Granting of a loan by husband to wife does not amount to transfer of asset to make it taxable under the Wealth Tax Act, rules the Income Tax Appellate Tribunal

The Income Tax Appellate Tribunal, Bench at Mumbai on Wednesday, reversed an order of the Commissioner of Income Tax (Appeals) to add Rs 2.28 crore to Bollywood actor Mr. Shah Rukh Khan’s (assessee) net wealth being the amount he had lent his wife as interest free loan to buy flat and jewellery.

 

Bollywood actor, Shah Rukh Khan

Mr. Khan’s wife Gauri had used Rs 1.65 crore of amount loaned to her to buy a house in Delhi and Rs 63 lakh for jewellery. The Commissioner of Income Tax (Appeals) had ordered adding the amount to Mr Khan's net wealth for assessment year 2005-06 on the ground that it amounted to transfer of assets.

It was against the said order of assessment that Mr. Khan preferred an appeal to the Mumbai Bench of the Income Tax Appellate Tribunal

The Mumbai bench of ITAT held on Wednesday that the Commissioner of Wealth Tax (Appeals) was not justified in confirming the addition of Rs 2.28 crore to the actor's net wealth and had erred in holding that the house and jewellery purchased by his wife was an indirect transfer of assets.

Income tax authorities had held that the loan advanced by Shah Rukh Khan was an indirect transfer of assets by the assessee to his wife. Accordingly, the loan amount of Rs 2.28 crore was added to the net wealth of Rs 2.75 crore declared by the actor for assessment year 2005-06.

Mr. Khan’s contention was that that he had extended a loan to his wife which cannot be said to be a transfer of assets. Counsel appearing for Mr. Shah Rukh Khan cited a judgment of the Karnataka High Court to support his argument that the loan given by Mr. Khan to his wife was recorded in the books of account and cannot be treated as transfer of assets from husband to wife.

Income Tax Department on the other hand argued that the loan amounted to indirect transfer of assets within the meaning of section 4(1)(a)(i) of the Wealth Tax Act.

The ITAT, Bench at Mumbai however, held that extending a loan to wife does not fall within the definition of 'Asset' under the provisions of the Wealth Tax Act and therefore it cannot be said that there was a transfer of asset from husband to wife as argued by the Income Tax authorities.

"We are not agreeing with the Assessing Officer since there is no 'transfer of asset' by the assessee rather an asset has been purchased in the form of a residential house after taking an interest free cash loan from the assessee. In our view, there is no transfer of asset by the assessee, as has been canvassed by IT Counsel and also held by IT Assessing Officer and IT Commissioner (Appeals)," ITAT members D Karunakara Rao and Joginder Singh ruled.

Wealth Tax is levied at one per cent on the net wealth (of an assessee) exceeding Rs 30 lakhs in a year. Net Wealth includes residential houses (with one house getting exemption) and jewellery.

Objection as to jurisdiction of Arbitral Tribunal : All objections as to jurisdiction of whatever nature must be taken at the stage of the submission of the statement of defence and not afterwards, holds the Supreme Court

The Supreme Court, in an appeal filed by M/s. MSP Infrastructure Ltd. against  Madhya Pradesh Road Development Corporation Ltd.¹, while answering the question, whether a party to an arbitration proceeding may be permitted to raise objections under Section 34 of the Arbitration and Conciliation Act, 1996 (for short "the Arbitration Act, 1996"), with regard to the jurisdiction of the Arbitral Tribunal (for short "the Tribunal") after the stage of submission of the written statement, has held that all objections to jurisdiction of whatever nature must be taken at the stage of the submission of the statement of defence, and must be dealt with under Section 16 of the Arbitration Act, 1996. However, the Court added, “if one of the parties seeks to contend that the subject matter of the dispute is such as cannot be dealt with by arbitration, it may be dealt under Section 34 by the Court”.

 

A commercial dispute between M/s. M.S.P. Infrastructure (Appellant), a contractor, and the Madhya Pradesh Road Development Corporation (Respondent) was referred to arbitration by the Calcutta High Court in terms of the contract between the parties under the provisions of the Arbitration Act, 1996.

The Arbitral Tribunal made an award on 27-11-2006. Aggrieved by the said award, the Respondent filed a petition on 09-01-2007 for setting aside the award under Section 34 of the Arbitration Act, 1996. The Respondent assailed the award as being in contravention of clause (b) of sub-section (2) of Section 34 of the Arbitration Act, 1996.

