Commissioner of Income Tax vs Smt. N. Muthammal

Thanikkachalam, J.—T.C. No. 823 of 1984 relates to income tax assessment, whereas T.C. No. 824 of 1984 relates to wealth-tax

assessment of the same assessee. At the instance of the department, the Tribunal referred the following questions in both the income tax

assessment as well as the wealth-tax assessment of the same assessee for the assessment year 1976-77 for the opinion of this Court:

T.C. No. 823 of 1984: Whether, on the facts and in the circumstances of the case, the Tribunal''s finding that the income arising to the minors

from out of the properties transferred through the medium of trusts cannot be included in the assessment of the assessee u/s 64(1)(vi) of the income

tax Act, 1961 is sustainable in law ?

T.C. No. 824 of 1984: Whether, on the facts and in the circumstances of the case, the Tribunal''s finding that the assets transferred to the minors

through the medium of trusts cannot be included in the net wealth of the assessee u/s 4(1)(a)(v) of the Wealth-tax Act, 1957 is sustainable in law ?

The assessee Smt. N. Muthammal, Dindigul is an individual. For the assessment year 1976-77, the accounting year ended on 31-12-1975. She

derived share income from two firms and other sources. Originally, the assessment was completed on 28-1-1977 on a total income of Rs. 28,590

in which the assessee has not shown any income against column 12(b) in the return of income pertaining to income arising to spouse/minor

child/son''s wife/son''s minor children; On the basis of communication from the ITO the assessment was reopened and the ITO included the income

arising from three private trusts created by the assessee, viz., Vijayashree Trust, Sujatha Trust and Ranjit Trust, in favour of minor grandchildren,

viz., Miss Vijayashree, Miss Sujatha and Master Ranjith by invoking section 64(1)(vi) of the income tax Act, 1961.

According to the ITO, the word ''indirectly'' appearing in section 64(1)(vi) would apply to transfer made by the assessee through the medium of

trusts inasmuch as the ultimate benefit of each of the trusts reached each of the three minor grand children of the assessee.

On appeal, the AAC upheld the validity of reassessment proceedings u/s 147(b) of the Act, but, on merits, he held that the transfers through the

medium of trusts, would not attract section 64(1)(vi) and, consequently, deleted the income assessed in the hands of the assessee.

Aggrieved, the revenue filed a second appeal before the Tribunal and the assessee filed a cross-objection. The Tribunal upheld the order of the

AAC regarding the validity of the reassessment proceedings. Even on merits, the Tribunal upheld the order of the AAC by relying on the decision

of the Bombay High Court in the case of Commissioner of Income Tax Bombay Vs. Framji H. Commissariat, and the Calcutta High Court in the

case of Commissioner of Income Tax Vs. A.N. Chowdhury, . According to the Tribunal, unless there is direct or indirect transfer to the assessee''s

grand-children, the provisions of section 64(1)(vi) would not apply and the transfers to the aforesaid persons through the medium of trust did not

attract the provisions of section 64(1)(vi).

Insofar as wealth-tax assessment is concerned, it relates to the assessment year 1976-77 and the valuation date is 31-12-1975. Smt.

Muthammal derived share income from two firms and other sources. The original assessment was completed on 28-1-1977 on a total wealth of

Rs. 3,13,500 on the basis of return filed on 1-12-1976, in which the assessee has not shown any wealth in Annexure XV pertaining to assets

transferred to spouse/minor child/son''s wife/son''s minor children. On the basis of communication from the ITO the WTO reopened the

assessment and included the assets transferred to three minor grand children through the medium of three private trusts, viz., Vijayashree Trust,

Sujatha Trust and Ranjit Trust, respectively, created for the benefit of grand children by invoking section 4(1)(a)(v) of the Wealth-tax Act, 1957.

The action of the WTO is similar to the action taken by him in the income tax assessment for this year.

On appeal, the AAC following his decision in the income tax appeal for the assessment year 1976-77 deleted the inclusion of assets made by

the WTO u/s 4(1)(a)(v).

