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Keshavji Morarji Vs. Commissioner of Income-tax, Bombay City-ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 22 to 1960
Judge
Reported in[1978]112ITR33(Bom)
ActsIncome Tax Act, 1922 - Sections 16(3)
AppellantKeshavji Morarji
RespondentCommissioner of Income-tax, Bombay City-ii
Appellant AdvocateR.J. Kolah, ;Craigie Blunt and ;Caroe, Advs.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
.....(4) applicable to two trusts created by assessee - as per judicial precedent by cross transfers assets transferred in trust for benefit of assessee's children - when such is case provisions of section 16 (3) (a) (4) are inapplicable. - - the whole sequence would clearly show that these transactions were entered into only to evade income-tax and were sham transactions. the transfers made by the appellant were nothing but indirect transfer made to the minor daughter of the appellant to the extent the minor is benefited by the transfer effected by the appellant's son .under the circumstance the income from trust created by the appellant's for the benefit of at least the minor daughter of the appellant is taxable in the hands of the appellant under section 16(3)(a)(iv).'4. in..........in the hands of the appellant, by virtue of the provisions of section 16(3) being income from assets transferred indirectly to the minor children.' 5. the appellate assistant commissioner, however, clarified that the income which could be included in the total income of the assessee would be only such as related to the interest in the assets conveyed in favour of the minors and not the income of th whole of the assets. 6. the appeals that the assessee and his son preferred against the appellate assistant commissioner's decision were confirmed by the tribunal holding that 'the gifts by the father and son of february 22, 1954, have been mutually prompted so that it is impossible to escape the conclusion that each of the so-called gifts had provided the consideration for the other. it.....
Judgment:

Kantawala, C.J.

1. This reference has a chequered history and it has come before us for decision in view of an order passed by the Supreme Court Commissioner of Income-tax v. Keshavji Morarji : [1967]66ITR142(SC) allowing an appeal from a decision of a Division Bench of this court in this reference at an earlier stage and remanding the matter with a direction to the High Court to call upon the Tribunal to submit a statement of the case under section 66(4) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'). In accordance with the said direction a supplemental statement of the case has been submitted by the Tribunal.

2. The assessee is a resident of Bombay. He has a son by name Jaysingh and three daughters Indumati, Kusum and Dipika. In the relevant years of assessment Dipika was a minor. Jaysingh has two infant children, Bipin and Kamla. On June 14, 1952, Keshavji, the assessee, transferred a sum of Rs. 5 lakhs to his son, Jaysingh. By an indenture of trust executed on February 22, 1954, Keshavji settled upon trust properties of the value of Rs. 4,41,000 in favour of his minor grandchildren, Bipin and Kamla. On the same day Jaysingh, the son of the assessee, by another indenture of trust settled a sum of Rs. 1,54,000 upon his three sisters, Indumati, Kusum and Dipika.

3. In the assessment of the assessee and Jaysingh for the relevant years of assessment the Income-tax Officer held that the simultaneous execution of the two above indentures of trust constituted indirect transfer of assets by the assessee, i.e., Keshavji, to his three daughters and by Jaysingh to his two infant children. The Income-tax Officer apparently came to the conclusion that the execution of the two indentures of trust amounted to indirect transfer as stated above on the only basis of it being simultaneous on the same day. He took the view that the income from the properties taken as so indirectly transferred had to be included in the total income of the assessee and his son in their respective assessments under section 16(3)(a)(iv) of the Act. In the appeals filed by the assessee and his son, the Appellate Assistant Commissioner confirmed the view taken by the Income-tax Officer as regards the nature of the various transactions. In disposing of the appeal preferred by the assessee, Keshavji, he observed : 'It is found that on December 22, 1954, the appellant transferred assets worth Rs. 4,41,000 to his grandson (sic) and his son on the other hand transferred assets worth Rs. 1,54,000 to the appellant's three daughters one of whom was minor by trust deed executed on the same date. The whole sequence would clearly show that these transactions were entered into only to evade income-tax and were sham transactions. The transfers made by the appellant were nothing but indirect transfer made to the minor daughter of the appellant to the extent the minor is benefited by the transfer effected by the appellant's son . Under the circumstance the income from trust created by the appellant's for the benefit of at least the minor daughter of the appellant is taxable in the hands of the appellant under section 16(3)(a)(iv).'

