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Addl. Commissioner of Income-tax, Gujarat Vs. M.K. Doshi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference Nos. 49 and 201 of 1975
Judge
Reported in[1980]122ITR499(Guj)
ActsIncome Tax Act, 1961 - Sections 64 and 64(1)
AppellantAddl. Commissioner of Income-tax, Gujarat;commissioner of Income-tax, Gujarat-iii
RespondentM.K. Doshi;devkunverben M. Doshi
Appellant Advocate N.U. Raval, Adv.
Respondent Advocate K.C. Patel, Adv.
Excerpt:
.....taxation - income - section 64 of income tax act, 1961 - assessee created trust for benefit of his minor sons - trust deed provided for accumulation of annual income - accumulated income to be handed over to beneficiaries on attainment of majority - nature of benefit looses its character of being income and attain character of capital - income from trust property cannot be included in income of assessee. - - 1. since these two references relating to assessment years 1963-64 and 1964-65 as well as assessment year 1966-67, respectively, raise an identical question arising under the same facts and circumstances pertaining to the assessment of the same assessee, who is the respondent before us, we intend to dispose of these two references by this common judgment. vijay, on his attaining..........by paying to the wife of the assessee for the maintenance, support and education of their three minor sons, viz., vijay, rohit and ashok. on the first son, vijay, attaining majority, the trustees were enjoined to divide the corpus in three equal shares after retaining sufficient assets so as to yield the corpus in three equal shares after retaining sufficient assets so as to yield an income rs. 50 per month which was to be utilised for the benefit of the aforesaid daughter, shashikala. vijay was to be handed over his 1/3rd share in the balance amount of the corpus. the income from the remaining two-three shares of the corpus was to be paid to the wife of the assessee for maintenance and education of the two sons, rohit and ashok, and on their attaining majority the respective 1/3rd.....
Judgment:

B.K. Mehta, J.

1. Since these two references relating to assessment years 1963-64 and 1964-65 as well as assessment year 1966-67, respectively, raise an identical question arising under the same facts and circumstances pertaining to the assessment of the same assessee, who is the respondent before us, we intend to dispose of these two references by this common judgment.

2. The facts and circumstances leading to these two references shortly stated are as under : The assessee is assessed in the status of an individual. He claimed before the ITO that during these three years of assessment under reference no part of the income from the two trusts created by him under the indentures of trust of July 11, 1955, as amended by an amending deed of trust of February 8, 1962, and another indenture of trust of the same date could be added under the provisions of s. 64(v) of the I.T. Act as was applicable at the relevant time. Under the aforesaid first indenture of trust of July 11, 1955, the assessee settled equity shares of there limited companies of the face value of Rs. 1,25,000 besides cash amount of Rs. 30,000. The trustees were enjoined to pay initially a sum of Rs. 50 per month to the assessee's wife for maintenance, support and education of her daughter, Kumari Shashikala, till her marriage, and the balance of the income was to be utilised by paying to the wife of the assessee for the maintenance, support and education of their three minor sons, viz., Vijay, Rohit and Ashok. On the first son, Vijay, attaining majority, the trustees were enjoined to divide the corpus in three equal shares after retaining sufficient assets so as to yield the corpus in three equal shares after retaining sufficient assets so as to yield an income Rs. 50 per month which was to be utilised for the benefit of the aforesaid daughter, Shashikala. Vijay was to be handed over his 1/3rd share in the balance amount of the corpus. The income from the remaining two-three shares of the corpus was to be paid to the wife of the assessee for maintenance and education of the two sons, Rohit and Ashok, and on their attaining majority the respective 1/3rd share of each of the said sons was to be handed over to him. The income of this trust was being added in the hands of the settler till assessment year 1961-62. It appears that on February 8, 1962, the settler executed another indenture which was in the nature of a supplementary deed to the original trust deed whereby the assessee sought to amend some of the provisions of the parent indenture. According to clause 2(b) of the supplementary indenture, the net income of the trust, after paying a sum of Rs. 50 per month to the wife of the accumulated and added to the trues fund, and on the eldest son, Vijay, attaining majority, the corpus of the trust was to be divided into three equal parts, one of which was to be handed over to the said Vijay, Similarly, on Rohit and Ashok attaining majority, their respective share in the corpus was to be paid over to them subject to the condition that out of the corpus a sum of Rs. 5,000 was payable to the aforesaid daughter, Shashikala, towards her marriage expenses. In the event of any of the three sons dying before attaining majority, his respective share was to be divided equally between the surviving brothers and was to be paid to each one of them on attaining majority.

