend on 10,000 shares of Sen and Pandit (P.) Ltd., which the assessee had gifted away to his wife. We have decided an identical point in the case of the assessee's father, Sri Sudhir Kumar Sen (deceased), being I.T.A No. 5861 of 1961–62 and following the same reasons we confirm the Appellate Assistant Commissioner's order and dismiss the departmental appeal.”

6. We need, at this stage, refer to the material portion of the judgment of the Appellate Tribunal in I.T.A 5816 of 1961–62, to which reference was made by the Appellate Tribunal, in the judgment in the instant case, and the reasons wherein were followed by the Tribunal without repetition. The material portion of the said judgment reads:

“Respectfully following the same decision (meaning the decision of the Madras High Court in C.M Kothari's case), we also hold that in this case there is no finding by the Income-tax Officer as regards any mutuality about the transaction in question and he has not assigned any reason whatsoever in his observation that these are associated and collateral transactions. That the transactions constituted a single transaction has got to be proved in such cases before the provisions of section 16(3) could be made applicable. In the latter part of his order the Income-tax Officer has simply pointed out:

“…the assessee has not come forward with any consideration adequate or otherwise for which the transfer was made.”

We therefore confirm the order of the Appellate Assistant Commissioner and dismiss the departmental appeal.”

7. Aggrieved by the order of the Tribunal the revenue applied for and obtained reference of the following question of law to this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 16(3)(a)(iii) and 16(3)(b) of the Indian Income-tax Act, 1922, were not applicable in regard to the transfer of 10,000 shares of Messrs. Sen & Pandit Private Ltd., by the assessee to his mother and brother's wife, and in deleting the dividend income in respect of the said shares from the assessee's taxable income.”

8. Mr. Sabyasachi Mukherji, learned counsel for the revenue, submitted that the Appellate Assistant Commissioner and the Appellate Tribunal both-drew considerable inspiration from the judgment of the Madras High Court in C.M. Kothari v. Commissioner Of Income-Tax and, proceeding on that basis, answered the question in favour of the assessee and against the revenue. He submitted that the decision of the Madras High Court in C.M Kothari's case stood reversed by the Supreme Court in Commissioner of Income-tax v. C.M Kothari [1963] 49 I.T.R S.C 107 and, consequently, the reasons which weighed with the Madras High Court should not be taken as good reasons any longer. The Tribunal, therefore, should be deemed to have erred in relying upon the Madras High Court decision in finding in favour of assessee.

9. In order to appreciate this argument, it is necessary for us to see what happened in C.M Kothari's case, in some detail. In that case, there was a firm of stock-brokers known as Messrs. Kothari & Sons. In 1947, the firm consisted of C.M Kothari and his two sons, D.C Kothari and H.C Kothari. On October 7, 1957, the firm entered into an agreement for the purchase of a house for Rs. 90,000 and the same day paid an advance of Rs. 5,000. This sum was debited in the books of the firm to the accounts of the three partners as follows:

