K.K. Desai, C.J.
1. This is a reference under section 66 (1) of the Indian Income-tax Act, 1922 and section 25(1) of the Expenditure-tax Act. The questions of law referred to us for decision run as follows :
'1. Whether, on the facts and in the circumstances of this case, the surrender, release and yielding up of his life interest by the assessee in the Neville Ness Trust Fund No. 2, created by late Sir Nusserwanjee Nowrosjee Wadia in 1947 amounted to a transfer of assets to Miss Diana Wadia and Master Nusli Wadia within the meaning of section 16(3)(a)(iv) of the Indian Income-tax Act ?'
2. Whether, on the facts and in the circumstances of this case, the expenditure incurred on the education of the minor children of the assessee out of their income which they derived from the trust made by their grand-father, late Sir Nusserwanjee Nowrosjee Wadia, in 1947 is liable to be added and included in the expenditure of the assessee under section 4 and if so, under which sub-section of section 4 of the Expenditure-tax Act ?'
2. The only facts which need to be noticed are as follows :
3. By a deed of settlement, dated 30th January, 1947, Sir Ness Wadia settled 1,001 fully paid ordinary shares of the Bombay Dyeing and . upon trusts mentioned in the deed. The main trusts which need to be noticed were as follows : The net dividends, interest and income of the trust were in the first instance payable to the settlor's son, Neville Ness (the assessee in this case), for the period of his life. After his death the dividends, interest and income were directed to be divided in equal half for payment over of the one half of the net dividends, interest and income respectively to one Diana Clear Wadia, being the daughter of the assessee, for the period of her life for her sole and separate use and after her death for payment over of the moiety or the corpus and income to all the children or any child of Diana absolutely and if more than one in equal shares. The other half of the net dividends, interest and income were directed to be paid over to Musli, the son of the assessee, for the period of his life and after his death the other moiety and, or half of the corpus and income were directed to be paid over to all the children or any child of the said Nusli absolutely and if more than one in equal shares.
4. During the assessment year 1958-59 by a deed dated 30th March, 1957, in order to accelerate the respective life estates of his next succeeding life tenants being his daughter, Diana, and son, Nusli, provided as under :
'...... Releasor doth hereby surrender release and yield up all that the interest in the said Neville Ness Trust Fund No. 2...... and in the interest dividends and income thereof by the said Indenture of settlement dated 30th January, 1947, limited to him the Releasor for and during the term of material life and in all those several trusts, rights, interests, authorities, powers and provisions by and contained and in the said Indenture of settlement dated 30th Januqry, 1947, reserved and contained in favour of him there releasor to the intent that the subsequent life estates or interest in the said Neville Ness Trust No. 2 on the decease of the Releaser may be accelerated and take effect in possession as from the date hereof to the entire exclusion of the Releasor and of any benefit to him.'
6. The clause 2 in the deed provided :
'The Releasor both hereby release and discharge the trustees.... from and of the Trust Fund and every part thereof and from all actions, proceedings, accounts, claims and demands in respect of the same or any part thereof.... and he the releasor both hereby covenant with the Trustees that he will at all times hereafter keep the Trustees and each of them.... indemnified against all actions, proceedings, accounts, claims and demands.... in the execution of the trusts declared by the said indenture of Settlement.'
7. For the years 1958-59 and 1959-60 a sum of Rs. 1,46,126 was received as income in respect of the trust investments and shares. The Income-tax Officer considered this income (dividends) to be includible in the assessee's income. He held that the assessee was liable in respect of the above income under section 16 (3)(a)(iv). His finding accordingly was that the above income which arose to the minor daughter and son of the assessee by reason of the above deed dated 30th March, 1957, was from the assets directly transferred by the assessee in favour of his minor children, and that the transfer was not for any consideration at all. Having regard to this finding Rs. 1,46,126 of the dividend income was included in the assessee's income for the year 1958-59. For the next year i.e., 1959-60, he added Rs. 73,063 on the same footing in the income of the assessee. These findings were confirmed by the Appellate Assistant Commissioner in the appeals filed by the assessee.
