COMMISSIONER OF INCOME-TAX VS SMT. N. MUTHAMMAL, 1998 PTD-MADRAS-HIGH-COURT-INDIA 1589 (1996)

(a) Income-tax---

----Transfer of assets---Minor---Transfer of assets by assessee to trusts for deferred benefit of grandchildren who were minors---No application of income of trusts for benefit of minors in relevant assessment years-- Assessment of trust under S.161---Income from trust was not includible in total income of assessee---Indian Income Tax Act, 1961, Ss. 64(1)(vi).& 16J..

(b) Wealth tax--

---- Net wealth---Transfer of assets by assessee to trust for deferred benefit of grandchildren who were minors---Assessment of trust under S.21---Assets transferred to trust not includible in net wealth of assessee---Indian Wealth Tax Act, 1957, Ss.4(1)(a)(v) & 21.

The assessee created three trusts in favour of her three minor grandchildren after June 1, 1973. The income of the trusts was being accumulated. The assessee paid gift tax in respect of the assets transferred to the trusts. The trusts were assessed under section 161 of the Income Tax Act, 1961, and section 21 of the Wealth Tax Act, 1957, on the income- derived by the trusts on behalf of the minor children and the corpus in the hands of the trust respectively. The Assessing Officer sought to include the income from the trusts in the total income of the assessee as an indirect transfer under section 64(1)(vi) of the Income Tax Act, 1961. In the wealth tax assessment the assets transferred to the trusts were included in the net wealth of the assessee. The reassessments under the Income Tax Act and the Wealth Tax Act were upheld by the Tribunal but on the merits the Tribunal held that the income and the corpus of the trusts were not includible in the hands of the assessee as indirect transfers by the assessee in favour of the three minors. On references at the instance of the Commissioner:

Held, (i) that as there was no income arising in the assessment year under consideration in the hands of the beneficiaries, section 64(1)(vi) of the Income Tax Act, 1961, was not applicable. The income arising to the minors from out of the properties transferred through the medium of trusts was not includible in the total income of the assessee;

(ii) that inasmuch as the net wealth of the minor beneficiaries was assessed in the hands of the trust under section 21 of the Wealth Tax Act, 1957, another assessment in the hands of the assessee was not valid since it could not be said that she was holding the net wealth in her hands, after the gifts were made to the trust; ,

(ii) that no purpose would be served in deciding the question whether there was any indirect transfer on the facts available on record.

CIT. v. Abhijit Sen (1968) 68 ITR 23 (Cal.); CIT v. Chowdhury (AN) (1969) 71 ITR 326 (Cal.); CIT v. Doshi (M.R.) (1995) 211 ITR 1 (SC); CIT v. Framji H. Commissariat (1967) 64 ITR 588 (Bom.); CIT v. Kothari (CM) (1963) 49 ITR SC 107; CIT v. Raman (T.G.K.) (1995) 214 ITR 11 (Mad.); CIT v. Sivasubramaniam (S) (1991) 189 ITR 157 (Mad.) and Sital Chowdhury v. CIT (1979) 119 ITR 698 (Cal.) ref.

C.V. Rajan for the Commissioner.

P.P.S. Janardhana Raja for the Assessee.

JUDGMENT

K.A. THANIKKACHALAM, J.---T. C. No.823 of 1984 relates to the income-tax assessment, whereas T.C.No.824 of 1984 relates to the Wealth Tax Assessment of the same assessee.

At the instance of the Department, the Tribunal referred the following questions in both the income-tax assessment as well as the wealth tax assessment of the same assessee for the assessment year 1976-77 for the opinion of this Court:

"T.C.No.823 of 1984.---Whether on the facts and circumstances of the case, the Tribunal's finding that the income arising to the .minors from out of the properties transferred through the medium of trusts cannot be included in the assessment of the assessee under section 64(1)(vi) of the Income Tax Act, 1961, is sustainable in law?