Aggrieved, ''the revenue filed a second appeal before the Tribunal and the assessee filed a cross-objection. The Tribunal following its order in

income tax Appeal No. 53 9 (Mad.) of 1982 and CO. 65 (Mad.) of 1982 dated 31-12-1982 upheld the order of the AAC both on the validity of

reassess ment proceedings and on merits of the case.

The learned standing counsel for the department submitted that section 64(1)(vi) applied to the transfer of assets through the medium of trust,

which amounted to indirect transfer. Therefore, the Tribunal was not correct in holding that section 64(1)(vi) would not be applicable to the facts of

this case. In order to support his contention, the learned standing counsel relied upon a decision of the Calcutta High Court in Sital Chowdhury Vs.

Commissioner of Income Tax, . Reliance was placed upon the decision of the Supreme Court in CIT v. C.M. Kothari [l963] 49 ITR 107, which

was applied in the decision in Sital Chowdhury''s case (supra). Therefore, according to the learned standing counsel, the income arising from the

trust in the name of the three minors is includible in the hands of the assessee, who is the grandmother. So also, in the wealth-tax assessment,

through the medium of trust, the net wealth was transferred by the grandmother in favour of the grandchildren. Therefore, the net wealth in the

hands of the minor children who are the beneficiaries, is liable to be assessed in the hands of the grandmother in her wealth-tax assessment as per

the provisions contained in section 4(1)(a)(v). According to the learned standing counsel, the Tribunal was not correct in holding that the net wealth

in the hands of the minor grandchildren is not assessable in the hands of the grandmother in her wealth-tax assessment.

On the other, hand, the learned counsel appearing for the assessee submitted that insofar as the income tax assessment is concerned, the

income was not transferred directly to the minors. If a trust is created and a gift was made by the grandmother in favour of the trust for the benefit

of the minor grandchildren, that will not come under the purview of section 64(1)(vi). It was further submitted that there is no question of indirect

transfer, according to the facts arising in the present case. The learned counsel further submitted that for the gifts made by the grand mother, she

paid the gift-tax. So also, the trust was assessed for the income accrued to the minor grandchildren u/s 161 of the income tax Act. Therefore, it

was submitted that in any event, the income arising to the minors from the trust is not includible in the hands of the assessee. So also, the net wealth

in the hands of the three minor children which has transferred to the trusts for the benefit of the minors, cannot be included in the hands of the

grandmother who is the assessee. Hence, it was submitted that the Tribunal was correct in excluding the net wealth gifted 0to the three minor

children from the assessment of the grandmother and also correct in excluding the income arising to the three minors from the 0trust in the hands of

the grandmother.

We have heard the submissions made by the learned standing counsel for the department as well as the learned counsel appearing for the

assessee.

The fact remains that the assessee Muthammal created three trusts in favour of the three grandchildren and gifted amounts for the benefit of the

three minors by creating a trust. The point for consideration is whether the income arising to the three minor children is assessable in the hands of

the assessee-grandmother by applying the provisions of section 64(1)(vi) and whether the net wealth in the hands of the three minors is assessable

in the hands of the grandmother, the assessee herein, since there was indirect transfer.

In the instant case, gifts have been made admittedly after 1-6-1973 to the above three different private trusts for the benefit of the abovesaid

three minor children through her son.

u/s 64(1)(vi), in computing the total income of any individual , there shall be included all such income as arises directly or indirectly to the son''s

wife, or son''s minor child of such individual from assets transferred directly or indirectly on or after 1-6-1973 to the son''s wife or son''s minor

child by such individual, otherwise than for adequate consideration.In the present case, there is no complaint that there is no adequate

consideration in making the gifts. According to the department, even though the amounts were transferred to a trust created in favour of three

minor grandchildren and even though there is no direct transfer of money in favour of 3 minor grandchildren, there is indirect transfer, since the

benefit from the transferred assets was given in favour of the 3 minor grandchildren. So also, in the matter of wealth-tax assessment even though

the assets were transferred to the trusts and not to the minor grandchildren directly, inasmuch as the minors are the sole beneficiaries, the net

wealth in their hands should be included in the wealth-tax assessment of the grandmother.

