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Commissioner Of Income Tax, Bihar And Orissa, Patna v. Maharaj Kumar Kamal Singh .
Factual and Procedural Background
The assessee, who is the holder of an impartible estate, executed an indenture on 23 November 1950 granting his wife a life interest in two Camac Street, Calcutta premises as supplementary kharposh (maintenance). During the assessment years 1957-58 to 1960-61, income from those properties was included in the assessee’s total income under Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922. The assessee objected, contending (i) that Section 16(3)(a)(iii) violated Article 14 of the Constitution, and (ii) that the income could not be treated as his for the purposes of that section. The tax authorities rejected both objections.
At the assessee’s instance, the Income-tax Appellate Tribunal referred three questions to the Patna High Court under Section 66(1) of the Act. The High Court, relying on the assessee’s second contention, answered the second question in his favour, declined to examine the third, and the first was not pressed in view of a prior Supreme Court judgment. The Revenue obtained a certificate of fitness, leading to the present appeals before the Supreme Court.
Legal Issues Presented
- Whether Section 16(3)(a)(iii) of the Indian Income-tax Act, 1922 is ultra vires Article 14 of the Constitution of India. (Not pressed before the High Court.)
- Whether, on the facts, Section 16(3)(a)(iii) applies to income from property transferred by the holder of an impartible estate to his wife for her maintenance.
- Consequent upon the above, whether such income must be included in computing the net annual value of the assessee’s residential house at 10 per cent of his total income under the first proviso to Section 9(2) of the Act.
Arguments of the Parties
Assessee's Arguments
- Section 9(4)(a) contains a limited legal fiction deeming the holder of an impartible estate to be the individual owner of estate properties only “for the purpose of this section” (i.e., Section 9); the fiction cannot be extended to bring the transferred property within Section 16(3)(a)(iii).
- Because the estate is joint family property in Hindu law, income from the transferred premises should not be treated as the assessee’s individual income after the transfer.
Revenue's Arguments
The opinion does not contain a detailed account of the Revenue’s legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Balaji v. Income-tax Officer, Akola, AIR 1962 SC 123; (1962) 2 SCR 983 | Upheld the constitutional validity of Section 16(3)(a)(iii) against an Article 14 challenge. | Cited to explain why the assessee did not press the first question on constitutionality. |
| Baijnath Prashad Singh v. Tej Bali Singh, AIR 1921 PC 62 | Impartible estate remains joint family property; devolves by survivorship. | Relied on to describe the legal character of an impartible estate and its incidents. |
| Shiba Prasad Singh v. Rani Prayag Kumari Debi, AIR 1932 PC 216 | Confirmed that custom of impartibility does not negate joint family character of the estate. | Used with Baijnath to outline general principles governing impartible estates. |
| CIT v. Dewan Bahadur Dewan Krishna Kishore, (1941) 9 ITR 695 (PC) | Before amendment, income from property forming part of an impartible estate was not the individual income of the holder under Section 9. | Referred to show the legal position prior to the insertion of Section 9(4), highlighting the change effected by that amendment. |
Court's Reasoning and Analysis
1. Section 9(4)(a) (inserted after the Privy Council decision in Krishna Kishore) deems the holder of an impartible estate to be the individual owner of all estate properties for purposes of Section 9. Consequently, prior to any transfer, income from the Camac Street premises would indisputably be the assessee’s individual income.
2. Section 16(3)(a)(iii) mandates that, in computing an individual’s total income, any income of a wife arising from assets directly transferred by her husband—otherwise than for adequate consideration or an agreement to live apart—must be included in the husband’s total income. The transfer in question was direct, for no consideration, and unrelated to an agreement to live apart; the statutory conditions are therefore satisfied.
3. The assessee’s principal submission—that the legal fiction in Section 9(4)(a) is confined to the computation under Section 9 and cannot influence Section 16—was rejected. The Court held that the phrase “for the purpose of this section” necessarily refers to determining taxable income under the Act as a whole because assessment is on total income, not on isolated heads. Giving effect to the fiction across the Act does not extend it beyond its object; it merely implements the statutorily mandated consequence.
4. Section 27(ii) of the Income-tax Act, 1961, which omits the words “for the purpose of this section,” was viewed not as a change in law but as a clarification of what was already implicit in Section 9(4)(a).
5. Having concluded that the income from the transferred properties must be aggregated with the assessee’s income under Section 16(3)(a)(iii), the Court held that the annual value of the assessee’s residential house must, under the first proviso to Section 9(2), be computed at 10 per cent of that enlarged total income.
