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income-tax Officer Vs. V.S. Kumaraswamy Reddiar - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1984)7ITD563(Coch.)
Appellantincome-tax Officer
RespondentV.S. Kumaraswamy Reddiar
Excerpt:
.....funds. this has been confirmed by the hon'ble high court in the case of cit v. v.s.kumaraswamy reddiar trust [1982] 138 itr 808 (ker.) which was a reference from the decision of the tribunal. there is, therefore, no scope for invoking the provisions of section 64. in any case, even if it is held that section 64 is attracted, the matter will not fall under clauses (iii) and (iv), but will fall only under clause (v). while clauses (iii) and (iv) cover direct and indirect transfers, clause (v) as it stood during the relevant assessment year did not cover indirect transfers. the clause will not, therefore, be attracted to the present case. in support of this position, the learned representative for the assessee relied upon the rulings in cit v. framji h. commissariat [1967] 64 itr 588.....
Judgment:
1. The two appeals by the department relate to the assessment year 1973-74 and are in respect of two different assessees. The cross-objection is by the assessee in IT Appeal No. 52 (Coch.) of 1982.

V.S. Kumaraswamy Rcddiar, the assessee in IT Appeal No. 410 (Coch.) of 1981 is the father of K. Nagaraja Reddiar, the assessee in IT Appeal No. 52 (Coch.) of 1982.

2. The grounds taken by the department in the two appeals are common and are to the effect that the AAC erred in holding that Section 64 of the Income-tax Act, 1961 ('the Act') will not apply to transfers of certain assets by the two assessees and, consequently, in deleting a sum of Rs. 45,324 included in the income of the assessee in IT Appeal No. 410 (Coch.) of 1981 and Rs. 12,362 included in the income of the assessee in IT Appeal No. 52 (Coch.) of 1982 under Section 64.

3. Shri Kumaraswamy Reddiar and his sons Nagaraja Raddiar, Radha-krishna Reddiar and Kannan were partners in a firm known as V.S.Kumaraswamy Reddiar. The firm was first constituted on 14-8-1969 and on that day Kannan, who was a minor, was admitted to the benefits of partnership. When he became a major, he opted to be a partner and a fresh deed of partnership was executed on 16-8-1971. The father had 55 per cent share and the sons 15 per cent share each in the firm. On 1-4-1972, a trust known as 'V.S. Kumaraswamy Trust' was created under a trust deed of the same date. The business carried on by the firm was transferred to this trust with effect from the same date. The trustees were Shri Kumaraswamy Reddiar, the father and Shiri Nagaraja Reddiar, one of the sons. The beneficiaries were the wife and the sons of Shri Kumara-swamy Reddiar excepting Shri Nagaraja Reddiar and the wife and sons of Shri Nagaraja Reddiar. The ITO had treated Kannan, one of the sons of Kumaraswamy Reddiar, who is one of the beneficiaries, as a minor, though he was actually a major.

4. The capital of the trust was constituted by certain amounts transferred by the four partners of the firm. Shri Kumaraswamy Reddiar purported to transfer the amounts on behalf of the wife and children of Shri Nagaraja Reddiar. Similarly, Shri Nagaraja Reddiar purported to transfer the amounts as nominee of the wife and children of Shri Kumaraswamy Reddiar. The names of the parties and the amounts transferred with regard to each are as follows :K. Alwar, minor son 6,000 | Amounts transferred by ShriK. Kannan, minor son 6,000_| Nagaraja Reddiarof Nagaraja Reddiar -K. Ananthakumar, son 2,400 | Amounts transferred byK. Dineshkumar, son 2,400_| Kumaraswamy Reddiar.

The case of the department is that there has been cross gifts by Kumaraswamy Reddiar and Nagaraja Reddiar to the wife and children of each other, that the income of the beneficiaries from out of the business conducted by the trust is, therefore, to be included in the income of Kumaraswamy Reddiar and Nagaraja Reddiar under clauses (iii) and (iv) of Section 64(1).

