1. At the instance of the Revenue, the following common question in respect of the two assessment years 1973-74 and 1974-75 has been referred to this court :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to be assessed under Section 161(1) of the Income-tax Act, 1961 ?'
2. The facts leading to the reference are as follows : The firm 'M/s. V. S. Kumaraswamy Reddiar' had been engaged in business in piece-goods. The constitution of the firm had undergone changes from time to time. As on August 16, 1971, the firm, constituted under the partnership deed executed on that day, consisted of four partners, Kumaraswamy Reddiar, Nagaraja Reddiar, Radhakrishna Reddiar and Kannan.
3. It appears that some time in 1972 the partners had discussions regarding the manner in which the business should be conducted in future. The result of such discussions is evidenced by the agreement dated March 30, 1972, which is annex. B to the reference. It recites an agreement for the transfer of the business of M/s. V.S. Kumaraswamy Reddiar to Sri V.S. Kumaraswamy Reddiar and Sri K. Nagaraja Reddiar 'who have agreed to constitute a trust effective from the 1st day of April, 1972' for the benefit of the 9 persons referred to therein. After providing that Kumaraswamy Reddiar and Nagaraja Reddiar shall be the trustees, the agreement further provides that Sri V.S. Kumaraswamy Reddiar shall be possessed of all the assets as on March 31, 1972. Clause 5 of the agreement states that 'a trust deed shall be made out and registered constituting the trust on April 1, 1972'. The agreement further provides for the execution of an agreement of sale in respect of the assignment of the business to the trust. In accordance with the terms of annex. B agreement, entries were made in the books of the firm, which evidence the transfer of various amounts to the trust fund. As envisaged under the agreement, a trust deed was executed on April 1, 1972. This is annex. D to the reference. Paragraph 2 of the trust deed deals with the appointment of Nagaraja Reddiar as one of the trustees along with the founder trustee. Clause (b) of that paragraph deals with the name of the trust and details relating to the head office and branch offices. Under para. 6(d) the trust is empowered 'to acquire and deal with the business, property, assets and liabilities of any trust, firm, company or person carrying on any busi-ness within the objects of the trust'. It is not necessary to refer to all the paragraphs in the trust deed for a consideration of the question referred to us for decision. On April 1, 1972, an agreement of sale relating to the business of M/s. V. S. Kumaraswamy Reddiar and Sons was executed in favour of the trust and this is evidenced by annex. E.
4. In the course of the assessment proceedings relating to the assessmentyear 1973-74, the assessee claimed that it should be assessed under Section 161(1)as a representative assessee coming within the provisions of Section 160(1)(iv) ofthe I.T. Act, 1961. This request was declined by the ITO for the reasonthat 'minors also' were 'the authors of the trust', and that the requisite permission of a principal civil court for the creation of a trust by or onbehalf of minors, as contemplated by Section 7 of the Indian Trusts Act, 1882,had not been obtained. In so doing, the ITO principally relied on paras. 2and 17 of the trust deed. Consequently, the assessment was made assigning to the assessee, the status of an association of persons.
5. The appeal preferred by the assessee was allowed by the AAC by hisorder dated March 1, 1976. The AAC noted that the ITO was not correctin assuming that para. 2 of the trust deed related to an agreement by theminors to transfer sums of money to the trustees. (The AAC is correct inhis observation, for, para. 2, as noticed earlier, related to the trustees, thename of the trust and other details relating to the head office and branches).He further observed that 'only majors were partners in that firm' andthat there was 'no reference in the trust deed to the effect that the minorswere the authors of the trust'. The AAC also referred to the fact that'the Income-tax Officer himself had noted the names of the majors whocontributed to the corpus in the names of the minor beneficiaries'. The further question, whether, even on the basis that there was a valid trust,the assessee could not be assessed under Section 4 of the Act, was considered bythe AAC. After referring to the decisions on the point and sketching thestatutory history leading to the enactment of the provisions of Section 161(2) of1961 Act, the AAC observed that it was not permissible for the ITO to taxincome received by a representative assessee as defined in Section 160, under thegeneral charging section, Section 4.
6. The assessment for the year 1974-75 made on similar lines by theITO was also set aside in appeal by the AAC by his order dated February 24, 1977 adopting the reasoning of his earlier order dated March 1,1976.
