1971 (8) TMI 19 - SC - Income Tax

Trust received gifts (shares) - we answer the questions referred to the High Court in the affirmative and in favour of the assessee - gifted shares were vested in the trustees and the trust was entitled to the dividends - as per 4(3)(i) of Indian Income-tax Act 1922 the dividends were exempt from tax and the trust was entitled to the refund

Summary

Issues:
- Validity of the gift made by Sardar Ajaib Singh
- Entitlement of the assessee to the refund of tax deducted at source on dividends accrued on the shares gifted by Sardar Ajaib Singh

Analysis:
The judgment by the Supreme Court arose from a reference under section 66(1) of the Indian Income-tax Act, 1922. The first appeal was brought by the appellant trust based on a certificate granted by the High Court under section 66A(2) of the Act, which was deemed invalid by the Supreme Court. Consequently, a Special Leave Application was filed seeking permission to appeal against the judgment. The High Court had answered two questions regarding the validity of the gift made by Sardar Ajaib Singh and the entitlement of the assessee to a tax refund on dividends accrued from the shares gifted. The High Court held that the gift was valid, but it did not augment the assessee trust, leading to the denial of the tax refund.

The facts revealed that Sardar Ajaib Singh transferred shares to the trust, reserving the right to revoke the transfer after seven years. The Income-tax Officer initially denied the tax refund, stating the gift was invalid due to lack of provision in the trust deed for receiving gifts. However, the Appellate Assistant Commissioner upheld the refund claim, asserting that the shares belonged to the assessee during the relevant year. The department appealed to the Income-tax Appellate Tribunal, arguing against the trust's competence to receive gifts and the conditional nature of the transfer. The Tribunal ruled in favor of the assessee, stating that a public charitable trust could receive gifts from the public.

The High Court, while upholding the validity of the gift, concluded that it did not augment the trust, thereby rejecting the tax refund claim. The Supreme Court found the High Court's reasoning flawed, emphasizing that if the gift was valid, the shares belonged to the trust, entitling it to the dividends. The Supreme Court disagreed with the High Court's view that the trustees were incompetent to receive the gift, highlighting that the trust deed did not prohibit such actions. Ultimately, the Supreme Court allowed the appeal, overturning the High Court's decision and granting the tax refund to the assessee. The certificate produced in a previous appeal was revoked, and the appeal was dismissed accordingly.