SRINIVASAN J. - (1.) THE assessee, who died during the pendency of these tax cases, was the managing director of M/s. Sri Hari Mills Private Limited. He gifted certain agricultural lands to his wife, who has been brought on record in these cases as the third respondent, under a document dated May 8, 1954. She sold the lands in 1959 for a sum of Rs. 65, 000 and deposited the sale proceeds with the company M/s. Sri Hari Mills Private Limited. She received a sum of Rs. 5, 790 by way of interest on the deposit from the company during the accounting year ending with March 31, 1965. While making assessment for the year 1965-66, the Income-tax Officer held that the aforesaid sum of Rs. 5, 790 was income received from an asset transferred by the assessee to his wife and, therefore, it was liable to be assessed in the hands of the assessee under section 64(1)(iii) of the Income-tax Act, 1961 In the assessment of M/s. Sri Hari Mills Private Limited, for the assessment years 1965-66 and 1967-68 to 1971-72, certain amounts were disallowed as attributable to the personal user by the managing director, the assessee, of the cars and telephone provided by the company.
(2.) THOSE amounts were included in the assessment of the assessee as perquisites received by him from the company. The value of the perquisites was fixed at the same amounts as were disallowed in the company's assessment. Thus, a sum of Rs. 11, 007 was included in the assessment of the assessee for the year 1965-66 as value of the perquisites received by him. Similarly, sums of Rs. 22, 692, Rs. 20, 870, Rs. 10, 598, Rs . 20, 500 and Rs. 20, 500 were included in the hands of the assessee as value of perquisites received by him from the company for the assessment years 1967-68, 1968-69, 1969-70, 1970-71 and 1971-72 respectively.The assessee preferred appeals to the Appellate Assistant Commissioner against the said orders of assessment. The Appellate Assistant Commissioner accepted the contention of the assessee regarding the inclusion of the interest income for the year 1965-66 and directed deletion thereof. As regards the value of the perquisites, the Appellate Assistant Commissioner held that whatever had been disallowed in the assessment of the company could not be automatically treated as the value of the perquisites in the hands of the assessee. Taking note of the facts that the assessee had owned a car in the previous year relevant to the assessment year 1965-66 and that his wife had owned a car in the previous years relevant to the assessment years 1968-69, 1969-70 and 1970-71, the Appellate Assistant Commissioner concluded that the value of the perquisites enjoyed by the assessee by the use of the company's car could be fixed at Rs. 250 per mensem for the assessment years 1965-66, 1968-69, 1969-70 and 1970-71 and at the rate of Rs. 500 for the other assessment years. Accordingly, he directed deletion of the excess amounts for the respective assessment yearsAggrieved by the order of the Appellate Assistant Commissioner, the Revenue took the matter to the Tribunal on appeal. The Tribunal held that there was no nexus between the interest income and the gift of the agricultural lands by the assessee in favour of his wife. The Tribunal also opined that if the assessee's wife had retained the agricultural lands, the income therefrom could not have been assessed either in her hands or in the assessee's hands and, therefore, the income received by way of interest from the company on deposit of the sale proceeds of the lands could not be treated as income arising indirectly from the transferred assets within the meaning of section 64(1)(iii) of the Income-tax Act. As regards the value of the perquisites, the Tribunal approved of the reasoning of the Appellate Assistant Commissioner and upheld his conclusion in that regard.At the instance of the Revenue, under section 256(1) of the Income-tax Act, the Tribunal forwarded a statement of the case and referred the following questions for consideration by this court."1. Whether, on the facts and in the circumstances of the case, Rs. 5, 790 being the interest received by the assessee's wife from M/s. Sri Hari Mills Limited, on the deposit of sale proceeds of the agricultural lands that had been earlier gifted to her by the assessee can be considered as his income arising indirectly from such transferred assets and hence has to be included in the assessment of the assessee for the assessment year 1965-66 under section 64(1)(iii) of the Income-tax Act, 1961 ?.2. Whether, on the facts and in the circumstances of the case, the entirety of the amount disallowed in the assessment of M/s. Sri Hari Mills Private Ltd. for the assessment years 1965-66, 1967-68 to 1971-72 as attributable to the user by the assessee of the cars, telephones, etc., should be considered as perquisites and brought to tax in the assessments made on the