the Commissioner of Income-Tax Bombay v. Manilal Dhanji, Bombay

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 323of196. Appeal from the judgment a.lld order dated September 25, 1958, of the Bombay High Court in I.T.R. No. 3 of 1958. K. N. Rajagopal Sastri and D. Gupta, for the appellant. I R. J. Kolah, J. B. Dadachanji, O. 0. Mathur and Ravinder Narain, for the respondent. 1962. January 31. Th~ Judgment of the Court was delivered by Tiu Ccmmissi•.,, •/ 111&oine-tax, BmN.1 Ji 1nil.J Dlionji. ll1m•41 lfH 111C..-i.JJiMCM t/ ,__.,_tu, He111toy M..tl1I DMr.ji, -.... D11 J. SUPRE~fE COURT REPORTS (1962] SUPP· S.K. DAS, J.-The CommiBSioner of Income-tax, Bombay City I, has preferred this appeal to this Court on a certificate of fitness granted by the High Court of .Bombay under s. 66A (2) of the Indian Income-tax Act, H!22. The a.ssessee, who is the respondent before us, waa assessed to income-tax as an inrlividual in respect of his incomo for the assessment yea.r 1954-55.

The taxing authorities included in the assesaee's total income for the year to sums, namely, a sum of Ra. 410/- and a sum of Hs. 14,170/-. It was stated tha.t these two sums accrued in the relevant account year in the following <>ircumstanees. Un January 12, 1953 the asse88ee created a. trust in respect of a sum of Hs, 25,000/-, the truste1·s whereof were the Central Bank Executor & Trustee Co., the &BBeSBoo himself his wife and brother. The scheme of the trust-deed was tha.t the said sum of Rs. 25,000/- was set apart by the asscssee and it was provided tha.t the interest on that amount should be accumulated and adder! to the corpus and a minor daughter of the a88essee, named Chandrika, was to receive the income from the corpus increased by the addition of interest, when she attained the age of 18 on February I, 1959. She was to receive the income during her life time and after her death the corpus was to go to persons with whom we are not concerned.

Tho income derived from the said trust fund amounted to Rs. 410/- in the relev!l.nt account yea.r and the taxing authorities included this amount in the total inrome of the aRSessee, purporting to a.ct under s. 16(a)(b) and/or s. 16(3)la)(iv) of the Income-tax Act. As regards the second sum of&. 14,170/- it appears that on Deoember l, 1941, the &88e6lletl's father had created a trust in respect of some shares and a caah sum of Rs. 3t.1,0UO/- for the benefit of hie four eoi;.s including the a.s&'88ee. The trustees were the Central Bank Executor and Trustee Co. Ltd., the asseSi!ee himself and one other person. The said truateea were to hold the trust fonda upon trust to pay the net interest and income thereof to the assessee "for the maintenance of himself and his wife and for the maintenance, education and benefit of all his children till his death". The sum of Rs. 14,170/-. it was stated, accrued as income in the hands of the assessee in the relevant account year from the said trust funde.

The view of the taxing authorities and the [ncome-tax Appellate Tribunal was that under tho aforesaid provision of the trust deed the assessee was the·sole beneficiary and that the a.mount was received by him for his own benefit and ho was not accountable to any one in respect of the amount and, therefore, this amount was liable to be included in his total income. On behalf of the assessee the contention was that the sum of Rs. 410/- aforesaid was not liable to be included in the total income of the assessee inasmuch as Chandrika, the minor daughter of the assessee, had no right to the income nor any beneficial interest therein in the relevant year of account under the provisions of the trus~ deed and, therefore, neither s. 16(2)(a)(iv) nor s. 16(3J(b) applied to the case. As to the sum of Rs. 14,170/- the case of the assessee was that it should not be included in his total income as the sole beneficiary, because the beneficiaries under the trust settlement were not only the assessee but his wife and children as well.

