1. The assessee D.M. Netarwala (hereinafter referred to as 'Netarwala') had along with his father-in-law Bharucha (hereinafter referred to as 'Bharucha') executed a trust deed, the subject-matter of the trust being securities worth Rs. 50,000, out of which securities worth Rs. 40,000 belonged to the assessee, Netarwala, and Rs. 10,000 to Bharucha. Apart from the two settlors, who also became the trustees, the Imperial Bank of India was also constituted a trustee by the trust deed. According to the recitals in the trust deed, the trustees were to pay the balance of interest, dividend and other income out of the trust funds remaining after all the proper costs, charges and expenses of and incidental to the collection of the income of the trust funds were defrayed, to the child of Netarwala and his wife who was already born on 24th January, 1946. The trust deed was executed on 24th April, 1946. The payment to the child was to be made for ten years from the date of the trust deed. A further direction in the trust deed was that if the said child died during the said period of 10 years, then the trustees were to accumulate the net income for the remaining period of ten years from the date of the trust deed. The trust deed then provided as follows :
'Subject as aforesaid from and after the expiration of the said period of ten years from the date of these presents, in trust to pay the trust funds to Perin Dhunjishaw Netarwala and Dhunjishaw Maneckji Netarwala in equal shares absolutely.'
2. Some other contingencies were also provided for in the trust deed such as that if any one of the two persons mentioned above, i.e., Netarwala and his wife was dead at the expiration of the period of ten years, the trust funds were to be given to the survivor and if none of them was alive, then the trust funds were to be paid to the child of Netarwala and his wife or if more than two to all of them in equal shares. A further provision was made that if there were no children or child of the Netarwala on the expiration of the said period of ten years, then 1/5th of the trust funds was to be paid to the heirs of Bharucha according to the law of succession and the balance of 4/5ths of the trust funds to the heirs of Netarwala according to the law of succession applicable to Parsis. The trust came to be determined on 24th April, 1956, i.e., in the accounting year relevant for the assessment year 1957-58, and the trust funds were divided between the assessee and his wife. During the assessment year 1958-59, the securities received by Netarwala and his wife from the trustees were sold by them and each of them deposited a sum of Rs. 25,000 with one Habib Hussein of Liberty Cinema at 9 per cent. per annum. This interest was sought to be brought to tax by the ITO. The interest earned on the deposit made by the wife was sought to be taxed by the ITO in the hands of Netarwala and the ITO included in the income of the assessee interest received from Habib Hussein to the extent of 4/5ths of the money invested from the sale proceeds of the securities.
3. In appeal filed by the assessee, the AAC took the view that the trust deed itself declared that Netarwala's wife was entitled to receive half of whole of the trust funds after the termination of the trust and since the trust funds were contributed to the extent of Rs. 40,000 by Netarwala, the words of S. 16(3)(a)(iii) would cover such at transfer. He held that the distribution of the trust funds by the trustees in 1956 was only in pursuance of the terms of the trust declaration made by Netarwala himself. He further came to a finding that the consideration sought to be made out for the transaction by Netarwala was not, in his opinion, adequate consideration and, therefore, the ITO was justified in including the income of the wife under S. 16(3)(a)(iii) of the Indian I.T. Act, 1922.
4. In an appeal filed by the assessee, the Appellate Tribunal held that S. 16(3) covers cases of a transfer to a person or an association for the benefit of the wife of the transferor and the assessee's case clearly constituted a transfer to an association of persons for the benefit of the wife of the assessee. The Tribunal held that the transfer in favour of the wife was not a contingent transfer and even if there was a contingent transfer, the same would be covered by S. 16(3) of the Act. The Tribunal, therefore, upheld the addition of 4/5ths of the interest income from the trust funds in the hands of the assessee. The assessee was aggrieved by the order of the Tribunal and the following question has, therefore, been referred at his instance to this court under S. 66(1) of the Indian I.T. Act, 1922 :
'Whether, on the facts and in the circumstances of the case, it was rightly held that 4/5ths of the interest income from the trust fund was assessable in the hands of the assessee ?'
5. Mr. Khanna appearing on behalf of the assessee has vehemently contended that the sum of Rs. 25,000 which the assessee's wife received after the expiry of 10 years as stipulated in the trust deed was not received by her by virtue of any transfer made by her husband. According to him, the moment Netarwala had created a trust in respect of the amount of Rs. 40,000, he ceased to have any power of disposal of the said amount and, if at all, the amount was received by Netarwala's wife from the trustees constituted by the settlors including Netarwala's father-in-law, Bharucha. The argument appears to be that Netarwala's wife received the amount in her own right and it has been received by her from an association of persons and not from her husband Netarwala and if at all any provision was attracted, it was the one made under S. 16(3)(b) of the Act and not S. 16(3)(a). For the proposition that the assessee's wife got moneys in her own right, Mr. Khanna has placed reliance on the decision of this court in Behramji Sorabji Lalkaka v. CIT : 16ITR301(Bom) .