T.C.No.824.of 1984.---Whether on the facts and circumstances of the case, the Tribunal's finding that the assets transferred to the minors through the medium of trusts cannot be included in the net wealth of the assessee under section 4(1)(a)(v) of the Wealth Tax Act is sustainable in law ?"

The assessee, Smt. N.Muthammal, Dindigul, is an individual. For the assessment year 1976-77, the accounting year ended on December 31, 1975. She derived share income from two firms and other sources. Originally, the assessment was completed on January 28, 1977, on a total income of Rs.28,590 in which the assessee had not shown any income against column 12(b) in the return of income pertaining to income arising to spouse/minor child/son's wife/son's minor children. On the basis of the communication from the Income Tax Officer, the assessment was reopened and the Income Tax Officer included the income arising from three private trusts created by the assessee, viz., Vijayashree Trust, Sujatha Trust and Ranjit Trust, in favour of her minor grandchildren, viz., Miss Vijayashree, Miss Sujatha and Master Ranjit, by invoking section 64(1)(vi) of the Income Tax Act, 1961.

According to the Income Tax Officer, the word "indirectly" appearing in section 64(1)(vi) would apply to the "transfer made by the assessee through the medium of trusts inasmuch as the ultimate benefit of each of the trusts reached each of the three minor grandchildren of the assessee.

On appeal, the Appellate Assistant Commissioner upheld the validity of the reassessment proceedings under section 147(b), but, on the merits, he held that the transfers through the medium of trusts would not attract section 64(1)(vi) and consequently deleted the income assessed in the hands of the assessee.

Aggrieved, the Revenue filed a second appeal before the Tribunal and the assessee filed a cross-objection. The Tribunal upheld the order of the Appellate Assistant Commissioner regarding the validity of the reassessment proceedings. Even on the merits, the Tribunal upheld the order of the Appellate Assistant Commissioner by relying on the decision of the Bombay High Court in the case of CIT v. Framji H. Commissariat (1967) 64 ITR 588 and of the Calcutta High Court in the case of CIT v. A.N. Chowdhury (1969) 71 ITR 326. According to the Tribunal, unless there is direct or indirect transfer to the assessee's grandchildren, the provisions of section 64(1)(vi) would not apply and that the transfers to the aforesaid persons through the medium of trust did not attract the provisions of section 64(1)(vi) of the Indian Income tax Act, 1961. .

In so far as the wealth tax assessment is concerned, it relates to the assessment year 1976-77 and the valuation date is December 31, 1975. Smt. Muthammal derived share income from two firms and other sources. The original assessment was completed on January 28, 1977, on a total wealth of Rs.3,13,500 on the basis of a return filed on December 1, 1976, in which the assessee has not shown any wealth in Annexure XV pertaining to assets transferred to spouse/minor child/son's wife/son's minor children. On the basis of communication from the Income Tax Officer, the Wealth Tax Officer reopened the assessment and included the assets transferred to the three minor grandchildren, through the medium of three private trusts, viz., Vijayashree Trust, Sujatha Trust and Ranjit Trust, respectively, created for the benefit of the grandchildren by invoking section 4(1)(a)(v) of the Wealth Tax Act, 1957. The action of the Wealth Tax Officer is similar to the action taken by him in the income-tax assessment this year.

On appeal, the Appellate Assistant Commissioner following his decision in the income-tax appeal for the assessment year 1976-77 deleted the inclusion of assets made by the Wealth Tax Officer under section 4(1)(a)(v) of the Wealth Tax Act, 1957.

Aggrieved, the Revenue filed a second appeal before the Tribunal and the assessee filed a cross-objection. The Tribunal, following its order in income Tax Appeal No.ITA 539 (Mds.) of 1982 and C.O. (Mds.) of 1982 dated December 31, 1982, upheld the order of the Appellate Assistant Commissioner both on the validity of reassessment proceedings and on the merits of the case.

