DESAI, J. - (1.) THIS is a reference at the instance of the assessee under s. 66(2) of the Indian IT Act, 1922, and the following question has been referred to us : Whether, on the facts and in the circumstances of the case, the gifts of shares made by the petitioner were hit by the provisions of s. 16(3)(a)(iii) and (iv) of the Indian IT Act, 1922 ?
(2.) WE are concerned in this reference with the asst. yrs. 1957- 58, 1958-59, 1959-60, 1960-61 and 1961-62, for which the corresponding accounting years are the calendar years 1956, 1957, 1958, 1959 and 1960. The questions in all these years are identical. The assessee is one, U. S. Patel, an individual. He is the brother of one, C. S. Patel. These two brothers had two business associates, K. H. Patel and R. H. Patel, who were also brothers. The four persons were concerned with two private limited companies called Ashok Construction Company (P) Ltd. (hereinafter referred to as "Ashok") and Modern Construction Company (P) Ltd. (hereinafter referred to as "Modern"). In para. 3 of the statement of case, the Tribunal has given the shareholdings in Ashok at the relevant period and has concluded that the assessee had a controlling interest in the said concern. Similarly, in para. 4 of the statement of case, the Tribunal has extracted the shareholdings in Modern and has concluded that the assessee's brother C. S. Patel and K. H. Patel and R. H. Patel together held a controlling interest in the said concern. On 21st September, 1955, a series of gifts of the shares of Modern were made as under : Donor Donee . No. of shares Amount Rs. Four or five months later, i.e., on 11th February, 1956, another set of gifts but of the shares of Ashok were made as follows :
(3.) IT will be seen from what has been stated above that although on 21st September, 1955, i.e., the date on which gifts of the shares of Modern were made to the assessee's wife and children by C. S. Patel, K. H. Patel and R. H. Patel, these persons, i.e., the donors did not make any gift to their own respective wives and children or to their brother's or sister's son. Similarly, on the 11th February, 1956, when the shares of Ashok were gifted by the assessee, the assessee made gifts to the wife and minor sons of C. S. Patel as also to the wife and daughter of K.H. Patel and to the sister's son of K. H. Patel and R. H. Patel but not to his own wife or children. The Tribunal has noted that the transfer of the shares of the respective companies by way of these gifts as noted did not materially affect the controlling interest of the assessee in Ashok and of C. S. Patel, K. H. Patel and R. H. Patel in Modern. C. S. Patel A. U. Patel (Major son of U. S. Patel) 40 Rs. 750 paid up per share 60,000 . Vikram U. Patel (minorson of U. S. Patel) 40 . . . . 80 . . K. H. Patel Mrs. D. U. Patel (wife of U. s. Patel) 33 Rs. 1,000 paid up per share 33,000 R. H. Patel A.U. Patel 10 Rs. 750 paid up per share 50,250 . Vikaram U. Patel 10 . . . Mrs. D. U. Patel 07 . . . Miss K. U. Patel (Mionor daughter of U. S. Patel) 25 . . . Miss Veysha U. Patel (minor daughter of U. S. Patel) 15 Total 1,43,250 Donor Donee . No. of shares Amount Rs. U. S. Patel A. C. Patel (mionor son of C. S. Patel) 30 Rs. 1,000 paid up per share 90,000 . C. C. patel (mionor son of C. S. Patel) 30 . . . Mrs. Sushilaben C. Patel (wife of C. S. Patel) 30 . . . . 90 . . U. S. Patel Mrs. M. Kamlaben.K. Patel (wife of K. H. Patel) 50 Rs. 1,000 paid up per share 75,000 . Miss B. K. Patel (daughter of K. H. Patel) 25 . . . . 75 . . U. S. Patel S. K. Patel (sister's son of K. H. & R. H. Patel) 10 Rs. 1,000 paid up per share 10,000 . . . . 1,75,000 In the course of the assessment for the year 1957-58, the ITO found that although the assessee had previously shown dividend income in respect of 282 shares of Ashok, the dividend income disclosed by him in the year under consideration was only for 107 shares of the said company. The difference came to 175 shares. On inquiry, it was learnt that the assessee had gifted 175 shares of the said company to various persons on 11th February, 1956. The ITO pursued the matter further and then found that a little earlier, i.e., on 21st September, 1955, there had been gifts of shares of the other company, viz., Modern by C. S. Patel, K. H. Patel and R. H. Patel and that the donees were the assessee's wife and children. The ITO asked the assessee to explain the circumstances under which such gifts had been made by the respective donors ; the assessee was further asked as to why, in the circumstances, the gifts should not be considered as mutual, thereby attracting the provisions of s. 16(3)(a)(iii) and (iv) of the Indian IT Act, 1922. The assessee came forward with the following explanation : (1) All the gifts had been made out of natural love and affection and there was no other consideration for the transfer of the shares at any time. (2) The two sets of gifts were independent transactions, neither simultaneous nor equal in value and, therefore, they did not constitute one single or mutual transaction by way of cross gifts. (3) The shares of Ashok Construction Co. P. Ltd. were not giving any yield by way of dividend, whereas the shares of the Modern Construction Co. P. Ltd. were indeed yielding dividend which also showed that there was no mutuality of transactions. The ITO rejected the explanation and concluded that the two sets of gifts constituted a single transaction. In his view this was a case of cross gifts which would attract the provisions of s. 16(3) (a)(iii) and (iv) of the Act. Accordingly, he included the dividend income in respect of Modern shares transferred to the assessee's wife and minor children in the assessee's total income for the asst. yr. 1957-58.;