V.S. Desai, J.
1. The assessee are the executors of the estate of the late J. J. Kapadia, a prominent share and stock-broker and the questions which we have to consider on this reference, arise out of the assessment of the said J. J. Kapadia for the assessment year 1947-48 and 1948-49. In the year 1942, J. J. Kapadia, who had four sons and five daughters, executed nine trust deeds for the benefit of his nine children. Under each of the court trust deeds for the benefit of the sons he transferred shares, debentures and securities of the value of Rs. 1,52,000. Under the other trust deeds for the benefit of the five daughters he transferred debentures of the value of Rs. 30,000 under each trust making a total of Rs. 1,50,000 for the five daughter. There were five trustees appointed for each trust and all the five persons were the same in respect of all the trusts. J. J. Kapadia being himself one of the trustees. The terms of the trusts in favour of the sons were identical and so were the terms of the trusts of the daughter also. Under clause (1) of each of the trusts, the properly transferred under the trusts, which as we have already pointed out, was shares, debentures and securities in the case of the sons and debentures in the case of the daughters were to be held by the trustees subject to the powers, provisions, arguments, and declarations conditioned in the trust deed. In the trusts, in favour of the sons it was provided that the trustees shall pay the net income of the trust to the son during his life time and after the death of the son, the property, would be held for such person as were specified in the trust deed. It was further provided that during the minority of the sons, the income to which, he was entitled under the trust would be applied towards the maintains, deduction, advancement or benefits of the minor and the balance would be accumulated. In the case of the daughters, the trustees were directed to pay net income of the trusts premises to the daughter during her life and from and after the death of the daughter the property was directed to the held absolutely for such so also in the case of the daughter, during their minority the income was directed to be applied for their maintenance, education, advancement, or benefit and the balance to be accumulated. Under the trust deeds very wide powers were given to the trustees to deal with the property transferred on trust. They had the power at the any times to seek the trust premises or any part or parts thereof and to invest the net proceeds of such sale or sales or any other moneys for the time being comprised in the said trust premised requiring investing in or upon the mortgage purchase or acquisition of immovable property or invest the same on the construction, development and improvement of buildings or on pledges of shares or debentures or government or other securities or deposits at interest with any companies, firms or in shares or debentures of companies or concerns or Government or other securities or in any other investments as the trustees may think fit. The trustees were given power to vary or transpose such investment from time to time and to borrow moneys on the security of the trust premises. The trustees were even empowered to keep any of the shares, debentures or Government or other securities for there being comprised in the trust premises in the name of any bank with whom the same may be deposited by the trustees for safe custody instead of in the names of the trustees. Under the trust deed the settlor, who was one of the trustees, had the final voice in the event of difference of opinion, arising amongst the trustees and after his death the opinion of the majority of the trustees was to prevail in such matter. The trust deeds gave power to the trustees in exaction of the trusts to decided what money or property represented income and what represented the capital of the trust and on the winding-up of all any part of the trust, they were given the power to allot or apportion any property according, to the respective rights and interest of the persons interested and where properties of the different trusts were blended, fix the value of the respective parts of the said trust premises. All the trust deeds were not revocable for a period of six years and two months from the date of their execution. In the course of the assessment for the assessment year 1944-45, for which the corresponding account year of the assessee was the Samvat Year 1999, the Income-tax Officer found that the trustees were the selves dealing in shares and the income earned by them would be income includible in the assessment of the settlor, J. J. Kapadia under section 16 (3) (b) of the Indian Income-tax Act. This decision of the Income-tax officer, however, was reversed by the Appellate Assistant Commissioner in appeal, who took the view that it was not possible to hold that the trustees were dealing in shares. No appeal was taken to the Tribunal by the department against the decision of the Appellate Assistant Commissioner. It appears that for the next two years, i.e. for the assessment years 1945-46 and 1946-47, the department followed the view taken by the Appellate Assistant Commissioner in the assessment for the