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M. Subrahmanya Sarma Vs. Commissioner of Income-tax and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred Nos. 24, 66 and 67 of 1965
Judge
Reported in[1969]74ITR407(AP)
ActsIncome Tax Act, 1922 - Sections 16(3); Wealth Tax Act, 1957 - Sections 4(1); Gift Tax Act, 1958 - Sections 16
AppellantM. Subrahmanya Sarma
RespondentCommissioner of Income-tax and ors.
Appellant AdvocateT. Veerabhadrayya, Adv.
Respondent AdvocateT. Ananta Babu, Adv.
Excerpt:
.....deed - first issue whether allotment of properties to son constitute gift - secondly whether self acquired property impressed with character of joint family property - thirdly whether income of minor to be included in total income of assessee - in order to impress self acquired property as joint family property declaration of unequivocal intention to treat separate property as joint family property will be sufficient - no inference can be drawn that self acquired property was impressed with character of joint family property - self acquired property was divided which amounted to gift to adopted son - assessment under gift tax act cannot be questioned - there was vesting of property with minor - held, income from property allotted to minor can be included in total income of assessee..........the case discloses that the assessee owned certain immovable properties which were admittedly his self-acquired properties over which he had full rights of disposal. as he had no male issue, he took one nageswara rao, aged 14 years, who is his brother's son, in adoption in 1957. on november 15, 1958, he purported to divide the properties between himself and his adopted son by a deed of partition. in the course of the wealth-tax proceedings for the years 1959-60 and 1960-61 and the income-tax proceedings for the assessment year 1960-61, the income-tax officer (who was also wealth-tax officer) refused to accept the case of partition as effected by the deed dated november 15, 1958, and proposed to assess the income of the properties as if he was the sole owner. in response to a notice.....
Judgment:

Jaganmohan Reddy, C.J.

1. The Income-tax Appellate Tribunal has referred the following questions for our opinion, viz.:

'Whether, on the facts and circumstances of the case ;and on a proper construction oaf the deed dated November 15, 1958,

(a) the income from the properties in question can be included in the total income of the applicant under Section 16(3)(a)(iv) of the Income-tax Act for the assessment year 1960-61;

(b) the values of the properties 'in question are includible in the net wealth of the assessee under Section 4(1)(a)(ii) of the Wealth-tax Act for the assessment years 1959-60 and 1960-61 ;

(c) 'the allotment of the properties in question to the adopted son under the deed constitutes a 'gift' within the meaning of the Gift-tax Act ?'

2. The Tribunal in its statement of the case has stated that, though separate applications were filed by the assessee for referring the questions of law arising under the Wealth-tax Act, the Income-tax Act and the Gift-tax Act, viz., R.As. Nos. 1927 and 1928 of 1963-64 (W.T.A. Nos. 1714 and 1715 of 1962-63 respectively) R.A. No. 1929 of 1963-64 (I.T.A. No. 10117 of 1962-63) and R.A. No. 586 of 1964-65 (G.T.A. No. 20 of 1.963-64), in their opinion, a similar question of law does arise out of the said orders and, therefore, they were making a consolidated reference for the opinion of the High Court.

3. We must at once point out that this is not the proper way of making a reference while dealing with three different orders passed under three different Acts, each of which provides specifically for a reference to be made under that Act. Three references should have been made, each under a different Act. Even if a consolidated reference is made, the Tribunal should have set out the statements of the case under the different Acts separately. We would have had no hesitation' in calling for separate references but for the fact that this is an old reference and will further delay our answering the questions referred. As the parties are agreed, we have directed the office to register two separate references under the Wealth-tax Act and the Gift-tax Act, treating the present reference as one under the Income-tax Act. The reference under the Wealth-tax Act is numbered as R.C. No. 66/1965 and the one under the Gift-tax Act as R.C. 67/1965. We propose to pass a consolidated order which will dispose of all the three references.

4. The statement of the case discloses that the assessee owned certain immovable properties which were admittedly his self-acquired properties over which he had full rights of disposal. As he had no male issue, he took one Nageswara Rao, aged 14 years, who is his brother's son, in adoption in 1957. On November 15, 1958, he purported to divide the properties between himself and his adopted son by a deed of partition. In the course of the wealth-tax proceedings for the years 1959-60 and 1960-61 and the income-tax proceedings for the assessment year 1960-61, the Income-tax Officer (who was also Wealth-tax Officer) refused to accept the case of partition as effected by the deed dated November 15, 1958, and proposed to assess the income of the properties as if he was the sole owner. In response to a notice under Section 16 of the Gift-tax Act for the assessment year 1959-60, the assessee claimed that this transaction involved no gift assessable under the Gift-tax Act, but this contention was also rejected. As we said, the Income-tax Officer, treating the deed as a deed of gift, assessed the assessee under section 16(3)(a)(iv) of the Income-tax Act and under Section 4(1)(a)(ii) of the Wealth-tax Act by including both the income and the wealth in the respective assessments of the assessee. The Gift-tax Officer by his order dated November 22, 1962, held that the transaction amounted to a gift and levied gift-tax on the value of the items allotted to the adopted son. The assessee preferred appeals. The Appellate Assistant Commissioner confirmed the assessments and rejected the appeals. It appears that in the gift-tax appeal the assessee not only disputed that any gift was effected within the meaning of the Gift-tax Act but also challenged the jurisdiction of the Gift-tax Officer to assess and levy tax in respect of lands and buildings. This contention also was rejected by the Appellate Assistant Commissioner. Further appeals to the Appellate Tribunal were also rejected.

