1. These appeals by the assessee relate to the assessment years 1978-79, 1979-80 and 1980-81.
2. The assessee is a firm known as Ajit Traders. Registration of the firm was refused by the ITO and this was confirmed by the AAC. The assessee has, therefore, come up in appeal before the Tribunal.
3. The grounds taken are to the effect that the AAC erred in confirming the order of the ITO.4. The assessee-firm was constituted by a partnership deed dated 1-7-1976. There are five partners. They are: The second, fourth and fifth partners have become partners of the firm in a representative capacity, namely, as the managing trustees of 'Suchita Benefit Trust', 'Dharmesh Benefit Trust' and 'Bijal Benefit Trust', respectively. There was only one beneficiary in each trust.
They were minors. They were Miss Suchita, Master Dharmesh and Miss Bijal, respectively.
5. Registration of the firm was refused by the ITO on the ground that the trust had been formed to circumvent the provisions of Section 64(1)(m) of the Income-tax Act, 1961 ('the Act'), to avoid the clubbing of the income of the minors with their parents and, further, that the minor beneficiaries have been made liable for the loss of the firm at least indirectly by the trusts becoming partners in the firm.
6. The order of the ITO was confirmed by the AAC on a different ground namely, that the trusts had not been validly created.
7. To appreciate the reason given by the AAC it is necessary to state some details with regard to the constitution of the trusts. All the three trust deeds were executed on 24-6-1976 and are identically worded. In respect of Suchita Benefit Trust, the settlor was Shri Madhusudan Mulji Thakker, the beneficiary being minor Suchita. The trustees were Shri Ajit Kumar Thakker, Shri Madhusudan Thakker and Smt.
Kusum Ajit Kumar Thakker. In respect of Dharmesh Benefit Trust, the settlor was Shri Ajit Kumar Thakker, the beneficiary being Master Dharmesh. The trustees were Shri Madhusudan Thakker, Shri Ajit Kumar Thakker and Shri Chandrakant Thakker. In respect of Bijal Benefit Trust, the settlor was Smt. Kusum Ajit Kumar Thakker, the beneficiary being Miss Bijal. The trustees were Shri Chandrakant Thakker, Smt.
Kusum Ajit Kumar Thakker and Shri Madhusudan Thakker.
8. The preamble to the trust deed in the case of Bijal Benefit Trust reads thus: Whereas Miss Bijal, daughter of Mr. Madhusudan Mulji Thakker, is a minor aged seven years born on 22-11-1969 and has received the gift of Rs. 2,500 (Rupees two thousand five hundred only) in cash from Mrs. Kusum Ajit Kumar Thakker of 509, Anant Deep "Chambers, 273/277, Narshi Natha Street, Bombay 400009, in terms of Deed of Gift executed on the 24th day of June, 1976.
Whereas the said Kumari Bijal, daughter of Mr. Madhusudan Thakker is entitled to the said sum of Rs. 2,500 (Rupees two thousand and five hundred only) which is now desposited in the partnership firm of Chandrakant & Brothers, having its registered office at 509, New Anant Deep Chambers, 273/77, Narshi Natha Street, Bombay 400009.
Whereas the settlor desires that the above-mentioned credit balance of Rs. 2,500 (Rupees two thousand five hundred only) should be held by the trustees upon trust powers and provisions hereinafter declared and contained concerning the same.
The provisions in the case of other trust deeds are similar. The amount gifted was Rs. 10,000 in the case of Suchita Benefit Trust and Rs. 2,500 in the case of Dharmesh Benefit Trust. The amounts gifted to Suchita and Dharmesh are mentioned in the respective deeds as having been deposited in a partnership firm of Mukesh Traders. The trusts were created with respect to the gifted amounts. The trust deeds authorised the trustees to invest the amounts and it is by virtue of this authorisation that they invested the amounts in the assessee-firm and became partners thereof.
