1974 (7) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Assessability of trust income under section 16(3) of the Indian Income-tax Act, 1922.
2. Application of section 41 of the Indian Income-tax Act, 1922.
3. Interpretation of the deed of trust and its clauses.

Issue-wise Detailed Analysis:

1. Assessability of Trust Income under Section 16(3):

The primary question was whether the income of the trust should be assessed in the hands of H. H. Mahendrasinhji Maharaja of Morvi under section 16(3) or in the hands of the trustees under section 41. The Income-tax Officer initially included the trust income in the assessee's income based on section 16(3), which was upheld by the Appellate Assistant Commissioner. However, the Tribunal concluded that the minor beneficiary did not receive any income nor had any beneficial interest during the relevant years, and thus, the income should not be included in the assessee's income.

2. Application of Section 41:

The Tribunal's protective orders led to the assessment of trust income in the hands of the trustees under section 41(1). The revenue contended that the income should be assessed under section 16(3)(b) as it was for the minor's benefit. However, the Tribunal's decision was based on the principle that the minor did not derive any benefit during the relevant years, aligning with the Supreme Court's ruling in Commissioner of Income-tax v. Manilal Dhanji.

3. Interpretation of the Deed of Trust and its Clauses:

The deed of trust executed by the assessee for his minor son had several clauses relevant to the case:
- Clause 4: Provided for the accumulation of income until the minor reached 21 years.
- Clause 5: Allowed trustees discretionary power to use income for the minor's maintenance, education, or benefit.
- Clause 6: Permitted spending up to Rs. 3,00,000 for the minor's betrothal and marriage.
- Clause 7: Stipulated the transfer of trust funds to the minor upon reaching 21 years.

The court emphasized that the minor did not receive any income or beneficial interest during the relevant years. The Supreme Court's principles in Manilal Dhanji's case were applied, stating that for section 16(3)(b) to apply, the minor must derive some benefit in the year of account. The Calcutta High Court's decision in Chhaganlal Baid v. Commissioner of Income-tax, which suggested that the right to accumulated income constituted a benefit, was not followed as it was inconsistent with the Supreme Court's rulings.

Conclusion:

The court concluded that the income of the trust for the relevant assessment years was not assessable in the hands of H. H. Mahendrasinhji Maharaja of Morvi under section 16(3) but should be assessed in the hands of the trustees under section 41. The revenue was directed to pay the costs of the assessee.