Full Judgment Text
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PETITIONER:
TULSIDAS KILACHAND
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX,BOMBAY CITY I.[And connected
DATE OF JUDGMENT:
03/01/1961
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
KAPUR, J.L.
SHAH, J.C.
CITATION:
1961 AIR 1023 1961 SCR (3) 351
CITATOR INFO :
RF 1961 SC1059 (6)
RF 1968 SC 189 (13)
R 1972 SC 7 (22)
R 1981 SC1274 (25)
ACT:
Income Tax-Holder of shares becoming trustee for the benefit
of wife-Liability to tax of such shareholder--"Adequate
consideration", meaning of-Indian Income-tax Act, 1922 (11
of 1922), ss. 16(1)(c), 16(3)(a)(iii), 16(3)(b).
HEADNOTE:
By a deed dated March 5, 1951, the appellant made a
declaration of trust in favour of hiswife as follows: "I
hereby declare that I hold 244 sharesupon trust to
pay the income thereof to my wifefor a period of
seven years from the date hereof or her death (whichever
event may be earlier) and I hereby declare that this trust
shall not be revocable". In the year of account, 1951, a
sum of Rs. 30,404 was received as dividend income on those
shares and the appellant claimed before the income-tax
authorities that this sum was not liable to be included in
his total income in view of the third proviso to s. 16(1)(c)
of the Indian-Income-tax Act, 1922, but this claim was
rejected on the ground that the case was covered either by
s. 16(3)(a)(iii) or by s. 16(3)(b) of the Act. The
appellant’s contention was that under the deed of trust
there was no transfer of assets either to the wife or to any
person for the benefit of the wife but merely a creation of
a trust in respect of the shares, the dividends from which
were payable to the wife, that even if it be held that there
was such a transfer, it was for adequate consideration being
for love and affection which was a good consideration, and
that thus s. 16(3)(a)(iii) or s. 16(3)(b) was not
applicable.
Held, that on a true construction of the deed dated March
15, 1951, there was a transfer of the shares by the husband
to himself as a trustee for the benefit of the wife and that
even though the husband was the same individual, in his
capacity as a trustee he must be regarded as a person
distinct from the transferor.
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Held, further, that the words "adequate consideration" in s.
16(3) of the Indian Income-tax Act, 1922, denoted considera-
tion other than mere love and affection, which, in the case
of a wife, may be presumed.
Accordingly, the present case fell within s. 16(3)(b) of the
Act and not within the third proviso to s. 16(i)(c).
Provat Kumar Mitter v. Commissioner of ’Income-tax, [1961] 3
S.C.R. 37, distinguished.
352
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 134 to 137
of 1959.
Appeals by special leave from the judgment and order dated
September 20,1957, of the Bombay High Court in Income Tax
Reference No. 14 of 1957.
R....J. Kolah, S. N. Andley, J. B. Dadachanji, Rameshwar
Nath and P. L. Vohra, for the appellants.
K....N. Rajagopal Sastri and D. Gupta, for the respondent.
1961. January 3. The Judgment of the Court was delivered by
HIDAYATULLAH, J. This judgment governs the disposal of
Civil Appeals Nos. 134 to 137 of 1959. They have been filed
by four assessees with special leave, and arise out of
similar facts, and it is not necessary to refer to more than
one case to consider the point in question.
The assessment year under consideration is 1952-53, and the
previous year, the Calendar year, 1951. In that year, Mr.
Tulsidas Kilachand, one of the four appellants, made a
declaration of trust in favour of his wife, a portion of
which may be quoted here:
"........... 1, Tulsidas Kilachand hereby de-
clare that I hold 244 shares of Kesar
Corporation Ltd. and 120 shares of Kilachand
Devchand & Co., Ltd upon trust to pay the
income thereof to my wife Vimla for a period
of seven years from the date hereof or her
death (whichever event may be earlier) and I
hereby declare that this trust shall not be
revocable."
In the year of account, a sum of Rs. 30,404 was received as
dividend income on those shares, and the assessee contended
that this income, after being grossed up, was not liable to
be included in his total income, in view of the third
proviso to s. 16(1)(c) of the Indian Income-tax Act. The
Income-tax Officer did not accept this contention, and
though the assessment order is not before us, we gather from
the statement of the case that the reason he gave was that
the income had accrued to or had arisen in the hands of
353
Mr. Tulsidas Kilachand and had been paid by him to his wife.
The Income-tax Officer held that the words of the proviso
"income arising to any person by virtue of a settlement or
disposition" did not apply to this income.
On appeal, the Appellate Assistant Commissioner held that
the case was governed by s. 16(3)(b), and need not be
considered under the third proviso. to s. 16(1)(c) of the
Act. It appears to have been conceded before him that if
the former provision applied, the proviso would not save the
income from being assessed in the hands of Mr. Tulsidas
Kilachand. The appeal was dismissed.