assessee for the above-mentioned assessment years ?" *Taking up the second question for consideration, it is seen that the Appellate Assistant Commissioner made the correct approach in assessing the value of the perquisites in the hands of the assessee. The principles relevant therefor have been laid down in CIT v. P. R. Ramakrishnan 1980 (124) ITR 545, 1980 (18) CTR 52, 1980 (18) CTR(Mad) 52 (Mad). It was held in that case that what was chargeable as perquisites in the hands of a director of a company would depend on the extent of benefit derived by him. In other words, how much it would have cost the assessee to keep a car or a telephone on his own for his exclusive use or for the use of his family would alone be the criterion and that it would not be proper to take into account the amount disallowed in the hands of the company as the perquisite. The same principle was reiterated in CIT v. S. S. M. Lingappan 1981 (129) ITR 597, 1980 (18) CTR 56, 1981 (7) TAXMAN 71, 1982 TaxLR 965, 1981 (18) CTR(Mad) 56 (Mad), wherein it was held that there was a distinction between the approach to be made in the case of disallowance of an item of expenditure in the hands of the company on the ground of its being excessive or unreasonable and in the case of assessment as perquisites in the hands of the recipient of the benefit. It was pointed out that merely because there was a disallowance in the hands of the company, it would not follow that the whole of the same should be taken as a benefit in the hands of the recipient of the benefit. In this case, the Appellate Assistant Commissioner had borne in mind the aforesaid principles and assessed the value of the perquisites in the hands of the assessee. The Tribunal has rightly confirmed the order of the Appellate Assistant Commissioner. Hence, the second question is answered in the negative and against the Revenue.As regards the first question, learned counsel for the Revenue vehemently argued that the Tribunal was in error in holding that there was no nexus between the income in question and the transfer of assets by the assessee to his wife. It was also submitted by him that the view of the Tribunal that the transferred assets being agricultural lands, the income from the sale proceeds thereof could not be taxed as an indirect income from the transferred assets inasmuch as agricultural income was not taxable, was wrong. Learned counsel urged that the provisions of section 64(1)(iii) of the Act would be attracted even if the assets transferred by the assessee to his spouse were converted into another form and the income derived from the assets in such converted form would be indirect income from the transferred assets within the meaning of the section. In support of his contentions, learned counsel placed reliance on the following decisions(1) CIT v. C. W. Kothari 1964 AIR(SC) 331, 1963 (49) HLR 107, 1964 (2) SCR 531, 1963 (2) MLJ 57, 1963 (49) ITR 107, 1963 (2) MLJ(SC) 57, 1963 (49) ITR(SC) 107, 1963 (2) MLJ 57 (SC), (2) Janab K. T. M. S. Mahamood v . CIT 1966 (61) ITR 63 (Mad), (3) Sevantilal Maneklal Sheth v. CIT 1968 AIR(SC) 697, 1968 (68) ITR 503, 1968 (2) SCR 360 (SC) and (4) Mohini Thapar v. CIT 1972 (83) ITR 208, 1972 (4) SCC 493, 1972 (1) SCR 883, 1972 (1) CTR 214, 1972 CTR(SC) 214, 1974 SCC(Tax) 302 (SC).As against this, learned counsel for the assessee supported the order of the Tribunal on the ground that the object of the section is to prevent evasion of tax by means of transfer of assets and in this case there could be no such evasion as the assets transferred were agricultural lands and the income therefrom was not liable to tax. Learned counsel contended that when the income from the agricultural lands transferred to his wife by the assessee could not be taxed as such, the income from the sale proceeds of such lands would not be liable to tax. According to him, what cannot be done directly by the Revenue cannot be done indirectly. Learned counsel submitted that, on the facts of this case, there could be no nexus between the income in question and the assets transferred, in view of the long lapse of time between the date of transfer and the conversion of the assets into money. Learned counsel submitted that the relevant test to be applied has been laid down by the Supreme Court in CIT v. Prem Bhai Parekh 1970 AIR(SC) 1518, 1970 (77) ITR 27, 1970 (1) SCC 784, 1971 (1) SCR 308(SC) and that in the present case, the same has not been satisfied. Learned counsel also invited our attention to the decision of the Andhra Pradesh High Court in CIT v. Smt. Pelleti Sridevamma 1976 (105) ITR 887in which the time lag between the date of transfer of assets and the date of conversion thereof has been held to be a relevant factor in deciding the question as to whether there is nexus between the income under consideration and the transferred assets.Before referring to the