8. The Income-tax Tribunal rejected the contention made on behalf of the revenue and in that connection observed that :
'One thing is clear from the deed of release, the minor children were not parties to the deed. The theory of acceleration usually arises in relation to gifts by will but it may apply to settlement..... the net result of this release is only that the subsequent interest of the grand-children got accelerated.'
9. The Tribunal discussed the true effect of the above deed and referred to certain authorities and held that the deed dated 30th March, 1957, did not constitute any transfer of property by the assessee and dismissed the appeals filed by the revenue. The first question referred to us relates to the above finding.
10. Mr. Hajarnavis for the revenue has made the following contentions :
11. Where life interest is followed by another life interest, a transfer by the holder of the prior life interest never extinguishes his interest. His submission was that for extinguishment of such subordinate interest the next relevant interest must be higher and not smaller interest like life interest. The submission was that possibly a surrender could be effected by the assessee if the beneficiary next entitled to him was given absolute ownership in the corpus of the trust funds. Since the daughter and the son of the assessee were holders merely of life interests in law the life interest of the assessee did not get extinguished by the execution of the above deed. On a true construction the above deed was merely a transfer of the assessee's interest in favour of his minor children who were owners of successor life interests. In the result the findings made by the Tribunal were incorrect and case of the assessee was completely covered by the provision of the section 16(3)(a)(iv). In support of his submissions he referred to Provident Investment Co. Ltd. v. Commissioner of Income-tax Makhan Lal v. Nagendra Nath and Commissioner of Income-tax v. Dadabhoy G. Broacha In the case of Provident Investment Co. Ltd. in connection with agreement of sale and transfer of block of management parties found that it was not convenient to execute a deed of transfer of the managing agency rights. After the block of shares was duly transferred in accordance with the alternative mode of performance agreed between the parties the sellers-assesses resigned as managing agents. In connection with this transaction the revenue claimed capital gains tax on the footing that resignation was a transaction that attracted capital gains tax. In that connection the contention of the revenue was negatived and a finding was made that the sum of Rs. 1 crore was received by the assessee for resigning the managing agency and not for selling it and the assessee was, therefore, not liable to tax. In connection with the question which arose the court observed in that case :
'If a transaction creates certain legal rights and obligations, then the court must give effect to those legal rights and obligations and must not, overlooking these rights and obligations, try and fathom what was in substance the nature of the transaction entered into by the parties.'
12. The further observations were to the effect that the form of the transaction could be ignored and the real nature of the transaction could be ascertained by the court.
13. In the case of Makhan Lal v. Nagendra Nath the High Court of Calcutta, while dealing with a deed which was described as a surrender in connection with a partition effected, observed :
'A surrender is a yielding up an estate for life to him that hath an immediate estate in reversion or remainder wherein the estate for life of years may merge by mutual agreement; it is the falling of a lesser estate into a greater. Though a surrender may under certain circumstances amount to a transfer and operate as such, surrender of an interest in a tenancy which is non-transferable does not amount to a transfer.'
14. In the case of Commissioner of Income-tax v. Dadabhoy G. Broacha questions were raised similar to the questions in the present case. On examining and scrutinising the deed on which reliance was placed by the parties the court came to the conclusion that the deed was in plain terms an assignment of life interest by the life tenant in favour of his wife and minor children. For that reason the court held that sub-clauses (iii) and (iv) of section 16 (3)a) were clearly attracted and the income from the trust received by the wife and children of the assessee was rightly included in the income of the assessee. It is interesting that whilst coming to the above conclusions in favour of the revenue at page 625 of the report, article 1062 at page 607 in volume 34 of Halsbury's Laws of England was quoted. This article in our view settles all and every argument that could be raised on behalf of the revenue in the present case and runs as follows :
'Where there is a gift to a person for life, and a vested gift in remainder expressed to take effect on the death of the first taker, the gift in remainder is construed as a gift taking effect on the death of the first taker or any earlier failure or determination of his interest; the result is that if the gift to the first taker fails in his lifetime or is disclaimed or surrendered then the person entitled to remainder will take immediately on the failure or determination of the prior interest, and will not be kept waiting until the death of the first taker. The principle applies to personality as well as to realty.'
