Commissioner of Income Tax vs Smt. Pushpawati

A.K. Sikri, J.—In these three references, we are concerned with identical questions which arise in respect of three assessment years of the same respondent-assessee; assessment years being 1979-80, 1982-83 and 1983-84.

These questions are referred by the Tribunal along with statement of the case pursuant to the direction given by this Court in its order dated July 11, 1989, on the application preferred by the Department. Before we disclose the exact nature of the questions referred to, we state the relevant facts.

The assessee is an individual. By a trust deed executed on April 15, 1978, the assessee and her husband Shri Bal Kishan Dass created a private trust by the name of U. B. Enterprises Trust. Each of the settlors had settled a sum of Rs. 10,000 in trust for the benefit of the five beneficiaries, namely, Smt. Shashi Agarwal, daughter-in-law of the settlors, Master Amit, Miss Ujala Agarwal, Master Kapil Agarwal and Miss Anupama, the grandchildren of the settlors. The Income Tax Officer making the assessment on the assessee examined the trust deed and held that under the provisions of Section 64(1)(vi) of the Act, 50 per cent. of the income from the trust was includible in the total income of the assessee. A sum of Rs. 24,855 was, thus, added in arriving at the total income of the assessee for the assessment year 1979-80.

The assessee appealed to the Appellate Assistant Commissioner, who held that on the facts of the case, Section 64(1)(vi) of the Income Tax Act, 1961 was not applicable. He, therefore, directed the exclusion of the aforesaid sum.

The Revenue then came to the Tribunal in I. T. A. No. 4513/(Del)/84 for assessment year 1979-80 and the Tribunal, vide order dated May 12, 1986, upheld the view taken by the Appellate Assistant Commissioner.

For the assessment years 1982-83 and 1983-84, the assessee did not include in her return the aforesaid 50 per cent. share of the income of the trust. The Income Tax Officer completed the assessments u/s 143(1). The Commissioner of Income Tax thereafter invoked his jurisdiction u/s 263 and, vide order dated November 19, 1985, setting aside the assessments, he directed the Income Tax Officer to include the said share in the income of the assessee. The assessee then preferred I. T. A. Nos. 6662 and 6663/Del./1985 against the orders of the Commissioner and the Tribunal, vide consolidated order dated May 12, 1986, cancelled the order passed by the Commissioner u/s 263. In doing so, the Tribunal followed its own order of date in I. T A No. 4513/(DEL)/84 for assessment year 1979-80.

The rationale given by the Tribunal was that the transfer of money by the two settlors were not made directly or indirectly to the daughter-in-law of the assessee or her grand children, who were minors. On the contrary, transfer of funds had been made to an association of persons for the benefit of the assessee''s daughter-in-law and her minor grand children. In such circumstances, according to the Tribunal, Section 64(1)(vi) would not apply. In this backdrop the following questions are referred for the opinion of this Court:

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the provisions of Section 64(1)(vi) were not applicable to the case of the assessee?

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that no part of the income derived by the trust was includible in the hands of the assessee under the provisions of Section 64(1)(vi)?

The answers to the aforesaid questions, naturally depends on the interpretation which is sought to be given to Section 64(1)(vi) of the Act. In order to appreciate the scope of this provision, we will have to take note of Clauses (vii) and (viii) prevalent in the relevant assessment years as well. The relevant portion of Section 64 incorporating these clauses reads as under:

Income of individual to include income of spouse, minor, child, etc.-(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly . . .

(vi) to the son''s wife, or son''s minor child, of such individual, from assets transferred directly or indirectly on or after the 1st day of June, 1973, to the son''s wife or son''s minor child by such individual otherwise than for adequate consideration;

(vii) to any person or association of persons from assets transferred directly or indirectly 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; and

(viii) to any person or association of persons from assets transferred directly or indirectly on or after the 1st day of June, 1973, 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 son''s minor child or both.

All such incomes which arise directly or indirectly as stipulated in Clause (vi) would also be included. Clause (vi) mentions that in case the assessee had transferred assets to his son''s wife (i.e., daughter-in-law) or his/her grand children directly or indirectly then income from those assets is to be added in the total income of the assessee. Clause (viii) was inserted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985 and therefore, there was no such provision in the concerned assessment years. Sub-section (1) of Section 64 of the Act mandates that all incomes whether directly or indirectly, which accrue from such a property shall be included. Here the expression "directly or indirectly" has reference to the income which would arise from the assets. In Clause (vi), again the expression "directly or indirectly" is incorporated. This expression, however, refers to transfer of assets directly or indirectly to such persons named in the clause by such individual/assessee. The question, therefore, is as to whether creation of trust and transfer of assets by the assessee to the trust would amount to the indirect transfer?

