1983 (11) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 64 of the Income-tax Act, 1961 to the transfers of assets.
2. Validity of reopening assessments under Section 147(a) of the Income-tax Act, 1961.
3. Inclusion of income from cross-transfers in the assessees' income.

Issue-wise Detailed Analysis:

1. Applicability of Section 64 of the Income-tax Act, 1961 to the transfers of assets:
The main contention of the department was that the AAC erred in holding that Section 64 of the Income-tax Act, 1961 ('the Act') will not apply to transfers of certain assets by the two assessees, and consequently, in deleting the sums included in their income under Section 64. The department argued that there were cross gifts by Kumaraswamy Reddiar and Nagaraja Reddiar to the wife and children of each other, making the income of the beneficiaries includible in the income of Kumaraswamy Reddiar and Nagaraja Reddiar under clauses (iii) and (iv) of Section 64(1).

The Tribunal examined the trust deed and found that the transfer of funds was to the trust and not directly to the wife and children. The relevant portion of the trust deed indicated that the funds were transferred by the partners of the firm to the trust and not to the minors. The Tribunal relied on its earlier decision and the High Court's affirmation that the trust was valid and that the transfer was not directly to the minors but to the trust fund. Consequently, clauses (iii) and (iv) of Section 64(1) were not applicable.

2. Validity of reopening assessments under Section 147(a) of the Income-tax Act, 1961:
The AAC had rejected the contention of the assessees that the reopening of the assessments under Section 147(a) was bad. The Tribunal noted that the original assessments did not include the income accruing to the beneficiaries under the alleged cross gifts, leading to the reopening of the assessments. However, since it was determined that there were no cross-transfers directly to the minors or spouses, the reopening could not be upheld as no income had actually escaped assessment.

3. Inclusion of income from cross-transfers in the assessees' income:
The department argued that the amounts transferred by the two assessees to the accounts of the wife and children of the other in the trust constituted cross transfers, attracting clauses (iii) and (iv) of Section 64. The Tribunal, however, found that the funds were transferred to the trust and not directly to the wife and children. The Tribunal followed the High Court's decision that the trust was not created by or on behalf of the minors and that the funds were transferred to the trust account before the constitution of the trust.

The Tribunal also considered the applicability of clause (v) of Section 64(1), which deals with transfers to persons other than the wife and children. It was held that clause (v) was not attracted as it did not cover indirect transfers during the relevant assessment year. The Tribunal cited rulings from the Bombay High Court and the Calcutta High Court supporting this view. Consequently, the Tribunal concluded that clauses (iii) and (iv) of Section 64(1) were not applicable, and only clause (v) could be considered, which did not apply to the present case due to the absence of the words 'directly or indirectly'.

Conclusion:
The Tribunal dismissed the department's appeals, upholding the AAC's decision that Section 64 was not applicable to the transfers in question. The cross-objection by the assessee regarding the validity of the reopening was allowed, as no income had escaped assessment. The Tribunal found no reason to interfere with the AAC's findings, thereby dismissing the department's appeals and allowing the assessee's cross-objection.