1. The question referred to us on this reference is :
'Whether on a true construction of the deed of declaration of trust dated 5th March 1951, the net dividend income of Rs. 30.404 on 120 shares of Kilachand Devchand & Co. Ltd., and 244 shares of Kesar Corporation Ltd. held under trust by the assessee for the benefit of his wife was income liable to be included in the total income of the assessee ?'
2. A declaration of trust was made by the assessee on the 5th of March, 1951. It was a short document and the relevant part of it is :
'.... I, Tulsidas Kilachand..... hereby declare that I hold 244 shares of Kesar Corporation Ltd., and 120 shares of Kilachand Devchand and Co. Ltd.,.... upon trust to pay the income thereof to my wife Vimla for a period of seven years from the date hereof or her death (whichever event may be earlier) and I hereby declare that this trust shall not be revocable.'
3. Now, although the question has been raised in a general form, it is clear that the income can be included in the income of the assessee only if it falls under section 16(1)(c) or under section 16(3)(b). The Tribunal took the view that it did not fall within section 16(1)(c), but that it did fall within section 16(3)(b).
4. Turning to the sections, section 16(1)(c) is in the following terms :
'all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor.'
5. Then, the third proviso to this sub-clause says :
'Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the said income as and when the power to revoke arises to him.'
6. Now, it is clear from the declaration of trust that the assets become vested in the trustee and it is impossible to hold that the assets remained the property of the settlor or the disponer. Therefore, the essential condition of section 16(1)(c) is not satisfied and the income cannot fall under section 16(1)(c). But even assuming that a contrary view of this declaration of trust was possible, yet the income would have been excluded by reason of the third proviso, because this income arises by virtue of a settlement which is not revocable for a period exceeding Six years or during the lifetime of the person and it is not alleged that the settlor derives any direct or indirect benefit from this income. The Tribunal, therefore, was, in our opinion, right coming to the conclusion that the income does not fall under section 16(1)(c).
7. Turning now to section 16(3)(b), it is in these terms :
'In computing the total income of any individual for the purpose of assessment, there shall be included -
(b) so much of the income of any person or association of persons 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.'
8. Now, Mr. Kolah contends that this sub-clause has no application to the income which we have to consider for various reasons. He says, in the first place, that there is no transfer of assets in this case because he says that a declaration of trust does not constitute a transfer of an asset. He then says that, in any event, by the specific words of this sub-clause there has to be a transfer by the assessee to some third person, and here, if at all, the transfer was by the assessee as settlor to himself as trustee and, therefore, the requirement of the section is not satisfied; and thirdly, he says that, assuming that both the requirements were satisfied, the transfer was for adequate consideration, namely, natural love and affection that existed between the husband and the wife.
9. Now, in support of his plea that there was no transfer of assets by the assessee to the trustee in making the declaration of trust, Mr. Kolah relies on the provisions of section 6 of the Indian Trusts Act. That section is in these terms :
'Subject to the provisions of section 5, a trust is created when the author of the trust indicates with reasonable certainty by any words or acts (a) an intention on his part to create thereby a trust, (b) the purpose of the trust (c) the beneficiary and (d) the trust-property and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust-property to the trustee.'
10. Mr. Kolah says that although the transfer of trust property to a trustee is an essential prerequisite for the creation of a trust under section 6, where the settlor himself is a trustee this section provides that no transfer is necessary. Now it is no doubt true that in terms the section so states; but the object of this particular provision in the Indian Trusts Act was pointed out by Chandavarkar, J., in the case of Bai Mahakore v. Bai Mangla. The learned Judge, at page 569, pointed out :
'Section 5 of the Trusts Act must be read with section 6 section 5 lays down what may be called the extrinsic conditions necessary to create a trust. In other words, it prescribes the mode of its creation. Section 6 lays down the intrinsic conditions necessary for a valid trust; in other words, given an instrument in writing or transfer of the kind mentioned in section 5, it prescribes what is necessary to make out a trust from the words used in the instrument or the act denoting the transfer. The question must naturally have occurred, I presume, to the draftsman of the sections, 'section 5 prescribes transfer as one of the two alternative modes for creating a trust of movable property. But the word transfer, as defined in the Transfer of Property Act (section 5), excludes the conveyance or delivery of property by a man to himself. Where a man creates a trust and constitutes himself its trustee, how can there be a transfer ' Hence, I apprehend, the exception was made in section 6 that in such a case there need be no transfer. Section 5, clause (2) lays down a general rule; section 6 creates an exception, in the case of a trust of movable property.'