7. The Revenue took up the matter before the Tribunal in two appeals,in respect of the two years. The Tribunal affirmed the view of the AACand dismissed the appeals.
8. The Tribunal found as a fact that the four partners of the firm had decided to transfer the properties in the firm as well as some funds to thetrust by their agreement dated March 30, 1972, and that the agreement showed that the founders of the trust were the four partners themselves. In para. 10 of its order the Tribunal observed :
'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.'
9. In the light of the above findings of fact, the Tribunal took the view that Section 7 of the Indian Trusts Act, 1882, was not applicable to the facts of the case.
10. Section 7 of the Act, relied upon by the counsel for the Revenue, to contend that there was no valid trust, reads as follows :
'7. Who may create trusts.--A trust may be created-
(a) by every person competent to contract, and
(b) with the permission of a principal civil court of original jurisdiction, by or on behalf of a minor ;
but subject in each case to the law for the time being in force as to the circumstances and extent in and to which the author of the trust may dispose of the trust-property.'
11. It is evident that a trust can be created by or on behalf of a minor, only with the permission of a principal civil court of original jurisdiction. Concededly no permission of any court had been obtained for the creation of the trust. The question, however, is whether the trust in question has been created by or on behalf of a minor or minors.
12. 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 annex. D. The trust deed refers to an antecedent transfer of the funds belonging to the major partners. The trust deed had been executed in accordance with the provisions contained in the agreement dated March 30, 1972. Clause 4 of the agreement, which has been noted earlier, is specific that Sri V. S. Kumaraswamy Reddiar shall be possessed of all these assets as on March 31, 1972. The entries in the books of account of the firm, to which the Tribunal has made reference in its order, also corroborate that it was the major partners of the firm that created the trust and transferred their funds to the trust fund. It is thus clear that there has not been any creation :of the trust by the minors though the minors also figure as some of the beneficiaries referred to in the trust deed. The ITO erred in observing that para. 2 indicated a transfer of the funds by the minors. His conclusionthat the trust deed mentioned the minors as the authors of the trust is not supported by the provisions of the agreement dated March 30, 1972, or of the trust deed of April 1, 1972. We are thus in agreement with the findings of the AAC and of the Tribunal, that the minors were not the authors of the trust and consequently the invalidating provision of Section 7(b) of the Indian Trusts Act, 1882 (arising out of an omission to obtain permission of a civil court for creating a trust by or on behalf of the minors) is not attracted to the facts of the case.
13. Counsel for the Department sought to rely on the recitals as contained in the 'journal entries' in the books of account (annex. 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 Tribunal has in para. 10 of its order observed as follows :
'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 accounts the amounts have been credited to a trust fund of the minors' accounts. 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. 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., March 31, 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 be formed on the next day. On this account we are unable to see any invalidity in the trust. Provisions of Section 7 cannot be invoked at all on the facts.'
14. We are in agreement with this finding of fact so recorded by the Tribunal.
15. It may be noted that Section 7 of the Indian Trusts Act, 1882, which dwells upon as to who may create trusts, and occurring in the chapter entitled 'of the creation of trusts', covers the same aspect relating to the concept of competence of infants to create trusts, dealt with in Lewin on Trusts, 16th Edn., p. 10 and Underhills 'Law of Trusts and Trust Properties', 13th Edn. at p. 192. The following passage occurs in Levin on Trust.
'In general an infant cannot dispose of property and, therefore, cannot make a valid settlement inter vivos; however,
(a) A settlement or covenant to settle made by an infant, if for his benefit, is not void but only voidable and is binding on him unless he disaffirms it within a reasonable time after he comes of age.'
16. And Underhill states at page 192 :
'Otherwise an inter vivos settlement made by an infant which, if made by an adult, would bind the property itself, is voidable but not void ; and, unless the infant repudiates it on or shortly after attaining his majority, it will be binding.'
17. It is, however, unnecessary to consider whether the above passages dealing with the legal situation in England are apposite to the Indian situation, as we have already concurred with the finding of the Tribunal that the trust involved in this case is not one created by or on behalf of the minors.