15. The further observation of the court was :
'This statement itself shows that where a surrender or disclaimer truly takes place, the person entitled in the reminder must take and take immediately on the failure or determination of the prior interest and such person takes the same interest the same interest which he or she would be entitled to in terms of the gift. That is not the case here.'
16. Having regard to what is stated in article 1062 in the above-quoted passage from Halsbury's Laws of England, the only question which really arises for decision is to ascertain the true meaning and effect of the contents of the deed dated 30th March, 1957. Mr. Hajarnavis emphasised that in the recital in the deed as also in clause (1) of the operative part of the deed the assessee himself stated that he was executing the deed to accelerate the respective further life estates and interest of his daughter and son and therefore in clause (1) stated :
'.... he the releasor both hereby surrender release and yield up all that the interest in the said Neville Ness Trust Fund No. 2... to the intent that the subsequent life estates or interest in the said Neville Ness Trust Fund No 2 on the decease of the releasor may be accelerated and take effect in possession as from the date hereof to the entire exclusion of the releasor and of any benefit to him.'
17. Mr. Hajarnavis has submitted that the words in the operative clause (1) are the words for making of a transfer by the assessee of his life estate in favour of his daughter and son. We are unable to accept this submission because the operative clause (1) directly and clearly provides for complete surrender and release of all interests of the assessee in the trusts created by the original deed of settlement dated 30th January, 1947. Whatever came to the daughter and son of the assessee in consequence of this deed was the result of the provisions made in their favour as beneficiaries under the original deed of settlement dated 30th January, 1947. The transaction effected by the assessee by using the words in the operative clause (1) did not create any interest of any kind in favour of the daughter and the son of the assessee. The provisions in the original deed of settlement were known to the assessee and he accordingly knew that by reason of his surrendering, releasing and extinguishing his life interest, the interest created in favour of his daughter and son under the original settlement dated 30th January, 1947, was bound to accelerate. Knowing that fact he referred to his desire to accelerate their interest and in fact he executed the deed of 30th March, 1957, to accelerate their interest. It is important to note that by clause (2) of this deed he gave complete release and discharge to the trustees of the deed of settlement from all obligations which arose against them in favour of the assessee (sic). It is impossible to construe this deed to mean that it is a deed of transfer of the life estate of the assessee in favour of his daughter and son. The findings made by the Tribunal in connection with the true effect and construction of this deed are accordingly confirmed. The submissions made by Mr. Hajarnavis appear to us to be entirely unsustainable having regard to the language of this deed.
18. In the result, the first question is answered in the negative.
19. The facts relating to the second question are as follows :
20. In the year 1958-59 Diana and Nusli, the daughter and son of the assessee incurred expenses respectively of Rs. 2,402 and Rs. 12,860 for education abroad. The Expenditure-tax Officer held that a part of the expenditure (that is) in the proportion in which the income of the above trust bore to the total income of the children was includible in the assessee's expenditure under section 4(ii) of the Expenditure-tax Act. He, therefore, added these two sums expended by Diana and Nusli in the (assessment of) expenditure (tax) of the assessee. The Appellate Assistant Commissioner set aside these findings and held that section 4(ii) was not applicable, but section 4(i) was applicable. He made modifications accordingly.
21. The Tribunal held that neither section 4(i) nor section 4(ii) was applicable to the case. In that connection the Tribunal referred to the definition of 'dependent' in section 2(g)(i) and held that from the facts of the case it was clear that it could not be said that the minor children were dependents within the meaning of section 2(g)(i) as they were neither mainly nor wholly dependent on the assessee. Mr. Hajarnavis for the revenue has rightly conceded before us that the provisions in section 4(i) and (ii) could be attracted and expenditure incurred by the dependents of the assessee can be included in his own expenditure only in cases where a finding could be made that the minors in question were dependents of the assessee. He admitted that the finding of fact made by the Tribunal, that the assessee's daughter and son were not dependents, could not be altered by us in the present reference. He, therefore, rightly conceded that having regard to the daughter and son of the assessee having not been found to be dependents the question of including the expenditure incurred by them in the expenditure of the assessee could never arise. The result of the above concession is that answer to question No. 2 must be in the negative. The questions are answered as mentioned above. The revenue will pay the costs of the assessee.