Sriramulu, J. -
(1.) AT the instance of the assessee, the following question of law, under Section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act"), has been referred to us for our opinion:
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,934 is includible in the assessee's income for the assessment year 1965-66 under Section 64(iii) of the Income-tax Act, 1961 ?"
(2.) THE facts that are material for answering the reference may briefly be stated :
THE assessee, who was assessed to tax in the status of individual, transferred promissory notes and cash of the total value of Rs. 40,000 to his wife on June 19, 1962. THE assessee's wife invested a portion of the said assets in a cloth business of her own. For the assessment year 1965-66 the assessee's wife filed a return of her own, showing an income of Rs. 4,934 from the said cloth business. THE Income-tax Officer was of the view that the said income arose to the assessee's wife out of the assets transferred to her without adequate consideration by the assessee and was, therefore, includible in the assessment of the assessee for the relevant assessment year under Section 64(iii) of the Act and accordingly included it in the assessee's total income.
The inclusion of the said income in the assessee's total income was upheld by the Appellate Assistant Commissioner in first appeal. In second appeal against the assessment, the assessee contended, and the Tribunal accepted, that the assets of the value of Rs. 40,000 were transferred by the assessee to his wife in order to obtain her consent for the adoption of a son by him. The Tribunal observed that "although the assets were transferred to the wife for obtaining her consent for adopting a son, still the transfer was 'without adequate consideration', and the income arising from the assets so transferred was includible in the total income of the assessee under Section 64(iii) of the Act". The Tribunal accordingly upheld the inclusion of the said income in the assessee's total income under Section 64(iii) of the Act. Hence, this reference.
Sri T. Venkatappa, the learned counsel appearing for the assessee, contended that (1) the assets were transferred by the assessee to his wife for adequate consideration, and (2) that even assuming that the assets were transferred by the assessee to his wife, otherwise than for adequate consideration, still the income in question did not arise to the wife either directly or indirectly out of the assets transferred to her by her husband. In any case the income of Rs. 4,934 was not includible in the total income of the assessee. In support of his argument the learned counsel relied upon the decision of the Supreme Court in Commissioner of Income-tax v. Prem Bhai Parekh, .
(3.) SRI K. SRInivasa Murthy, the learned counsel appearing for the department, contended to the contra. His contention was that the meaning that was to be given to the phrase "adequate consideration" was consideration in money or money's worth. What the court has to see is whether the assessee in consideration of the transfer made by him to his wife, received either money or money's worth, which was equivalent to the value of the assets so transferred. In return for assets of Rs. 40,000 transferred by him to his wife, the assessee received the consent of his wife for adopting a son. That may give spiritual benefit to the assessee. Spiritual benefit cannot be valued in terms of money. It is, therefore, not adequate consideration. On the other hand, by adopting a son, the assessee has lost certain portion of his wealth in favour of his son. It is, therefore, positively a case of reduction in wealth. The assessee did not receive any monetary benefit by obtaining the consent of his wife for adopting a son. In Commissioner of Income-tax v. Prem Bhai Parekh the transfer was by a father to his minor child. The minor child invested the assets so transferred to him by his father in a partnership business, to the benefits of which he was admitted. The profits that the minor derived from the partnership firm for his share was not in consequence of his investing the assets transferred to him by his father, but on account of the fact that the other partners had agreed to admit him to the benefits of a partnership. It was, on those facts, the Supreme Court held that there was no nexus between the income earned and the assets transferred. In the present case the wife invested the assets in a business of her own and earned an income. For earning that income there was no necessity for her to depend upon the agreement of others. Therefore, the ruling in Commissioner of Income-tax v. Prem Bhai Parekh does not apply to the facts of this case. The department was justified in including the income of the assessee's wife in the total income of the assessee under Section 64(iii) of the Act.
For appreciating the contentions raised in this case, it is advantageous to notice the relevant portion of Section 64(iii) of the Act :
"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."