year 1944-45. For the assessment years 1947-48 and 1948-49, however, which correspond to the previous years, viz., Samvat years 2002 and 2003, respectively, the Income-tax Officer scrutinized the nature of the transactions carried on by the trustees and came to the conclusion that the trustees were dealing in shares for the years. The income earned in the dealing, therefore, was income liable to tax and the total income of J. J. Kapadia in respect of all the trusts in the assessment year 1947-48 and of the 8 out of the 9 trusts excluding the trust, in four of the eldest son. Jagadish during the assessment year 1948-49, because during that the assessment year Jagadish had become a major and the income was, therefore, taken out of the operation of section 16 (3) (iv). For the assessment year 1948-49, income of the trust in favour of Jagdish was assessed in the assessment of Jagadish. From the assessment orders passed by the Income-tax officer in the assessment of J. J. Kapadia, appeals were preferred to the Appellate Assistant Commissioner. In the said appeals the Appellate Assistant Commissioner once against came to the conclusion that the trustees were not carrying on business in shares, and consequently, the profits on the sale of shares was not income from business but capital profit. In that view of the matter, he set aside the orders made by the Income-tax Officer including the income made by the trustees in the income of J. J. Kapadia. The department appealed against these decisions of the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal. In the said appeals, the Tribunal held that the trustees were dealing in shares and consequently, the profit on the sale of shares earned by them was income liable to tax. The Tribunal also further held that the said income would be includible as the income of the settlors in the settlor's assessment under section 16 (3) of the Act. It, accordingly, allowed the appeals of the department. The assessee application under section 66 (1) of the Income-tax Act for referring certain question of law arising out of the Tribunal order to this court was rejected by it and the assessee applied under section 66 (2) to this court and on the said application this court directed the Tribunal to draw up a statement of the case and refer the following two questions to this court :
'1. Whether, there was any evidence and/or material before the Tribunal to conclude that the trustees of the trust created by late Mr. J. J. Kapadia were carrying on business in shares
2. Whether, the finding of the Tribunal that the income-tax authorities were right in including under section 16 (3) of the Income-tax Act, income in respect of dealing in shares in the appellant assessment is justified in law ?'
2. The Tribunal accordingly drew up a statement of the case and referred the said question to this court. The reference first came before us on the 3rd of March, 1967, when it was found that a further statement will have to be called for from the Tribunal for the proper disposal of the reference, in as much as neither the order of the Tribunal nor the statement of the case drawn up by it supplied the material on which the conclusions of the Tribunal were arrived at. This court accordingly directed the Tribunal to submit a further supplemental statement of the case and, in pursuance of the said director, the Tribunal has submitted a further statement of the case.
3. Now, the first question relates to the Tribunal finding that the trustees of the trusts created by the late Mr. J. J. Kapadia were carrying on business in shares. The material relating to the said question consists of the transactions in shares carried on by the trustees during the years in question. A statement of the said dealing has been furnished by the assessee for the years commencing from Samvat year 1999 to Samvat year 2009. On a scrutiny and examination of the said statement, the Tribunal is of the opinion that the number of transactions and the volume of shares purchased and sold indicates that the business in shares were being done by the trustees until at any rate the end of Samvat Year 2004, inasmuch as, during the said years, nearly about 2/3rds of the capital has been turned over. This circumstances, taken along with the further fact that no explanation has been submitted by the assessee as to why several of the scrips were sold in the relevant accounts years, indicates, according to the Tribunal, that the business in shares was indulged in by the trustees and the said inference in their opinion is further supported by the facts that the settlor, who was a prominent and experienced dealer in shares, was himself one of the trustees having a dominating voice in the administration of the trust. Now, it is contended on behalf of the assessee that the facts and circumstances pointed out by the Tribunal do not constitute satisfactory or sufficient material to support the conclusion. It is pointed out that the volume of the transaction has been very nearly the same from the commencement of the trust; yet for the assessment year 1944-45 and the subsequent two years the activities of the trustees were held not to be business activities. There is no difference in the activities in the