5. The original assessment in the case of Kumaraswamy Reddiar was completed on 14-8-1975 and in the case of Nagaraja Reddiar on 30-9-1975. The income accruing to the beneficiaries under the alleged cross gifts were not returned as income by the respective assessees and the same was not included in their assessments. The assessments were, therefore, reopened under Section 147(a) of the Act. In the fresh assessments, a sum of Rs. 45,324 was included in the income of Kumaraswamy Reddiar and Rs. 12,362 in the income of Nagaraja Reddiar under Section 64.

6. Both the assessees stook up the matter in appeal. The AAC rejected the contention of the assessees that the reopening of the assessments under Section 147(a) was bad. But he held that in the present case there was no transfer of amounts by the two assessees to the wife and children of the other assessee, that the transfer of the amounts by the assessees was to the trust fund, that there was, therefore, no gift in favour of the minors and that Section 64 was not, therefore, attracted.

In coming to the conclusion, the AAC relied upon the decision of the Tribunal dated 23-8-1978 in IT Appeal No. 214 (Coch.) of 1976-77 and 131 (Coch.) of 1977-78. This was in respect of the assessment of the trust for the assessment years 1973-74 and 1974-75. The ITO held that the constitution of the trust is invalid for the reason that it is constituted with amounts which were transferred to the minors and that the minors were incompetent to constitute the trust. The AAC held that the constitution of the trust was not invalid. The department came up in appeal before the Tribunal. The Tribunal also held that the constitution of the trust is valid. It was held that the transfer of the fund was by the partners of the firm to the trust and not to the minors. It was relying upon this finding of the Tribunal that the AAC held that there was no cross transfers by the two assessees to the wife and children of the other. Aggrieved by the same, the department has come up in appeal.

7. The contentions of the learned departmental representative were to the following effect. The beneficiaries under the trust deed are the wife and children of the two assessees. The amounts were transferred by the two assessees to the accounts of the wife and children of the other in the trust. It was, therefore, a case of cross transfer of the funds by one assessee to the wife and children of the other assessee. The finding of the Tribunal regarding the validity of the trust does not affect the matter. Clauses (iii) and (iv) of Section 64 are clearly attracted to the present case. In support of the contention that there were cross transfers attracting clauses (iii) and (iv) of Section 64, the learned departmental representative relied upon the decision of the Calcutta High Court in the case of CIT v. A.N. Chowdhury [1969] 71 ITR 326, that of the Supreme Court in the case of CIT v. C.M. Kothari [1963] 49 ITR 107, that of the Madras High Court in the case of Smt. V.Amirtham Ammal v. CIT [1976] 102 ITR 350 and that of the Supreme Court in CIT v. Keshavji Morarji [1967] 66 ITR 142.

8. On the other hand, it was pointed out by the learned representative for the assessee that the Tribunal had in its order in the case of the trust held that there was no transfer of funds by the assessees to the wife and children and that the transfer was to the trust funds. This has been confirmed by the Hon'ble High Court in the case of CIT v. V.S.Kumaraswamy Reddiar Trust [1982] 138 ITR 808 (Ker.) which was a reference from the decision of the Tribunal. There is, therefore, no scope for invoking the provisions of Section 64. In any case, even if it is held that Section 64 is attracted, the matter will not fall under clauses (iii) and (iv), but will fall only under Clause (v). While clauses (iii) and (iv) cover direct and indirect transfers, Clause (v) as it stood during the relevant assessment year did not cover indirect transfers. The clause will not, therefore, be attracted to the present case. In support of this position, the learned representative for the assessee relied upon the rulings in CIT v. Framji H. Commissariat [1967] 64 ITR 588 (Bom.) and Keshavji Morarji v. CIT [1978] 112 ITR 33 (Bom.). It was also claimed that Clause (v) will not be attracted for another reason, namely, that the cross gifts are not of equal amounts and it cannot, therefore, be said that there is no consideration for the transfer.