Rs. C.M Kothari 1,800 D.C Kothari 1,600 H.C Kothari 1,600 Total 5,000

10. The transaction was completed on October 24, 1947. The sale deed, however, was taken in the names of Mrs. C.M Kothari, Mrs. D.C Kothari and H.C Kothari. The balance of the consideration was paid to the vendors by the firm. Each of the two ladies paid to the firm a cheque of Rs. 28,333-5-4. Mrs. C.M Kothari further paid a cheque of Rs. 1,800 and Mr. D.C Kothari paid another cheque of Rs. 1,600. Thus, the two ladies paid one-third share of Rs. 85,000 and the amounts which were respectively paid by their husbands as part of the earnest money. H.C Kothari was debited with a further sum of Rs. 28,333-5-4. In this way, Mrs. CM. Kothari paid Rs. 200 more than the other two, because her husband had previously paid Rs. 200 more than his sons. The share of the three vendees was, however, shown to be one-third each. The ladies issued the cheques on their accounts into which were paid by the firm certain amounts by cheques. Into Mrs. CM. Kothari's account was paid an amount of Rs. 27,000 which was debited on October 24, 1947, to D.C Kothari. It was stated to be a birthday gift by him to his mother. On November 13, 1947, another amount of Rs. 3,000 was paid into Mrs. C.M Kothari's account which was debited to the account of D.C Kothari as a gift by him to his mother for Diwali. Similarly, on November 13, 1947, Mrs. D.C Kothari's account with the bank was credited with a sum of Rs. 30,000 by a cheque issued by the firm. This was debited to the account of C.M Kothari and was shown as a gift by him to his daughter-in-law. In this way, both the ladies received from the firm Rs. 30,000, which was the exact one-third share of the consideration of Rs. 90,000, but the amount was not paid by their respective husbands, but by the son in the one case and the father-in-law in the other. In the assessment years involved in that case, the Income-tax Officer assessed the income from the ⅓ share of the house received by Mrs. CM. Kothari as the income of her husband. Similarly, for the same assessment years, the income of Mrs. D.C Kothari from this house was assessed as the income of her husband. This was on the ground that because of the interchange of the money in the family, either the purchases were made by the donors benami in the names of the donees, or alternatively, from assets transferred indirectly by the husband to the wife in each case. The Income-tax Officer pointed out that the birthday of Mrs. C.M Kothari had taken place earlier in the year and there was no occasion to give a birthday present to her several months later and on the date coinciding with the purchase of this property. The Income-tax Officer also found that in the past, the father-in-law had never given such a big present to his daughter-in-law on Diwali, and this time there was no special circumstance to justify it. The assessee appealed before the Appellate Assistant Commissioner but failed. The appeal before the Appellate Tribunal also fared the same fate. The Tribunal did not, however, hold that the transaction was benami but confirmed the other finding that the two ladies had acquired their shares in the house out of the assets of the husbands indirectly transferred to them. At the instance of the assessee, the Tribunal stated a case for opinion of the High Court but the High Court answered the question in the negative. When the matter reached the Supreme Court, the question whether the two transactions were benami transactions did not fall to be considered. The only question which survived for decision of the Supreme Court was whether the case was covered by section 16(3)(a)(iii) of the Income-tax Act. The Supreme Court considered section 16(3)(a)(iii) and observed:

“The section takes into account not only transference of assets made directly but also made indirectly. It is impossible to state here what sorts are covered by the word ‘indirectly’, because such transfers may be made in different ways.”

11. The Supreme Court then proceeded to elaborate the proposition in the following manner:

“It is argued that the first requisite of the section is that the assets must be those of the husband and that is not the case here. It is true that the section says that the assets must be those of the husband, but it does not mean that the same assets should reach the wife. It may be that the assets, in the course of being transferred, may be changed deliberately into assets of a like value of another person, as has happened in the present case. A chain of transfers, if not comprehended by the word ‘indirectly’, would easily defeat the object of the law which is to tax the income of the wife in the hands of the husband, if the income of the wife arises to her from assets transferred by the husband. The present case is an admirable instance of how indirect transfers can be made by substituting the assets of another person who has benefited to the same or nearly the same extent from assets transferred to him by the husband.”

12. The Supreme Court thereafter considered how far chain transactions are to be included in the word “indirectly” and observed:

“It is next contended that even if chain transactions be included, then, unless there is consideration for the transfer by the husband, each transfer must be regarded as independent, and in the present case, the department has not proved that the transfers by the son to the mother and by the father-in-law to his daughter-in-law were made as consideration for each other. We do not agree. It is not necessary that there should be consideration in the technical sense. If the two transfers are inter connected and are parts of the same transaction in such a way that it can be said that the circuitous method has been adopted as a device to evade implications of this section, the case will fall within the section.”

