High Court Of Uttaranchal
Manik Chandra vs. Assistant Commissioner Of Income Tax
Sections 64(1)(iii), Expln. 2A
Asst. Year 1980-81
S.H. Kapadia, C.J. & M.M. Ghildiyal, J.
IT Appeal No. 2 of 2003
24th October, 2003
Counsel Appeared
Arvind Vashishth, for the Appellants : P. Maulekhi, for the Respondent
JUDGMENT
S.H. Kapadia, C.J. :
The above two appeals raise a common question of law and, therefore, both the appeals are heard together and disposed of by this common judgment. Both the appeals are filed by the assessee. They pertain to the asst. yr. 1980-81. For the sake of convenience, we are mentioning hereinbelow the facts in IT Appeal No. 2 of 2003.
Facts
2. The appellant, Manik Chandra, is an individual. For the asst. yr. 1980-81, he was assessed under s. 143(3) of the IT Act, 1961. The order of assessment was passed on 28th Feb., 1981. Thereafter on 31st Jan., 1985, he was served with a notice under s. 148 of the Act. He filed his return of income on 26th Feb., 1985. He objected to the reopening of assessment. The assessment was reopened for the following reasons : Nidhi Life Trust was created by one Shri Surender Goyal, brother-in-law of the assessee, by settling Rs. 7,500 in favour of the trust. Similarly, Ruchi Life Trust was created by Yogender Goyal, brother-in-law of the assessee, by settling Rs. 7,500 in favour of the trust. The minor daughters of the assessee, Km. Nidhi and Km. Ruchi, were respective beneficiaries under the aforestated trusts. Under the aforestated trust deeds the income from the trust fund was to be accumulated and held by the trustees and was to be handed over to the two daughters of the assessee on their attaining the age of 18. Under the trust deeds, the trust funds were invested in the partnership firms, M/s Chandra Brothers and M/s Commercial Body Builders, by the trusts of Nidhi Life Trust and similarly the funds of Ruchi Life Trust were invested in the partnership firm, Kailash Traders. During the assessment year in question, the two trusts earned income from the said partnership firms amounting to Rs. 1.12 lakhs which was assessed in the hands of the respective trusts with an order dt. 25th March, 1983, passed under s. 143(3) of the IT Act. However, the assessment was reopened on 21st March, 1988, with an order under s. 143(3)/148 of the IT Act and the said income of Rs. 1.12 lakhs was assessed in the hands of the assessee under Expln. 2A to s. 64(1)(iii) on the ground that the said income of Rs. 1.12 lakhs had to be clubbed with the income of the assessee in respect of the asst. yr. 1980-81. Being aggrieved by the order of reassessment dt. 21st March, 1988, the assessee went in appeal before the CIT(A). By order dt. 5th Feb., 1996, the learned CIT(A) took the view that the minors had no right to receive the income of the trust till the age of 18.
The learned CIT(A) took the view that since the minors had no right to receive the income during their minority the provisions of s. 64(1)(iii) r/w the Expln. 2A was not applicable and therefore the income of Rs. 1.12 lakhs could not be clubbed with the income of the assessee. Being aggrieved by the order passed on 5th Feb., 1996, by the CIT(A), the Department preferred an appeal before the Tribunal, New Delhi. By impugned judgment and order dt. 22nd July, 2002, the Tribunal took the view that the two trusts were created for the benefit of minor children. It was held that the income was generated by way of investments made by the trust for the benefit of the minors. It was held that the right to receive the income had accrued to the minors but payment was to be made to the minors on their attaining majority. It was further held that the income which was accumulated was for the benefit of the partners of the firm in which investment was made by the trustees and therefore s. 64(1)(iii) r/w the Expln. 2A was attracted and, therefore, the ITO was right in taxing the income of Rs. 1.12 lakhs in the hands of the assessee. Being aggrieved the assessee has filed this appeal against the decision of the Tribunal under s. 260A of the IT Act. Arguments Mr. Vashishth, learned counsel appearing on behalf of the assessee, contended that the above two trusts were created for the benefit of the minor(s). He argued that during the asst. yr. 198081, Ruchi and Nidhi were minors. That under the trust deeds income was to be accumulated till the minor attained the age of majority. That the trusts were partners in the two firms respectively. That the trust funds amounting to Rs. 7,500 in each case was invested in the respective firms. He invited our attention to the various clauses of the said two trust deeds. He contended that in order to attract Expln. 2A to s. 64(1)(iii) income should accrue to the minor(s) during the assessment year in question. That no income accrued to the minor(s) during the assessment year in question and, therefore, Expln. 2A to s. 64(1)(iii) is not attracted. In this connection, it was submitted on behalf of the assessee that two conditions were required to be satisfied in order to attract Expln. 