9. We have carefully considered the matter. The present matter relates to the assessment year 1973-74 and it is, therefore, governed by Section 64 prior to its amendment by the Taxation Laws (Amendment) Act, 1975. Section (1) of Section 64 as it stood at the relevant time, omitting the Explanation, which is not relevant for the purpose, reads thus : (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly- (i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner ; (ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner; (iii) subject to the provisions of Clause (i) of Section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart; (iv) subject to the provisions of Clause (i) of Section 27, to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minorchild by such individual otherwise than for adequate consideration ; and (v) to any person or association of persons from assets transferred otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.

The case of the department is that the transactions in the present case are hit by clauses (iii) and (iv). Clause (iii) relates to the income arising to the spouse of the assessee from assets transferred directly or indirectly to the spouse. Clause (iv) relates to income arising from assets transferred directly or indirectly to the minor child by the assessee. The main question for consideration, therefore, is whether in the present case there was a transfer of funds by one assessee to the wife and children of the other. The relevant portion of the trust deed reads thus : AND WHEREAS The Founder Trustee (Kumaraswamy Reddiar) has transferred upon trust the sum of Rs. 2,400 as nominee of minor grandson Anantakumar, Rs. 2,400 as nominee of minor grandson, Dinesh Kumar and Rs. 1,200 as nominee of daughter-in-law Prema, wife of Shri K. Nagraja Reddiar ; AND WHEREAS K. Nagaraja Reddiar has transferred and assigned to the trustees upon the trust the sum of Rs. 6,000 as nominee of K. Alwar, his minor brother, Rs. 6,000 as nominee of K. Devarajalu, his minor brother and Rs. 4,000 as nominee of his mother K. Rajammal ; It is clear from the above portions that the transfer of the funds was to the trust and not to the wife and children, It is however, contended by the learned departmental representative that as the transfer was as a nominee of the wife and children, it should be deemed that there was first a transfer of the funds to the wife and children and a subsequent transfer to the trust. Oa the other hand, it is contended by the learned representative for the assessee that this matter is already concluded by the decision in the case of the trust. As already stated, the ITO had held the trust to be invalid for the reason that the funds should be deemed to have been transferred by the minors. In dealing with this aspect, the Tribunal in its order dated 23-8-1978 in IT Appeal Nos. 214 (Coch). of 1976-77 and 131 (Coch.) of 1977-78 held as follows : We have also given an illustration of one such transfer. It would be seen from that as a matter of fact that no funds were transferred to the minors. In fact, in the books of account, the amounts have been credited to a trust fund of the minors' accounts. The agreement dated 30-3-1972, between the four partners is the basis for this transfer. The book entries made in the books of the firm are mere consequences of the agreement. This agreement dated 30-3-1972 makes it very clear that the moneys transferred from the capital accounts of the partners were for the purpose of the trust fund, i.e.., it is not a straight gift to the minors and later this being made a subject-matter of the trust. It is not a case of two different transactions as viewed by the department. There is no initial gift to the minor and later a transfer to the trust. There is only one transaction, a transfer from the capital account to the trust fund.

So the settlor in respect of these amounts is really the four partners whose accounts have been debited. The minors did not at all come into the picture. These amounts had been given by the four partners to a trust which is going to be formed on the next day. For the one day, i.e., 31-3-1972 when,the debits were really made the four partners were holding these funds as trustees to be handed over to a trust which is to formed on the next day. On this account we are unable to see any invalidity in the trust.

The matter went up before the Hon'ble High Court in reference and the decision in the case of V.S. Kumaraswamy Reddiar Trust (supra). The High Court held the provisions of the various agreements and the trust deed, in our opinion, make it clear that the trust was not created by or on behalf of the minors. The decision for the creation of the trust arose out of the discussions of the major partners of the firm. The funds had been transferred to the trust account, before the constitution of the trust under annexure D. The trust deed refers to an antecedent transfer of the funds belonging to the major partners.