4. In disposing of the appeal preferred by the assessee's son, Jaysingh, the Appellate Assistant Commissioner, inter alia, observed :

'The transactions were clearly sham transactions and meant to evade income-tax. The properties transferred by the appellant's father to the appellant's minor children are nothing but indirect transfer of assets made by the appellant because it is clear from both the transactions being effected on the same day that it was on the consideration of the transfer of assets worth Rs. 4,41,000 made by the appellant's father to his minor children that the appellant transferred a sum of Rs. 1,54,000 for the benefit of his sisters. Thus, out of a transfer of assets worth Rs. 4,41,000 to the minor children of the appellant it must at least be admitted that transfer of assets valued at Rs. 1,54,000 to his sisters were indirect transfers made by the appellant in favour of his minor children as the said transfer was made on the same day and clearly on the understanding that the father of the appellant would also transfer a bigger amount in favour of his own children. The income form assets worth Rs. 1,54,000, therefore, should be taxed in the hands of the appellant, by virtue of the provisions of section 16(3) being income from assets transferred indirectly to the minor children.'

5. The Appellate Assistant Commissioner, however, clarified that the income which could be included in the total income of the assessee would be only such as related to the interest in the assets conveyed in favour of the minors and not the income of th whole of the assets.

6. The appeals that the assessee and his son preferred against the Appellate Assistant Commissioner's decision were confirmed by the Tribunal holding that 'the gifts by the father and son of February 22, 1954, have been mutually prompted so that it is impossible to escape the conclusion that each of the so-called gifts had provided the consideration for the other. It cannot be denied that the minor children of each of the two assessees have received benefit to the extent of at least Rs. 1,54,000 along with a simultaneous and equal depletion of their parent's resources. This to our mind clearly constitutes an indirect transfer by each of the assessees to his respective minor child or children.'

7. At the instance of the assessee and his son the following two questions were referred to for the determination by the High Court :

'1. Whether, on the facts of the case, the provisions of section 16(3)(a)(iv) are applicable to the two trusts created by Keshavji Morarji and Jaysingh Keshavji both on February 22, 1954

2. Whether, on the facts and in the circumstances of the case, the creation of a trust by the assessee in favour of his minor grandchildren concurrently with the creation of a trust by the assessee's son in favour of the assessee's daughters constitutes an indirect transfer of assets to his children for the purposes of section 16(3)(a)(iv) of the Act ?'

8. The reference came up for hearing before a Division Bench of this court consisting of Tambe and Desai JJ. and was disposed of by a judgment delivered on October 26, 1961 Keshavji Morarji v. Commissioner of Income-tax [1963] 47 ITR 418 (Bom). The Division Bench took the view that there was no material to come to the conclusion that there were indirect transfers of assets and section 16(3)(a)(iv) was not applicable to the case. The fact that the transfers were effected on the same day was not sufficient to establish that they were executed each in consideration for the other or that the simultaneous execution of the two deeds constituted but a single transaction whereby each of the settlors made provision for his own minor children.

9. In Civil Appeals Nos. 149 of 151 of 1966, preferred by the revenue the Supreme Court by its judgment delivered on March 16, 1967 Commissioner of Income-tax v. Keshavji Morarji : [1967]66ITR142(SC) allowed the appeals and directed the case to be remanded with a direction that the High Court should call upon the Tribunal to submit a statement of the case under section 66(4) of the Act. The Supreme Court found that the observations made by the Tribunal while disposing of the appeals were cryptic and that the Tribunal had not referred to all the material evidence on which their conclusion was founded. The Supreme Court found that the observations made by the High Court while disposing of the earlier appeals that the only circumstance on which the contention of an indirect transfer was based was the simultaneous execution of the two deeds of settlement was also not accurate. According to the Supreme Court there were several other circumstances which appeared from the order of the Tribunal which were incorporated in the statement of the case and the record. A few of them were mentioned by way of illustration and they are as under :

'The two settlors were related as father and son; that the father had made a settlement in favour of his grandchildren simultaneously with the execution of a deed of settlement by the son in favour of his sisters one of whom was a minor; that from the description given in the tow deeds of settlement both the settlors were residing in the same house; that no explanation was given why Keshavji and his son, Jaysingh, executed the two deeds of settlement simultaneously.'

