Madras H.C : The rental income from the flat was taxed in the hands of the assessee. Despite the transfer, the rental income realised from the flat was treated as the income of the assessee by reason of s. 64(1)(iv)

Counsel Appeared

Mrs. Chitra Venkataraman, for the Revenue : V.D. Gopal for P.B. Ramanujam, for the Assessee

JUDGMENT

R. Jayasimha Babu, J. :

The assessee transferred a flat which was in his name to that of his wife. There was no consideration for such transfer. The rental income from the flat was taxed in the hands of the assessee. Despite the transfer, the rental income realised from the flat was treated as the income of the assessee by reason of s. 64(1)(iv) of the IT Act, 1961.

The wife being prudent, instead of spending the rental income, chose to save the same and the savings so effected were put in a fixed deposit in her name. The interest accruing to her from those deposits was regarded by the ITO as the income of the assessee for the asst. yr. 1979-80. The correctness of that view was questioned by the assessee in appeal. The AAC agreed with the assessee. The Revenue’s appeal to the Tribunal against that order in appeal having proved unsuccessful, the correctness of the Tribunal’s view is being contested by the Revenue in this reference before us. Sec. 64(1)(iv) of the IT Act refers to “such income as arises directly or indirectly to the spouse of such individual” “from the 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”. The income from the asset transferred to the spouse for inadequate consideration is, by reason of s. 64, made taxable in the hands of the spouse who transferred the asset. What is made taxable in the hands of the transferor-assessee is the income from the asset. The manner in which the income realised from the asset is applied—whether it is spent or saved is a matter which falls outside the purview of s. 64. The section does not nullify the transfer. The property, after the transfer was made, ceased to be the property of the transferor and becomes the property of the transferee. This section merely treats the income from the asset transferred for inadequate consideration as taxable in the hands of the assessee-transferor and nothing more. Though the income realised from the transferred asset is, in fact, the income of the transferee, for the purpose of taxation that income is deemed to be forming part of the income of the transferor. This special provision which is meant to prevent assessees avoiding the payment of tax on income under their control by divesting themselves of title to the asset in favour of the spouse or minor child for no consideration or inadequate consideration, cannot be stretched to include the second generation income, namely, income from the invested income from the asset that had been transferred. The rental income from the transferred asset having been taxed in the hands of the assessee, the interest income derived from depositing the rental income in a fixed deposit which stood in the name of the transferee wife, cannot be deemed to be the income of the assessee.

The source of the interest income derived by the assessee’s wife who had saved the rental income and made the fixed deposit is not the flat that was transferred to her. The source is the money which she had deposited in the bank. There was no direct nexus between the interest which she e received on her deposit and the flat which had been transferred to her name by her husband for inadequate consideration.

The scope of s. 64 is limited to income which is directly or indirectly received from the transferred asset and does not include income received from the savings effected from the income realised from the transferred assets. Counsel for the Revenue invited our attention to the decision of the Supreme Court in the case of CIT vs. Smt. Pelleti Sridevamma (1995) 216 ITR 826 (SC). That was a case where the cash gift had been made to a minor child which amount was used to acquire a house property which in turn was used in the business of the assessee parent. The capital gain which accrued when that house was sold was held by the apex Court to be income taxable in the hands of the assessee parent. It was observed by the Court that when the cash gift was used to acquire a house property, it was only a case of substitution of one form of property by another form of property. If in this case the flat that had been gifted to the wife had been sold and the money had been deposited in the bank, the interest realised from the deposit would have been taxable in the hands of the assessee transferor, but that is not the case here.

Learned counsel for the assessee brought to our notice the decision of this Court in the case of CIT vs. T. Saraswathi Achi (1982) 133 ITR 315, wherein it was held that bonus shares received by the minor daughter of the assessee—the bonus shares having been received on the strength of the holding of shares gifted to the minor by her father was not the asset that had been transferred to the minor, as the bonus shares were not in existence at the time the original shares were transferred to the minor. That decision is based on the fact that the asset from which the income was derived in that case, was not the asset that had been transferred to the minor child. Sec. 64 is in the nature of a special provision which makes a departure from the ordinary law regulating transfers and is required to be given effect to only to the extent specifically provided for therein. It can only be applied to the income directly or indirectly realised from assets transferred or to the income realised from the transferred asset or the one substituted for the transferred asset.

One other submission that was made by learned counsel for the asses-see needs to be noticed. He points out that the tax implication is only Rs. 1,100 and did not warrant a reference at the instance of the Revenue. Had this been a petition seeking reference we would have declined to call for a reference. Since the reference is before us, it is just that we record our answer to the question that has been referred. We answer the question referred to us, as to whether on the facts and in the circumstances of the case and having regard to the provisions of s. 64(1)(iv) of the IT Act, the Tribunal was right in deleting the assessee’s wife’s interest income included in the income of the assessee, in favour of the assessee and against the Revenue. The assessee shall be entitled to costs in the sum of Rs. 2,000.

[Citation : 252 ITR 126]