Orissa H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that clubbing of income will arise only when the income is earned and the same is utilised or enjoyed and income as is earned in the trust, is not subject to tax in the hands of the settlor?

High Court Of Orissa

CIT vs. Sri Abhayananda Rath Family Benefit Trust

Section 64(1)(vii)

Asst. Year 1984-85, 1985-86

P.C. Naik & P.K. Patra, JJ.

SJC No. 10 of 1994

21st February, 2002

Counsel Appeared

A.K. Mohapatra, for the Appellant : S.N. Ratho, M.K. Badu, S.K. Dash & S.B. Jena, for the Respondent

JUDGMENT

P.C. NAIK, J. :

The question of law which, at the instance of the Revenue, has been referred to this Court for an answer, is : “Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that clubbing of income will arise only when the income is earned and the same is utilised or enjoyed and income as is earned in the trust, is not subject to tax in the hands of the settlor?”

The background facts are that individual Shri Abhayananda Rath, a Government servant, had taken a loan from the housing building fund of the Government and constructed a house. He had four minor children—three daughters and a son. On a desire that his minor children or his wife should not dispose of the property in question at any time but enjoy the same as beneficiaries, he created a trust in accordance with law. It was incorporated in the trust deed (settled by him) that every minor child after attaining the age of majority would get the benefit of 25 per cent share from the accumulated rent, the benefit for which is deferred. The house in question at that relevant time was fetching a yearly rental income of Rs. 1,000. These facts are not disputed.

The assessee, Shri Abhayananda Rath, has filed a return on 30th June, 1985, showing total income of Rs. 36,235. He had also filed a return for the asst. yr. 1984-85 as trustee of Abhayananda Rath Family Benefit Trust and protective assessment was completed. The AO, on the basis of the order of assessment for the year 1984-85 held that the income from the house property, as shown in the hands of the trust, is to be treated as the income of the individual Abhayananda Rath. It was held that as it was a case of diversion of income and that the income had already accrued to the minor children, it was liable to be included in the hands of the trust for the purpose of assessment of income under s. 64(1)(vii) of the Act. Hence, a sum of Rs. 37,173 being the income from the trust property, was added to the total income of the assessee-appellant. This led to the filing of two separate appeals— one by the individual Abhayananda Rath and the other by the Abhayananda Rath Family Benefit Trust. On a consideration of the matter, the Dy. CIT (A) was of the opinion that “at best there can be deferred benefit which is payable beyond the period of minority of the children. The deferred benefit not being for minor children, the clubbing clause under s. 64(1)(vii) of the IT Act is not attracted and cannot be applied to this case. “Accordingly, the appeals were allowed and the protective assessment was held to be unjustified. Consequently, an order was passed treating the assessment as a regular assessment of the applicant accepting the status of an AOP and the total income declared. Aggrieved by the said orders which related to the years 1984-85 and 1985-86, the Revenue went up in appeal before the Tribunal, Cuttack Bench, Cuttack (in short “the Tribunal”). Being of the view that the income was set aside and deferred and the beneficiaries being minors have no right to enjoy the income, the Tribunal upheld the view taken by the Dy. CIT(A) and consequently dismissed the appeals. Dissatisfied with the said order, the Revenue moved the Tribunal under s. 256(1) of the IT Act, 1961 (in short, “the Act”), seeking a reference to the High Court and the Tribunal, being of the opinion that a question of law does arise out of the Tribunal’s order, dt. 30th Jan., 1991, disposing of IT Appeals Nos. 103 and 104 of 1989, drew up a statement of case and referred the question stated above to this Court for its opinion.

4. Before the proceeding further we may make a reference to para XIV of the trust deed which clearly provides that after the cessation of the benefits to the beneficiaries, the corpus together with accretion and accumulated income therefrom shall pass on to Smt. Snehaprabha Rath (wife of the settlor) provided she survives. Otherwise, they shall belong to the son and the daughters in equal shares and in the absence of any one or more beneficiaries, shall belong to the other surviving beneficiaries. The name of the settlor, Abhayananda Rath, nowhere figures as beneficiary in the trust deed. Indeed, it is held so by the Dy. CIT(A) which has been affirmed by the Tribunal which has also taken the view that the income is set apart and deferred and that the beneficiaries have no right to enjoy the same till they attain majority. Thus, as is clear from the trust deed, a major does not have any vested interest in the property in question while he/she is a minor and the income gets capitalised from year to year. The income as per the said deed vests only on his/her attaining majority.