earlier years and the relevant assessment years viz., 1947-48 and 1948-49 and, consequently, there is no provocation what so ever for coming to a different conclusion so far as these years are concerned. It is also further pointed out that for one of these two years viz., for the assessment year 1948-49, in the assessment of the son, who had become major, viz., Jagadish Kapadia, the Tribunal's conclusion on the same material was that the trustees were not carrying on any business activity. It is contended that mere circumstance that there has been a change in the investment by sale of the shares originally held and the purchase of new shares would not be sufficient to inter that business activity at its conclusion that the trustees were carrying on a business activity, had not properly scrutinised the material on record and had omitted to consider several important and material circumstances which indicated that there was in business activity involved in the transactions of the trustees. It was thus pointed out that the trustees all along had nursed the investment, which had been transferred to them on trust : disposing of some of them and going in for others in the best interest of the trust. The sale proceeds realised by the sale of the shares were reinvested in purchase of other shares and the holding was argument from year to year. The course of dealing would also show that a consistent attitude was maintained in all the trusts under their management which indicated that what was being done by the trustees was not with a view to doing business but with a view to safeguarding the interests of the trusts. The course of the transactions also indicated, it was urged, that the shares and securities were not being dealt with as stock-in-trade in the manner in which a person dealing in them would do, in as much as there was no fluctuation either way in the holding but the holding has only steadily increased during the course of the years. It was therefore, argued on behalf of the assessee that, having regard to the overall picture presented by the transactions carried on by the trustees, it could not be said they were engaged in any activity in the nature of the business.
4. It was because of these arguments that this court, when the reference was heard by us for the first time, called for a more detailed statement with regard to the transactions carried on by the trustees, in respect of the several trusts. In the order, which was made on the said occasion calling for a further statement, this court had directed that the Tribunal should supply further information with regard to the transactions and their nature and extent, which would have a bearing on the determination of the question as to whether the transaction indicated a course of dealing in the nature of business or a dealing merely in investment. In the further statement furnished by the Tribunal, it is pointed out that the dealing in the material years comprised a partial unloading in the case of certain shares and complete unloading in the case of others. It is pointed out that in several cases shares purchased a new have been disposed of with in a short time and although explanation has been given with regard to some of such purchases and sales, there are other instances in respect of which there is in explanation. Along with the supplementary statement, the Tribunal has also forwarded as part of it, details with regard to the purchase and sales in the Samvat years 2002 and 2003 and also a statement showing the purchase and sale of certain shares.
5. Now, an examination of these statement would show that there have been several purchase of new shares during these years. Thus, taking the case of one trust only in favour of the eldest son, Jagadish Kapadia, the purchase are in 25 different kinds of shares of a total price of Rs. 87,151. The sales effect are almost to the same extent being for the total value of Rs. 86,259. The circumstances that the purchases and the sale approximate the same value may, it may be said, indicate that there has been only a change in the investment but a closer scrutiny will show that it is not the change in the investment but a closer scrutiny will show that it is not the truth of the matter. In the first place, there is no reason why the shares already held have been sold. It will be seen from the statement that most of the shares that were sold in this years were not from the original holding but from the late purchase, which would mean that the shares sold were those which had been freshly purchased by the trustees after the execution of the trust. This conduct is hardly consistent with the conduct of an investor in shares, and on the other had, is quite consistent with the conduct of a dealer. It would be seen from the statement submitted that the shares of the Belapur Sugar, which were purchased in the Samvat year 2002 have been sold out a loss in the Samvat year 2003. If the said shares were purchased in Samvat year 2002 by way of investment, there is hardly any reason why they should have been sold out in Samvat year 2003 at a loss. In view of the short internal between the purchase and the sale, it would be appear that the transaction is not consistent with its being a transaction