3. Similarly, on February 8, 1962, the assessee executed another indenture deed setting some more shares valued at Rs. 1,43,575 besides cash amount of Rs. 20,000 and two immovable properties situate within the City of Jamnagar. Out of these properties, one was ancestral property situate in the main bazar of the City of Jamnagar and another property described as self-acquired property was known as 'Ascharya Kunj'. It is claimed by the assessee that the said self-acquired property was thrown by him into the common hotch-potch so as to make it available for dividing the same amongst the sons. It was further directed by the settlor that the said property known as 'Ascharya Kunj' was to be divided between Rohit and Ashok in equal shares on the condition that they relinquish their rights in the ancestral property situate in the bazar of Jamnagar City. The latter property was to be given absolutely to the son. Vijay, on his attaining majority or after the death of the settlor's wife, who was entitled to enjoy the income from the said property during her lifetime, whichever event occurs later. The income from the property 'Ascharya Kunj' as well as from dividends of the settled shares was directed to be accumulated and added to the corpus till each of the sons attained majority. As soon as any son attained majority his 1/3rd share in the accumulated income was to be paid over to him and similarly the two other shares in the accumulated income were to be paid to each of the sons, Rohit and Ashok, as and when they attained majority. The cash amount of Rs. 20,000 was to be paid to the two major married daughters of the assessee at specified intervals. This is broadly the scheme of the two major married daughters of the assessee at specified intervals. This is broadly the scheme of the two indentures of trust.

4. The Tribunal has, in the statement of case making the reference to this court, summed up the cumulative effect of these various clauses contained in the two indentures of trust, including the supplementary deed of trust by which the first indenture was amended, in the following terms :

'...... In short, therefore, as a result of the two instruments dt. 8-2-1962 the income of the two trusts was to be accumulated in the hands of the trustees to form part of the trust corpus, and that corpus was to be divided equally among the three sons as and when they attained majority.'

5. The ITO, however, rejected the assessee's claim for not including the income arising from the properties settled on trust in his income under s. 64(v) of the aforesaid Act as the same was not attracted and applicable in the facts and circumstances of the case. In the opinion of the ITO, the assets were transferred by the assessee to the trust otherwise than for adequate consideration for the benefit of the three minor sons and the benefit of the income arising from the said properties was deferred and, therefore, it was liable to be included in the hands of the settlor as prescribed under s. 64(v) of the Act.

6. The assessee being aggrieved by this order of the ITO, carried the matter in appeal before the AAC, who accepted the contention of the assessee and deleted the addition. The revenue, therefore, went in appeal before the Appellate Tribunal. The Tribunal considered the provisions contained in s. 64(v) as was in force at the relevant time and also the corresponding provisions contained in s. 16(3)(b) of the Indian I.T. Act, 1922, and was of the opinion that the addition of the words in s. 64(v), namely, 'to the extent to which the income from such assets is for the immediate or deferred benefit of his/her spouse or minor child (not being a married daughter) or both' did not appreciably alter the position which was available under the old Act, and that in order to press in service the provisions contained in s. 64(v) of the 1961 Act, it was necessary that the assets should be held in the relevant accounting year for the immediate or deferred benefit of the minor children. The Tribunal was further of the opinion that, in the facts and circumstances of the case, the interest or the benefit which the minor children enjoyed or possessed was more in the nature of a contingent interest and not a vested interest, inasmuch as, if any of the minor children dies before attaining majority, his share in the trust corpus including the accumulated income was to go to the surviving brothers. In that view of the matter, the Tribunal confirmed the order of the AAC. At the instance of the Commissioner, therefore, the following question has been referred to us for out opinion :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income of the two trusts was not includible in the hands of the settlor under the provisions of section 64(v) of the Act ?'

7. We must answer this question in favour of the assessee and against the revenue, that is, in the affirmative, obviously for the following reasons :

8. We will read the material provision of s. 64(v) as was applicable at the relevant time :

'64.(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly-

(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.'

