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income-tax Officer Vs. Smt. N. Muthammal - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1983)6ITD136(Mad.)
Appellantincome-tax Officer
RespondentSmt. N. Muthammal
Excerpt:
.....in the course of the original assessment the ito had no information as regards the author of the trust, the beneficiaries of the trust and the relationship with the author and this information came to him only after the completion of the original assessment and, therefore, there was information subsequent to the assessment giving rise to the belief that the income assessable had escaped assessment. consequently, he upheld the validity of the reassessment proceedings under section 147(6). as regards merits, he disagreed with the view of the ito as in his view there must be transfer of assets to the assessee's son's wife or son's minor child and, consequently, the change of ownership to the beneficiaries and as the assets v/ere transferred to the trustees the trustees were the owners and.....
Judgment:
1. The appeal by the revenue and the cross-objection by the assessee are consolidated and disposed of by a common order for the sake of convenience, as they arise from the same order of the AAC wherein he has upheld the validity of the reassessment proceedings under Section 147(6) of the Income-tax Act, 1961 ('the Act') but on merits deleted the addition made by the ITO under Section 64(l)(vi) of the Act on the ground that there has been no transfer of asset by the assessee to her son's wife or son's minor child. While the revenue is in appeal against the deletion of addition on merits, the assessee is in cross-appeal against the validity of reassessment proceedings upheld by the AAC.2. The facts in brief are that the ITO completed the original assessment on 28-1-1977 on the basis of return filed in December 1976 which showed nil income against column 12(b) of the return pertaining to 'income arising to spouse/minor child', etc. On 30-5-1980, the ITO received a letter from his counterpart [Circle 11(8), Madras] stating that three private trusts were created by the assessee in favour of three minor grandchildren separately and the beneficiaries had filed their returns and the assessments were completed. On the view that the income accrued to the beneficiaries escaped assessment under Section 64(l)(vi), he included such income after overruling the objection of the assessee that Section 64(l)(vi) was not applicable to the income arising to the beneficiaries through the medium of the trust and there was no transfer even indirectly. According to the ITO, the word 'indirectly' appearing in Section 64(l)(vi) would apply to transfers through the media of the trust also created on or after 1-6-1973 inasmuch as, the ultimate benefit of each one of the trusts reached each of the three minor beneficiaries.

3. The assessee appealed to the AAC challenging the validity of the reassessment proceedings on the ground that all the relevant details were truly and fully disclosed at the time of original assessment. On merits, it was contended that Section 64(1 (vi) did not apply to the income of the trust. The AAC held that in the course of the original assessment the ITO had no information as regards the author of the trust, the beneficiaries of the trust and the relationship with the author and this information came to him only after the completion of the original assessment and, therefore, there was information subsequent to the assessment giving rise to the belief that the income assessable had escaped assessment. Consequently, he upheld the validity of the reassessment proceedings under Section 147(6). As regards merits, he disagreed with the view of the ITO as in his view there must be transfer of assets to the assessee's son's wife or son's minor child and, consequently, the change of ownership to the beneficiaries and as the assets v/ere transferred to the trustees the trustees were the owners and the interest of the beneficiary was only a right against the trustee as regards the income of the trust property. Since the test is not satisfied, he held that Section 64(l)(vi) was not applicable and the inclusion of income of the beneficiaries was, consequently, deleted. He has also referred to the decision of the AAC in the case of Smt. Bhanwari Devi Gandhiya, Madras, which has been duly confirmed by the Tribunal.

4. The learned departmental representative has been heard at length.

His main contention was that Section 64(l)(vi) applied to the transfer of assets through the medium of trusts which amounted to indirect transfer as the beneficiaries would have otherwise obtained the benefit without the interposition of the trust and each beneficiary was the whole and sole beneficiary of the separate trusts created. He has relied on the decision of the Kerala High Court in the case of CWT v.V. Thiruvenkata Reddiar [1981] 128 ITR 689 in support of his view that the beneficiary shall be deemed to be the owner of the trust property and, consequently, Section 64(l)(vi) applied to the income arising from the trust property.