In the appeal before the Tribunal, Mr. Tulsidas Kilachand
again relied upon the third proviso to s. 16(1)(c), and
contended that the case was riot governed by s. 16(3)(b) and
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that the dividend income could not be included in his
assessment. The Tribunal came to the conclusion that the
case was covered either by s. 16(3)(a)(iii) or by s.
16(3)(b), and that the income from the shares was,
therefore, liable to be included in the income of Mr.
Tulsidas Kilachand. The Tribunal, however, raised and
referred the following question under s. 66(1) of the Act to
the High Court of Bombay:
"Whether on a true construction of the deed of
declaration of trust dated 5th March , 1951,
the net dividend income of Rs. 30,404 on 120
shares of Kilachand Devchand & Co., Ltd. and
244 shares of Kesar Corporation Ltd. held
under trust by the assessee for the benefit of
his wife was income liable to be included in
the total income of the assessee?
The High Court came to the conclusion that, though s. 16(1)(c)
was not satisfied in view of the third proviso, s. 16(3)(b)
was applicable to the case, and answered the question in the
affirmative.
In the appeal before us, the case for the Department was
based both on s. 16(3)(a)(iii) and s. 16(3)(b), while the
appellants contended that this disposition fell within the
third proviso to s. 16(1)(c). The relevant provisions are:
45
354
" 16. Exemptions and exclusions in determining the total
income.-
(1) In computing the total income of an
assessee....................................................
(c) all income arising to any person by virtue of a
settlement or disposition whether revocable or not, and
whether effected before or after the commencement of the
Indian Income-tax (Amendment) Act, 1939 (7 of 1939), from
assets remaining the property of the settlor or disponer,
shall be deemed to be income of the settlor or disponer, and
all income arising to any person by virtue of a revocable
transfer of assets shall be deemed to be income of the
transferor:
Provided....................................................
Provided further............................................
Provided further that this clause shall not apply to any
income arising to any person by virtue of a settlement or
disposition which is not revocable for a period exceeding
six years or during the lifetime of the person and from
which income the settlor or disponer derives no direct or
indirect benefit but that the settlor shall be liable to be
assessed on the said income as and when the power to revoke
arises to him.
(2)..............................................(omitted)
(3)..In computing the total income of any individual for the
purpose of assessment, there shall be included--
(a) so much of the income of a wife or minor child of such
individual as arises directly or indirectly-
(i)......................................................
(ii).....................................................
(iii) from assets transferred directly or indirectly to the
wife by the husband otherwise than for adequate
consideration or in connection with an agreement to live
apart; or
(b)..so much of the income of any person or association of
persons as arises from assets transferred otherwise than for
adequate consideration to the person or
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association by such individual for the benefit of his
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wife or a minor child or both."
The object of framing s. 16 can almost be taken from the
observations of Lord Macmillan in Chamberlain v. Inland
Revenue Commissioners (1), where he stated as follows:
"This legislation ... (is) designed to overtake and
circumvent a growing tendency on the part of taxpayers to
endeavour to avoid or reduce tax liability by means of
settlements. Stated quite generally, the method consisted
in the disposal by the taxpayer of part of his property in
such a way that the income should no longer be receivable by
him, while at the same time he retained certain powers over,
or interests in, the property or its income. The
legislature’s counter was to declare that the income of
which the taxpayer had thus sought to disembarrass himself
should, notwithstanding, be treated as still his income and
taxed in his hands accordingly."
These observations apply also to the section under
consideration, and the Indian provision is enacted with the
same intent and for the same purpose. Section 16 thus lays
down certain exemptions and exclusions in determining the
total income of an assessee. Some of the provisions lay
down the conditions for inclusion of certain income, while
others lay down the conditions for exclusion of other
income. We are concerned with the income accruing in case
of settlements and the conditions under which income of a
wife is treated as the income of the settlor or disponer or
as the income of the husband. We have to see if the pro-
visions for exclusion or inclusion apply to this case.
Section 16(1)(c) provides that income from assets remaining
the property of the settlor or disponer or arising to any
person by virtue of a revocable transfer of assets shall be
deemed to be the income of the transferor. What cl. (c)
means was decided by this Court in Provat Kumar Mitter v.
Commissioner of Income-tax (2). There, Provat Kumar Mitter
had assigned the dividends only, and had not transferred the
relevant shares. It was held by this Court that this
(1) (1943) 25 T. C. 317, 329.
(2) [1960] 3 S.C.R. 37.
