Commissioner of Wealth Tax vs Bhavani Devi Sadhaiya

Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following question No. 1 for the asst. yrs. 1976-77 and

1977-78 with regard to Tax Case Nos. 301 and 302 of 1984 and question No. 2 for the asst. yr. 1978-79 with regard to Tax Case No. 825 of

1984 for the opinion of this Court under s. 27(1) of the WT Act, 1957 (hereinafter referred to as the Act) :

Question No. 1 :

Whether, on the facts and in the circumstances of the case, the value of the assets settled by assessee for the deferred benefit of her son''s minor

son under a trust deed, dt. 29th March, 1974 could be included in the net wealth of assessee either under s. 4(1)(a)(i) or under s. 4(1)(a)(v) of the

WT Act ?

Question No. 2 :

Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 4(1)(a) of the WT Act, the Tribunal was right

in deleting the inclusion of Rs. 41,000 being the value of the property settled by the assessee on her grandson, as per deed, dt. 29th March, 1974

?

The assessee is an individual. All the three Tax Cases relate to the asst. yrs. 1976-77 to 1978-79. By a deed, dt. 29th March, 1974, she settled

certain immovable properties being godowns in Calcutta for the benefit of her grandson, Darsan Kumar Sadhaiya, appointing her spouse Sri

Nemichand Sadhaiya as the trustee. The deed provided that the trustee shall hold the properties on trust on condition that he shall accumulate the

income and transfer the property to the beneficiaries, on his attaining the age of twenty one. In case of the death of the beneficiary, before attaining

the age of twenty one, the properties were to be held for the benefit of the heirs of Darsan Kumar Sadhiaya and transferred to them when they

attain the age of majority.

The case put forward by the Revenue was that the properties in question should be considered to be an asset held by the son''s minor child of

the assessee to whom such assets have been transferred directly or indirectly, otherwise than for adequate consideration and consequently added

to the net wealth of the assessee by applying s. 4(1)(a)(v) of the Act. The alternate contention of the Revenue was that the asset should be

considered to be one transferred by the assessee to her spouse without consideration and, therefore, required to be added to the net wealth of the

assessee under s. 4(1)(a)(i) of the Act.

On the other hand, the contention of the assessee was that there is no specific provision in the Act for adding back the assets transferred for the

deferred benefit of a son''s minor child. The other contention of the assessee was that a transfer of an asset to a spouse in the capacity of a trustee

cannot be considered to be transferred to the spouse within the meaning of s. 4(1)(a)(i) of the Act.

Aggrieved, the assessee filed an appeal before the AAC, contending that since the minor son did not get any immediate benefit, the provisions of

s. 4(1)(a)(i) of the Act could not be applied. The AAC agreed with the said contention, but sustained the addition under s. 4(1)(a)(i) of the Act, as

an asset transferred to the spouse of the assessee.

Not satisfied with the order passed by the AAC, the assessee filed an appeal before the Tribunal, contending that since the transfer was only to

a trustee for the benefit of a minor child, it was not transferred to the spouse and, therefore, s. 4(1)(a)(i) of the Act could not be applied. On the

other hand, the Department contended that the section r/w the Explanation did not make any distinction between the vesting of the properties and

the beneficial ownership. Alternatively, it was contended that even if the reasoning of the AAC was not correct, the addition should be sustained on

the reasoning of the WTO.

On consideration of the submissions made by the assessee as well as the Department, the Tribunal came to the conclusion that the assessee

should succeed. According to the Tribunal, the property transferred by the grandmother in favour of the grandchild by creating a trust and

appointing her spouse as the Trustee ..... such a transferred asset .... cannot be assessed in the hands of the assessee either under s. 4(1)(a)(i) or

under s. 4(1)(a)(v) of the Act.

Before us, learned standing counsel appearing for the Department submitted that inasmuch as the assets were transferred by the transferor to her

spouse, even if it is in his capacity as a trustee, under the provisions of s. 4(1)(a)(i) of the Act, the net wealth-tax is includible in the hands of the

assessee for wealth-tax purposes. It was further submitted that only the enjoyment of the income was postponed till the minor attained the age of

twenty one. Even during the minority of the spouse the beneficiary is holding the property transferred by his grandmother under a trust. Since the

trust is holding the property on behalf of the minor, the provisions contained in s. 4(1)(a)(i) would be applicable.