6. In order to appreciate the contentions raised by Mr. Khanna, it would be necessary to refer to the provisions of S. 16(3)(a) and (b) as they were in force at the material time. These provisions read as follows :
'(3) In computing the total income of any individual for the purpose of 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 -
(i) from the membership of the wife in a firm of which her husband is a partner;......
(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;......
(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.'
7. Now, it is not the case of the revenue that when the income earned by Netarwala's wife from the deposit made with Habib Hussein was sought to be clubbed with the income of Netarwala, it was sought to be done under the provisions of S. 16(3)(b) of the Act. It is also difficult to see how any reference to S. 16(3)(b) of the Act, so far as the facts of the present case are concerned, would at all be relevant. Section 16(3)(b) is intended for only a certain category of cases and under that provision an assessee can be taxed only on the income from a trust fund created for the benefit of his wife or a minor child or both, if in the relevant year of account the wife or the minor child or both have derived some benefits under the trust deed. It may be that clause (b) of sub-s. (3) would have become relevant for determining whether the income from the trust funds during the period of ten years during which the trust was in existence, could be included as the part of the income of the trustees out of whom two were the settlors. But since the period of ten years as provided in the trust deed has expired and the trust had worked itself out, the provisions of clause (b) of sub-s. (3) would be completely out of the way.
8. It is true that the moneys which are paid to the wife of Netarwala are paid in pursuance of the direction given to the settlors and it could be said that the money are received by her in her own right which flows from the recitals in the trust deed. But it must be remembered that this circumstance does not take the case before us out of S. 16(3)(a)(iii). That circumstance may be relevant for taking a case out of clause (b) of S. 16(3), because clause (b) will cease to operate the moment the trust funds are delivered to the beneficiaries and the trust has come to an end. To the same effect are the observations made by this court in Behramji Lalkaka's case : 16ITR301(Bom) on which Mr. Khanna has relied but which have no relevance to the case before us. The question in Behramji Lalkaka's case, was whether the income received by the beneficiaries after the trust had come to an end, could be brought to tax under S. 16(1)(c) of the Act. We are not in this case dealing with the question as to whether the income earned by the wife after she had received the money after the expiration of the period for which the trust was made could be brought to tax under S. 16(1)(c). The question in the instant case is whether even though the wife received Rs. 25,000 in her own right, the interest earned on that amount of Rs. 25,000 would be clubbed by virtue of the special provision which is made under the Indian I.T. Act, 1922, in S. 16(3)(a)(iii) thereof. A transfer may be good for all purposes, but then so far as the provisions of the I.T. Act are concerned, the question of clubbing the income in the instant case with the income of Netarwala will have to be decided in the light of the special provisions in S. 16(3)(a) of the Act. Nobody can dispute that under the general law, the amount of Rs. 25,000 wholly belongs to Netarwala's wife. Title may have vested in Netarwala's wife to the sum of Rs. 25,000 under the general law. But those concepts would stand modified for the purposes of the Indian I.T. Act when we consider the special provisions with regard to the clubbing of the income under S. 16(3)(a). Indeed, the provisions of S. 16(3)(a)(iii) themselves deal with a transfer. It is not disputed even by Mr. Khanna that there has been a transfer in the instant case. All that he says is, that the transfer is not by Netarwala alone, but that there was originally a transfer by Netarwala in favour of the two settlors and that the two settlors, who were also the trustees, along with a third trustee, transferred half of the trust funds to Netarwala's wife. The question which we have to decide in the instant case is whether having regard to the provisions of S. 16(3)(a)(iii), the transaction or the chain of transactions can be so construed that the transfer in favour of the wife can be said to have been made indirectly by Netarwala. It is important to remember that S. 16(3)(a)(iii) does not deal with only a direct transfer of assets. It deals with even an indirect transfer of assets and an indirect transfer by its very nature would involve more than one transaction, the ultimate object being to give effect to the original intention of transferring funds by the husband to the wife.
9. Dealing with the provisions of S. 16(3)(a)(iii) of the Act, the Supreme Court has in CIT v. C.M. Kothari : 49ITR107(SC) , pointed out that S. 16(3) takes into account not only transference of assets made directly, but also made indirectly and it is important to state what sorts of cases are covered by the word 'indirectly' because such transfers may be made in different ways. It was then observed in that case (p. 110) :
'It is true that the section says that the assets must be those of the husband, but it does not mean that the same asset should reach the wife. It may be that the assets, in the course of being transferred, may be changed deliberately into assets of a like value of another person, as has happened in the present case. A chain of transfers, if not comprehended by the word 'indirectly', would easily defeat the object of the law which it to tax the income of the wife in the hands of the husband,......'