18. The further contention that even if a valid trust is posited the assessee was liable to be assessed as an association of persons was also pressed before us. Passages from p. 949 of the 7th Edn. of Kanga and Palkhivala on Income Tax, were relied on by counsel for the Department. These passages are based on the decisions in Hotz Trust of Simla v. CIT  5 ITC 8 (Lah) and J. V. Saldhana v. CIT  6 ITC 114 (Mad). The two decisions themselves had been referred to and considered both by the AAC and the Tribunal. The subsequent development in the case law as also statutory developments, which ultimately led to the enactment of the new provision, Section 161(2), had been referred to by these taxing authorities.
19. The decisions in Hotz Trust of Simla v. CIT  5 ITC 8 (Lah) and J. V. Saldhana v. CIT 6 ITC 114 (Mad), do not have any direct bearing on the question referred in this case. The correct principles to be applied in the case of an assessment of income in the hands of a representative assessee, had been considered by the Bombay High Court, while interpreting the analogous provisions of Sections 40 and 41 of the Indian I.T. Act, 1922, in CIT v. Balwantrai Jethalal Vaidya : 34ITR187(Bom) . After referring to the observations made by that court in its earlier judgment in Saifudin Alimohamed v. CIT : 25ITR237(Bom) , which in turn referred to the decisions in Hotz Trust of Simla v. CIT  5 ITC 8 (Lah) and J. V. Saldhana v. CIT  6 ITC 114 (Mad), the Bombay High Court declared that 'it is no longer open to the Department to levy a tax on a trustee in the same way as on an assessee who does not fulfil the character of a trustee'. That court further held that if the income is received by a representative assessee as defined in Section 160 of the Act, the Department is obliged to effect the assessment underSection 161(1) of the Act. The position of law as clarified in Balwantrai Jethalal Vaidya's case : 34ITR187(Bom) , has been given statutory acceptance in the light of the recommendation of the Law Commission in its 12th Report and has been specifically approved by the Supreme Court as laying down the correct law. A combined reading of Sections 160 and 161 clearly establish the position that a representative assessee is to be assessed only under Section 161(2) of the Act. This legal position is now well settled in the light of the pronouncements of the Supreme Court while interpreting the corresponding provisions--section. 41 of the Indian I.T. Act, 1922 : (vide CIT v. Nandlal Agarwal : 59ITR758(SC) and C. R. Nagappa v. CIT : 73ITR626(SC) ; as also the analogous section (Section 21) of the W.T. Act : (vide CWT v. Trustees of Nizam's Family (Remainder Wealth) Trust : 108ITR555(SC) ). The Tribunal having found that the assessee herein does satisfy the requirements of a representative assessee and the said finding having been affirmed by us in the earlier part of this judgment, we are clearly of the view that the assessment could only be one under Section 161(1) of the Act.
20. Two subsidiary contentions were also urged by counsel for the Revenue : (1) There is no valid trust as defined in Section 3 of the Indian Trusts Act, 1882, as according to counsel, the authors of the trust and the beneficiaries are identical ; (2) the income received from the business stood outside the activities of the trust and, therefore, in any event, the assessment under Section 161(1) of the Act would not be applicable to such income received from the business which had been only transferred under annex. E. These contentions, in that form, are not seen urged at any time and so naturally have not been even shadowed in the order of the Tribunal. It is, therefore, not open to the Department to urge those contentions before this court. Apart from that, the contentions are devoid of force. The requirements for the creation of trust as defined in Section 3 are fully satisfied in the case. The authors of the trust and the beneficiaries are not identical as contended by counsel.
21. The trust deed did contemplate acquisition of business by the trustees. The acquisition of the business under annex. E agreement was one which was clearly contemplated at the time of the agreement dated March 30, 1972, and had been fully authorised by the second paragraph of Clause 5 of the trust deed. As observed by the Tribunal in para. 11 of its order, 'the business is as much a part of the trust as the sum of Rs. 40,000'. The income arising out of the business activities was, therefore, one to which Section 161 did apply.
22. In the light of the foregoing discussions, the reference is to be answered in the affirmative, in favour of the assessee and against the Department.We do so, but without making any order as to costs.
23. A copy of this judgment under the seal of the High Court and thesignature of the Registrar will be forwarded to the Income-tax AppellateTribunal, Cochin Bench.