Learned standing counsel for the Department submitted that section 64(1)(vi) applied to the transfer of assets through the medium of trust, which amounted to indirect transfer. Therefore, the Tribunal was not correct in holding that section 64(1)(vi) would not be applicable to the facts of this case. In order to support his contention, learned standing counsel relied upon a decision of the Calcutta High Court in Sital Chowdhury v. CIT (1979) 119 ITR 698. Reliance was placed upon the decision of the Supreme Court in CIT v. C.M. Kothari (1963) 49 ITR (SC) 107, which was applied in the decision in Sital Chowdhury v. CIT (1979) 119 ITR 698 (Cal.). Therefore, according to learned standing counsel, the income arising from the trust in the name of the three minors is includible in the hands of the assessee, who is the grandmother. So also, in the wealth tax assessment, through the medium of trusts, the net wealth was transferred by the grandmother in favour of the grandchildren. Therefore, the net wealth in the hands of the minor children who are the beneficiaries, is liable to be assessed in the hands of the grandmother in her wealth tax assessment as per the provisions contained in section 4(1(a)(v) of the Wealth Tax Act, 1957. According to learned standing counsel, the Tribunal was not correct in holding that the net wealth in the hands of the minor grandchildren is not assessable in the hands of the grandmother in her wealth tax assessment.

On the other hand, learned counsel appearing for the assessee submitted that in so far as the income-tax assessment is concerned, the income was not transferred directly to the minors. If a trust is created and a gift was made by the grandmother in favour of the trust for the benefit of the minor grandchildren, that will not come under the purview of section 64(1)(vi) of the Indian Income Tax Act, 1961. It was further submitted that there is no question of indirect transfer, according to the facts arising in the present case. Learned counsel further submitted that for the gift made by the grandmother, she paid the gift-tax. So also, the trust was assessed for the income accrued to the minor grandchildren under section 161 of the Indian Income Tax Act, 1961. Therefore, it was submitted that in any event, the income arising to the minors from the trust is not includible in the hands of the assessee. So also, the net wealth in the hands of the three minor children which was transferred to the trusts for the benefit of the minors, cannot be included in the hands of the grandmother, who is the assessee. Hence, it was submitted that the Tribunal was correct in excluding the net wealth gifted to the three minor children from the assessment of the grandmother and also correct in excluding the income arising to the three minors from the trust in the hands of the grandmother.

We have heard the submissions made by the learned standing counsel for the Department as well as learned counsel appearing for the assessee.

The fact remains that the assessee, Muthammal, created three trusts in favour of the three grandchildren and gifted amounts for the benefit of the three minors by creating a trust. The point for consideration is whether the income, arising to the three minor children is assessable to the hands of the assessee grandmother by applying the provisions of section 64 (1)(vi) of the Indian Income Tax Act, 1961, and whether the net wealth to the hands of the three minors is assessable in the hands of the grandmother, the assessee herein, since there was indirect transfer.

In the instant case, gifts have been made admittedly after June 1, 1973, to the above three different private trusts for the benefit of the abovesaid three minor children through her son.

Under section 64 (1)(vi), in computing the total income of any individual, there shall be included all such income as arises directly or indirectly to the son's wife, or son's minor child of such individual from assets transferred directly or indirectly on or after the June 1, 1973, to the son's wife or son's minor child by such individual, otherwise than for adequate consideration. In the present case, there is no complaint that there is no adequate consideration in making the gifts. According to the Department, even though the amounts were transferred to a trust created in favour of three minor grandchildren and even though there is no direct transfer of money in favour of three minor grandchildren, there is indirect transfer; since the benefit from the transferred assets were given in favour of the three minor grandchildren. So also, in the matter of wealth tax assessment, even though the assets were transferred to the trusts and not to the minor grandchildren directly, inasmuch as the minors are the sole beneficiaries, the net wealth in their hands should be included in" the wealth tax assessment of the grandmother.