of investment. In the case of the trusts in favour of the daughters the assets settled were debentures of 3 scrips. It appears from the statement furnished that in the first year i.e., Samvat year 1999, a few new scrips were purchased by the trustees and the total holding augmented from Rs. 1,50,000 to Rs. 1,57,681. In the Samvat year 2000, there was no activity what so ever in these trusts, but in the Samvat year 2001, there was considerable sale and purchase activity and it appears that the sales effected were at a loss. The total sales, which comprised of the sale of the 3 original scrips and one of a newly purchased a scrip a for months before the sale, came to Rs. 1,84,756 and the total purchase came to Rs. 1,53,947. The result of these transactions was that at the end of the year the total holding in these trusts feel down from Rs. 1,57,681 to Rs. 1,26,872. Having regard to this material on record, it would seem that the dealing of the trustees in the several trusts could not be characterized with any definitions as the dealing of an investor nursing the investments, and would appear to be rather in the nature of dealing in business. At any rate, these features, which we have pointed out, would constitute material relevant to the finding of the Tribunal, that the trustees were indulging in an activity in the nature of business and, consequently, it would not be possible to hold that the finding of the Tribunal that the trustees were indulging in an activity in the nature of business and, consequently, it would not be possible to hold that the finding of the Tribunal that the trustees of the trust were carrying on business in shares, is not supported by any evidence or material on record. Since the first question which we have to answer is whether there was any evidence and/or material before the Tribunal for its conclusion the said questions in our opinion, must be answered in the affirmative and against the assessee.
6. The second question is whether the income in respect of the dealing in shares in the several trusts could be included under section 16 (3)(b) of the Income-tax Act in the income of the settlor. The contention of the assessee was two-fold. It was urged that the trustees not having carried on any business there was no income which was taxable; the excess realised on the sales being only an accretion of capital. Consequently, there was no income to be included in the settlor's assessment under section 16 (3). The alternative argument was that, even a assuming that the activity of the trustees was business activity and the income was the income of the business carried on by the trustees, it was still not the income of the assets transferred on trust and consequently, not includible in the income of the settler under section 16 (3) (b). In order to appreciate this contention, it would be necessary to consider the provisions of section 16 (3) of the Indian Income-tax Act. That section provides as follows :
'In computing the total income of any individual for the purpose of the assessment, there shall be included.
(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly -......
(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; pr
(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration; and
(b) so much of the income of any persons or association of person as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both.'
7. What we have to consider in the present case is whether the income from business of dealing in shares and scrutinized carried on by the trustees can be said to be the income arising from the assets transferred by J. J. Kapadia to the trustees for the benefit of his minor children. It is argued Mr. Mehta, the learned counsel who appears for the assessee, that the assets transferred by J. J. Kapadia to the trustees were the shares, securities or debentures and any income which may arise from the transferred shares, securities and debentures would along be includible under section 16 (3) (b) in the income of J. J. Kapadia. The income from the assets, according to the learned counsel, would be the income by way of dividends or interest on the shares or securities. Income from business carried on by the trustees would not be the income from the assets transferred and consequently the said income will not come under section 16 (3) (b) so as to be capable of being included in the assessment of the settlor. Mr. Mehta pointed out that what section 16 (3) (b) hits at is income whose source is the assets transferred. The income in the present case which is sought to be included is the income from the source 'business' and the business was not an asset transferred by the settlor. The mere circumstances that the assets transferred have facilitated the carrying on of the business or made the carrying on of the business possible would not make the business which is carried on with the aid of the assets a transferred assets itself. According to the Mr. Mehta therefore, even if it is held that the trustees were carrying on a business activity and the income earned by them was business income, it still would not be includible in the assessment of J. J. Kapadia under section 16 (3) (b), as it was not the income from the assets transferred.