According to the facts arising in the case of Sital Chowdhury (supra), the assessee A (since deceased) had executed a deed of trust conveying

certain stock and debentures as well as interest in same landed property of the total value of Rs. 4,98,000 to his brother J, who was directed to

hold the same in trust for the benefit of the wife and two daughters of the said J. On the same day, J executed a similar trust in respect of assets

and properties of the same nature and value as conveyed in trust by the assessee. In the trust executed by J, the assessee A, was appointed as the

trustee and benefits thereunder were conferred on the assessee''s wife and major son. On these facts, the Calcutta High Court, while answering the

question, whether the entire income from the assets transferred by Amarendra Nath Chowdhury to Jatindra Nath Chowdhury (since deceased) is

includible in the income of Amarendra u/s 64(iii), held as under:

Held it has been held by the Supreme Court in the case of Commissioner of Income Tax, Madras Vs. C.M. Kothari, Madras (Dead), and after

him his Legal Representative, that if the transfers are interconnected and are parts of the same transaction in such a way that it can be said that the

circuitous method has been adopted as a device to evade implications of section 16(3)(a)(iii) of 1922 Act, the case will fall within the section. It

was contended for the assessee that in the case before the Supreme Court, there was no trust involved and secondly, there was no finding that

there were chain transactions. This distinction was of little consequence. The words ''directly or indirectly'' in section 64(iii) of the 1961 Act,

corresponding to section 16(3)(a)(ii) of the 1922 Act, cover the case of a trust and the nature of the transaction in the instant case was similar to

that which was before the Supreme Court. The assets of the assessee in the process of being transferred in favour of his wife have been

deliberately and in a planned manner converted into the assets of a like value in the hands of another person and on the basis of the exchange the

income is indirectly reaching the hands of the assessee''s wife. Consequently, section 64(iii) of the 1961 Act was applicable arid the entire income

from the assets transferred by the assessee to J was includible in the income of the assessee - Commissioner of Income Tax, Madras Vs. C.M.

Kothari, Madras (Dead), and after him his Legal Representative, and COMMISSIONER OF Income Tax, WEST BENGAL Vs. ABHIJIT

SEN., followed.

In CM. Kothari''s case (supra), the Supreme Court while considering the provisions of section 16(3)(a)(iii) of the Indian income tax Act, 1922

and while answering the question, whether the income arising to Mrs. C and Mrs. D from the house arose out of assets transferred indirectly to

them by C and D, respectively, and could, therefore, be included in the total income of C and D u/s 16(3)(a)(iii) held as under :

... (i) that for the purpose of section 16(3)(a)(iii) it was not necessary that the same assets belonging to the husband should have reached the wife.

The assets might, in the course of being transferred, be changed deliberately into assets of a like value of another person, as happened in this case.

A chain of transfers such as those in this case was comprehended by the word ''indirectly'' in section 16(3)(a)(iii).

(ii) that if two transfers were interconnected and were parts of the same transaction in such a way that they could be said to have been adopted as

a device to avoid implications of section 16(3)(a)(iii) the case would fall within the section even though one was not consideration for the other in

the technical sense.

(iii) that, on the facts, the gifts made by the son, D, to his mother, Mrs. C and by the father, C, to his daughter-in-law, Mrs. D, were so intimately

connected that they could not but be regarded as forming part of a single transaction. There was an indirect transfer of assets from C to Mrs. C

and from D to Mrs. D and, therefore, the income arising to Mrs. C and Mrs. D from the property arose from assets transferred to them indirectly

by C and D respectively, and had to be included in the total income of C and D respectively.

On the other hand, in order to support his contention, the learned counsel appearing for the petitioner relied upon a decision of this Court in

Commissioner of Income Tax Vs. S. Sivasubramaniam, wherein, while considering the provisions of section 64 this Court held as under:

... that as the trust in the instant case was created by the brother of the assessee, the creation of the trust and the contribution to it by the

assessee''s brothers could not, in any manner, be attributed to the assessee or to any act on his part. The reduction in the share of profits of the

assessee from 55 per cent to 35 per cent was not relatable to any act of transfer on the part of the assessee for there was no transfer as such by

the assessee of a 20 per cent share of the profits in favour of the trust. The reduction in the share of profits of the assessee could at best be

attributed to an act of the firm at the time when the trust was taken in as a partner in consideration of the capital contribution made by it and not by

the assessee. Even assuming that the assessee had relinquished his interest in his share of profits to the extent of 20 per cent, that would at best be

a surrender in favour of the firm and not in favour of the minor children of the assessee. Consequently, there was no transfer of assets by the

assessee in favour of his minor children or for their benefit even indirectly. The Tribunal was, therefore, right in deleting the addition of the share

income of the trust in the assessment of the assessee for the assessment years in question.