9. The view taken by the AAC was that there was first a gift of the amounts to the minors, that the amounts became the property of the minors and that thereafter the settlors could not have formed any trust with regard to the said amounts. As far as the minors were concerned, their guardians could not have constituted the trusts for the amounts without the permission of the principal civil courts of original jurisdiction in view of Section 7 of the Indian Trusts Act, 1882.
10. It was contended by the learned representative for the assessee that the gift deeds and the trust deeds were executed on the same date, that it was a simultaneous transaction, that it cannot, therefore, be said that the gifted amounts became the property of the minors and that the construction of the trusts was with funds belonging to the minors.
As against this, it was contended by the learned departmental representative that the gift is antecedent to the constitution of the trust and that the amounts had become the property of the minors before the constitution of the trusts. The learned departmental representative also supported the order of the AAC on the ground relied on by the ITO, namely, that the trust was constituted to defeat the provisions of Section 64(1) and, further, that the effect of the constitution of the trust is that the minors are made to suffer the loss of the firm.
11. We may first consider the correctness of the finding of the ITO that the trust was constituted to defeat the provisions of Section 64(1) and that the minors will be made to suffer the loss occurring to the firm and that the trust is, therefore, invalid. This Tribunal had occasion to consider the question in the case of similar trusts. It was held by the Tribunal by the order in IT Appeal No. 352 (Coch.) of 1980, dated 28-12-1981, and by the order in IT Appeal No. 98 (Coch.) of 1982, dated 22-7-1983, that registration of the firm cannot be refused for the reasons mentioned by the ITO. No distinguishing features were pointed out and no new arguments were advanced in the matter. Following the earlier orders, this contention of the department is rejected.
12. The only other question to be considered is, whether the constitution of the trust is bad for the reason that it has been constituted with the amount belonging to the minor. The preamble of the trust deeds, one of which has been extracted earlier, will show that at first a particular amount was gifted by the settlor in cash to the minor in each case, that the amounts were deposited in some other firms and that the trusts were constituted with regard to the said amounts.
The learned representative for the assessee was unable to explain why the amounts were first gifted to the minors and why the trusts were not straightaway constituted by the settlors with the amounts without first gifting the amounts to the minors. As already stated, the only contention advanced by the learned representative was that as the transactions were simultaneous, it should be treated as a case of the settlors constituting the trusts with regard to their own amounts and not with regard to the amounts belonging to the minors as per the gifts. On a careful consideration of the matter, we are unable to accept the contention advanced by the learned representative. The preamble clearly says that the minors have received the gifts of the amounts in cash in terms of the gift deeds executed on the same day.
The settlors, therefore, chose to make a specific gift of the amounts to the minors and that too by executing gift deeds. It is then stated in the preamble that the minors are entitled to the amounts gifted and that the amounts are deposited in certain partnership firms. Then comes the recital that the settlor desires that the credit balance in the firm in favour of the minor should be held by the trustees upon trust under the provisions declared and contained in the trust deed. Under these circumstances, we hold that the amounts were first transferred to the minors by way of gifts, that the amounts became the property of the minors and that it was only subsequently that the trusts were constituted. It is clear from Section 7 that the settlor can constitute a trust only with regard to a property, at his disposal and not with regard to a property which already belongs to a minor.
13. In this context, we may refer to the decision of the Kerala High Court in the case of CIT v. V.S. Kumaraswamy Reddiar Trust  138 ITR 808. In that case, certain amounts were transferred to a trust fund to the accounts of the minors who were beneficiaries. The validity of the trust was upheld in that case by the High Court for the reason that the amounts were transferred to the trust fund by majors and that it cannot be treated as a case where the minors first received the amounts and then put the amounts in the accounts of the trust. The following observations of the Tribunal in that case were approved by the High Court: ...The agreement dated March 30, 1972 makes it very clear that the monies 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 inter vivos, this being made a subject-matter of the trust. It is not a cause 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....
In our view the position in the present case is materially different, inasmuch as, there was initially a gift to the minor and later, the constitution of the trust. We, therefore, find no reason to interfere with the order of the AAC.