It was contended that the assessee received the amount in trust for himself and his wife and children and it was open to the Department to proceed under the first proviso to s. 41 (1) of the lncome-tax Act and recover tax on a separate ·assessment made on the assessee a.s a. trustee in respect of the said sum at the maximum rate, because the individual shares of the beneficiaries on whose behalf the money was re~eivable were indeterminate and not known. The Income-tax Appellate Tribunal, on an appeal by the assessee, did not accept these contentions. The Tribunal was then moved to state a IS6t" The Oommissiolur •f Inconte .. tax, Bombay Manilal Dl"mji, bombo.1 Das J. n.c_,n-.1 l11ec>.-....X• Be"'69 JI ""li:.f:;"i4 case to the High Court on two questions of law those questions were : "l. Whether the sum of Rs. 410/· is propt•rly includible in the asseSBee's +·:al income either in accordance with the provisi?ns of section IH(3hbJ and/or section lti(3)(a)

(1v) of tho Indian Income-tax Act, 1!!22? 2. Whether the sum of Rs. 14, 170/· is properly includible in the total income of the a.BBessee as the sole beneficiary thereof under the trust settlement made on 1-12-1941 by Dhanji Devsi ?" On being tiatisfied that these questions of law aroee out of the order of the Tribunal dated April 24, 1957, the Tribunal stated a case under s. 66(1) of the Income-ta.x Act. The High Court answered both the questions in favour of the asse·s1ee by its judgment and order dated September 25, 1958.There after the High Court granted a certificate of fitness under s.66A(2) of the Income-tax Act and, as we have already stated, the persent appeal has been brought to this Court on the strength of that certificate. We proceed now to deal with the first ques· tion which relates to the sum of Rs. 410/·. The question is whether this sum was properly includible in t-he asHeSBee's total income under the provisions of s. l6(3)(b) of the Income-tax Act, bll<'auee Mr. Rajagopal Saatri appearing for thC1 appellant hae not pressed the claim which WM made before the Tribunal on behalf of the Department under the provisions of s. l6(:l)(a)(iv).

Before we go to the provisions of s. Jf~:l)(b) it is advisable to set ont the material portions of els. 3 and 4 of the trust· deed of January 12, 1953. Those clauses were in these terms : "3. Th" Trustees shall hold and stand pusscsi;etl of the trust fund and the invest- 1J1ents for the tilni; being representing the 2 sc .. R. same and receive the income, divided, interest and rents thereof and invest the same and the resnlting income, dividend, interest and rents ther-:iof so as to accumulate at compound interest to the intent that suc>h accumulations shall be added to the principal trust fund until the settler's daughter Chandrika shall attain the age of eighteen years which age she will attain on the lst February 1959 and after the expiration of the above named period the Trustees shall deal with and dispose of the trust fund as hereinafter stated.

The Trustees shall hold and stand possessed of the trust fund and the accumulations thereof upon trust to pay the net interest and income thereof after deducting ail outgoings and charges for collection to the said Chandrika for her life for her maintenance ... " It is clear from these clauses that during the minority of Chandrika, the income from the trust funds was to be accumulated and added to the trust funds md after the attained majority on February l, 1959, she was to get only the income from the enl~rged trust funds. Now, in the relevant year of account Chandrika was still a minor and under the terms of the trust deed she had no right to the trust income nor any beneficial interest therein ; she could neither receive nor enjoy the income.

She did not derive any .benefit whatsoever from the trust funds during her minority and even after she attained majority, she did not have any right to the trust income which arose during her minority and her only right was to enjoy the income arising from the enlarged ti;ust funds, i. e., the original trust funds and the accumulations of trust income during her minority. Therefore, the sum of Rs. 410/- was not the income of Chandrika, but was the income of the trustees and the income }Vas impressed with a trust, namely, that it should be added to IHB n, CommissiDw of Income-ta.., Bom6'!1 Manilal Dhonji, Das J. TA. CnnmisJiottn o.f IMom,.tax. B00tb•)' M Milo/ DMflji, Bombay D., J. the trust cm pus. The qurbt ion is, does s. 16(3)(b) apply to ~uch a ell.Se ? We shall presently read s. 16(3), but before we do so it is necessary to refer to the soheme or s. 16 of the Income-tax Act. The section deals with the computation of total income as defined in s.