356
was a case of application of one’s own income and not
assignment of the source from which the income was derived,
which alone saved the income from tax, subject, however, to
provisions like s. 16(1)(c) and s. 16(3). The deed in
favour of the wife in that case gave only a right to the
dividends, and not being a transfer of an existing property
of the assessee, s. 16(1)(c) and the third proviso were not
attracted. That case thus has no application to the facts
of the present case, where the disposition is differently
made.
The disposition here is for a period of seven years or the
life of the settle’ whichever is shorter. During that
period or the life of the settlee, Mr. Tulsidas Kilachand
has bound himself upon trust to pay the dividends to his
wife and not to revoke the settlement. The intention is
obviously to put this case within the third proviso to s.
16(1)(c), because cl. (c) does not apply to any income
arising to any other person provided the disponer derives no
direct or indirect benefit, even though the assets remain
his property. If it were only a question of the application
of the proviso, this disposition would be exempt. But by
the deed of trust, the settlor holds the shares in trust;
the shares do not remain the property of the settlor.
Section 16(1)(c) has, therefore, no application, and the
proviso is not attracted.
The section goes on to deal with other situations and to
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provide for them specially. Sub-section (3) provides
specially for assets transferred to the wife or minor child.
Income from assets transferred to the wife is still to be
included in the total income of the husband, (a) if the
assets have been transferred directly or indirectly to the
wife by the husband otherwise than for adequate
consideration [vide sub-s. (3)(a)(iii)], or (b) so much of
the income of any person or association of persons as arises
from assets transferred otherwise than for adequate
consideration to the person or association by such
individual for the benefit of his wife [vide sub-s. (3)(b)].
The first question is whether there can be said to be
transfer of assets to the wife or to ’any person’ for the
benefit of the wife. The second question is whether there
was adequate consideration for the transfer, if
357
there was one The contention of the assessee is that there
was no transfer of any assets at all. It is contended that
the ownership of shares involves a bundle of rights, and
that they are, generally speaking, (a) right to vote, (b)
right to participate in the distribution of assets on
dissolution, and (c) right to participate in the profits, e.
g., dividends which might be Hi, .declared. It is pointed
out that none of these rights was transferred to the wife,
because transfer of assets connotes a creation of a right in
the assets in praesenti. It is urged that there was no
transfer of assets either to the wife or to any person for
the benefit of the wife but merely a creation of a trust in
respect of the shares, the dividends from which were payable
to the wife, and that thus s. 16(3)(a)(iii) or s. 16(3)(b)
was not applicable. It is lastly contended that even if it
be held that there was such a transfer, it was for adequate
consideration, being for love and affection, which is a good
consideration.
The contention that there was no transfer at all in this
case is not sound. The shares were previously held by Mr.
Tulsidas Kilachand for himself. After the declaration of
trust by him, they were held by him not in his personal
capacity but as a trustee. No doubt, under ss. 5 and 6 of
the Indian Trusts Act if the declarer of the trust is
himself the trustee also, there is no need that he must
transfer the property to himself as trustee; but the law
implies that such a transfer has been made by him, and no
overt act except a declaration of trust is necessary. The
capacity of the declarer of trust and his capacity as
trustee are different, and after the declaration of trust,
he holds the assets as a trustee. Under the Transfer of
Property Act, there can be a transfer by a person to himself
or to himself and another person or persons. In our
opinion, there was, in this case, a transfer by Mr. Tulsidas
Kilachand to himself as a trustee, though there was no
formal transfer.
The assessee also stresses the words "any person or
association of persons" in s. 16(3)(b), and contends that
such a person must be other than the husband, who transfers.
The word "any person" is wide
358
enough to include the husband, when he transfers property to
himself in another capacity. The change of capacity makes
him answer the description "any person". This deed must be
regarded as involving a transfer by the husband to a
trustee, and even though the husband is the same individual,
in his capacity as a trustee he must be regarded as a person
distinct from the transferor. In our opinion, s.
16(3)(b) covers the case.
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It remains to consider whether there was adequate
consideration for the transfer. Reliance has been placed
only upon love and affection. The words "adequate
consideration" denote Consideration other than mere love and
affection, which, in the case of a wife, may be presumed.
When the law insists that there should be "adequate
consideration" and not good consideration", it excludes mere
love and affection. They may be good consideration to
support a contract; but adequate consideration to avoid tax
is quite a different thing. To insist on the other meaning
is really to say that consideration must only be looked for,
when love and affection cease to exist.
In our opinion, this case falls within the special rules
concerning wife and minor child, laid down in s. 16(3)(b)
and not within the third proviso to s. 16(1)(c). It must
thus be held that there was a transfer of the assets to the
husband-trustee for the benefit of the wife, The answer
given by the High Court was thus correct.
The appeals fail, and are dismissed with costs. One hearing
fee.
Appeals dismissed.
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