According to the facts arising in the case of Sital Chowdhury v. CIT (1979) 119 1TR 698 (Cal.), the assessee A (since deceased) had executed a deed of trust conveying certain stocks and debentures as well as interest in some landed property of the total value of Rs.4,98,000 to his brother. J who was directed to hold the same in trust for the benefit of the wife and two daughters of the said J On the same day J executed a similar trust in respect of assets and properties of the same nature and value as conveyed in trust by the assessee. In the trust executed by J, the assessee, A, was appointed as the trustee and benefits thereunder were conferred on the assessee's wife and major son. On these facts, the Calcutta High Court, while answering the question, whether the entire income from the assets transferred by Amarendra Nath Chowdhurv to Jatindra Nath Chowdhury (since deceased) is includible in the income of Amarendra under section 64(iii) of the Income Tax Act, held as under (headnote):

"Held, it has been held by the Supreme Court in the case of CIT v. C.M. Kothari (1963) 49 ITR (SC) 107, that if two transfers are interconnected and are parts of the same transaction in such a way that it can be said, that the circuitous method has been adopted as a device to evade implications of section 16(3)(a)(iii) of the 1922 Act, the case will fall within the section. It was contended for the assessee that in the case before the Supreme Court, there was no trust involved and, secondly, there was no finding that there were chain transactions. This distinction 'was of little consequence. The words 'directly or indirectly' in section 64(iii) of the 1961 Act, corresponding to section 16(3)(a)(iii) of the 1922 Act, cover the case of a trust and the nature of the transaction in the instant case was similar to that which was before the Supreme Court. The assets of the assessee in the process of being transferred in favour of his wife have been deliberately and in a planned manner converted into assets of a like value in the hands of another person and on the basis of the exchange the income is indirectly reaching the hands of the assessee's wife. Consequently, section 64(iii) of the 1961 Act was applicable and the entire income from the assets transferred, by the assessee to J was includible in the income of the assessee: CIT v. Kothari (C.M.) (1963) 49 ITR (SC) 107 and CIT v. Abhijit Sen (1968) 68 ITR 23 (Cal.) followed."

In CIT v. C.M. Kothari (1963) 49 ITR (SC) 107 the Supreme Court while considering the provisions of section 16(3)(a)(iii) of the Income-tax Act, 1922, and while answering the question, whether the income arising to Mrs. C and Mrs. D from the house arose -out of the assets transferred indirectly to them by C and D, respectively and could, therefore, be included in the total income of C and D under section 16(3)(a)(iii) of the Indian Income-tax Act, 1922, held as under (headnote):

"(i) That for the purpose of section 16(3)(a)(iii) it was not necessary that the same assets belonging to the husband should have reached the wife. The assets might, in the course of being transferred, be changed deliberately into assets of alike value of another person, as happened in this case. A chain of transfers such as those in this case was comprehended by the word 'indirectly' in section 16(3)(a)(iii).

(ii) That if two transfers were interconnected and were parts of the same transaction in such a way that they could be said to have-been adopted as a device to avoid implications of section 16(3)(a)(iii) the case would fall within the section even though one was not consideration for the other in the technical sense.

(iii) That, on the facts, the gifts made by the son, D, to his mother, Mrs. C, and by the father, C, to his daughter-in-law, Mrs. D, were so intimately connected that they could not but be regarded as forming part of a single transaction. There was an indirect transfer of assets from C to Mrs. C and from D to Mrs. D and, therefore the income arising to Mrs C and Mrs. D from the property arose from assets transferred to them indirectly by C and D, respectively, and had to be included in the total income of C and D, respectively."

On the other hand, in order to support his contention, learned counsel appearing for the petitioner (sic) relied upon a decision of this Court in CIT v. S. Sivasubramaniam (1991) 189 ITR 157, wherein, while considering the provisions of section 64 of the Income Tax Act, 1961, this Court held as under (headnote):