Holding and Implications
Appeals allowed. The Supreme Court vacated the Patna High Court’s answer to Question 2 and answered it, as well as Question 3, in the affirmative and in favour of the Revenue. Costs were awarded to the Revenue in both the High Court and the Supreme Court.
Implications: The decision confirms that the deeming provision in Section 9(4)(a) (and its successor Section 27(ii) of the 1961 Act) operates throughout the Act, enabling the inclusion under Section 16(3)(a)(iii) of income arising from assets of an impartible estate transferred by the holder to his wife. The ruling clarifies the interaction between the two sections but establishes no broader constitutional principle, the validity of Section 16(3)(a)(iii) having already been settled in Balaji.
K.S Hegde, J.— These are appeals by certificate. They arise from a common judgment delivered by the High Court of Patna.
2. The assessee-respondent is the holder of an impartible estate. By an indenture, dated November 23, 1950, he granted to his wife two premises at Camac Street, Calcutta for life by way of supplementary Kharposh (maintenance) grant. During the assessment years with which we are concerned viz. 1957-58 to 1960-61, the income from those house properties was included in the total income of the assessee under Section 16(3)(a)(iii) of the Indian Income Tax Act, 1922 (to be hereinafter referred to as the Act). The assessee challenged the validity of that inclusion firstly on the ground that Section 16(3)(a)(iii) of the Act is ultra vires Article 14 of the Constitution and secondly on the ground that the income in question cannot be considered as his income for the purpose of the said section. These objections were overruled by the authorities under the Act. Thereafter at the instance of the assessee, the following three questions were referred to the High Court of Patna under Section 66(1) of the Act:
“(1) Whether the provisions of Section 16(3)(a)(iii) of the Indian Income Tax Act, 1922 are ultra vires the Constitution of India?
(2) Whether in the facts and circumstances of the case the Tribunal was justified in holding that the provisions of Section 16(3)(a)(iii) applied to the income arising from a property transferred by the holder of an impartible estate to his wife for her maintenance?
(3) Whether in the facts and circumstances the Tribunal was right in holding that the income under Section 16(3)(a)(iii) was to be included in the total income for the purpose of computing the net annual value of the residential house at 10% the total income under first proviso to Section 9(2)?”
3. Before the High Court, counsel for the assessee did not press for any answer on the first question evidently in view of the decision of this Court in Balaji v. Income Tax Officer, Special Investigation Circle, Akola AIR 1962 SC 123, (1962) 2 SCR 983. The second question was answered in favour of the assessee and in view of the decision of the High Court on that question, the High Court did not think it necessary to go into the third question. The answer to the third question necessarily depends on the answer to the second question. If we come to the conclusion that the second question was not correctly answered then it follows that the income from the properties in question has to be included in the total income of the assessee and the income from the residential house of the assessee will have to be computed at 10% of his total income under the first proviso to Section 9(2) of the Act. Hence the material question to be decided is whether the income from the properties in Calcutta is liable to be included in the income of the assessee.
4. The assessee is assessed as an individual. As mentioned earlier, he is the holder of an impartible estate. The incidents of impartible estate have been well settled by the decisions of courts in this country as well as by the decisions of the Judicial Committee. The holder of an impartible estate has uncontrolled power of enjoyment and disposal over the impartible estate as well as over the income arising therefrom; but, yet the estate belongs to the Hindu joint family of which the holder is a member. Subject to any custom to the contrary, on the death of the holder of an impartible estate, the estate devolves by survivorship — see Baijnath Prashad Singh v. Tej Bali Singh AIR 1921 PC 62 and Shiba Prasad Singh v. Rani Prayag Kumari Debi AIR 1932 PC 216. In CIT v. Dewan Bahadur Dewan Krishna Kishore, Rais, Lahore (1941) 9 ITR 695 (PC) the Judicial Committee held that the income of a house property which is a part of an impartible estate cannot be considered as the individual income of an assessee under Section 9 of the Act as it stood then. Therein the Judicial Committee observed:
“Since the decision of the Board in Baijnath Prashad Singh v. Tej Bali Singh it has been settled law that property, though impartible, may be the ancestral property of joint family, and that in such cases the successor fails to be designated according to the ordinary rule of Mitakshra. The concluding words of the judgment, delivered on behalf of the Board by Lord Dunedin in Baijnath case are to that effect, and in that case, as well as in Shiba Prashad Singh v. Prayag Kumari Debi which followed it, ‘the keynote of the whole position is — not that property which is not joint property devolves by virtue of custom as though it had been joint — but that the general law regulates all beyond the custom, that the custom of impartibility does not touch the succession since the right of survivorship is not inconsistent with the custom; hence the estate retains the character of joint family property and devolves by the general law upon that person who, being in fact and in law joint in respect of the estate, is also the senior member in the senior line.”