Subsequently, on 28-02-2009 the Respondent moved an application to amend the original petition under Section 34 to add additional grounds of objection. The Additional District & Sessions Judge, Bhopal (Madhya Pradesh) vide order dated 26-08-2009 rejected the said amendment application. The learned Additional District & Sessions Judge observed that it was absolutely unjust and unfair to file such objections after two years of the filing of the petition under Section 34 of the Arbitration Act, 1996. Aggrieved, the Respondent preferred a Petition under Article 227 before the High Court of Madhya Pradesh at Jabalpur. The Madhya Pradesh High Court without going into the tenability of the amendment application at the stage at which it was moved, i.e., beyond the time permitted by Section 16 of the Arbitration Act, 1996, simply allowed the amendment by observing that they are not deciding the merits of the case and that they were simply considering the amendment application.

On 18-02-2010, the High Court allowed the Respondent's petition and set aside the order of the District Court, thus allowing the amendment application.

Aggrieved by the allowing of the amendment application, the Appellant has moved this Court. The main challenge to the order allowing the amendment, raised by the appellant was that it allows the Respondent to raise an objection to jurisdiction contrary to Section 16 of the Arbitration Act, 1996, which provides that an objection to jurisdiction shall not be raised later than the submission of the statement of defence. 

The ground sought to be added vide the amendment application was that only the Arbitration Tribunal Constituted by the State Govt. of M.P. had the exclusive jurisdiction to decide the said dispute on being submitted to it under sub section 1 of, Section 7 of the M.P. Madhyastham Adhikaran Adhiniyam, 1983 and none else, and as such the Arbitral Tribunal earlier constituted-by the Indian Council of Arbitration, New Delhi has no jurisdiction to entertain and/or decide the dispute, and “the impugned award is a total nullity and non-est in the eye of law.”

The Appellant contended that (i) the Tribunal under the Arbitration Act, 1996 was fully empowered to enter into and decide the dispute submitted to it, since the dispute was referred in pursuance of an arbitration clause contained in the Concession Agreement, (ii) this agreement was entered into by the parties in the year 2002, being fully aware of the existence of the Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983 (for short "the M.P. Act of 1983"), (iii) the parties reiterated this agreement before the Calcutta High Court when they specifically agreed vide Clause 'C' of the consent terms that if the Appointing Authority fails to appoint and constitute the Tribunal in terms of the Concession Agreement dated 04-04-2002 within a period of 30 days, the parties shall be at liberty to apply to the Madhya Pradesh High Court for appointment and constitution of the Tribunal under the provisions of the Arbitration Act, 1996. Thus, on two occasions, the parties asserted and consented that the dispute between them would be resolved by Arbitration under the provisions of the Arbitration Act, 1996.

The Appellant therefore contended that there is no merit whatsoever in the ground introduced by the amendment application. Even otherwise, the Appellant contended that the provisions of the Arbitration Act, 1996, being a Parliamentary Statute would have precedence over the M.P. Act of 1983, which is a State Act on the same subject. Above all, it was contended that the introduction of the ground that the Tribunal did not have jurisdiction is grossly belated and impermissible in view of Section 16(2) of the Arbitration Act, 1996.

The Court proceeding to answer the question whether, having regard to Section 16 of the Arbitration Act, 1996, the Respondent was entitled to introduce the ground that the Arbitration Tribunal constituted under the M.P. Act of 1983 would take precedence over the Tribunal constituted under the Arbitration Act, 1996, that too by way of an amendment to the petition under Section 34, held after referring to the provisions of Section 16(2) of the Arbitration Act, 1996 that .there is a prohibition on the party from raising a plea that the Tribunal does not have jurisdiction after the party has submitted its statement of defence. The intention is very clear. “This provision (Section 16(2)) disables a party from petitioning an Tribunal to challenge its jurisdiction belatedly, having submitted to the jurisdiction of the Tribunal, filed the statement of defence, led evidence, made arguments and ultimately challenged the award under Section 34 of the Arbitration Act, 1996. This is exactly what has been done by the Respondent Corporation. They did not raise the question of jurisdiction at any stage. They did not raise it in their statement of defence; they did not raise it at any time before the Tribunal; they suffered the award; they preferred a petition under Section 34 and after two years raised the question of jurisdiction of the Tribunal. In our view, the mandate of Section 34 clearly prohibits such a cause. A party is bound, by virtue of sub-section (2) of Section 16, to raise any objection it may have to the jurisdiction of the Tribunal before or at the time of submission of its statement of defence, and at any time thereafter it is expressly prohibited. Suddenly, it cannot raise the question after it has submitted to the jurisdiction of the Tribunal and invited an unfavourable award. It would be quite undesirable to allow arbitrations to proceed in the same manner as civil suits with all the well-known drawbacks of delay and endless objections even after the passing of a decree.”