5. In so far as the income-tax reference is concerned, the question is whether the property which is the subject-matter of the partition deed is joint family property or separate property. Admittedly, the property was self-acquired property of the father on the date of the alleged partition. If so, the only question for our consideration is whether the self-acquired property has become impressed with the character of joint family property. It is an undoubted proposition of Hindu law that a Hindu might throw his self-acquired property or separate property into the hotchpot or blend it with joint family property, or, by an unequivocal declaration of a clear intention, convert the whole or any part of his self-acquired property into joint family property (vide D. Sadasiva Vittal v. Bolla Ruttan, A.I.R. 1958 A.P. 145). In order to impress the self-acquired or separate property with the character of joint family property no particular method or formality is necessary. A mere declaration of an unequivocal intention to treat the separate property as joint family property will be sufficient. Their Lordships of the Supreme Court have gone to the extent of saying that even instructions given to a lawyer to prepare a deed treating the self-acquired property as joint family property would be sufficient to impress the self-acquired property from that moment with the character of joint family property. Sikri J., delivering the judgment of their Lordships of the Supreme Court in Commissioner of Income-tax v. M.K. Stremann, : [1965]56ITR62(SC) , while repelling the contention that all the clauses of the deed took effect on the signature of the partition deed, and no moment of time elapsed between the alleged blending and partition, observed at page 8 :

'The deed seems to be carefully drafted and the assessee must have given instructions as to the contents of the draft. When instructions are given that the self-acquired property is to be treated as joint family property, in our opinion, at that moment the property assumes the character of joint family property. On execution, the deed becomes evidence of a preexisting tact, i.e., of throwing the self-acquired property into the hotchpot. The words 'till this date' are significant and must be given effect to.'

6. It is obvious, therefore, that there must be some evidence, some declaration, some act, which must evidence the pre-existing fact, namely, that the separate property was impressed with the character of joint family property.

7. It is contended by Mr. Veerabhadrayya for the assessee that the deed ofpartition itself shows that the assessee had in fact impressed his self-acquiredproperty with the character of joint family property and thereafter dividedthe same between himself and his adopted son. The relevant clause of the deed of partition is that which has been extracted by the Tribunal in its reference, the English translation of which is as follows :

'The party of the first part now makes the party of the second part, who had been taken in adoption, as one entitled to a share in his self-acquired properties.'

8. The original Telugu text also was given in the appellate order, where it is stated:

'The first amongst us has now made the second amongst us who has been taken in adoption a sharer in his exclusively self-acquired properties.'

9. The clause giving the adopted son a share from now onwards in the self-acquired properties would not, in our view, connote an intention of impressing the self-acquired properties of the father a moment prior to the adoption with the character of joint family property. There is nothing to indicate, except that the intention was to divide the properties between himself and his adopted son, that the self-acquired properties were to be treated as joint family properties. Sri Veerabhadrayya contends, that the words 'from now onwards' would themselves connote that he intended to treat the self-acquired property as joint family property. But we have searched in vain to ascertain from the deed of partition itself as to whether any words or phrases or terms have been used which will in the slightest indicate that there was a prior blending of the properties or the self-acquired properties being impressed with joint family character. Their Lordships of the Supreme Court, in the decision to which we have referred, were considering a deed in which such indications were given. In fact, in that case there was a clear recital to the following effect:

'Whereas the party of the first part has been earning commission and acquiring properties and blending his money with the assets inherited from his father and treating the entire properties extant before and after the birth of the parties of the second and third parts till this date as joint family property without making any discrimination or distinction.'

10. This declaration itself would indicate that the self-acquired properties were being treated as joint family properties as and when they were being acquired. Even though the taxing authorities found that that recital was not in fact true, their Lordships nonetheless held that in order to incorporate that declaration, the owner of the self-acquired properties must have given instructions, and those instructions were themselves sufficient to impress the self-required property with the character of joint family property. As we have said, there is no such indication in the deed which we are called on to consider. We have not the slightest hesitation in holding that there is no evidence or much less any facts, from which we can draw an inference that the self-acquired properties of the assessee were impressed with the character of joint family property. The partition deed, therefore, can only operate, not as partitioning joint family property, but as dividing the self-acquired property, which, in effect would amount to a gift of the properties allotted to the share of the adopted son. In that view, the assessment under the Gift-tax Act cannot be questioned.

