Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs T. Ponnaiah on 18 November, 1987
Equivalent citations: [1988]172ITR269(AP)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT B.P. Jeevan Reddy, J.
1. The Income-tax Appellate Tribunal has referred the following question under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court :
"Whether, on the facts and in the circumstances, of the case, the Income-tax Appellate Tribunal was right in concluding that the income from the properties settled 'in trust in favour of the minor beneficiaries could not be clubbed with the income of the assessee under Section 64(1)(vii) ?"
2. The assessee is an individual. He was the owner of the house bearing Municipal No. 8-3-1032, Sreenagar Colony, Hyderabad. On April 14, 1975, he settled a half share in the said house in favour of his major son, Sri Paul Ravinder Ponnaiya. By another settlement deed dated July 2, 1976, he settled the other half of the house under a trust for the benefit of his two minor sons, Ezekiel and Immanuel. The elder/major son, Paul, was appointed the trustee. The object of the trust dated July 2, 1976, with which alone we are concerned herein, was to provide for the education of the two minor children. The wife of the assessee was named as the alternative trustee. The trust deed provided that from the income accrued each year, the amount remaining after meeting the expenses on managing the trust and all expenses of the beneficiaries necessary and incidental to their education, should be accumulated and handed over to the minors on their attaining majority. The half share in the property was also to be handed over to the minors on their attaining majority. For the assessment years 1977-78 and 1978-79, the Income-tax Officer held that the income arising from the half share settled for the benefit of the minors ought to be included in the income of the assessee. On appeal, however, the Appellate Assistant Commissioner held that it cannot be so included. The Revenue carried the matter to the Income-tax Appellate Tribunal. Relying on certain decisions of the High Courts, the Tribunal held that Section 64(1)(vii) of the Act has no application to the income accumulated. It, however, observed that in so far as the income which is actually applied for the education and maintenance of the minors is concerned, it is liable to be included in the income of the assessee under Section 64(1)(vii), Thereupon, the question aforesaid was asked to be referred by the Revenue and was referred.
3. Section 64(1)(vii) of the Act, in so far as it is relevant, reads as follows :
"64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly--......
(vii) to any person or association of persons from assets transferred directly or indirectly otherwise than for adequate consideration to the 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."
A reading of the above provision shows that it provides that while computing the total income of any individual, all such income as arises directly or indirectly to any person/association of persons from assets transferred directly or indirectly otherwise than for adequate consideration, to the extent to which the income from such assets is for the immediate or deferred benefit of the individual's spouse or minor child, or both, shall be included. The controversy pertains to the meaning to be placed upon the words "to the extent to which the income from such assets is for the immediate or deferred benefit of his......minor child...".
4. The contention urged for the assessee is that where the income from a property transferred to a trustee for the benefit of the minor child of the individual is directed to be accumulated and paid over to the minor only on his attaining majority, it cannot be said that there is any benefit to the minor, whether immediate or deferred. According to this view, only where the benefit is deferred but that deferred benefit is payable during the minority, can it be said that it is for the benefit of the minor, and it can be included in the income of the parent. On the other hand, the contention urged by the Revenue is that, all that one has to see is whether in a given year, any benefit--whether immediate or deferred--is provided to the minor child from property transferred to a trustee and if the above requirement is satisfied, Section 64(1)(vii) is satisfied. According to this view, even where the income is to be accumulated and paid over to the minor on his attaining majority, such income is liable to be included in the total income of the parent.
5. In our opinion, the trust deed concerned herein does not answer either of the two extreme contentions advanced before us. The deed concerned herein, viz., the one executed on July 2, 1976, does not say that the entire income from the half share in the house settled thereunder should beaccumulated and paid over to the minors only on their attaining majority. On the other hand, it contemplates that the income arising every year should be spent upon the education and maintenance of the two minor children and that only the amount remaining, if any, should be accumulated and paid over to the minors on their attaining majority. It may well happen that in a given year, no balance may be left for accumulation. It is in the light of the above language of the deed that the Tribunal has answered the question in the manner it did. It opined that the income actually spent upon the minor children should be included in the total income of the assessee, but the income which is accumulated each year cannot be so included. The question is whether the Tribunal was right in so holding. There is no doubt that the decision of the Tribunal is entirely based upon the decision of the Gujarat High Court in Addl. C1T v. M.K. Doshi and more particularly that of the Bombay: High Court in Yogindraprasad N. Mafatlal v. CIT .
6. On a consideration of the contentions urged by both the parties, we are inclined to agree with the opinion of the Bombay High Court in Yogindraprasad N. Mafatlal v. CIT . In this decision, it has been pointed out that the words "immediate or deferred benefit" are capable of two interpretations, namely, (i) deferred benefit means benefit which is deferred, irrespective of the fact whether the deferment is within the minority of the child, or beyond his minority, and (ii) that the deferment should necessarily be within the minority of the child, and if the deferment is beyond his minority, it cannot be said that it is a benefit to the minor. The Bombay High Court then examined the legislative history of the said provision and its underlying object, in extenso; and held on that basis that the expression " deferred benefit " must be construed as deferment within the minority of the child, and that if the deferment is beyond the minority of the child, it cannot be said to be a benefit to the minor. In other words, it was held that deferred benefit must be construed as being a benefit deferred to a year subsequent to the accounting year in which the income is taxable, so long as it is not deferred beyond the minority of the child. Once we accept the Bombay High Court's view as correct, it would follow that the course adopted by the Tribunal is the correct one, viz., that the income actually spent upon the minors in a given accounting year should be included in the total income of the parent for the assessment year relevant to that accounting year, and that portion of the income, if any, which has been accumulated for being paid over to the minors on their attaining majority, cannot be so included.
7. As against the view taken by the Bombay High Court, learned standing counsel for the Revenue sought to press into service certain decisions of other High Courts which we may presently refer. In M.S.M. Ratnaswami Nadar v. CIT , the Madras High Court was considering a case under Section 16(3)(a)(iv) of the Indian Income-tax Act, 1922 (which corresponds to Section 64(1)(v) of the 1961 Act). It was observed that since educating the children is the obligation of the parent, transfer of a property with the purpose of utilising its income for children's education is a device and, therefore, should not be allowed. It is clear that this decision does not consider or pronounce upon the controversy in issue before us. Similarly, the decisions of the Bombay High Court in Shardaben Jayantilal Mulji v. CWT and K.M. Sheth v. CIT/CWT do not deal with the aspect with which we are concerned herein and which has been dealt with by the Bombay High Court in Yogindraprasad N. Mafatlal v. CIT .
8. For the above reasons, we answer the question referred in the affirmative, i.e., in favour of the assessee and against the Revenue. No costs.