5. On the basis of the above reasoning their Lordships held “for the purpose of Section 9 of the Act” the income in question is not the individual income of the holder of the estate. After that decision was rendered Section 9 of the Act was amended by incorporating Section 9(4) which reads:
“For the purpose of this section—
(a) the holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate.
(b) * * *”
6. Hence it is clear that after Section 9 was amended, the income of house property owned by a holder of an impartible estate has to be considered as his individual income. From this it follows that had the assessee not transferred the premises in question in favour of his wife, the income from those premises would have been considered as his individual income under Section 9. Now we have to see whether because of the transfer of the premises in favour of his wife, the said income cannot be considered as the income of the assessee under Section 16(3)(a)(iii). Section 16(3)(a)(iii) reads:
“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—
(i)-(ii) * * *
(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) * * *
(b) * * *”
7. There is no dispute that the transfer with which we are concerned is a direct transfer. Further it is admitted that the transfer in question was not effected for any consideration adequate or otherwise; nor was it effected in connection with an agreement to live apart. But the assessee's contention was, which contention was accepted by the High Court that Section 9(4)(a) only deems the income of a house property included in an impartible estate as the individual income of the holder and that only for the purpose of Section 9 and not for any other purpose. In other words, it was urged that section raises a legal fiction and that legal fiction is limited for the purpose of Section 9. It was further urged that a legal fiction cannot be extended beyond the purpose for it was created. Counsel for the assessee urged that the fiction incorporated in Section 9(4)(a) can be taken into consideration only for the purpose of Section 9 and not for the purpose of Section 16(3). This contention appears to us to be fallacious.
8. Section 6 of the Act sets out the various heads of income, profits and gains chargeable to income tax. They are (i) Salaries; (ii) Interest on securities; (iii) Income from property; (iv) Profits and Gains of business, profession or vocation; (v) Income from other sources (vi) Capital gains. Section 3, read with Section 4 brings to tax the total income profits and gains of an assessee from whatever source it might have been received or accrued. The total income is defined in Section 2(xv) as meaning total amount of income, profits and gains referred to in sub-section (1) of Section 4 computed in the manner laid down in the Act.
9. Section 9 deals with only one head of income. Prior to the transfer by the assessee, he, in law would have been considered as the owner of those premises for purposes of ascertaining his income from house property and that income would have been taken into account in computing his total income. In other words, in ascertaining the total income of the assessee for the purpose of assessment that income also would have entered into the calculation. Hence when Section 9(4)(a) speaks “for the purpose of this section” it really means for the purpose of determining the taxable income of the assessee. It must be remembered that an assessee is not separately taxed under each head of income. Hence when a source of income is transferred by the assessee to his wife, excepting for the two purposes mentioned in Section 16(3)(a)(iii), income from that source has to be considered as the income of the assessee because an asset of the assessee stands transferred to his wife. Such a conclusion does not amount to extending the fiction created under Section 9 beyond the purpose for which it is created. It merely gives effect to that fiction. It is true that a legal fiction should not be extended beyond the purpose for which it is created; but that does not mean that the court should not give effect to that fiction.
10. Section 27(ii) of the Income Tax Act, 1961 which has taken the place of Section 9(4) of the Act does not begin by saying “for the purpose of this section”. On the other hand it says that “the holder of an impartible estate shall be deemed to be the individual owner of all the properties comprised in the estate”. It was contended on behalf of the assessee that this is a change in the law and on that basis we were asked to accept the assessee's construction of Section 9(4)(a). We are unable to accept this contention. We do not think that there is any change in the law. Section 27(ii) of the Income Tax Act, 1962 makes explicit what was implicit in the provision as it originally stood.
11. In view of our conclusion that the income of the house property in question should be included in the total income of the assessee, it follows as a necessary corollary that the annual value of the assessee's residential house has to be computed at 10% of the total income to the assessee which income as already held includes the income from the house properties transferred to his wife as required by the first proviso to Section 9(2).
12. For the reasons mentioned above, these appeals are allowed; the answer given by the High Court to Question 2 is vacated and in its place we answer that question in the affirmative and in favour of the Revenue. Our answer to the third question is also in the affirmative and in favour of the Revenue. The assessee shall pay the costs of the Revenue both in this Court and in the High Court.
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