Case: Commissioner of Income Tax, Bombay City Ii Vs. Keshavji Morarji and Another

1. In a reference under section 66 of the Indianx Act, 1922, the High Court of Judicature at Bombay answered the secondquestionset out herein below in the negative, and declined to answer the firstquestion"1. Whether, on the facts of the case, the provisions of section 16(3)(a)(iv) are applicable to the two trusts created by Keshavji Morarji and Jaysinh Keshavji both on February 22, 1954 ?2. Whether, on the facts and in the circumstances of the case, the creation of a trust by Keshavji in favour of his minorWith special leave, the Commissioner ofKeshavji, a resident of Bombay, has a son, Jaysinh, and three daughtersIndumati, Kusum and Dipika, of whom, in the relevant years of assessment, Dipika was a minor. Jaysinh has two infant children, Bipin and Kamla. On June 14, 1952, Keshavji transferred a sum of Rs. 5 lakhs to his son, Jaysinh. On February 22, 1954, by a deed, Keshavji settled a sum of Rs. 4,41,000 in favour of his minor, Bipin and Kamla, and on the same day Jaysinh, by another deed, settled a sum of Rs. 1,54,000 upon his three sisters, Indumati, Kusum and Dipika. In proceedings for assessment of tax for the assessment years6 and7 thex Officer held that Keshavji had by the settlement indirectly transferred assets belonging to him to his minor daughter and Jaysinh had transferred assets belonging to him to his minor children, and on that view directed that under section 16(3)(a)(iv) the income attributable to the share of Dipika be assessed in the hands of Keshavji and the income from the trust created by Jaysinh"being in reality"for the benefit of his minor children be assessed in his hands. The Appellate Assistant Commissioner upheld the view of thex Officer about the nature of the transactions. He, however, held that the income which could be included in the total income of the assessee was only that amount which"related to the interest in the assets conveyed in favour of the minors and not the income of the whole of the assets. Thex Appellate Tribunal confirmed the order of the Appellate Assistante High Court held that thecircumstance that the two deeds of settlement were executed on the same day did not justify an inference that Keshavji and Jaysinh made indirect transfers of assets in favour of their respective children"for the purposes of section 16(3)(a)(iv) of the Act.Citing with apparent approval the decision of the Madras High Court in C. M. Kothari v. Commissioner of, the High Courtheld that thefact that there weres either by itself or taken with the fact that the gifts were simultaneous in point of time did not establish that each transfer formed consideration for the other or that the transfers were mutual

Reasoning: We do not agree. It is not necessary that there should be consideration in the technical sense. If the two transfers aree if the transfers ared and are parts of the same transaction in such a way that it can be said that the circuitous method was adopted as a device to evade implications of the section, the case will fall within the section. In C. M. Kotharis case the court was interpreting section 16(3)(a)(iii), but the same considerations are relevant in the application of section. TheTribunal merely observed that the two transactions were"mutually prompted"and each of the gifts provided for the consideration of the other and did not attempt an examination of the evidence in the light of the true. TheHigh Court, in disagreeing with the Tribunal, also did not consider all the material evidence in the light of the test suggested by this court. We are, in the circumstances, unable to sustain the answer recorded by the High Court on the seconde may observe, lest there should be misconception as to the true rule applicable, that the observations made by the Madras High Court in L. G. Balakrishnan v. Commissioner ofx on which reliance was placed at the Bar that if"We allow this appeal. We direct that the case be remanded with the direction that the High Court do call upon the Tribunal to submit a statement of the case under section 66(4) of the Indianx Act in the light of the tests expounded by this court in Commissioner ofx v. C. M. Kothariand that the High Court do proceed to dispose of the reference in the light of the statement of the case and such supplementary statement of the case as the Tribunal may make.