Philip John Plasket Thomas v. CIT (1963): no clubbing of income from a gift made before the marriage (as set, 1961 Act, AY 2019-20)

Source of the case: the Supreme Court's own text of the judgment, Philip John Plasket Thomas v. Commissioner of Income Tax, Calcutta, decided by the Supreme Court in 1963 (1964 AIR 587; 1964 SCR (2) 480). The provision it construed was s.16(3)(a)(iii) of the Indian Income-tax Act, 1922; the matching clause of the 1961 Act is section 64(1)(iv).

The facts

• The assessee owned 750 'A' shares of J. Thomas & Co. Ltd., Calcutta. His engagement to Mrs. Judith Knight was announced in the newspapers on 3 September 1947.
• On 10 December 1947, while they were still only engaged, he signed a transfer deed giving her the 750 shares, the deed reciting that it was made in consideration of their forthcoming marriage. The company registered her as the holder on 15 December 1947, and the two were married on 18 December 1947.
• The dividends on the shares, received by her as his wife, were added to the husband's income for four assessment years, 1949-50 to 1952-53 (grossed up, Rs 97,091 for 1949-50, Rs 78,272 for 1950-51, Rs 1,00,000 for 1951-52 and Rs 16,385 for 1952-53). The Tribunal upheld the addition under s.16(3)(a)(iii), reasoning that the transfer became effective only once they married.

The question before the Supreme Court

The High Court of Calcutta had agreed with the Revenue. In its view the relationship of husband and wife was to be tested either when the husband's income is computed (Mukharji J.) or when the income accrues to the wife (Bose J.), not when the assets were transferred. Before the Supreme Court the question therefore had two parts: (1) at what moment must the transferee be the transferor's wife for the clause to apply; and (2) did this transfer take effect on 10 December 1947, or only on the wedding day?

What the Court decided, and why

1. The relationship must exist on both dates. The clause reaches only income of a wife, so she must be the wife when the income arises; but it also reaches only income from assets transferred to the wife by the husband. That is a second condition, and it is met only if they were already married on the day of the transfer. Not every income a wife earns from her own assets is the husband's income.
2. Plain meaning. The words wife and husband carry their ordinary sense of a lawful marriage; they do not cover a fiancee or a future husband. A provision that creates an artificial income is read strictly, and the English cases cited by the Revenue were held not to apply.
3. The transfer took effect at once. The deed contained nothing deferring it to the marriage. Whether it is seen as given for the promise to marry or as a gift with marriage as a condition subsequent, the gift was complete on 10 December 1947, when the two were not yet married.

The appeals were allowed: the dividends were not the husband's income. The Court did not need to decide whether the transfer was for adequate consideration.

The principle of income tax derived from it

Under section 64(1)(iv) of the 1961 Act, and subject to section 27(i) (under which a transferor is himself treated as the owner of house property so transferred), an individual's total income includes income arising, directly or indirectly, to the spouse from assets that the individual has passed to the spouse, directly or indirectly, without adequate consideration, unless the transfer was tied to an agreement to live apart. Where the spouse invests such assets in a business, otherwise than as a partner's capital or to be admitted to the benefits of partnership in a firm, only the part of the business income in the ratio of those assets to her total investment in the business on the first day of the previous year is included; where she invests them as a partner's capital, the same ratio, measured against her total capital contribution in the firm, applies to the interest receivable by her from the firm (Explanation 3 to section 64(1)). Following the judgment, the clause applies only when two things are both true:

• the transferee was already the transferor's spouse on the date the transfer took effect; and
• the income arises while the marriage still subsists.

A transfer made before the marriage, even in contemplation of it, falls outside the clause, and the income from that asset stays the transferee's own after the wedding as well.

Illustration (our own figures)

Mr. R, engaged to Ms. S, gives her listed debentures worth ₹6,00,000 on 5 May 2017, and they marry on 20 January

2018. Interest of ₹48,000 on the debentures in the previous year 2018-19 is Mrs. S's income, not Mr. R's, for assessment year 2019-20: on the day of the gift she was not his spouse. Had he given her the debentures after the wedding, without adequate consideration, the ₹48,000 would be included in his total income under section 64(1)(iv).