We have heard learned standing counsel appearing for the Department and we have also perused the records carefully.

The point for consideration is in a case, where the assets transferred by the grandmother for the benefit of her grandson by creating trust and

appointing her spouse as the trustee, would be includible in the hands of the assessee, who is the grandmother, either under the provisions of s.

4(1)(a)(i) or under the provisions of s. 4(1)(a)(v) of the Act.

Sec. 4(1) of the Act states that in computing the net wealth of an individual, there shall be included, as belonging to that individual, (a) the value

of the assets on the valuation date are held (i) by the spouse of such individual to whom such assets have been transferred by the individual, directly

or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart. The Explanation to the said section states

that the expression ''transfer'' includes any disposition, settlement, trust, covenant, agreement or arrangement and the expression ''property''

includes any interest in property. Therefore, the asset given to a person to be held in trust would be an asset transferred to that person and if that

person happens to be a spouse of the assessee, those assets could be added to the net wealth of the assessee, as belonging to him. In the present

case, the assets were transferred to the trust and not to the spouse. The spouse was appointed as a trustee of the trust. Therefore, it does not mean

that the properties were transferred by the assessee in favour of her spouse for inadequate consideration. When the property was transferred by

the assessee to a trust for the benefit of her minor grandson and when a direction was given in the trust deed to vest with the minor the corpus and

the income accumulated thereon on his attaining the age of twenty one years, it cannot be said that during minority, the minor is entitled to either

enjoy the income from the trust or to hold the property. Under s. 21 of the Act, only a representative assessee can be assessed, in case, where the

beneficiary cannot be assessed directly. Therefore, when the property was not transferred either directly or indirectly by the assessee, who is the

grandmother, to her spouse, the provisions of s. 4(1)(a)(i) of the Act cannot be applicable to the facts of this case.

In so far as the provisions contained in s. 4(1)(a)(v) of the Act is concerned, it states as under :

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 the 1st day of June, 1973, otherwise than for adequate consideration ....."".

Sec. 4(1)(a)(i) of the Act cannot be made applicable to the facts of this case. The procedure as contemplated under s. 4(1)(a)(i) of the Act for the

purpose if its application is any agreement between the husband and wife to live apart. Here, there is no such agreement between the spouse. As

per the terms of the trust deed, both the corpus and the accumulated income arising out of the trust properties should be handed over to the minor,

when he attains the age of twenty one years. Till then, there is no enjoyment of the income from the trust properties by the minor and the corpus

also cannot be said to be absolutely vested with the minor. The crucial word under s. 4(1)(a)(i) of the Act is word ''held'' and this word is to be

understood as equivalent to the phrase ''belonging to''. Though the property vests in the trustee, it is not held by him in his own rights, since he

cannot set up a title against the beneficiary. Therefore, when the properties are transferred in trust to the spouse, it cannot be said that the

properties are held by the spouse, as he does not hold them in his own right. In such a case, no question of lack of adequate consideration would

arise. After the transfer of the property by the assessee in favour of the trust, it cannot be said that the assessee is holding the assets, which were

transferred to the trust. Neither the assessee nor the beneficiary held the property during the assessment years under consideration. Therefore, the

inclusion of the transferred property in the hands of the assessee, as her ''net wealth'' under s. 4(1)(a)(v) of the Act cannot be made. Sub-cl. (v) of

s. 4(1)(a) of the Act does not include the deferred benefit of the son''s child. Therefore, the property transferred by the assessee, who is the

grandmother in favour of her grandson, by creating a trust and appointing the spouse as the trustee can never be included as the net wealth in her

hands for the assessment years under consideration either under the provisions of s. 4(1)(a)(i) as under the provision of s. 4(1)(a)(v) of the Act.

Accordingly, we answer the question No. 1 referred to us in Tax Case Nos. 301 and 302 of 1984 in the negative and against the Department.

Insofar as the question No. 2 referred to us in Tax Case No. 825 of 1984 is concerned, we answer the same in the affirmative and against the

Department.

There will be no order as to costs.