11. Sri Veerabhadrayya again contends that even on the assumption that there was a gift, as indeed we have now held it to be so, the minor did not have the benefit or enjoyment of the income therefrom and, consequently, Section 16(3)(a)(iv) of the Income-tax Act, 1922, cannot be made applicable. The clause in the partition deed, on which the learned advocate relies, is as follows :

'As the second individual of us is a minor, the first individual of us who is the minor's guardian shall keep the 'B' schedule property in his possession, protect and improve the same and hand over the income derived from the said property to the minor after he attained majority, accounting for the same justly.'

12. The interpretation sought to be placed on this clause is that till the minor attains majority, he is not entitled to the income from the properties because the guardian was required to be in possession of the properties, protect and improve the same and hand over the income and also to accumulate the income, giving an account of it, only after the minor has become a major. On a prima facie reading of this clause, it is our view that there is no postponement of the vesting of the property in the minor. What was required of the guardian was nothing more nor less than what a guardian is expected to do in each case where he is managing the properties of a minor, namely, to be in possession of the properties and improve the same, to manage it and accumulate the income and give an account of it to the minor when he or she becomes a major. The decisions which Sri Veerabhadrayya has cited are cases relating to properties where the vesting of the property has been postponed to the date of attainment of the majority of the minor. It is an accepted principle of the law of trusts that the trustee is the legal owner of the property and the object of the trust is the beneficiary, namely, the cestui que trust. If the benefit which the cestui que trust is entitled to is postponed or is to commence only from a particular date, then the beneficiary has no vested interest in the trust property until the happening of that event. Both the cases cited, viz., Commissioner of Income-tax v. Manilal Dhanji, : [1962]44ITR876(SC) and Commissioner of Income-tax v. Hajee Hassan Yacoob Sait, [1964] 53 I.T.R. 5 are cases of the kind adverted to by us. In the first of the cases, the assessee created a trust in 1953 in respect of a sum of Rs. 25,000, the trustees whereof were four persons, including the assessee himself, his wife and brother. The scheme of the trust deed was that the said sum of Rs. 25,000 was set apart by the assessee and it was provided that the interest on that amount should be accumulated and added to the corpus and a minor daughter of the assessee was to receive the income from the corpus, increased by the addition of interest, when she attained the age of 18 on February 1, 1959. She was to receive the income during her lifetime and after her death the corpus was to go to certain persons specified therein. The Supreme Court held that on a true construction of Clause (b) of Section 16(3) of the Income-tax Act, no benefit accrued to the minor daughter in the year of account and that the sum of Rs. 410 could not be included in the total income of the assessee. S. K. Das J., after referring to the provisions of Section 16, observed at pages 882-883 as follows:

'..... the scheme of the section requires that an assessee can only be taxed on the income from a trust fund for the benefit of his minor child, provided that in, the year of account the minor child derives some benefit under the trust deed--either he receives the income, or the income accrues to him, or he has a beneficial interest in the income in the relevant year of account. But if no income accrues, or no benefit is derived and there is no income at all (so far as the minor child is concerned), then it is not consistent with the scheme of Section 16 that the income or benefit which is non-existent so far as the minor child is concerned, will be included in the income of his father.'

13. This decision and the passage cited above was relied upon in the latter case by the Kerala High Court in construing a settlement deed by and under which a sum of Rs. 90,000 and certain other properties were conveyed to the trustees for the use and benefit of the assessee's daughter, who was then a minor, being only 5 years of age. The donor constituted himself and two others as trustees and provided, inter alia, for the investment of the trust moneys in any trade, commerce, etc., at the discretion of the trustees and with the consent of the settlor, and for the collection of rents from immovable properties settled upon trust. It also provided that the trust shall cease to operate when the aforesaid minor attains the age of 21, which will be in March, 1962, from when the trust property shall vest absolutely in her. There was however no provision in the document for the payment of any portion of the income or the corpus of the trust properties to the beneficiary until she attained the age of 21 years. It was held that the provisions of Section 16 do not apply. These cases are clearly distinguishable and have no application to the facts of the instant case, where there is no postponement of the vesting of the property in the minor. Moreover, in the partition deed, the clause immediately preceding the clause referred to above, which provides that 'the property worth Rs. 58,949-5-6 shall be enjoyed by the second individual of us freely with absolute powers of gift, mortgage, exchange, sale, etc.', shows that there has been an immediate vesting of the properties in the minor. In this view, we are in agreement with the Tribunal's conclusion that the income from the properties allotted to the minor can be included in the total income of the assessee under Section 16(3)(a)(iv).

14. The same reasoning will apply to the reference under the Wealth-tax Act.

15. In the result, the question in each of the three references is answered in the affirmative and in favour of the department, with costs one set, being in R. C. No. 24/65 : Advocate's fee, Rs. 250.


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