13. The Supreme Court concluded the judgment with the following observation:

“The High Court also overlooked the fact that the purchase of the house at first was intended to be in the names of the three partners of the firm. No evidence was tendered why there was a sudden change. It is difficult to see why the ladies were named as the vendees if they did not have sufficient funds of their own. They could only buy the property if some one gave them the money. It is reasonable to infer from the facts that before the respective husbands paid the amounts, they looked up the law and found that the income of the property would still be regarded as their own income if they transferred any assets to their wives. They hit upon the expedient that the son should transfer the assets to his mother, and the father-in-law, to the daughter-in-law, obviously failing to appreciate that the word ‘indirectly’ is meant to cover such tricks.”

14. Mr. Mukherjee contended that in the instant case, the motive of the father-in-law transferring his shares to his two daughters-in-law, the motive of the sons transferring an equal number of shares to the mother and the motive of the two brothers transferring shares owned by them to the wife of the other brother were such as would raise the only inference that this was done with a purpose the purpose being to circumvent the provisions of section 16(3) of the Indian Income-tax Act. According to Mr. Mukherjee, the entire thing was part of a scheme which was described by the Income-tax Officer as “collateral and associated operation” and the scheme was engineered to achieve the same purpose as would have happened if the father of the assessee had transferred the share to his own wife, and the sons to their respective wives. This was done in the circuitous manner so as not to fall within the mischief of section 16(3) of the Income-tax Act

15. Section 16(3) of the Indian Income-tax Act is couched in the following language:

“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 a minor child of such individual as arises directly or indirectly—

(i) from the membership of the wife in a firm of which her husband is a partner;

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner;

(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; or

(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration; and

(b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both.”

16. Mr. Mukherjee submitted that either section 16(3)(a)(iii) or section 16(3)(b) was attracted in the instant case. He submitted that there was no evidence that the transfers were made for adequate consideration or in connection with an agreement to live apart within the meaning of section 16(3)(a)(iii). The fact that the transfers were not made by the husband to the wife but by the father-in-law to the daughters-in-law, by the sons to the mother and by brothers to the other brother's wife, would not fail to attract the mischief of section 16(3)(a)(iii), because the object of transferring shares by the husband to the wife was sought to be achieved by this indirect method. He further submitted that if section 16(3)(a)(iii) was not attracted, section 16(3)(b) would be attracted because the transactions were such as amounted to assets transferred otherwise than for adequate consideration to a person by an individual for the benefit of his wife.

17. Mr. Sukumar Mitra, learned counsel for the assessee, tried to repel the contentions raised by Mr. Mukherjee with the following arguments. He submitted, in the first place, that the Income-tax Officer came to an a priori finding that the transaction amounted to a collateral or associated operation. He further submitted that there was no evidence which would go to establish that the transfer by the father-in-law to the daughters-in-law, the transfer by the sons to the mother or the transfer of the brothers to the other brother's wife was made under an understanding or an arrangement whereby a purpose was sought to be achieved. In the absence of such evidence, he submitted, the circumstances relied on by the revenue would not go to establish the proposition that the transfers were made indirectly to wives with the object of avoiding the mischief of section 16(3). He also submitted that in a chain transaction it may be necessary to show that the same property by circuitous method reached the wife, but in the instant case, there was no chain transaction and it was, therefore, necessary to establish that the shares which either the father-in-law or the sons or the brothers transferred ultimately, reached the donees as such and not in a substituted form. Mr. Mitter sought to distinguish the Supreme Court decision in Commissioner of Income-tax v. C.M Kothari, with the contention that the evidence in that case was such as pointed to the only conclusion that the course adopted was ultimately to transfer the shares to the donors' respective wives without inviting the mischief of section 16(3) of the Income-tax Act. In the instant case, however, Mr. Mitter submitted that there was no such evidence and that, according to him, distinguished the decision of the Supreme Court in C.M Kothari's case from the facts involved in the present case.