8. Mr. Joshi, learned counsel for the revenue, on the other hand, has argued that the income could properly could properly be treated as arising from the assets transferred. He has argued that the assets transferred in the present case were the stock-in-trade of the transferor and the transfer of the assets was associated with the powers invested in the transfers to deal with the assets transferred. Thus, under clause (1) of the trust, the trustees were directed to hold the transferred assets subject to the powers and provisions, agreements and declarations declared and contained in the trust deed and when we consider the powers, subject to which the assets were transferred to the trustees, we find that the trustees were empowered to deal with the transferred assets and carry on business with the transferred assets as stock-in-trade if they chose to do so. Mr. Joshi has argued that, in order to determine whether the income arises from the transferred assets it would be relevant and necessary to consider the intention of the transferor in the transferring the assets and what he contemplated should be done with the transferred assets. The transferor, in the present case, was himself one of the trustees. He was himself a dealer in shares and he had directed the trustees if they chose to deal in the transferred assets, which were shares and securities, to do so. Mr. Joshi has argued that in these circumstances the transfer of assets was intended to enable the transferee to employ the transferred assets as stock-in-trade and carry on dealing with them, and in view of this intention of the transferor, the income which has been earned by the employment of the transferred assets in the manner intended and indicated by the settlor, would be income from the transferred assets.
9. Now, in our opinion, income arising from the assets within the meaning of section 16 (3) (b) must be income which directly arises from the assets as its source and not income which is obtained by a process of a complex activity in which aid or help of the transferred assets is taken. It may be pointed out that section 16 (3) has used different language in different parts of it. Thus in clause (a) of the section where income of the wife or the minor child from the assets transferred to such wife or minor child is dealt with, the language used is 'income which arises directly or indirectly from assets transferred directly or indirectly to the wife or child' : where as in clause (b) which deals with the income of the assets transferred on trust for the benefit of the wife or child the expression 'directly or indirectly' has been omitted both with reference to the income as well as to the transfer. Having regard to this deliberations employed by the legislature, it must be held that in so far as clause (b) is concerned, the income from the assets must arise directly from the assets transferred on trust. Unless, therefore, the income in the present case could be said income would not come within the purview of section 16 (3) (b) of the Indian Income-tax Act.
10. Mr. Joshi argument is that the income arises directly from the assets, because it is the income earned on the turnover of the assets. It is no doubt true that the income result from the turnover of the assets but that, in our opinion is not the same thing as saying that the income arises from the assets themselves, although it is carried on with the help of the assets. The source of the income is this activity and not the assets, though the activity is made possible by the assets. If the words 'directly or indirectly' which occur in the first part of section 16 (3) were also to occur in this clause as well, it would have been possible to take the view that the income which is earned by the employment of the transferred assets would be income arising indirectly in as much business activity is rendered possible and facilitated by the transferred assets the income earned in the activity may still be said to be indirectly arising from the transferred assets. On the language of this sub-section as it stands, however, the mere employment of the transferred assets or the transferred assets being in some indirect way responsible for the earning of the income would not be sufficient to treat it as the income arising from the transferred assets. If, under the trust, the business as a going concern was itself transferred and the trustees had carried on the said business and earned income, the said income could have been qualified as income arising from the transferred assets. There is however, no doubt that there has been no transfer of the business under any of the trust deed and, consequently, the business carried on by the trustees could not be treated as business, which was transferred to them on trust. In our opinion, therefore, the Tribunal was not right in taking the view that the income in respect of the dealing in shares carried on by the trustees under the trusts could be included under section 16 (3) of the Indian Income-tax Act in the assessment of the settlor. Our answer to the second question, therefore, must be in favour of the assessee and against the department.
11. In the result, therefore, our answer to the 1st question is in the affirmative and to the 2nd question in the negative. Since out of the two question referred to us, on has been answered in favour of the assessee and the other in favour of the department and against the assessee, in the circumstances of the case and having regard to the time taken by each of the two question decided by us, we think that there should be no order as to costs. We order accordingly.