10. The Supreme Court took the view that the observations made by the Madras High Court in the case of L. G. Balakrishnan v. Commissioner of Income-tax : [1963]49ITR102(Mad) to the effect that 'if cross transactions are independent of each other, the section cannot have any application. Even if they are parts of the same transaction they would fall outside the section if they are real. But if they are no more than mere appearances devised to circumvent the section assiduously maintained, the department can lift the veil and declare the true nature of the transaction as being one within the section', do not correctly interpret section 16(3)(a), clauses (iii) and (iv). According to the Supreme Court what is material is not the unreality of the cross transactions, nor whether the appearance of reality is attempted to be maintained, but whether the transfers are part of the same transaction adopted with a view to evade the implications of the section.

11. The above two questions have to be decided by us in view of the order of remand by the Supreme Court. Mr. Kolah on behalf of the assessee pointed out that at the time when the reference was disposed of by the High Court on the earlier occasion, the question whether the provisions of section 16(3)(a)(iv) were applicable where the transfers are in favour of the trustees and not in favour of the minors, was not decided but was kept open. He submitted that after the order of remand there has been a decision of a Division Bench of this court in the case of Commissioner of Income-tax v. Framji H. Commissariat : [1967]64ITR588(Bom) where this court has taken the view that in the case of a trust the provisions of section 16(3)(a)(iv) were not applicable or attracted. The Division Bench also took the view that though section 16(3)(b), inter alia, related to trusts, it did not use the words 'directly or indirectly' as in section 16(3)(a)(iv). He points out that the Division Bench has clearly taken the view that section 16(3)(b) can apply only to income of assets transferred to trustees for the benefit of the wife or minor children of the transferor himself and not to the case of cross-transfers. He submitted that in view of this decision answered in favour of the assessee as each one of them is in relation to the applicability of section 16(3)(a)(iv). He further submitted that even after remand when a supplementary statement of the case was made by the Tribunal no other circumstances are pointed out by the Tribunal apart from the simultaneous execution of the two trust deeds. His submission is that the mere fact that the two trust deeds are executed on the same date is not by itself sufficient to come to the conclusion that the execution of such trust deeds forms part of the one and the same transaction. He emphasises that each one of the trust deeds is an independent transaction and is executed by the respective settlor out of natural love and affection he has for the beneficiaries. While such is the case, according to his submission neither section 16(3)(a)(iv) nor section 16(3)(b) shall be attracted. Mr. Joshi, on the other hand, on behalf of the revenue submitted that the decision of the Bombay High Court in Framji Commissariat's case : [1967]64ITR588(Bom) should not be regarded as good law, because the Division Bench completely overlooked the object with which section 16 was enacted. His submission is that the provisions of section 16(3)(a)(iv) will be attracted even in the case of trusts if the other conditions laid down in that cause are fulfilled and that the mere fact that assets are transferred by execution of an indenture of trust will not be sufficient to exclude them from the operation of section 16(3)(a)(iv).

12. It will be pertinent to notice that both the questions that have been referred for our determination are confined to the provisions of section 16(3)(a)(iv) and if in view of a decision of a Division Bench of this court that clause is not applicable when a trust deed is executed, we have no other option but to answer the question in favour of the assessee. In Framji Commissariat's case : [1967]64ITR588(Bom) the assessee and his brother created separate trusts each, in favour of his minor nephew (son of the other), of his undivided half share in immovable property possessed by them jointly. In the assessment year 1957-58 the claim of the assessee to exclude the income from the transferred property from his assessment was negatived and the income was included under section 16(3)(a)(iv). This was confirmed by the Appellate Assistant Commissioner, but the Tribunal held that the income was not liable to be assessed in the assessee's hands under section 16(3)(a)(iv) as it did not arise from assets transferred by the assessee to his minor son but from property transferred in favour of his nephew.