The Respondent took the contention that a party is entitled under the law to raise an objection at any stage as to the absence of jurisdiction of the Court which decided the matter, since the order of such a Court is a nullity. Meeting this contention, the Court said that it must be remembered that this position of law has been well settled in relation to civil disputes in Courts and not in relation to arbitrations under the Arbitration Act, 1996. Parliament has the undoubted power to enact a special rule of law to deal with arbitrations and in fact, has done so. Parliament, in its wisdom, must be deemed to have had knowledge of the entire existing law on the subject and if it chose to enact a provision contrary to the general law on the subject, its wisdom cannot be doubted. Accordingly, the Bench rejected the said submission of the Respondent.

It was next contended on behalf of the Respondent by placing reliance on clause (b) of sub-section (2) of Section 34 that objections to the jurisdiction of a Tribunal may be of several kinds as is well-known, and Section 16 does not cover them all. It was further contended that where the objection was of such a nature that it would go to the competence of the Arbitral Tribunal to deal with the subject matter of arbitration itself and the consequence would be the nullity of the award, such objection may be raised even at the hearing of the petition under Section 34 of the Act.

This argument also did not favour with the Court which said that there is nothing to warrant the inference that all objections to the jurisdiction of the Tribunal cannot be raised under Section 16 and that the Tribunal does not have power to rule on its own jurisdiction.The Court said that Parliament has employed a different phraseology in Clause (b) of Section 34. That phraseology is "the subject matter of the dispute is not capable of settlement by arbitration." The Coirt held that this phrase does not necessarily refer to an objection to 'jurisdiction' as the term is well known. “In fact, it refers to a situation where the dispute referred for arbitration, by reason of its subject matter is not capable of settlement by arbitration at all. Examples of such cases have been referred to by the Supreme Court in the case of Booz Allen and Hamilton Inc. Vs. SBI Home Finance Limited and Ors.²This Court observed as follows:-

"36. The well-recognised examples of non-arbitrable disputes are:

(i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences;

(ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;

(iii) guardianship matters;

(iv) insolvency and winding-up matters;

(v) testamentary matters (grants of probate, letters of administration and succession certificate); and

(vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes."

Accordingly the Bench of the Supreme Court comprising of Justices Mr. J. Chelameswar and Mr. S.A. Bobde held that all objections to jurisdiction of whatever nature must be taken at the stage of the submission of the statement of defence, and must be dealt with under Section 16 of the Arbitration Act, 1996. “However, if one of the parties seeks to contend that the subject matter of the dispute is such as cannot be dealt with by arbitration, it may be dealt under Section 34 by the Court.”

The Apex Court holding that the amendment application raised a ground which was contrary to law and ought not to have been allowed by the High Court, accordingly, set aside the judgment and order of the High Court.

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1. Civil Appeal No.10778 of 2014 arising out of SLP (Civil) No. 16539 of 2010 decided on 05.12.2014

2. (2011) 5 SCC 532

General principle in law of plaintiff being the dominus litis in matter of the persons against whom he wishes to litigate subject to the discretion granted to Court to add or strike-out parties under Order 1 Rule 10(2) of CPC, holds the Apex Court

The Apex Court in Baluram Vs. P. Chellathangam & Ors.¹ has held that the general rule in regard to impleadment of parties that the plaintiff in a suit, being dominus litis, may choose the persons against whom he wishes to litigate and cannot be compelled to sue a person against whom he does not seek any relief and that as a consequence, a person who is not a party has no right to be impleaded against the wishes of the plaintiff, is subject to the provisions of Order 1 Rule 10(2) of the Code of Civil Procedure. 

 

Supreme Court of India at New Delhi

The Apex Court was considering appeals preferred against Orders dated 24th November, 2011 and 18th September, 2012 passed by the High Court of Madras, Bench at Madurai in C.R.P. No.2610 of 2010 and in Review Application No.1 of 2012 in C.R.P. No.2610 of 2010 respectively. 