2(15) of the Act, and provides that what sums are to be included or excluded in determining the total income. The definition of cotal income in~. :?(15) involves two elem('nts-(a) the income must comprise tho total amount of income, profits and gains refe1red to in s. 4( 1), and (b) it must be computed in the manm·r laid down in the Act. The exemption granted under the Act is of two kinds ; certain classes of income are exempted from tax and n !so excluded from the computation of total income, while certain other classes of income exempted from tax are to be included in the a86essee's total income. Now cl. (a) of sub-8. (i) of s. Iii provides the sums exempted from tax under certain provisions of the Act should be included in the assessee'1 total income. Clause (b) lays down the mode of computing a partner's share in the profit or loss of the firm. Under cl.

(c) income which arist~ to any person by virtue of any settlement or disposition from assets remaining the property of the settler or disponer etc. is taxed as his income. The object of the legislation is clearly designed to overtake and circumvent a tendency on the part of the tax-payers to endeavour to avoid or reduce tax liability by means of settlements. Sub-Mection (2) deals with grossing up of dividend etc. Then we come to sub-a. (:I). This sub·section aims at foiling an individual's attempt to avoid or reduce the incidence of tax hy transferring his <1.Ssets to his wife or minor child or admit ting his wife as a partner or admitting his minor child to the benefits of a partn\'rship in a firm in which such individual is a partner. The bU b-scctiu11 crrntes an artificial SUPREME COURT REPORT.3 liability to tax and must be strictly construed. Now, let us read the sub-seotion. "16. (3)

In compnting the total income of any individual for the purpose of assessment there shall be included: (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly : (i) from the membership of th!l wife in a firm of which her husband is a partner; (ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner; (iii) from assets transferred directly or indirectly to the wife by the husband otherwi~e than for adequate consideration or in connection with an agreement to live apart; or (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration ; and (b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate codsideration to the person or association by such individual for the benefit of his wife or a minor child or both."

The argume11t on behalf of the appellant is that the conditions laid down in cl. (b) of sub-s. (3) of s. 16 are fulfilled in the present case and therefore the Department was intitled to include in the Till Oommissiow of lncome .. tax, Bom69 M .. ilol Dlumjl, , Bolft6q) 1. , D., .I, . I96a T"' c....;,,;.,.,, of l""'111ff-ta1 Bombq, M ,.;/M D"4nji, Bom/19 DuJ. tots.I income of the asseiieee so much of the income in the hands of the trusteee as aroee from the aaaete transferred bv the aasesaee for the benefit ofhia minor .child. It is pointed out that the conditions laid down m cl.(b)are-(l)thatthere must be income in thehanda of any person or Msooiation of persona (trusteea in the prelK'nt caaes;) (2) the inoome must ariae from al!8ets transferted otherwise than for adequate consideration to the trustees; and (3) the transfer mnat be for the benefit of the minor child.

It is argued· that when the oonditions are fulfilled and the only exceptional oaee, namely, where the transfer is for adequat" oonafderation is out of the way, cl. (b) mW!t apply and the Department ia entitled to include thll inoome in the handll of the trustees in computing th& total irioome of the individual &880811ee who made the transfer. At f'rst eight the arirument appeara to be attrac· tive and supported by the words used in the olaW!e. On a closer scrntinv, however; it seems to us that cl. (b) must be read 0in the context of the scheme of 16 and the two clauses (a) and (b) of sub-a. (3) thereof must be read togf'ther.

So read the only rea.sonahle interpretation appears to be the one which the High Court accepted, namely, that the scheme of the section requires that an &1111e880e oan only be taxed on the income from a truet fund for the benefit of his minor child, provided that in the year of account the minor child derives 1ome benefit under the trust deed either he receives the income, or the income accrues to him, or he hu a beneficial interest in the income in the relevant year of account. But if no income accrues, or no benefit derived and there is no income at all (eo far as the minor child is concerned), then it is not oonaistent with the scheme of e. 16 that the income or benefit which is non-existent eo far as the minor child ia concerned, will be included in the income of hi1 father. Take, for example, a oaae •here the ueeta 2 S.C.R. SUPREME OOURT REPORTS !111 were trAnsferred ot;berwise than for adequate consideration for the 'benefit of a minor child, but the child has attained majority befor the relevant year of account.