" .that as the trust in the instant case was created by the brother of the assessee, the creation of the trust and the contribution to it by the assessee's brother could not, in any manner, be attributed to the assessee or to any Act on his part. The reduction in the share of profits of the assessee from 55 per cent. to 35 per cent. was not relatable to any Act of transfer on the part of the assessee for there was no transfer as such by the assessee of a 20 per cent. share of the profits in favour of the trust. The reduction in the share of profits of the assessee could at best be attributed to an Act of the firm at the time when the trust was taken in as a partner in consideration of the capital contribution made by it and not by the assessee. Even assuming that the assessee had relinquished his interest in his share of profits to the extent of 20 per cent., that would at best be a surrender in favour of the firm and not in favour of the minor children of the assessee. Consequently, there was no transfer of assets by the assessee in favour of his minor children or for their benefit even indirectly. The Tribunal, was therefore, right in deleting the addition of the share income of the trust in the assessment of the assessee for the assessment years in question "

Learned counsel also relied upon a decision in CIT v T.G.K. Raman (1995) 214 ITR 111, wherein this Court while considering section 64 of the Act, held (headnote):

....that a plain reading of the trust deed showed that the benefit was not given to the minor during his minority, but upon his attaining majority. Section 64(1)(v) was not, therefore, applicable.The Tribunal was right in excluding the dividend from the sharesfrom the total income of the assessee. "

Our attention was also drawn to a decision of the Supreme Court in CIT v. M.R. Doshi (1995) 211 ITR 1, where the Supreme Court, while considering the provisions of section 64(v) (prior to amendment in 1971) held as under:

...that the specific provision of the law under section 64(v) (as it stood before amendment in 1971) was that the immediate or deferred benefit should be for a minor child. As the deferment of benefit in this case was beyond the period of minority of the assessee's three sons, and the payment was to be made after each of the sons attained majority the provisions of section 64(v) had no application and the income of the trusts was not to be included in the total income of the assessee. "

On the facts, it was pointed out that even though three gifts were made by the grandmother in favour of the grandchildren by creating a trust. no income was applied by the trust to the benefit of the minor children in the assessment year under consideration. According to the assessee, the income was accumulated. It was further submitted that for making gift, the grandmother paid the gift tax. It was also further submitted that the trust was assessed under section 161 of the Income Tax Act, and section 21 of the Wealth Tax Act on the income derived by the trust on behalf of the minor children and the corpus in the hands of the trust respectively. Thus, the net wealth of the three minor children in the hands of the trust was also assessed in the assessment of the trust under section 21 of the Wealth Tax Act Inasmuch as, on an appraisal of facts, the Tribunal came to the conclusion that there is no income arising to the minor children in the assessment year under consideration on the gifts made by the grandmother by creating the trusts, there is no question of levying any tax by applying the provisions of section 64(1)(vi) of the Income Tax Act, 1961. For the same reasons, it is also not possible to levy wealth tax under section 4(1)(a)(v) of the Wealth Tax Act, 1957. Inasmuch as on the facts, the Tribunal recorded a finding that there is no income arising in the assessment year under consideration in the hands of the beneficiaries, there is no point in applying the provisions of section 64(1)(vi) of the Income Tax Act, 1961, and section 4(1)(a)(v) of the Wealth Tax Act, 1957. Under such circumstances, we consider that there is no purpose served in deciding the question whether there is any indirect transfer in the present cases on the facts available on record.

In so far as the wealth tax assessment is concerned, according to the Department, the net wealth in the hands of the beneficiaries is includible in the hands of the grandmother, since there is indirect transfer. Section 4(1)(a)(v) states that 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 June 1, 1973, otherwise than for adequate consideration. According to the facts, as stated by learned counsel appearing for the assessee, the net wealth in the hands of the minor beneficiaries was stated to be assessed in the hands of the trust, under section 21 of the Wealth Tax Act, 1957, since the trust was considered to be holding the net wealth of the minors. Inasmuch as the net wealth of the minor beneficiaries was assessed in the hands of the trust under section 21 of the Wealth Tax Act, 1957, we consider that another assessment in the hands of the grandmother is not warranted, since it cannot be said that she is holding the net wealth in her hands, after the gifts were made to the trust

Accordingly, on the basis of the facts recorded by the Tribunal, we answer the questions referred to us in both the tax cases in the affirmative and against the Department. However, we made no order as to costs.

M.B.A./1706/FC Reference answered.