Case: The Commissioner Of Income-Tax Bombay Vs. Manilal Dhanji, Bombay

2. The assessee, who is the respondent before us, was assessed to income-tax as an individual in respect of his income for the assessment year 1954-55. The taxing authorities included in the assessees total income for the year two sums, namely, a sum of Rs. 410 and a sum of Rs. 14,170. It was stated that these two sums accrued in the relevant account year in the following circumstances. On January 12, 1953 the assessee created a trust in respect of a sum or Rs. 25,000, the trustees whereof were the Central Bank Executor and Trustee Co., the assessee himself, his wife and brother. The scheme of the trust-deed was that the said sum of Rs. 25,000 was set apart by the assessee and it was provided that the interest on that amount should be accumulated and added to the corpus and a minor daughter of the assessee, 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 1, 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. The income derived from the said trust fund amounted to Rs. 410 in the relevant account year and the taxing authorities included this amount in the total income of the assessee, purporting to act under S.16(3)(b) and/or S. 16(3)(a)(iv) of the Income-tax Act. As regards the second sum of Rs. 14,170 it appears that on December 1, 1941, the assessees father had created a trust in respect of some shares and a cash sum of Rs. 30,000 for the benefit of his four sons including the assessee. The trustees were the Central Bank Executor and Trustee Co. Ltd., the assessee himself and one other person. The said trustees were to bold the trust funds 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 funds. The view of the taxing authorities and the Income-tax Appellate Tribunal was that under the aforesaid provision of the trust deed the assessee was the sole beneficiary and that the amount was received by him for his own benefit and he was not accountable to any one in respect of the amount and, therefore, this amount was liable to be included in his total income.3. 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 trust-deed and, therefore, neither S. 16(3)(a)(iv) nor S. 16(3) (b) applied to the case. As to ths 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 Income-tax Act and recover tax on a separate assessment made on the assessee as 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 receivable were indeterminate and not known.4. The Income-tax Appellate Tribunal, on an appeal by the assessee, did not accept these contentions. The Tribunal was then moved to state case to the High Court on two questions of law. Those questions were:"1 whether the sum of Rs. 410 is properly includible in the assessees total income either in accordance with the provisions of S.l6(3)(b) and/or S.16(3)(a) (iv) of the Indian Income-tax Act, 1922?2. Whether the sum of Rs. 14,170 is properly includible in the total income of the assessee as the sole beneficiary thereof under the trust settlement made on 1-12-1941 by Dhanji Devsi?"On being satisfied that these questions of law arose out of the order of the Tribunal dated April 24, 1957, the Tribunal stated a case under S. 66(1) of the Income-tax Act. The High Court answered both the questions in favour of the assessee by its judgment and order dated September 25, 1958. Thereafter the High Court granted a certificate of fitness under S. 66A(2)of the Income-tax Act and, as we have already stated, the present appeal has been brought to this Court on the strength of that certificate.

Court's reasoning:
7. The argument 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 entitled to include in the total income of the assessee so much of the income in the hands of the trustees as arose from the assets transferred by the assessee for the benefit of his minor child. It is pointed out that the conditions laid down in cl. (b) are-(1) that there must be income in the hands of any person or association of persons (trustees in the present case); (2) the income must arise from assets transferred otherwise than for adequate consideration to trustees; and (3) the transfer must be for the benefit of the minor child. It is argued that when the conditions are fulfilled and the only exceptional case namely, where the transfer is for adequate consideration is out of the way, cl. (6) must apply and the Department is entitled to include the income in the hands of the trustees in computing the total income of the individual assessee who made the transfer.8. As first sight the argument appears to be attractive and supported by the words used in the clause. On a closer scrutiny, however, it seems to us that cl. (b) must be read in the context of the scheme of S. 16 and the two clauses (a) and (b) of sub-s. (3) thereof must be read together. So read, the only reasonable interpretation appears to be the one which the High Court accepted, namely, that the scheme of the section requires that an assessee can only be taxed on the income from a trust fund for the benefit of his minor child, provided that in the year of account the minor child derives some benefit under the trust deed - either he receives the income, or the income accrues to him, or he has a beneficial interest in the income in the relevant year of account. But if no income accrues, or no beneficial is derived and there is no income at all (so far as the minor child is concerned), then it is not consistent with the scheme of S. 16 that the income or benefit which is non-existent so far as the minor child is concerned will be included in the income of his father. Take, for example, a case where the assets were transferred otherwise than for adequate consideration for the benefit of a minor child, but