Regarding the manner in which the transfer was effected, the High Court held "Counsel for the department sought to rely on the recitals as contained in the 'journal entries' in the books of account Annexure C as given in the paper book furnished to the Tribunal at the time of hearing, to contend that there had been 'gifts' of cash to the minors.

We are of the view that these entries cannot prevail over the provisions in the documents already referred to". The High Court also agreed with the finding of the Tribunal that it is not a case of two different transactions as viewed by the department and that there is no initial gift to the minor and later a transfer to the trust and there was only one transaction, a transfer from the capital account to the trust fund. In view of this, we are unable to accept the contention of the learned departmental representative that there has been a cross transfer of the funds, either directly or indirectly, by the two assessees in favour of the wife and children of the other. Clauses (iii) and (iv) of Section 64(1) are not, therefore, attracted in the present case.

10. As rightly pointed out by the learned representative for the assessee, only Clause (v) which deals with a transfer by the assessees to a person other than the wife and children will be attracted to the present case. This proposition is fully supported by the ruling of the Bombay High Court in Framji H. Commissariat's case (supra). That was a case where the assessee and his brother created separate trusts in favour of the minor sons of each other. It was held by the Bombay High Court that since the transfer was to a trust, Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, which corresponds to clauses (iii) and (iv) of Section 64(1) of the Act, was not applicable, that only Section 16(3)(6) of the 1922 Act, which corresponds to Clause (v) of Section 64(1) is attracted, that as the words 'directly or indirectly' do not occur in this clause, it will not be attracted to a case of transfer to persons other than the wife and children. This was followed by the Bombay High Court in the case of Keshavji Morarji (supra). The ruling of the Calcutta High Court in the case of A.N. Chowdhury (supra), is also to the same effect. It is true that the Calcutta High Court has taken a different view in Sital Chowdhury v. CIT [1979] 119 ITR 698.

But it is found that the High Court has not entered a clear rinding whether the matter falls under Clause (v) or the matter falls under Clause (iii) and has treated the matter as concluded by the decision of the Supreme Court in C.M. Kothari's case (supra). Before us, the learned departmental representative had relied upon the said decision of the Supreme Court. But in the case before the Supreme Court, the cross transfer of the assets was to the wife and children and it was not a case of transfer to a trust. The Supreme Court ruling has been distinguished for this reason by the Bombay High Court in the rulings referred to above. With great respect, we are inclined to follow the decision of the Bombay High Court and to hold that when the transfer is not to the wife and children but to a trust, only Clause (v) will be attracted, in which case, the contentions of the department has to fail because of the absence of the words 'directly or indirectly' in Clause (v). (It may be noted that after the amendment of Section 64 by the Taxation Laws (Amendment) Act, 1975, Clause (v) has been renumbered as Clause (vii) and it contains the words 'directly or indirectly'. But as already stated, this is not applicable to the assessment year now under appeal.) We, therefore, find no reason to interfere with the finding of the AAC on this aspect.

11. The cross-objection by one of the assessees questions the validity of the reopening. The form prescribed for filing the return required the assessee to include any income, which is includible in the income of the assessee under Section 64. The ruling of the Supreme Court in CIT v. Smt. P.K. Kochammu Amma [1980] 125 ITR 624, relied upon by the learned representative of the assessee, is relating to penalty and is based on the return to be filed under the provisions obtaining prior to 1-4-1972 and is not applicable to the present case. The reopening would, therefore, have to be upheld provided the income is actually the income of the assessee under Section 64. But, in view of the finding in the appeals, no income has escaped assessment and the reopening cannot, therefore, be upheld.12. In the result, the appeals by the department are dismissed and the cross-objection by the assessee is allowed.


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