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Karnataka High Court
Commissioner of Income-tax, Karnataka-I, Bangalore - Appellant
Versus
M.D.Veeranarasimhaiah - Respondent
Decided On : 06-24-88
I.T.R.C. : 145 of 1981
Income-Tax - Trust Deed - Section 64 (1) (vii) - Summary of Acts and Sections: Income-Tax Act, 1961, Section 64 (1) (vii)
Fact of the Case:
The assessee, an individual, had created trusts for minor children, and the share income received by the trusts from the firms was apportioned equally between the beneficiaries and taxed in their hands. The Commissioner of Income Tax set aside the assessments and directed the Assessing Officer to add the sums of money, contending that the deferred payment to the minors would be income arising indirectly to the assessee.
Finding of the Court:
The court found that the minor children had no beneficial interest under the trust-deed during the subsistence of the trust, and the deferred benefit was payable on the extinguishment of the trust, which was beyond the period of minority of the child. Therefore, the clubbing clause under section 64 (1) (vii) was not attracted and could not be applied.
Issues: The crucial question was whether any benefit that accrued to the minor children of the respective assessees could be included in the total income of the assessee.
Ratio Decidendi: The court held that the provisions of Section 64 (1) (vii) were not attracted if the enjoyment of benefit in the income or corpus was postponed beyond the period of minority of the child. The court followed the decisions of the Bombay, Gujarat, and Andhra Pradesh High Courts, which held that in cases of accumulation and payment being made to the minors only on their attaining majority, the income would have to be treated as deferred income and could not be treated as having been received or accrued in the relevant year in question.
Final Decision: The court's answer to the question referred was in the affirmative and against the revenue.
( 1 ) THE Income-Tax Appellate Tribunal, bangalore Bench, Bangalore, has referred at the instance of the Department, the following question under Section 256 (1) of the Income-Tax Act, 1961 (hereinafter referred to as the Act) for the opinion of this Court :"whether, on the facts and in the circumstances of the case, the I. T. A. T. is right in holding that the provisions of Section 64 (1) (vii) do not apply in the present case ? "
( 2 ) THE assessee in this reference is an individual. M/s D. L. Narasimhaiah family Trust and M/s. M. D. Veeranarasimhaiah family Trust are partners in the registered firms of M/s. Jaya and Co. , and m/s. D. L. Narasimhaiah and Brothers. D L. Narasimhaiah is the other partner in the firm M/s. D L. Narasimhiah and Brothers while M. D. Venkatanarasimhiah is the other partner in the firm M/s. Jaya and Co. In the D. L. Narasimhaiah Family Trust the beneficiaries are the 5 minor children of the said Narasimhaiah represented by their mother, trustee in the firm of M/s. Jaya and Co. Similarly in the Veeranarasimhiah trust the 3 minor children of veeranarasimhiah are represented by their mother as the trustee in the registered firm of Narasimhiah and Brothers. The said two trusts were created on 29-11-1969 and they were registered on 4-12-1969.
( 3 ) A sum of Rs. 10,000/-was settled by M. D. Veeranarasimhaiah in favour of the trust created by him ; while D. L. Narasimhiah settled a sum of Rs. 9999/- in favour of the other trust. The trust funds were invested in the said two firms and the trust-funds became partners in the respective firms. For the assessment year 1976-77, the share income received by the respective trusts from the firms were apportioned equally between the respective beneficiaries and taxed in their hands.
( 4 ) THE trust deed provided that the income arising from the property of the trust shall be accumulated until the termination of the trust It is only on the determination of the trust, the monies accumulated and the trust fund are to be distributed among the beneficiaries at the time of the declaration of the trust. The beneficiaries were minors. However, the assessee in this case did not return the income from the share of the firm as arising directly or indirectly to the minors from the assets transferred to them. This sum was also not assessed by the Incometax officer But the Commissioner of income Tax in exercise of his suo motu powers of revision under Section 263 of the Act, set-aside the assessments and directed the Assessing Officer to add the said sums of money. The Commissioner was of the view that even the deferred payment TO the minors would be income arising indirectly to the assessee and therefore should be added under Section 64 (1) (vii) of the Act.
( 5 ) THE assessee filed an appeal before the Tribunal contending thai, inasmuch as, the trust was to last for a period of 20 years, all the beneficiaries would be majors by the time they receive the benefit and they would have passed the stage of minority by then and hence the same is not liable to tax in the hands of the assessee.
( 6 ) THE Revenue took the stand that the benefit though not immediate was a deferred one arising out of an asset. The transfer of the benefit of minors and such income should be added back notwithstanding that the money would not be received by the minor children before he/ she becomes a major. But the Tribunal, following a decision of the Gujarat High court in the case of M. K. Doshi (122 ITR 499) and H. H. Maharani Shri Vijaya kunverba Saheb of Morvi and others (99 itr 162) took the view that where the benefit is received only after attaining the majority, the provisions of Section 64 (1) (vii) of the Act cannot be applied. The tribunal observed that admittedly on the facts of this case, the minor children of the assesses can receive no benefit during their minority, and in that view of the matter, allowed the appeals and reversed the order of the Commissioner. Thus the crucia
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