The learned counsel also relied upon a decision in Commissioner of Income Tax Vs. T.G.K. Raman (Deceased) by Legal Representatives,

wherein this Court, while considering section 64 held :

... that a plain reading of the trust deed showed that the benefit was not given to the minor during his minority, but upon his attaining majority.

Section 64(v) was not, therefore, applicable. The Tribunal was right in excluding the dividend from the shares from the total income of the

assessee.

Our attention was also drawn to a decision of the Supreme Court in Commissioner of Income Tax, Gujarat Vs. M.R. Doshi (Dead) by Lrs.,

when the Supreme Court, while considering the provisions of section 64(v)(prior to amendment in 1971) held as under:

... that the specific provision of the law u/s 64(v)(as it stood before amendment in 1971) was that the immediate or deferred benefit should be for

a minor child. As the deferment of benefit in this case was beyond the period of minority of the assessee''s three sons, and the payment was to be

made after each of the sons attained majority the provisions of section 64(v) had no application and the income of the trusts was not to be included

in the total income of the assessee.

On facts, it was pointed out that even though 3 gifts were made by the grandmother in favour of the grandchildren by creating a trust, no

income was applied by the trust to the benefit of the minor children in the assessment year under consideration. According to the assessee, the

income was accumulated. It was further submitted that for making gift, the grandmother paid the gift-tax. It was also further submitted that the trust

was assessed u/s 161 of the income tax Act and section 21 of the Wealth-tax Act in the income derived by the trust on behalf of the minor children

and the corpus in the hands of the trust, respectively. Thus, the net wealth of the 3 minor children in the hands of the trust was also assessed in the

assessment of the trust u/s 21. Inasmuch as, on an appraisal of facts, this Court came to the conclusion that there is no income arising to the minor

children in the assessment year under consideration on the gifts made by the grandmother by creating the trusts, there is no question of levying any

tax by applying the provisions of section 64(1)(vi). For the same reasons, it is also not possible to levy wealth-tax u/s 4(1)(a)(v) of the Wealth-tax

Act. Inasmuch as on facts, the Tribunal recorded a finding that there is no income arising in the assessment year under consideration in the hands of

the beneficiaries, there is no point in applying the provisions of section 64(1)(vi) of the income tax Act, and section 4(1)(a)(v) of the Wealth-tax

Act. Under such circumstances, we consider that there is no purpose served in deciding the question whether there is any indirect transfer in the

present cases on the facts available on record.

Insofar as the wealth-tax assessment is concerned, according to the department, the net wealth in the hands of the beneficiaries is includible in

the hands of the grandmother, since there is indirect transfer. Section 4(1)(a)(v) states that in computing the net wealth of an individual, there shall

be included, as belonging to that individual, the value of the assets which on the valuation date, are held by the son''s wife or the son''s minor child

of such individual, to whom such assets have been transferred by the individual directly or indirectly on or after 1-6-1973, otherwise than for

adequate consideration. According to the facts, as stated by the learned counsel appearing for the assessee, the net wealth in the hands of the

minor beneficiaries was stated to be assessed in the hands of the trust, u/s 21 of the Wealth-tax Act, since the trust was considered to be holding

the net wealth of the minors. Inasmuch as the net wealth of the minor beneficiaries was assessed in the hands of the trust u/s 21 of the Wealth-tax

Act, we consider that another assessment in the hands of the grandmother is not warranted, since it cannot be said that she is holding the net wealth

in her hands, after the gifts were made to the trust. Accordingly, on the basis of the facts recorded by the Tribunal, we answer the questions

referred to us in both the tax cases in the affirmative and against the department. However, we make no order as to costs.