We are of the opinion that the Tribunal was right in its conclusion that transfer of asset to the trust was not even an indirect transfer. It was because of the reason that the trust is an independent legal entity and it is the trustee who is the legal owner of the trust property. The persons named therein may be the beneficiaries, but they have right only against the trustee who is the owner of the trust property. This is so held by the Supreme Court in W.O. Holdsworth and Others Vs. The State of Uttar Pradesh,

This legal position becomes clear when we read the provisions of Clause (vi) in contradistinction to Clause (vii) which uses the expression "person or association of persons". The expression "association of persons" is significantly missing in Clause (vi). Insertion of Clause (viii) makes it clear that the Legislature found this omission in Clause (vi) and, therefore, incorporated the amendment. With the insertion of this clause even when there is transfer of an asset to a trust, i.e., association of persons, an income generated therefrom shall be included in the total income of the assessee. However, the said clause has been made effective with effect from April 1, 1985. This fact is taken note of by the Tribunal in the impugned judgment as is clear from the following:

The income derived by the trust would have been includible in the hands of the assessee and the other co-settlor provided the provisions of Section 64(1)(viii) were made retrospectively applicable to the assessment year 1979-80 but since these were made applicable only with effect from the assessment year 1985-86 and since the provisions of Section 64(1)(vi) do not cover a case like the present one, within their ambit, the order passed by the Appellate Assistant Commissioner disapproving the stand point of the Income Tax Officer has to be upheld.

Attempt of Ms. Bansal was not to impress us to hold that Clause (vi) was clarificatory in nature. We cannot agree with this. Had it been so, it would not have been made effective from April 1, 1985. Few other judgments which are cited on which reference may be made have been discussed by the Tribunal also at length and since we are agreeing with the reasons given by the Tribunal, we reproduce the discussion contained therein:

The other decision of the hon''ble Supreme Court of India reported in Commissioner of Income Tax, Madras Vs. C.M. Kothari, Madras (Dead), and after him his Legal Representative, also does not help the case canvassed by the Departmental representative. That was a case of cross-gifts/transfers from father to daughter-in-law and son to mother of equal amounts and it was held by their Lordships that the income derived from property thus transferred was includible in the hands of the two transferors. In the present case, the facts are entirely different. As has been repeatedly said earlier it is a case whether the transfer had been avowedly made by the settlors to trust for the benefit of daughter-in-law and minor grand children but since the transfer had not been made directly or indirectly to the above mentioned beneficiaries, the provisions of Section 64(1)(vi) would not be applicable. The decision reported in D.M. Netarwala Vs. Commissioner of Income Tax, Bombay City-I, also does not help the case of the Department as in that case also the facts were entirely different. In that case, certain amounts held under trust had been transferred to the assessee''s wife after the trust had come to an end. Their Lordships of the hon''ble Bombay High Court had held that when the assessee''s wife received the trust funds after the determination of the trust, it amounted to indirect transfer by the assessee to his wife and that the interest received by the wife could be included in the hands of the assessee under the provisions of Section 16(3)(iii) of the Indian Income Tax Act, 1922. The facts in the present case being different, the decision of the hon''ble High Court in the abovementioned case would not in any way help the case of Department. Similarly, the decision reported in R. Venkatachala Thevar Vs. State of Madras and Another, also does not help the case of the department as in that case also the facts were wholly different. In that case, the assessee husband had settled certain properties on wife who had in turn settled those properties on children born later. It was held that it was a case of indirect transfer. In the present case, the transfer had been made to a legal entity and since it had not been made directly or indirectly to the class of persons mentioned in Section 64(1)(vi), the decision reported in R. Venkatachala Thevar Vs. State of Madras and Another, would not apply. Even though we bow to the law laid down by the hon''ble Supreme Court of India in McDowell and Co. Ltd. Vs. Commercial Tax Officer, and Workmen Employed in Associated Rubber Industry Ltd., Bhavnagar Vs. Associated Rubber Industry Ltd., Bhavnagar and Another, we find that the present case does not fall within any colourable device or a subterfuge. The provisions of a taxation law have to be interpreted in a manner so that they counter-act evasion but in the present case where the affairs had been so planned that they do not fall within the provisions of Section 64(1)(vi), we would not be able to stretch the law and hold that the income derived by the trust was assessable/includible in the hands of the assessee. In these facts and circumstances, the decisions of the hon''ble Supreme Court reported in McDowell and Co. Ltd. Vs. Commercial Tax Officer, and Workmen Employed in Associated Rubber Industry Ltd., Bhavnagar Vs. Associated Rubber Industry Ltd., Bhavnagar and Another, and the decision of the hon''ble Full Bench of the Patna High Court reported in Commissioner of Income Tax Vs. Sheo Kumari Debi, would not stand in the way of the assessee who has succeeded before the Appellate Assistant Commissioner. On the other hand, we find that in absolutely similar circumstances, the Madras Bench of the Income Tax Appellate Tribunal had held in the case of Smt. N. Muthammal (1983) 6 ITD 136 that the income of a trust from the assets transferred by the assessee to the trustees for the benefit of minor grand children would not be includible in the hands of the settlor/transferor under the provisions of Section 64(1)(vi). Respectfully following the decision of the Madras Bench in the abovementioned case and noticing that the decision of the hon''ble Supreme Court of India reported in W.O. Holdsworth and Others Vs. The State of Uttar Pradesh, squarely supports the stand point taken by the assessee, we would uphold the order passed by the Appellate Assistant Commissioner.

We thus, answer the questions in favour of the assessee and against the Revenue.