CPT V24P7-Art1 (Content).pmd - Taxmann

Direct Tax Laws
both. The first issue, which arose, was whether
the word ‘individual’ in the provision meant
only the male and not the female of the species,
particularly because of use of the word ‘wife’
in juxtaposition ? Supreme Court held in 1950’s
in the case CIT v. Sodra Devi [1957] 32 ITR 615
that in section 16(3) the word ‘individual’
connotes only a male, thus, granting immunity
to female taxpayers from the operation of the
anti-avoidance provision. This must not have
been a deliberate intention of the Legislature,
but only inadvertent mistake in drafting. The
Legislature did not react immediately. The
mistake was corrected only in the Income-tax
Act, 1961, with effect from 1-4-1962, by using
the word ‘spouse’ in place of ‘wife’.
An interesting issue regarding applicability of
clause (b) of section 16(3) arose before the
Supreme Court in 1952 in the case of CIT v.
Manilal Dhanji [1962] 44 ITR 876. A taxpayer,
to avoid application of the above provision,
settled some assets in trust for the benefit of
his minor child with the direction to the trustee
that the income arising from the transferred
assets should be accumulated by the trustee
during the minor status of the child and paid
to him in a lump sum after he attains majority.
The taxpayer contended before the Court that
section 16(3)(b) would not be applicable as the
child did not have any right to receive any
income from the transferred assets during his
minor status. Revenue argued that the income
from the transferred assets was held by the
trustee when the child was minor for his benefit,
which was paid to him on attaining maturity.
Supreme Court held that a person could be
taxed on the income from assets transferred
for the benefit of his wife or minor child,
provided that in the year of account she or
he derived some benefit under the transfer,
either income should be received or accrued
or any beneficial interest in the income acquired
in the relevant year of account, and, accordingly,
the provision of section 16(3) will not be
applicable. Legislature did not react in this
case also. The omission was corrected only in
the Income-tax Act, 1961 by qualifying the
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word ‘transferred’ by the words ‘directly or
indirectly’ and ‘benefit’ by the words ‘immediate
or deferred’.
Taking recourse to the provisions of the Hindu
law, another tax planning exercise came into
vogue. A taxpayer, to avoid the provisions of
section 64 of I.T. Act, 1961, would not transfer
directly or indirectly any asset to his spouse
or minor children. Instead, he would throw
his separate property into the common hotchpot
of the Hindu undivided family consisting of
himself, his wife and minor children to blend
it with the H.U.F property. The property and
its income would henceforth belong to the
H.U.F. The H.U.F could thereafter undergo a
partition of its property including the property
thrown into the common hotchpot distributing
it among the individual, his wife and minor
children. As held by the Supreme Court in
1965 in the cases of CIT v. Keshavlal Lallubhai
Patel [1965] 55 ITR 637 and CIT v. M.K. Streman/
Manilal Virchand [1965] 56 ITR 62, neither the
act of throwing separate property by an
individual in the common stock of an H.U.F
of which he is a coparcener nor the subsequent
partition of H.U.F property amount to transfer
of property nor the provisions of section 64
apply to such transactions. Here again the
Legislature did not react immediately, but
introduced sub-section (2) of section 64 by the
Amendment Act of 1970 with effect from
1-4-1971 to neutralize such tax planning
undertaken after 1-1-1970.
6.6 Retrospective amendments to neutralize
Judicial decisions - Since 1998, there have
been a large number of retrospective amendments
mainly to neutralize judicial decisions of the
High Courts and below, the most notable of
them being introduction of section 14A with
retrospective effect from 1-4-1962, which sought
to neutralize the decision of the Supreme Court
in the case of CIT v. Indian Bank Ltd. [1965]
56 ITR 77, rendered in 1965, to the effect that
in computation of taxable business income, all
expenses incurred for the purpose of business
should be allowable as deduction including
expenditure incurred in the course of business