5. The learned counsel, on the other hand, reiterated its contention urged before the authorities that Section 64(l)(vi) was not applicable as there was no direct or indirect transfer to the beneficiaries and such section does not cover the transfer to the beneficiaries through the medium of trust. In support of his proposition, he relied on the decision of the Bombay High Court in the case of CIT v. Framji H.Commissariat [1967] 64 ITR 588 and the Calcutta High Court in the case of CIT v. A.N. Chowdhury [1969] 71 ITR 326. He further contended that the trust was discretionary in nature and the income of the trust was not applied to the beneficiary and, therefore, there was no question of the beneficiary having derived any benefit which called for clubbing under Section 64(l)(vi). Finally, he supported the decision of the AAC on merits. As regards the validity of the reassessment, he reiterated the contention before the authorities that it was not valid.

6. In reply, the departmental representative reiterated his contention that the transfer through the medium of trust amounted to indirect transfer and the inclusion of income could be justified on the ground that the beneficiary had interest in expectancy.

7. We have duly considered the rival contentions urged on behalf of both the parties. At the outset, we have to observe that the orders of the authorities clearly show that the ITO had obtained information from his counterpart after the completion of the original assessment as to the particulars of the trusts created by the assessee and had reasons to believe that income chargeable to tax has escaped assessment. The Courts cannot go into the adequacy or sufficiency of the reasons which led to the belief of the ITO that the income chargeable had escaped assessment. The question whether the income has escaped assessment with reference to a particular sub-section or not is only a matter of appreciation of law and interpretation of the statute. Therefore, we uphold the order of the AAC so far as his decision on the question of validity of reassessment proceeding is concerned.

8. As regards merits, we have to uphold the decision of the AAC as it is in accordance with the decision of the Bombay and Calcutta High Courts, relied upon by the learned counsel for the assessee, which have a persuasive value. The decision cited by the learned departmental representative pertained to the exemption under section 5(1){xxvi) of the Wealth-tax Act 1957 claimed by a beneficiary of a trust in respect of deposits in banks and in whose case direct assessment was made by the WTO and, therefore, the Court allowed exemption on the ground that the beneficiary had a beneficial interest in the deposits and, therefore, the deposits are to be deemed to be held by the beneficiary.

The Court has taken a liberal view in respect of an exemption statutorily allowed in the context of direct assessment on the beneficiary. But in the case of the assessee the assets were transferred by the assessee to the trustees and the trustee possessed the property till the date of distribution which has been prescribed as ten years after the execution of settlement or such other date as may be appointed by the trustees. The trustee was enjoined to pay or apply the net income of the trust towards maintenance, educalion and other benefits of the beneficiary. The trust deed also enumerates the various circumstances according to which the trust property has to be applied on the date of distribution. Therefore, there is a valid trust created by the assessee in favour of the beneficiary and in view of such trust, the income, if any, arising to the beneficiary cannot be clubbed with the income of the transferor or the settlor as held by the Bomaby and Calcutta High Courts. Therefore, we agree with the view of the AAC that unless there is direct transfer or indirect transfer to the assessee's son's wife or the assessee's son's minor child after 1-6-1973, otherwise than for adequate consideration, Section 64(l)(vi) does not apply and the Courts have held that the transfer to the aforesaid persons through the medium of trust did not attract the aforesaid section. Even if the case of the assessee falls under clause (v/7) of Section 64(1), the income accruing for the immediate or deferred benefit of spouse or minor child (not being married daughter) or both only was covered and not to son's wife or son's minor child as in the present case. This is abundantly clear from the insertion of Explanation 1A and Explanation 2A made by the Finance Act, 1979, with effect from 1-4-1980 which has taken care of a situation contemplated by clauses (i) and (iii) of Section 64(1), namely, the spouse or minor child being beneficiary of a trust being represented in the firm through the medium of a trust. Such statutory presumption in favour of clause (vi) of Section 64(1) has not been specifically provided and even the definition of 'child' in Section 2(15A) inserted by the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1976 does not cover 'grand-child'. The contention of the learned counsel for the assessee that no income has been applied to the beneficiary in this year has also not been controverted by the learned departmental representative, In the circumstances, therefore, we uphold the decision of the AAC in excluding the income arising to the beneficiaries.

9. The cross-objection of the assessee was only with regard to the validity of reassessment proceedings taken by the ITO and in view of our decision, it has to be rejected.

10. In the result, the appeal as well as the cross-objection are dismissed.


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