The question raised for consideration of the Court was whether the High Court was justified in reversing the Order of the trial Court allowing the prayer of the appellant to be added as a party in a suit for specific performance filed by the Respondent No.1/plaintiff.

The facts, as revealed from the judgment is as follows : The case of the plaintiff in O.S. No.3 of 2007 filed in the Court of District Judge, Kanyakumari, was that K. Jagathees and R. Subbaram Babu @ Subbaram, Respondent Nos.2 and 3 respectively (original defendants in the suit) acting as trustees of "Subbaiah Paniker Family Welfare Trust" (for short "the Trust") entered into the agreement dated 9th December, 2003 to sell the suit property in favour of the plaintiff. The price of the property was settled at Rs.22,000/- per cent. A sum of Rs.1 lakh was received as advance. The plaintiff was ready and willing to perform his part of the contract but the defendants failed to execute the sale deed even in extended time. When called upon to do so, they took the stand that the sale deed could be executed only if the beneficiaries of the Trust agreed to the sale which was not a valid ground.

During pendency of the suit, the appellant, Baluram filed I.A. No.584 of 2008 in O.S. No.3 of 2007 in the Court of District Judge, Kanyakumari at Nagercoil, for being impleaded as defendant, pleading that he will suffer prejudice being beneficiary of the Trust if the sale is effected at a throw away price. According to him, the value of the property was more than Rs.50,000/- per cent while the proposed sale was for Rs.22,000/- per cent.

The application was opposed by the plaintiff submitting that the beneficiary was a stranger to the agreement and was not a necessary or proper party. The trial Court allowed  the application. It held that the petitioner in the application was not a stranger to the subject matter of dispute and was entitled to be impleaded as a party. In so allowing the application, the trial Court placed reliance was placed on the Judgment of the Madras High Court in S.D. Joseph and Other vs. E. Ebinesan and others² wherein it was held as follows : "Every member who is having interest and right should be given an opportunity of being heard and the court must see whether subject matter could be factually adjudicated upon in the absence of proposed parties in a case where the property belonged to YMCA, a public Trust."

Aggrieved by the Order of the trial Court, the respondent-plaintiff preferred a petition under Article 227 of the Constitution before the High Court with the plea that the appellant was not a necessary or proper party and thus the order of the trial Court impleading him as a party defendant was erroneous. 

The respondent-plaintiff relied on the Judgment of the Apex Court in Bharat Karasondas Thakkar vs. Kiran Construction Co. and others³ The High Court upheld the plea of the plaintiff and dismissed the I.A. No.584 of 2008 filed by the appellant in the suit filed by the respondent-plaintiff. It was further observed that since suit property is a Trust property, the trial Court can look into the relevant provisions of law and examine whether permission of the Court was required before entering into the sale agreement.

It was against the order passed by the Madras High Court that the petitioner in I.A. No.584 of 2008 filed in the suit before the trial Court approached the Apex Court.

The appellant raised the contention that he was certainly a proper party and the trial Court was justified in exercising its jurisdiction under Order I Rule 10(2) of the Code of Civil Procedure, 1908 in impleading the appellant as a party. Even if the Trustee had the right of alienation, the Court was entitled to control the exercise of power of a Trustee under Section 49 of the Indian Trusts Act, 1881 (for short "the Trusts Act"). The appellant was entitled to be impleaded as a party to safeguard his right as beneficiary of the Trust so that the Trustees did not exercise their power of alienation unreasonably. Reliance has been placed on Judgment of this court in Mumbai International Airport (P) Ltd. vs. Regency Convention Centre & Hotels (P) Ltd⁴

The respondent no.1- plaintiff however, opposed the said contention and supported the impugned order passed by the High Court. It was submitted that since the appellant was neither necessary nor proper party, application for impleading the appellant as a party could not be entertained. The appellant was stranger to the transaction and could not object to the sale in question.

The Apex Court held that the High Court erred in interfering with the order of the trial Court impleading the appellant as a party defendant. Admittedly, the appellant is a beneficiary of the Trust and under the provisions of the Trusts Act, the Trustee has to act reasonably in exercise of his right of alienation under the terms of the trust deed. Appellant cannot thus be treated as a stranger. No doubt, it may be permissible for the appellant to file a separate suit, as suggested by Respondent No.1, but the beneficiary could certainly be held to be a proper party. There is no valid reason to decline his prayer to be impleaded as a party to avoid multiplicity of proceedings. Order I Rule 10(2), CPC enables, the Court to add a necessary or proper party so as to "effectually and completely adjudicate upon and settle all the questions involved in the suit".

