This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian income-tax Act, 1922. The question referred are :
'(1) Whether, on the facts and in the circumstances of the case, the settlement dated May 19, 1956, executed by the assessee in favour of his three minor sons admitted to be genuine is a transfer otherwise than for adequate consideration within the meaning of section 16(3)(a)(iv) ?
(2) If the answer to the first question is in the negative, whether the inclusion of the income from the properties covered by the said settlement deed subsequent to May 19, 1956, in the assessees assessment for 1957-58 is valid ?'
The department has no case that the document does not represent a genuine transaction or that the recitals therein are in any way false or incorrect. The only contention before us is that the transfer in favour of the three minor sons of the assessee was not a transfer for adequate consideration.
Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, provides that in computing the total income of any individual for the purpose of assessment there shall be included so much of the income of a minor child of such individual as arises directly or indirectly 'from assets transfer directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration'. According to the assessee the transfer in favour of his minor children was for adequate consideration and on inclusion of their income from the properties transferred is permissible in computing his total income for the purpose of assessment.
We are inclined to accept this contention. The document concerned is given as annexure 'A' to the statement of the case and reads as follows :
'THIS SETTLEMENT IS made on the 19th day of May, 1956, by S. Viswasom, son of Samikkannu Nadar of Kovilpatti, now residing at Neyyattinkara, Neyyattinkara Taluk, Trivandrum District, in Travancore & Cochin State, hereinafter referred to as Settlor, unto and in favour of minor sons (1) Maria Jasu, (2) George Peter, (3) Francis Xavier, aged 7, 5 1/2 and 4 year respectively, hereinafter referred to as the Settlees, represented herein by their mother and guardian, Maria Thangammal, wife of the above settlor.
WHEREAS the Settlor is carrying on business in the said Neyyattinkara town.
WHEREAS the Settlor has acquired properties in the course of his business.
WHEREAS the Settlees are the minor sons of this Settlor.
WHEREAS the mother of the Settlees has been making frequent demands on this Settlor for making suitable and adequate provisions for the maintenance and education of the Settlees and consequently there has been misunderstandings between the Settlor and the mother of the Settlees.
WHEREAS the Settlor is under a legal and imperative duty to maintain the Settlees according to their status in life and in the standard of comfort to which they are accustomed and give them suitable education.
WHEREAS the Settlor is anxious and desirous of making during his lifetime adequate provisions in fulfilment of his legal obligation to the Settlees.
Now that in pursuance of the said desire and the legal duty and obligation cast on him.
The Settlor as owner of the properties scheduled hereunder hereby conveys by way of settlement to the Settlees the properties mentioned fully and described in the Schedule hereunder written.
The Settlees shall enter into possession of the properties forthwith and hold the same absolutely with full and absolute rights of ownership, with equal shares amongst themselves.
The Settlement is executed in consideration of and in fulfilment of the duty and obligation of the Settlor and is irrevocable.'
The document makes it quite clear that it was executed in pursuance of the legal duty and obligation cast upon the assessee to maintain and educate his minor children and in fulfilment of that duty and obligation. It should follow that such a transaction has to be considered as one supported by consideration.
Section 25(1) of the Indian Contract Act, 1872, provides that 'an agreement made without consideration is void, unless it is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other'. We are not dealing with an agreement made without consideration but saved by this provision.
The contention of the department is not that the document is devoid of consideration but that the consideration is not adequate. In other words, we are dealing with a document clothed with consideration, the only question raised for determination being whether the consideration recited and accepted was adequate or not.
The value of the properties covered by the document and described in the schedule thereto is not in dispute. It is agreed that they were worth Rs. 20,000 on May 19, 1956, the date on which the document was executed. We do not think that a transfer of properties worth Rs. 20,000 by a person in the position of the assessee in discharge of his legal obligation to maintain and educate three minor children, aged 7, 5 1/2 and 4 years respectively, is a transfer for inadequate consideration, that is, for a consideration which is not reasonably proportionate to the liability sought to be discharged.
It follows that both the questions referred have to be answered in favour of the assessee and against the department. We do so, but without any order as to costs.
A copy of this judgment under the seal of the High court and the signature of the Registrar will forwarded to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.