5. At this stage, it would be appropriate to quote the provisions contained in s. 64(1)(vii) of the Act (as it stood at the relevant time) which reads thus : “64. Income of individual to include income of spouse, minor child, etc.—(1) In computing the total income of any individual, there shall be included in such income as arises directly or indirectly—. . . . . .. (vii) to any person or AOP from assets transferred directly or indirectly otherwise than for adequate consideration of the person or AOP by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.”

The question, which needs to be considered is whether the income from the trust property could, in the facts and circumstances of the case, be incuded in the income of the individual.

As we have observed earlier, the income in terms of the trust deed vests in the beneficiaries when they attain majority. No income under the said deed vests in or comes to the hands of any minor child nor does any income accrue to him or her. Thus, it is apparent that no minor child has any vested interest in the income arising from the trust property while he/she is a minor and the income is to get capitalised from year to year. Thus, as no income vests in or comes to the hands of any of the minor children nor does any income accrue to him/her, the question of including any such income in the hands of the settlor, who is the father, does not arise. In other words, as no income accrues to a minor, the provisions contained in s. 64(1)(vii) of the Act neither can get attracted nor can apply to the case at hand.

At this juncture, a reference may be made to the decision of the apex Court in CIT vs. M.R. Doshi (1995) 211 ITR 1 (SC) : TC 42R.571, which was a matter involving s. 64(1)(v) of the Act where it has been laid down that in computing the total income of an individual, there shall be included all such income as arises directly or indirectly from assets transferred, otherwise than for adequate consideration, to a person or association of persons by such individual to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both. Under the trust deed, in that case, the income therefrom was to be accumulated until the attainment of majority by the assessee’s sons and the cumulative income was then to be divided in three equal shares and one such share was to be paid to each son. Payment, therefore, was to be made after the sons attained majority. Considering the statutory provisions of s. 64(1)(v) of the Act, the apex Court observed that inasmuch as the deferment of the benefit is beyond the period of minority of the assessee’s sons, since the assets are to be received by them when they attain majority, the provisions of s. 64(1)(v) have no application. This proposition of law squarely applies to the facts of the case at hand, for the immediate or deferred benefit under the statute is not for the benefit of a minor child.

We may observe that as the provisions in question relates to creating a artificial income in the hands of the assessee, it has to be strictly construed, as has been observed by the apex Court in CIT vs. Keshavlal Lallubhai Patel (1965) 55 ITR 637 (SC) : TC 42R.719 and CIT vs. Prem Bhai Parekh (1970) 77 ITR 27 (SC) : TC 42R.680. We may reiterate that the provisions contained in s. 64(1)(vii) of the Act can only apply in a case where the child is a minor at the time of receiving or enjoying any benefit out of the transferred property. If that were not so, the provision would have not been worded in the manner it has been done. As has been observed in Cape Brandy Syndicate vs. IRC (1921) 1 KB 64 : 12 Tax Cases 358, which has been noticed by the apex Court in CIT vs. Keshavlal Lallubhai Patel (supra), “in taxation you have to look simply at what is clearly said. There is no room for any intendment, there is no equity about a tax, there is no presumption as to a tax, you read nothing in, you imply, nothing, but you look fairly at what is said and at what in said clearly and that is the tax”. It, therefore, follows that the provisions in question has to be read as it stands and the consequences flowing from such reading are to follow. From a bare reading of the provision, as it stood at the relevant point of time, one finds that for an artificial fiction to be received by the beneficiaries when they attain majority, the said provision will not be attracted.

10. It was then contended by learned counsel for the Revenue that the trust has been created by the assessee for the purpose of avoidance of tax. What, in substance, is contended is that for the purpose of evading tax, the trust was brought into existence. This contention cannot be accepted. “Evading payment of tax” is quite different from “tax planning”. A person may plan his finances in such a manner, strictly within the four corners of the taxing statute that his tax liability is minimised or made nil. If this is done and as observed strictly in accordance with and taking advantage of the provisions contained in the Act, by no stretch of imagination can it be said that payment of tax has been evaded. In the context of payment of tax, “evasion” necessarily means, “to try illegally to avoid paying tax”. But, as in the instant case, a trust has been created in accordance with law and creation of such a trust is not hit by any of the provisions contained in the Act, one fails to understood how creation of such a trust can be said to have been created “illegally to avoid payment of tax”.

For the reasons aforesaid, the reference is answered against the Revenue and in favour of the assessee.

P.K. PATRA, J. :

I agree.

[Citation : 255 ITR 436]

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