9. It should be recalled that the cumulative effect of the various clauses contained in the supplementary deed of trust of February 8, 1962, by which the first indenture of trust of July 1, 1955, was amended and also of those contained in the second indenture of trust of even date is that the income of the two trusts was to be accumulated in the hands of the trustees and that the accumulated income was to be divided equally amongst the three sons as and when they attained majority, subject to the condition that in case of any of them dying before attaining majority, his shares was to go to the surviving sons. In order that the provision contained in cl.(v) of s. 64 of the I.T. Act, 1961, could be pressed into service so as to justify the inclusion of income arising from the properties transferred to a person or association of persons for the benefit of the spouse or minor child, the following conditions must be satisfied : namely, (1) there should be a transfer of assets; (ii) the transfer must be a transfer otherwise than for adequate consideration; and (iii) the income from such assets is intended for the immediate or deferred benefit of the spouse or minor child of the settlor or both. Even assuming that the transfer of the assets in question in the present case is otherwise than for adequate consideration, the question none the less remains, whether there is any income arising from such assets the benefit of which is available immediately or is deferred for the spouse or minor child of the settlor. It is common ground that the benefit was not immediately available to the minor children. The question, therefore, which is to be answered is, whether, in the facts and circumstances of the case, it can be said that the income arising from the properties settled, there was a deferred benefit for the spouse or minor children of the settlor. It has been urged on behalf of the revenue that there is no warrant, in the context of the relevant provisions of the section, to give a restricted meaning to the words 'deferred benefit' so as to terminate it either with the accounting year or to the minority of the children concerned. We are afraid, we cannot accede to this submission urged on behalf of the revenue for the simple reason that cl.(v) of s. 64 prescribes, as stated above, that income from the transferred assets can be included in the income of the transferor provided that under the transfer the benefit of the income from such assets is immediately available or is deferred for the spouse or the minor children of the settlor. In other words, the mischief of tax evasion by assessees by transfer of their assets, such as by settlement or by trust, so as to make the income of such transferred assets available to the spouse or minor children without subjecting it to the tax liability of the settlor, is sought to be avoided by providing that such income would be includable in the hands of the assessee-settlor provided the benefit from the income of such assets is either immediately available or is deferred for the spouse or minor children of the settlor. The legislature has, therefore, provided limitation in the relevant clause by prescribing that the benefit or income from such assets is either immediately available or is deferred after a certain time to the spouse or the minor children. If the child, for whom the benefit is provided, attains majority, it is clear that the provisions contained in cl.(v) would not be attracted, on the plain reading of cl.(v) itself, because otherwise the Legislature would not have expressed itself in the manner in which it did by providing that income from such assets is for the immediate or deferred benefit of his or her spouse or minor child. It is, therefore, manifestly clear to say that the benefit cannot be deferred beyond the minority of the child who is sought to be benefited.

10. There is also another aspect of the question which is arising in the present facts and circumstances of the case. Under the two indentures of trust with which we are concerned, the settlor has provided that the accumulated income was to be divided in three equal shares and to be paid and handed over to each of the sons as and when he attains majority, and in the case of any of the sons dying before attaining majority, his share is to go to the surviving sons. The interest which each son has, therefore, got in the accumulated income in the present case cannot be said to be a vested interest but is merely a contingent interest in the sense that his interest will ripen into vested interest on the condition of attainment of majority by him (vide CWT v. Kum. Manna G. Sarabhai : [1972]86ITR153(Guj) . Unless, therefore, it can be said that any of the sons has a vested interest, it cannot be urged successfully that the income has accrued to him. There is, therefore, in the present case, neither receipt nor accrual of income so as to attract the provision contained in cl.(v) of s. 64(1). There appears to be a further hurdle in the way of the revenue. The cumulative effect of the relevant clauses as stated in the two indentures of trust read with the supplementary deed of trust by which the first indenture was amended, is that the income was to be accumulated till the attainment of majority by each of the sons, and the respective share of each of the sons is to be paid and handed over to him as and when he attains majority. The accumulated income, therefore, would be naturally, at the end of every year, capitalised and when available to the respective shares, would be more in the nature of capital and, therefore, a corpus and it, therefore, loses its characteristic of being an income. In that view of the matter, therefore, cl.(v) of s. 64(1) is not attracted and cannot be applied in the facts and circumstances of the case.

11. Our attention has been invited to a decision of a Division Bench of the Bombay High Court in Yogindraprasad N. Mafatlal v. CIT : [1977]109ITR602(Bom) , where the Division Bench had taken the same view on the matter that the meaning of the terms 'deferred benefit' cannot be so extended as to hold that the benefit which is available beyond the period of minority would also be a deferred benefit so as to attract the provision of clause (v) of s. 64 of the I.T. Act.

12. The result is that we reject this reference which is made at the instance of the commissioner by answering the question in the affirmative, in favour of the assessee and against the revenue. The Commissioner shall pay costs of this reference to the assessee.


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