The Hindu Business Line : When tax law gets `personal'

THE complication in interpreting income-tax law arises not merely from inept drafting but also from having to take into consideration the personal law of the taxpayer while applying the various assessment provisions.

Section 64 was introduced in the Income-Tax Act, 1961 to arrest the growing tendency of taxpayers to avoid or reduce tax liability either through settlement or disposal of part of their property in such a way that they no longer received the income even as they retained certain powers over, or interest in, the property and/or its income.

The scope of the provision is limited only to a few members of the family who ordinarily are under the protection of, and dependent on, the assessee. Income derived from property transferred to wife is includable in the hands of the transferor husband. This straightforward provision has been interpreted by courts to mean that it will not apply in the case of dower debts.

In a recent case, Shaik Mohammed Arif transferred a property in Lucknow to his wife in discharge of dower debts.

The transfer was effected without a registered deed. The income-tax officer (ITO) applied Section 64 and included the rental income from the property in the hands of Arif.

Arif objected on the ground that he had transferred the property in lieu of mehar to his wife and, therefore, the income from the said property ought not to be clubbed in his hands. He had handed over the property to his wife as part-payment of mehar due to her and the municipal records were mutated.

The property stood in the name of the woman who was paying water and other taxes to the local authorities.

Brushing aside these objections from the Department, the Allahabad High Court decided the matter against the Revenue. According to the court, for the purposes of Section 22, the owner must be that person who can exercise the rights of owner, not on behalf of the owner but in his own right. The wife, after the transfer, started dealing with the property as owner thereof. Her name was mutated in the municipal records. She let out the property to the tenants and realised the rent from them. Her husband ceased to be the `owner' within the meaning of Section 22. It is not necessary that owner for the purposes of Sections 22 and 32 should have complete title. It is enough if he can exercise the rights of owner not on behalf of the person in whom the title vests but in his own right (278 ITR 461 All).

This ruling raises basic questions about the I-T law itself. The law should apply uniformly to all citizens irrespective of religion. Hindu law is brought in because the definition of the term `person' in Section 3 includes Hindu Undivided family (HUF).

There is no such categorisation for Muslims. Section 64 applies to all individuals irrespective of religion. A Muslim taxpayer can take advantage the law regarding mehar and dower to escape Section 64.

The Allahabad High Court ruling also merits analysis from other angles. The court had held that no transfer of property can take place in the absence of registered transfer deeds. The Supreme Court had ruled in Gomtibai vs Mattulal (1996 9JT 454) that in the absence of any registered instrument of gift and acceptance thereof by the donee, the said property could not be said to have been legally transferred. In other words, the gift is not complete in the eyes of the law.

The Madras High Court had held that in respect of bilateral transfer, unless the document transferring immovable property is validly registered, there is no gift under the law.

On the specific question of settlement of dower debts, the Full Bench of the Patna High Court (111 ITR 475 and 186 ITR 749) held that where house property was transferred by a Muslim to his wife in discharge of the dower debts but there was no registered deed, there was no valid transfer and the income from the house property was assessable in the hands of the transferor.

Neither Section 123 of the Transfer of Property Act nor Section 47 of the Registration Act prescribe any exemption from registration in respect of settlement by way of dower in favour of the wife by the Muslim spouse.

The exemption from Section 64 of the I-T Act has been brought in not by statute but judicial interpretation of the personal law of the taxpayer. This is an urgent matter warranting the attention of the draftsmen when rewriting the income-tax law next year.

(The author is a former Chief Commissioner of Income-Tax.)

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