the child has attained majority before the relevant year of account. After the child attains majority the sub-section would cease to apply and the income from assets transferred for the benefit of the child would no longer be taxable in the parents hands. The reason must be that in the relevant year of account there is no benefit the minor child by the transfer, even though the transfer was originally made for the benefit of the child. The same principle may be illustrated by another example which has 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 cl. (b) of sub-sec. (3) of S. 16 would not be attracted till the minor derived benefit under the trust deed. Ms. Rajagopal Sastri did not make any such concession before us; but it seems to us that the 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 Income-tax Act makes it clear that what is taxed is the total income of the relevant account year, and total income 7 according to S. 2(15), is the income, profits and gains referred to in sub-s. (1) of S. 4 and computed in the manner laid down in the 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-s. (3) of S. 16. In our opinion, when cl. (b) of sub-s.(3) of S. 16 talks of benefit of the minor child it refers to benefit which arises or accrues 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 Gases which also illustrate the same 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 of the child would be taxable in the hands self the settlor. All these illustrations only establish the principle that the minor child must derive some benefit in the relevant year of account before cl. (b) would9. Furthermore, we are also of the view that cls. (a) and (b) of the sub-section must be read together. Clause (a) begins with the expression "so much of the income of a wife or minor child of such individual as arises directly or indirectly, and this is followed by the four circumstances 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 minor child. Mr. Rajagopal Sastri has not disputed this. The obvious intention of the Legislature in enacting cl (b) was to see that the provisions of cl (a) were not defeated by the assessee creating a trust and in order to deal with that mischief it enacted cl. (b). Instead of the expression "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 association of persons etc." Obviously, when a trust is created the income is income in the hands of the trustees. But the underlying principle in the two clauses (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 derived by the wife or minor child in the year of account under cl. (b). This is consistent with the scheme of S. 16 and particularly sub-s. (3) thereof ; which is intended to fail anattempt to avoid or reduce the incidence of tax 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 consistent with the scheme of S. 16 to say that even though there is no accrueal 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.We have, therefore, come to the conclusion that on a true construction of cl. (b) of sub-s. (3) of S. 16, the view expressed by the High Court was correct and the sum of Rs.10 did not form part of the total income of the assessee. The High Court correctly answered the first question referred tocases where property is given to a parent or other person standing or regarded as in loco parentis, parent with a direction touching the maintenance of the children, the question often arises whether the settler intended to impose a trust by the direction or whether the direction was only motive of the gift. The line between the two classes of cases has not been drawn always very firmly. It is, however, clear that in construing provisions of this kind the Court will not enforce or treat as obligatory a mere wish or desire or hope on the part of the settlor that the donee of the fund should or would or 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 direction or trust in favour of third parties if such a binding obligation can be clearly ascertained from the document.On behalf of the appellant our attention was drawn to S. 8 of the Indian Trusts Act, 1882 (II of 1882) which states that this subject matter of trust must be property transferable to the beneficiary and it must not be merely beneficial interest under a subsisting trust. It is contended that the assessee held a beneficial interest in the income from the trust funds under the trust deed of December 1, 1941 and in respect of that beneficial interest another trust could not be created in favour of himself, his wife and children. We think that this argument proceeds on a misconception. The assessee did not create a second trust in respect of the beneficial interest which he held under the trust deed of December 1, 1941. The assessees father created two trusts by that trust deed, one requiring the trustees to pay the trust income to the assessee and the other requiring the assessee who was himself a trustee, to spend the income for the maintenance, 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.16. 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 amount. The true position of the assessee in this case was that he was a trustee and not the sole beneficiary under the trust deed. He held the income on trust for himself, his wife and his children. The shares of the beneficiaries were indeterminate and therefore under the first proviso to S. 41(1) of the income-tax Act, it was open to the Department to levy and 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 Sastri 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 or Rs. 14,170 the assessee was a trustee, within the meaning of S. 41 of the Income-tax Act, appointed under 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).