2A to s. 64(1)(iii), namely, that the income should arise to the trustee from the membership of the trust in the firm and that such income should accrue for the benefit of the minor during the assessment year in question. Mr. Vashishth submitted that the second condition in this case is not satisfied. He argued that income has not accrued to the minors during the assessment year in question because under the trust deed the income had to be accumulated up to the age of 18 and, therefore, Expln. 2A was not attracted. He further contended that Expln. 2A was inserted by the Finance Act of 1979 only w.e.f. 1st April, 1980, and therefore Expln. 2A was not applicable to the assessment year in question. He relied upon several judgments of the High Court in support of his contention. Per contra, it was argued by Mr. P. Maulekhi, learned counsel for the Department, that the right to receive income from the investments made by the trustee in the firms had accrued to the minor (s) during the assessment year in question. He contended that under the trust deed in the event of the minor(s) getting married or in the event of the minor(s) meeting death prior to age of 18, the income was to devolve on the brothers and sisters of the minor(s) which indicated that the income had accrued to the minor(s) during the assessment year in question and only payment was deferred till the minor(s) attained the age of 18 and, therefore, Expln. 2A to s. 64(1)(iii) was applicable to the facts of this case. He contended that the right to receive income vested in the minor(s) during the assessment year in question. That the share of the minor(s) under the trust deed was specific and not indeterminate and, therefore, the income of Rs. 1.12 lakhs was taxable in the hands of the assessee.
He contended that the various judgments cited on behalf of the assessee did not apply to the facts of the present case because in the present case under the trust deed it has been stipulated that in the event of death of the minor(s) before reaching 18 years would result in devolution in favour of the younger brothers/younger unmarried sisters surviving on the date of the death of minor(s). That in the event of the marriage of the minor(s) before their death the interest of the deceased beneficiary in the corpus, income and assets of the trust fund devolved on her brother which indicated that income had accrued to the minor(s) even before attaining the age of 18 and therefore the above income of Rs. 1.12 lakhs was required to be taxed in the hands of their father, the assessee.
Questions
5. The following questions have been referred to us in the above appeals :
“(a) Whether, the Tribunal erred in holding that the provisions of s. 64(1)(iii) r/w the Expln. 2A were attracted particularly when the minor children of the assessee were not entitled to any right to the trust funds including the income from the trusts until they attained the age of majority ?
(b) Whether, in view of the decision of the Supreme Court in CIT vs. M.R. Doshi (1995) 211 ITR 1 (SC), the Tribunal erred in coming to the conclusion that s. 64(1)(iii) r/w the Expln. 2A was attracted in the facts of the present case ?
(c) Whether, the Tribunal erred in not holding that the reassessment proceedings were without jurisdiction and that no income had escaped assessment so as to attract s. 147/148 of the IT Act ?”
Our answer
6. For the reasons given hereinafter all the above mentioned three questions are answered in the negative, i.e., in favour of the Department and against the assessee.
Findings
7. Under s. 64(1)(iii), income arising to a minor from admission to the benefits of partnership, is included in the total income of that parent who has higher income, although neither of the parents is a partner in the firm to the benefits of which the minor is admitted. To counter the device, the Finance Act, 1979, inserted Expln. 2A to provide that where a minor is a beneficiary under a trust and the trust is a partner in the firm, the income arising to the trust shall be deemed to arise indirectly to the minor and to that extent such income will be included in the total income of that parent who has the higher income. In this case, Rs. 7,500 was settled in favour of each trust. The trust became the partner in the respective firms. In view of Expln. 2A the income of Rs. 1.12 lakhs which accrued to the trust was income which indirectly arose to the minor(s) by reason of the deeming fiction and therefore it was includible in the total income of the assessee. Further, under cl. 3(b) of the trust deed it is, inter alia, provided that if the minor dies before 18 the interest in the trust fund was to devolve on the younger brother/sisters of the deceased but payment was to be made to the substituted beneficiary on attaining 18. This cl. 3(b) indicates that a vested interest in the trust fund was given to the minor but payment was deferred till the age of 18 so that accrued income could be utilised by the firm for a long period. In fact, Expln. 2A was introduced in order not to allow the firms to use the income accruing for long periods. Therefore, the judgment of the Supreme Court in CIT vs. M.R. Doshi (supra) has no application to this case. Lastly, the Finance Act of 1979 came into force w.e.f. 1st April, 1980, and therefore, it was applicable to the assessment year in question. Accordingly, both the above appeals are disposed of.
No cost.
[Citation : 265 ITR 212]