18. In our opinion, the arguments of Mr. Mitter are unworthy of acceptance. We have recounted the facts involved in this case herein before. There is nothing to indicate why, on February 5, 1958, Sudhir Kumar Sen, the father of the assessee and of Sanjoy Kumar Sen, conceived the idea of transferring 10,000 shares, out of his shareholdings to his daughters-in-law, each getting 5,000 shares. On the same day, it further appears that the assessee and Sanjoy transferred equal number of shares to their mother. Also on the same day, two brothers transferred 5,000 shares each to the respective wives of the other brothers. The result of the transaction was such as could be achieved, if Sudir Kumar Sen, instead of transferring the shares to the daughters-in-law, had transferred the shares to his own wife and if the assessee and Sanjoy Kumar Sen, instead of transferring the shares to the other brother's wife, would have transferred the shares in favour of their own respective wives. In our opinion, these circumstances speak and lead to the inference that this was done with the object of avoiding the mischief of section 16(3), so that the dividend income from the shares transferred might not be included in the income of the donors any more. We are not satisfied with the argument of Mr. Mitter that the transfer by itself was no indication of the purpose behind the transfer. That is not a universal proposition, because there may be some transfers made in some circumstances which by themselves speak. Were it a case in which the father, annoyed with his own wife, had gifted away his entire shareholdings to his daughters-in-law so as to deprive the wife and the sons, out of filial piety, compensated the mother by making a gift of equal number of shares to the mother so as to neutralise the injustice perpetrated by their own father upon their own mother, the two transactions might be taken as different transactions. Here there is no such evidence What was done, in the instant case, can be explicable either on the theory that it was a thoughtless transaction throughout, or that it was done with the purpose of avoiding the effect of section 16(3). This is further reinforced by the fact that not only did the father-in-law make the transfer of shares in favour of the daughters-in-law and the sons made transfer of shares of equal number in favour of the mother but the two brothers transferred equal number of shares to the other brother's wife, thus arriving at the same position which could be achieved if each of the brothers transferred the shares to their own wives. Man is a thinking creature. Ideas move him. Thought provokes his action. It is not, therefore, possible, without more to arrive at the conclusion that what was done, in the instant case, was thoughtlessly done. If thoughtlessness be out of the picture, then the transactions are explicable only on the theory of thoughtfulness and the only thought which can justify such transactions in circumstances of the case, is the thought of avoiding the mischief of section 16(3). The Supreme Court observed in C.M Kothari's case that it was impossible to state what sort of transactions were covered by the word “indirectly”, because such transactions may be made in different ways. The course selected by the assessee was a somewhat crude course and is explicable only on the theory that he purported to avoid a direct transfer to his wife but wanted to achieve the same object indirectly and that is how the course as evolved in the case was thought of We, therefore, overrule the contentions of Mr. Mitter and uphold the contentions urged on behalf of the revenue.

19. Although of the opinion that section 16(3)(a)(iii) of the Indian Income-tax Act is attracted to the instant case, we do not hold that section 16(3)(b) comes into play at all in the facts and circumstances. section 16(3)(b), which we have already quoted, provides for transfer of assets to somebody for the benefit of transferor's wife or minor child, for example, by way of trust. By the transactions involved, there was no trust or quasi trust of any sort created and we do not think the provisions of section 16(3)(b) come into play in the instant case. Further, section 16(3)(b) does not contemplate indirect transfer but direct transfer. In the instant case, we are concerned-with the acts of indirect transfers and that is an additional reason why section 16(3)(b) does not come into the picture at all.

20. In the view that we take, we answer the question referred to this court in the negative and against the assessee to this extent that the Tribunal was not right in holding that the provisions of section 16(3)(a)(iii) of the Indian Income-tax Act were not applicable in regard to the transfer of 10,000 shares of Messrs. Sen and Pandit Private Ltd. by the assessee to his mother and brother's wife and in deleting the dividend income in respect of the said shares from the assessee's taxable income. So far as this question concerns. section 16(3)(b) of the Indian Income-tax Act, we hold that the section does not apply and the Tribunal was right in holding that way. Since the revenue loses on the ground of the applicability of section 16(3)(b) of the Indian Income-tax Act, we do not make any order as to costs of this reference.

K.L Roy, J.:— I agree