13. The High Court took the view that since the case was one of a trust, section 16(3)(a)(iv) was not applicable. At page 592 the Division Bench observed-See : [1967]64ITR588(Bom) :

'That provision, i.e., section 16(3)(a)(iv) applies to assets transferred directly or indirectly to the minor child, not being a married daughter, by the assessee otherwise than for adequate consideration. In the present case, however, the assets are not transferred either directly or indirectly to the minor but they are transferred to the trustee for the benefit of the minor. Now, to such cases the provision applicable would be provision of section 16(3)(b).....'

14. Even though the question in that case was restricted to the applicability of section 16(3)(a)(iv), the Division Bench further proceeded to consider whether the provisions of section 16(3)(b) were attracted. The Division Bench pointed out that-See : [1967]64ITR588(Bom) :

'........ in section 16(3)(b) the words 'directly or indirectly' in relation to the transfer, which were used in sub-section (3)(a)(iv) of section 16 are omitted. Consequently, it is not possible to avail of this provision in the case of indirect transfers effected by cross-transfers as in the present case. On the wording of this provision, it can apply only to the income of the assets, which are transferred by the assessee to the trustees for the benefit of his wife or minor child. In the present case, the income has arisen not from the assets, which are transferred by the assessee in trust for the benefit of his minor son, but from the property which has been transferred in trust for the benefit of the assessee's son by the brother of the assessee. Since section 16(3)(a)(iv) is inapplicable to the present case and the case is not capable of falling under section 16(3)(b) also, we do not think that the said item of income is capable of being included in the assessment of the assessee.'

15. This being a decision of the Division Bench is binding on us. In the present case by the cross-transfers assets are transferred in trust for the benefit of the assessee's children and when such is the case according to this decision the provision of section 16(3)(a)(iv) is inapplicable. So also the provision of section 16(3)(b) is inapplicable. So far as this court is concerned, it is not possible for us to ignore this judgment unless our attention is drawn to any decision by which it is directly or impliedly overruled.

16. It was urged by Mr. Joshi that the decision in Framji Commissariat's case : [1967]64ITR588(Bom) should not be treated as good law in view of the observations of the Supreme Court approving of the observations of Lord Macmillan in Chamberlain v. Inland Revenue Commissioners [1943] 25 TC 317. He relied upon the decision of the Supreme Court in the case of Tulsidas Kilachand v. Commissioner of Income-tax : [1961]42ITR1(SC) . At page 4, the Supreme Court has pointed out the object with which section 16 was enacted. It is observed :

'The object of framing section 16 can almost be taken from the observations of Lord Macmillan in Chamberlain v. Inland Revenue Commissioners [1943] 25 TC, where he stated as follows : 'This legislation....... (is) designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The legislature's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly'.'

17. According to the Supreme Court, these observations of Lord Macmillan equally apply to section 16 and the Indian provision was enacted with the same intent and for the same purpose. We have carefully considered these observations relied upon by Mr. Joshi and there is nothing therein to indicate that thereby the Supreme Court even indirectly wanted to take the view that the provisions of section 16(3)(a)(iv) are applicable even in cases where assets are transferred through the medium of a trust. Further, it should not be overlooked that this decision of the Supreme Court was delivered on January 3, 1961, while the Division Bench decided the Framji Commissariat's case : [1967]64ITR588(Bom) thereafter, i.e., on March 3, 1967. We can normally proceed on the assumption, more so as Mr. Joshi was one of the counsel who appeared in Framji Commissariat's case : [1967]64ITR588(Bom) , that both the court as well as the counsel were fully aware of the observations of Lord Macmillan which were approved by the Supreme Court. Those observations, in our opinion, do not assist Mr. Joshi.

18. In the result, our answers to the questions referred to are as under :

Question No. 1 : is answered in the negative in view of the decision of this court in Framji Commissariat's case : [1967]64ITR588(Bom) .

Question No. 2 : has to be answered in the negative in view of our answer to question No. 1, because this question also is restricted to the applicability of the provisions of section 16(3)(a)(iv) even when assets are transferred by creation of a trust.

19. The revenue shall pay the costs of the assessee throughout.


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