Commissioner of Income Tax vs Srichand T. Lulla and Another

T.N.C. Rangarajan, J.—The facts leading to this consolidated reference are as follows :

Two trusts were created on April 25, 1977, by Smt. Leela Gobindram Vazir for the benefit of the minor sons of Sri Srichand T. Lulla and Sri Ramchand T. Lulla, constituting them as the trustees. Similarly, two trusts were created on April 1, 1978, by Smt. Lakshanbai, one for the benefit of the two other minor children of Sri Srichand Lulla, and the other for the benefit of two other minor children of Sri Ramchand T. Lulla, constituting them as trustees. The trustees had invested the amounts toward capital in two firms, Messrs. Sri Ram Sons and Messrs. Amar Sons, the share of income from which worked out to Rs. 14,379 and Rs. 5,724, respectively, in the previous year relevant to the assessment year 1980-81. The Income Tax Officer sought to add these amounts to the total income of the father of the minors, the assessees before us, u/s 64(1)(iii) read with Explanation 2A thereto of the Income Tax Act, 1961. The Appellate Tribunal considered clause 4 of the trust deeds, which is as follows :

"4. The trustees shall be entitled :

(a) Upon trust to receive the income, rents and profits, taxes, assessments and outgoings in respect of trust found and all costs, charges and expenses whatsoever which may be incurred on or about the administration of the trust of these presence including the Income Tax, wealth-tax, or any other taxes levied or assessed upon the trust or the beneficiary in respect of the trust fund or trust income.

(b) On or after defraying the expenses as provided in sub-clause (a) above, the trustee shall credit the balance in the name of the beneficiary up to the date of distribution hereinafter contained. From out of the income of the trust, the trustee may spend such amount as he deems necessary on the maintenance and education of the beneficiary.

(c) On the completion of 18 years of age by the beneficiary, the trustee shall hand over the trust property which shall include the fund and investments representing the same for the time being, to the end and intent the said beneficiary shall be the sole and absolute owner of the trust fund and investments representing the same for the time being."

The Tribunal came to the conclusion that under the terms of this clause, the trustees were to accumulate the income, with the consequence that this income did not accrue to the benefit of the minor children drinking the accounting year. The Appellate Tribunal accordingly found that there was no benefit derived by the minor children inasmuch as there was no application of the income for their benefit during the current year and the said income could not, therefore, be aggregated u/s 64(1)(iii) of the Act. At the instance of the Appellate Tribunal, the following questions were referred :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that no benefit arose to the beneficiaries to attract the provisions of section 64(1)(iii) ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in deleting share incomes of minor children included in the hands of the assessees u/s 64(1)(iii) of the Income Tax Act ?"

The questions before us are practically concluded by the decision of this court in Commissioner of Income Tax Vs. T. Ponnaiah, . Learned counsel for the Revenue sought to distinguish this decision, both on the facts and in law. In the present case, an addition has been made on the ground that under Explanation 2A, the income arising to the trusts is deemed to be the income arising indirectly to the minor children. According to learned counsel for the Revenue, since clause 4(a) of the trust deed provided that the income was to be credited, it had to be construed as the amount accruing to the minor children, falling within the expression "income is for the benefit of the minor children" in Explanation 2A. We are unable to accept this contention, because the clause has to be read as a whole, and the next sentence in the same clause 4(a) provides for the application of the income of the trust, thus negativing the view of learned counsel for the Revenue that the income was credited to the beneficiary. In fact, the trust deeds have been amended subsequently making this clear. But the Tribunal rightly fund that even disregarding that amendment, this clause amply indicated that the income was only to be accumulated. The second distinction sought to be made by learned counsel for the Revenue was that this court followed the Bombay High Court''s decision in Yogindraprasad Yogindraprasad N. Mafatlal Vs. Commissioner of Income Tax, Bombay City-I, holding that the deferred benefit was a contingent right and such a view was inconsistent with the provisions of the Transfer of Property Act and the Succession Act. Here again, we find that the said judgment has dealt with those provisions, and it was found that since the income has to be accumulated until the minor attains the age of majority, there can be no vested interest in the deferred benefit. The third point urged by learned counsel for the Revenue was that in respect of the discretion given to the trustees to spend the funds for the benefit of the minors, it should be considered that the minors had the right to the income and, therefore, it should be taken as an amount accruing to the minors and benefit arising to them. Here again, the Bombay High Court actual followed the decision of the Supreme Court in The Commissioner of Income Tax Bombay Vs. Manilal Dhanji, Bombay, , wherein it was clearly laid down that if the minor derives no benefit in the relevant year of account, it can hardly be said that for that year the transfer was for the benefit of the minor child. If the present case, in view of Explanation 2A, the deeming provision is only to the extent that the income is for the benefit of the minor child. If full effect has to be given to this expression, and reading the provision strictly, as we have to, in the case of deeming provisions, the charge on the income has to be limited only to the extent of the amount actually spend for the maintenance and education of the minor children. But, the finding of the Tribunal was that nothing was spend on that count. Hence, the conclusion of the Tribunal that no part of the income can be added u/s 64(1)(iii) read with Explanation 2A, is correct. We, accordingly, answer the questions referred in the affirmative, in favour of the assessees and against the Commissioner. Costs Rs. 500.