After the child attains majority the sub·sectfon would cease to apply and the income from assets transferred for the benefit of the child would no longer be taxable in the parent's hands. The reason must be that in the relevant year of account there · is no benefit to the minor child by the transfer, even though the ·transfer was originally made for the benefit of th£' child. The same .principle may be illustrated by another example which bas been dealt with by the High Court. Take a case where there are intermediate beneficiaries before the minor gets the benefit under the trust deed. In such a case the learned Advocate for the Department conceded in the High Court that ol. (b) .of sub-a. (3) of s. 16 would not be attracted till the minor derived benefit under the trust d~ed. Mr. Rajagopal Sastri did not make any such concession before us; but seems to us that principle underlying the illustration is incontestable.

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. Section 4, the charging section, of the Inoome-tax Act makeR it clear that what is taxed is the total income of the relevant account year, and total income, according to .s. 2 (15), is the income, profits and gains referred to in sub-a. (1) of s. 4 and computed in the manner laid down in tlie Act. In other words, the tax is levied on a yearly basis.· It is true that in the present case there was income in the hands of the trustees and the trustees were liable to pay tax thereon. That, however, is not the question before us. The question before us is whether such income in the hands of the trustees could be included in the total income of the assessee under cl. (b) of sub-a. (:l) of s. 16.

In our opinion, when Tiu Commission1r of Incomt .. t"2X, Bombay M anilal Dhqnji, Bomba..~ Das J. lllOt Tiii c....,;,,;- •f /11&om~W BomboJ M .,.ilol D1'anji, llomb•y DasJ, cl. (b) of sub-s. (3) of s. 16 talks of benefit of the minor child it refers to benefit which ari.eea or aoc· rue11 to the minor in the year of account. If there be no such benefit, the income cannot be included in the total income of the individual who made the transfer. There is a third type of case which also illustrate the 8&Ille principle. If only a portion of the income of the trust is reserved for the minor child, cl, ( b) would apply and that portion of the income which is set apart for the benefit for the child would be taxable in the handa of the settler. All these illustrations only establiah the principle that the minor child mullt derive some benefit in the relevant year of account before cl. (b) would apply. Furthermore, we are also of the view that els.

(a) and (b) of the sub-section must be read together. Clause (a) begins with the expreeaion "so much o: tho income of a wife or minor child of such individual as ariees directly or indirectly", and this is followed by tho four circumstanoee numbered (i), (ii), (iii) and (iv). There is no doubt that so far as cl. (a) is concerned, there must be income of the wife or miuor child. Mr. Rajagopal Sa.stri has not disputed this. The obvious intention of the Legislature in enacting cl. (b) wa.a to see that the provisions of cl. (a) were not defeated by the a.sst>.88ee creating a trust and in order to deal with that mischief it enacted cl. (b). Instead of the expre88ion "so much of the income of a wife or minor child" the expression used in cl. (b) is "so much of the income of any person or 8.880Cir.- tion of persons etc.". Obviously, when a trust is created the income is income in the hands of the trustees. But the undHlying principle in the two els.

(a) and (b} appears to be the same, namely, there must be income of the wife or minor child under cl.(a) and there must be some benefit derivfld by the wife or minor child in the year of account under ol.(b). Thia is consistent with the scheme of a.16 28.C.R. and particularly subs. (3) thereof. which is intended to foil <in individual's attempt to avoid or reduce the incidence of t1.x by transferring his assets to his wife or minor child etc. When, however, the minor child derives no benefit under the trust deed in the year of account, it is not consis· tent with the scheme of s. 16 to say that even thou~h there is no accrual of any income or benefit in the year of account in favour of the minor child, yet the income must be included in the total income of the individual concerned. 1 ht Commisaiontr. of lnc.Jme-tav, Bomboy Our attention has been drawn to s. 64 of the Income.tax Act, 1961 (43 of 1961). That section corresponds to s. 16 of the Income.tax Act, 1922 and cl. ( v) of s.