The Court relied on the dictum laid down in Mumbai International Airport (supra) this Court :

“13. The general rule in regard to impleadment of parties is that the plaintiff in a suit, being dominus litis, may choose the persons against whom he wishes to litigate and cannot be compelled to sue a person against whom he does not seek any relief. Consequently, a person who is not a party has no right to be impleaded against the wishes of the plaintiff. But this general rule is subject to the provisions of Order 1 Rule 10(2) of the Code of Civil Procedure ("the Code", for short), which provides for impleadment of proper or necessary parties. The said sub-rule is extracted below:

"10. (2) Court may strike out or add parties.-The court may at any stage of the proceedings, either upon or without the application of either party, and on such terms as may appear to the court to be just, order that the name of any party improperly joined, whether as plaintiff or defendant, be [pic]struck out, and that the name of any person who ought to have been joined, whether as plaintiff or defendant, or whose presence before the court may be necessary in order to enable the court effectually and completely to adjudicate upon and settle all the questions involved in the suit, be added."

14. The said provision makes it clear that a court may, at any stage of the proceedings (including suits for specific performance), either upon or even without any application, and on such terms as may appear to it to be just, direct that any of the following persons may be added as a party:

(a) any person who ought to have been joined as plaintiff or defendant, but not added; or

(b) any person whose presence before the court may be necessary in order to enable the court to effectively and completely adjudicate upon and settle the questions involved in the suit. In short, the court is given the discretion to add as a party, any person who is found to be a necessary party or proper party.”

“A "necessary party" is a person who ought to have been joined as a party and in whose absence no effective decree could be passed at all by the court. If a "necessary party" is not impleaded, the suit itself is liable to be dismissed. A "proper party" is a party who, though not a necessary party, is a person whose presence would enable the court to completely, effectively and adequately adjudicate upon all matters in dispute in the suit, though he need not be a person in favour of or against whom the decree is to be made. If a person is not found to be a proper or necessary party, the court has no jurisdiction to implead him, against the wishes of the plaintiff. The fact that a person is likely to secure a right/interest in a suit property, after the suit is decided against the plaintiff, will not make such person a necessary party or a proper party to the suit for specific performance.”, said the Court. 

The Apex Court followed the dictum laid down in Kasturi⁵ wherein referring to suits for specific performance, the Court held that the following persons are to be considered as necessary parties:

(i) the parties to the contract which is sought to be enforced or their legal representatives;

(ii) a transferee of the property which is the subject-matter of the contract.

“This Court also explained that a person who has a direct interest in the subject-matter of the suit for specific performance of an agreement of sale may be impleaded as a proper party on his application under Order 1 Rule 10 CPC. This Court concluded that a purchaser of the suit property subsequent to the suit agreement would be a necessary party as he would be affected if he had purchased it with or without notice of the contract, but a person who claims a title adverse to that of the defendant vendor will not be a necessary party.”

The Court then proceeded to consider the scope and ambit of Order 1 Rule 10(2) CPC regarding striking out or adding parties. The Court held “The said sub-rule is not about the right of a non-party to be impleaded as a party, but about the judicial discretion of the court to strike out or add parties at any stage of a proceeding. The discretion under the sub-rule can be exercised either suo motu or on the application of the plaintiff or the defendant, or on an application of a person who is not a party to the suit. The court can strike out any party who is improperly joined. The court can add anyone as a plaintiff or as a defendant if it finds that he is a necessary party or proper party. Such deletion or addition can be without any conditions or subject to such terms as the court deems fit to impose. In exercising its judicial discretion under Order 1 Rule 10(2) of the Code, the court will of course act according to reason and fair play and not according to whims and caprice."

Applying the principle so laid down in the above referred cases, the Apex Court held that in the case at hand, the appellant could not be held to be a stranger being beneficiary of the Trust property. “The trial Court was justified in impleading him as a party. The High Court erred in interfering with the order of the trial Court.”, found the Apex Court. 

Accordingly, the Supreme Court allowed the appeal, set aside the impugned order of the High Court and restored that of the trial Court dated 10th August, 2010, impleading the appellant as a party defendant in the suit.