10. It may be remembered that C.M. Kothari's case : 49ITR107(SC) , was a case of cross-transfers which were so intimately connected that they formed part of a single transaction though the two transfers were not mutual, i.e., each transfer did not constitute consideration for the other in the technical sense. It will, therefore, have to be decided in each case on its own facts as to whether the assets coming to the wife have come by way of a transfer indirectly made by the husband. In this case, we have merely to go to the recitals in the trust deed for these purposes. A bare reading of the trust deed would show that the dominant intention of Netarwala while providing in the trust deed that half of the trust fund was to be paid to his wife after ten years was to see that a part of the amount of Rs. 40,000, which is the value of the securities owned by Netarwala and in respect of which the trust was created, is transferred ultimately in the name of the wife. There can be no doubt that by the recitals in the trust deed a vested interest was created in favour of Netarwala's wife. Indeed, the recitals would show that the last clause clearly intended to maintain the separate identity of 1/5th and 4/5ths of the original contributions made by the two settlors, because in the contingency of neither Netarwala's wife nor Netarwala, nor any other child surviving at the expiration of the period of ten years, the trust funds were to go to the heirs in law of the respective settlors in the same proportion in which they had contributed to the trust funds in substance, and all that was intended to be done by the trust deed was that half of the amount belonging to Netarwala was to be transferred to Netarwala's wife after the period of ten years. That clearly appears to be the dominant intention in making the trust deed. It is true that the moiety of the entire trust fund was to be transferred to Netarwala's wife, but we cannot lose sight of the fact that this was to include the contribution to the trust fund by Netarwala himself which was indeed a major contribution. The fact that there was an intervening stage and that the trust fund continued to earn interest for a period of ten years, did not, in our view, prevent the transfer being classified as an indirect transfer of assets. To use the terminology of the Supreme Court in C.M. Kothari's case : 49ITR107(SC) , this was really one of the links in the chain of transactions. The ultimate intention of Netarwala was clearly to transfer part of his moneys in favour of Netarwala's wife. Therefore, it will be no answer to rule out the applicability of S. 16(3)(a)(iii) to say that the actual transfer is not by Netarwala alone, but by more than one person. Indeed, it is to guard against such kinds of transfer that the provision seeking to club the wife's income from assets which are indirectly transferred has been made.
11. The second requirement in order to rule out the applicability of S. 16(3)(a)(iii) is that the transfer must be for adequate consideration. Mr. Khanna has relied on a decision of the Patna High Court in Rai Bahadur H.P. Banerjee v. CIT : 9ITR137(Patna) . In support of the argument that the word 'consideration' appearing in S. 16(3)(a)(iii) is used in its legal sense as it is used in connection with the transfer of assets and has argued that since the word has not been defined in the Transfer of Property Act, it must be given a meaning similar to the meaning which has been given to it in the Indian Contract Act. For the purposes of the present case, however, it is not necessary for us to go into the question as to whether the consideration contemplated by S. 16(3)(a)(iii) need not necessarily be monetary or whether it is permissible for the consideration to flow not from the wife alone but it could be even from a third person, because even on facts we are inclined to take the view that there was no adequate consideration for the transfer of the assets in favour of the wife. What is argued before us is that the consideration for Netarwala to ultimately transfer half of the trust funds by making securities of the value of Rs. 40,000 subject to the trust was the offer by Bharucha to make his own securities of the value of Rs. 10,000 subject to the same trust.
12. Now the amount which Netarwala's wife received on the expiry of the period of ten years was Rs. 25,000. We may assume that the entire amount contributed by Bharucha was received by the wife of Netarwala and the balance of Rs. 15,000 only was received from Netarwala. If so analysed, the transaction would mean that a sum of Rs. 15,000 was paid by Netarwala to his wife, the consideration for which was the fact that Bharucha also paid Rs. 10,000. Now even according to the learned counsel for the assessee in this case, the consideration contemplated by S. 16(3)(a)(iii) should be measured in terms of money or money's worth. If the consideration in this case is so looked at, it will be clear that paying a sum of Rs. 15,000 by the assessee to his wife because his father-in-law has paid Rs. 10,000, could hardly be said, in our view, to be adequate consideration. Therefore, in our view, even the test of adequacy of consideration for ruling out the applicability of S. 16(3)(a)(iii) has not been satisfied. On facts, therefore, we are clearly of the view that the income earned by the wife had clearly to be clubbed with the income of Netarwala, having regard to the provisions of S. 16(3)(a)(iii) of the Indian I.T. Act, 1922.
13. In the question referred to us the validity of the clubbing of 4/5ths of the income has been made the subject of the question. It, however, appears to us that only 3/5ths of interest could properly be clubbed with the income of the husband. If, as we have already observed, Rs. 25,000 received by Netarwala's wife is taken as having been made of Rs. 10,000 of the trust fund contributed by her father, then what is received by way of transfer of assets by the husband would be only Rs. 15,000 which would be 3/5ths of the sum of Rs. 25,000 received by her. The correct amount of interest which would, therefore, have to be clubbed would be 3/5ths of the interest earned by Netarwala's wife. We would, therefore, answer the question referred to us by holding that 3/5ths of the interest income of the trust fund would be rightly assessable in the hands of the assessee. Having regard to the contentions raised, the assessee has substantially failed in the reference and in our view he should, therefore, pay costs of this reference to the revenue.