64 has made the position clear by using the expression ' immediate or deferred benefit" so that even a benefit which is postponed and does not arise in the year of account will not entitle the Department to include the income in the hands of the trustees in the total income of the settler. We do not, however. think that the Act of l 961 can be taken as declaratory of the law which existed previously ; nor can s. 64 (v) be taken as determinative of the true scope and effect of cl. (b) of sub-s. (3) of s. 16. The Legislature may have thought fit in its wisdom to widen the scope of the law that existed previous to it so as to take in deferred benefits as well. We think that we must interpret cl. (b) of sub-a. (3) of the context of the section as it occurs in the Income-tax Act of 192:?. We have been referred to two EogliRh decisions Dale v. Mitcalfe (1) and }lfauray v. Gommissianer8 of Inland Revenue ('). One of the deci~ion Dale v. Mitcalfe ( 1 J related to s.

25 of the English Income Tax Act, 1918 (8 & 9 Geo. V. C. 40) aud the other related to 1;1. 20 ( l)(c) of the English Finance Act 1922 ( 12 and 13 Geo V. C. 17). Those provisions were differently worded and appear in a different {I) (1927) IS T. C. 41. (2) (19~4) 26 T. C. 91. M anilal Dl.anji, Bombay Das J. r.1 Co..,,;,,;.,, of ,_,Bombo_, M..a.I DA.,.ji, DuJ. 914 SUPREME OOURT REPORTS [1962) SUPP. context and decisions of the En~Iish Courts given on provisions differently worded and appearinl!' in a different context are not, in our opinion, help· fol in determining the true scope and effect of cl. (b) suli-s. (3) of s. 16 of the Income-tax ,Aot, 1922. We have therefore, come to the conclusion that on a. true constnwtion of cl. (b) of sub-s. (3) of s. I 6, the view expressed by the High Court was correct anrl the sum of Rs. 410/- did not f(Jrm part of the total income of the &BSessee. The High Court correctly answered the first question referred to it.

We now turn to the second question. The rPlevant clause of the trust deed of December I, 1941 is ol. 7 which reads as follows : "The trustees shall bold and stand poS8688ed of the Trust Fund mentioned in the second Schedule hereto and the accmnulations thereof referred to in clause 3 thereof upon T111st to pay the net interest and income thereof to the Settlt!r's son MANILAL for the maintenance of himself, his wife and for the mainten&nce, education and benefit of all his children till his death." The queRtion before us is whetbllr under this clause the income received by the assessee is impressed with a trust in favour of himself, his wife and children to whom he is accountable as a trustee for the amount received.

In other words, the question is whether tha trust deed of December I, 1941, created two tmsts, the one requiring the trastees to pay the income from the trust funds to the assessee and the second requiring the assessee to spend the income for the maintenance of himself and his wife anrl for the maintenance, education and benefit of his children. In cases where pro· perty i.s given to a parent or other person standing or regarded aa in /,ow parentia, with a direction 2 s.c.H .. SUPREME OOURT REPORTS touching the maintena.nce of .the children, the question often a.rises whether the settler intended to impose a. ~rust by the dirccMon or . whether the directiein was ·only the motive of the gift.

The line between the two cmsses of casea has not been drawn "lways very ar1X1ly; ,It is,. however, . clear that in construing provisione Of this kind the Con rt will not enforce .or treat as obligatory a. mere wish or desire or hope on the pa.rt of the settler tha.t the d.onee of the fund should or would ought to or is expected to apply it for the benefit of other persons ; on the other hand, the Court does regard as binding and obligatory and does enforce a direc· tion or trust in favour of ·third parties if such a binding obligation can .be clearly ascertained from th-0 document. Instances of cases where no trust is create(l a.nil of ca.sea where. trust is created. are detailed a.t pa.gee. $$ ~n.d $!i) of J:,ewin on Trusts .(llitli F;dition). We a.re un'able tohold tha.t. in the ca.se before · ~a ol.