decided cases, it will be necessary to advert to the section as it stood at the relevant period. Section 64(1) of the Act "(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-(iii) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart."It is significant to note that the words" directly or indirectly" *occur in two places, one relating to the income and the other relating to the transfer. The two kinds of transfers which are excepted under this section are (1) transfer for adequate consideration, and (2) where the transfer is in connection with an agreement to live apart. On a plain reading of the section, the income sought to be taxed shall arise directly or indirectly from assets transferred. In this case, the transfer being direct transfer to the wife of the assessee, and there being no dispute that the income from the sale proceeds is not a direct income from the transferred assets, the only question that arises for consideration is whether the income sought to be taxed arises indirectly from the transferred assets.While upholding the constitutional validity of section 16(3) of the Income-tax Act, 1922, corresponding to the present section 64(1), the Supreme Court in Balaji v. ITO 1962 AIR(SC) 123, 1962 (2) SCR 983, 1961 (43) ITR 393 1962 AIR(SC) 123, 1962 (2) SCR 983, 1961 (43) ITR 393, pointed out that the object of the legislation was to prevent evasion of tax and to put an end to perpetration of fraud on taxation. In Sevantilal Maneklal Sheth v. CIT 1968 AIR(SC) 697, 1968 (68) ITR 503, 1968 (2) SCR 360 (SC), the Supreme Court observed that the section should be interpreted in such a manner as to prevent the mischief and to advance the remedy according to the true intentions of the makers of the statute. It was pointed out once again in that case that the object of the section was to prevent avoidance of tax or reducing the incidence of tax on the part of the assessee by transfer of his assets to his wife or minor childIn CIT v. Prem Bhai Parekh 1970 AIR(SC) 1518, 1970 (77) ITR 27, 1970 (1) SCC 784, 1971 (1) SCR 308 (SC), the Supreme Court laid down the requirements of section 16(3) of the Act for deciding that a particular income arises directly or indirectly from the transferred assets. The following passage in the judgment is relevant (p. 30)."That section must receive strict construction as observed by this court in CIT v. Keshavlal Lallubhai Patel 1965 AIR(SC) 866, 1965 (55) ITR 637, 1965 (2) SCR 100, 1966 AIR(SCI) 432 (SC). In our judgment, before an income can be held to come within the ambit of section 16(3), it must be proved to have arisen-directly or indirectly from a transfer of assets made by the assessee in favour of his wife or minor children.
(3.) THE connection between the transfer of assets and the income must be proximate. THE income in question must arise as a result of the transfer and not in some manner connected with it."(underlining ours)THE significance of the word" proximate" *used by the Supreme Court in the above passage cannot be lost sight of. It is clear therefrom that the income sought to be taxed and the transfer of assets must be connected with each other by proximity in every respect. That would take in the time limit also. The two must be so near to each other that it would form one chain of causation. What has to be really considered is whether the income in question can be linked with the transfer of assets as a direct or indirect consequence. The facts of the case should be scanned for the purpose of finding out the aforesaid connection with the object of the section in the background. If, on the facts of the case, it is possible to discover the inner thread whereby the tax liability is sought to be evaded or reduced, it is to be held in such cases that there is a nexus between the transfer of assets and the income in question.Learned counsel for the respondents relied on the following passage in the Law of Income Tax by Sampath Iyengar, seventh edition, at page 2395, in Vol. 3."The provisions of sections 60 to 65 do not extend to assets of an agricultural character. The includibility of income arising to a transferee of agricultural lands in the agricultural income of the transferor is a matter depending upon the specific provisions relating thereto in the agricultural income-tax of a particular State." *There is a reference in the footnote to the case of Ramdas Dossa & Co. v. CIT 1956 (29) ITR 1001 (Bom). That case has nothing to do with transfer of agricultural assets or sections 60 to 65 of the Act. In our view, the proposition has been too widely stated by the author in the above passage. No doubt, transfer of agricultural lands does not by itself bring about evasion of tax. It cannot be laid down as a proposition of law that income arising from a transfer of assets yielding non-taxable income will always be outside the purview of section 64 of the Act. ;