11. Therefore, it is clear that in providing that there need be no transfer, the Legislature had in mind the definition in the Transfer of Property Act of a transfer which did not include a transfer by a man to himself; but that definition in the Transfer of Property Act has since been amended, and now, under the amended definition, there may be a transfer by a person either to himself or to himself and one or more other living persons. Therefore, the provision in section 6 of the Trusts Act that no transfer is necessary where the settlor is himself the trustee is intended merely to convey that no deed or document of transfer as such is essential in the sense in which the word 'transfer' was defined in the Transfer of property Act and not that there need be no transfer of property, because no trust can come into existence unless the transfer of property, because no trust can come into existence unless the trust property is divested from the settlor and vested in the trustee. Where the settlor and the trustee are the same individual, no formality of a transfer need be gone through and a declaration of trust is sufficient but there is no doubt in our mind that the effect of a declaration of trust is to divest the settlor of the property and to vest the property in himself as the trustee, which is a transfer of property which may perhaps be more appropriately defined as a constructive transfer, although not an actual transfer. In our opinion, therefore, in this case there is a transfer of assets by reason of the declaration of trust from the individual settlor to himself as a trustee under the declaration of trust.
12. Turning nest to the second contention of Mr. Kolah, no doubt the words of the sub-clause justify the argument that the contemplate a transfer by the assessee to a third person, because the words are 'so much of the income of any person..... as arises from assets transferred.... by such individual.' Therefore, the assessee must transfer assets to any person. That, no doubt, is the normal case, and if it is true to say as it undoubtedly is, in any event after the amendment of the definition of 'transfer' in the Transfer of Property Act that a person can transfer a property to himself, obviously the assessee as settlor can transfer assets to himself as trustee. He occupies a different character as a trustee than he does as settlor, and in that capacity he is a different person from his capacity as a settlor. Therefore, although prima facie the words indicate the existence of a transfer by the assessee to any person, that person may be the assessee himself in a different legal capacity.
13. Lastly Mr. Kolah says that, in any event, such transfer in the present case for adequate consideration, because the courts have always taken the view that any agreement between a husband and wife may be supported by natural love and affection which constitutes adequate consideration in law. That, no doubt, is true in the context of an ordinary agreement; but we are here dealing specifically with a provision which provides that an income which is for the benefit of the wife or a minor child of the assessee shall be deemed to be the income of the assessee. One must presume that in all normal cases the existence of the relationship of husband and wife or parent and child imports natural love and affection; and were we to accept the argument of Mr. Kolah, this particular sub-clause would have to be rendered nugatory because natural love and affection would ordinarily exist in such a relationship and the sub-clause can if at all, apply only to rare case where natural love and affection has ceased to exist between the husband and the wife or the parent and the child; but then, even such a case appears to be remote because it is unlikely that in such a contingency the individual concerned would part with assets in order to secure any income to the wife or the minor child. We are, therefore, of opinion that the words 'adequate consideration' in this contest cannot include within their scope natural love and affection
14. In our opinion therefore this in income which is to be included in the total income of the assessee under section 16(3)(b).
15. Lastly Mr. Kolah argued that having regard to the decision of their Lordships of the Privy Council in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, by reason of this declaration of trust the income from these shares was diverted from the income of the assessee by an overriding title an never became his income at all, and, therefore, it cannot be taxed as income. No doubt, Mr. Kolah is right that there was an overriding title and the income was diverted and did not ever form part of the income of the assessee; but it is not because it is income of the assessee that it is to be included in the income of the assessee. Section 16, sub-section (3), deals with income which primarily is not the income of the assessee, but which is to be included in the income of the assessee if the conditions laid down in that sub-section are satisfied. In other words, this is the deemed income of the assessee and not his actual income. Therefore Dudhuria's case cannot help Mr. Kolah for the purpose of claiming exemption.
16. The result, therefore is that the question referred to us will be answered in the affirmative.
17. Assessee to pay costs.
18. Reference answered in the affirmative.