7 of the tl:i:ist d~d merely ~P~ssei:l a wiMi p1 desfr:~ or ~ope9i1 tit~ f>&tt of ib:e aettier;, We . a.r~ in :11ogreem~t with, the: l{tgh C9tirt thi!.t the d~rectfon QOntli.itied' in cl: '7 crea.ted a trust in fi!.Y.i:r1~.; of th& a$1e'8ee,-his wif& apd. child,ren. . The . . etpre$1iiou ·•"for the . maintenanc(l of himself and . his wife and for the maintenaQce, . eoucation . and . . • benefit of au his Chilcrrerl'' i11 .not .indicative of ·a .tii:ete d¢sif~· .or bop~: it imfci&e$ a. bi:iiding and obliga.tocy truJ!t; In r~; · BOQ{k, .JJciitk v. Bootk f) a. ·te$ta.toi" gli. ve · the rtlllidue of his . esta.te to bis 13x:eoutors, on tiruijt, to pay to hii! \life or permit. her to recuive the a.nnua.l .in09me thereof'during her life, "fqr lier use .a.nd .benefit and for the m&intenance a.nd education· of my children". It was he.id that the wifti took the income subject to a trui!t for the maiµtenanoe a.nd eduoa.tion of the ·. {'~1.-{1Rq4:) r: (::h. ~R1.

Tht_Commi~sfuncr o/ 1,.,,,,,,...,.,, Boml>'IJ' Mtinilo Dha'\ii, 11 ... b'IJ' _ DasJ. llHll n, CommiJsio1Wr of l•ams-•a, Bombff1 JIMilal D.\oiV1 B-NJ DasJ. children. A similar view Wl\8 exprel!8ed in Raike,s v. Ward (1) and Woods v. Woods(') On behalf of the appellant our attention was drawn to s. 8 of the Indian Trusts Act, lb82 (II of 1882) which states that the subject matter of a trust must be property transferable to the bene· ficiary and it must not be merely beneficial inter· est under a subsisting trust. It is contended that the asseesee held a beneficial interest in the income from the trust funds under the trust deed of December l, 1941, and in respect of beneficial interest another trust could not be created in favour of himself, bis wife and children. We think that this argument prooeeds on a misconception. The a.ssessee did not create a second trust in respect of the beneficial interest which he held under the trust, deed of December I, 1914.

The &SBessee's father created two trusts by that trust deed, one requiring the trustees to pay the trust income to the assessae a.nrl the other requiring the 888C88ee, who wll.8 himself a tn1stee, to spend the income for the maintena.noe, education and benefit of his children. It is not disputed that by a single document more than one trust may be created. It is not, therefore, true to say that the subject matter of the trust in the present case was merely a beneficial interest under a subsisting trust. Under s. 41 of the Income-tax Act it was open to the Department either to tax the trustees of the trust deed or to tax those on whose behalf the trustees had received the a.mount. The true position of the 8.ll8Cl!IMJO in this case was that he was a trustee and not the eole beneficiary under the trust deed. He held the income on trust for himself, bis wife and bis children. The aha.res of the beneficiaries were indeterminate and therefore under the first proviso to s. 41(1) of tho (I)

(1842) 66 ll. R. 1106-1 Hue 44S. (2) (1836) 4-0 I!. R. 429·1 MY&: C. R .COi. Income-tax Act, it was open to the Department to levy anil recover the tax at the maximum rate from the assessee ; but that did not entitle the Department to include the sum _of Rs. 14,170/- in the total income of the assessee as though he was the sole beneficiary under the trust· deed, Mr. Rajagopal ::lastri made it clear that the intention of the Department was to include the sum in the total income of the assessee in order to levy and charge super-tax on him. This, we do not think, the Department was entitled to do. In respect of the sum of .Ks. 14,170/- the assessee was a trustee, within the meaning of s. 41 of the Income-tax Act, appointed under a trust declared by a duly executed instrument in writing and as such trustee he had the right to contend that his assessment in respect of the money received by him not as a beneficiary but as a trustee could only be made under the first proviso to s. 41 (1).

We have, therefore, come to the conclusion that on the second question also the answer given by the High Court was correct. The result, therefore, is that the appeal fails and is dismissed with costs. Appeal dismissed. 1111 CommissiDnlf' of [tJCMnl .. ffx, Bomba, M anilal Dhanji, Bomb!!.] DaJJ.