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TMI Blog1983 (11) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... hna Reddiar and Kannan were partners in a firm known as V.S. Kumaraswamy Reddiar. The firm was first constituted on 14-8-1969 and on that day Kannan, who was a minor, was admitted to the benefits of partnership. When he became a major, he opted to be a partner and a fresh deed of partnership was executed on 16-8-1971. The father had 55 per cent share and the sons 15 per cent share each in the firm. On 1-4-1972, a trust known as 'V.S. Kumaraswamy Trust' was created under a trust deed of the same date. The business carried on by the firm was transferred to this trust with effect from the same date. The trustees were Shri Kumaraswamy Reddiar, the father, and Shri Nagaraja Reddiar, one of the sons. The beneficiaries were the wife and the sons of Shri Kumaraswamy Reddiar excepting Shri Nagaraja Reddiar and the wife and sons of Shri Nagaraja Reddiar. The ITO had treated Kannan, one of the sons of Kumaraswamy Reddiar, who is one of the beneficiaries, as a minor, though he was actually a major. 4. The capital of the trust was constituted by certain amounts transferred by the four partners of the firm. Shri Kumaraswamy Reddiar purported to transfer the amounts on behalf of the wife and chi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stituted with amounts which were transferred to the minors and that the minors were incompetent to constitute the trust. The AAC held that the constitution of the trust was not invalid. The department came up in appeal before the Tribunal. The Tribunal also held that the constitution of the trust is valid. It was held that the transfer of the fund was by the partners of the firm to the trust and not to the minors. It was relying upon this finding of the Tribunal that the AAC held that there was no cross transfers by the two assessees to the wife and children of the other. Aggrieved by the same, the department has come up in appeal. 7. The contentions of the learned departmental representative were to the following effect. The beneficiaries under the trust deed are the wife and children of the two assessees. The amounts were transferred by the two assessees to the accounts of the wife and children of the other in the trust. It was, therefore, a case of cross transfer of the funds by one assessee to the wife and children of the other assessee. The finding of the Tribunal regarding the validity of the trust does not affect the matter. Clauses (iii) and (iv) of section 64 are clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual from the membership of the spouse in a firm carrying on a business in which such individual is a partner ; (ii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm in which such individual is a partner ; (iii) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart ; (iv) subject to the provisions of clause (i) of section 27, to a minor child, not being a married daughter of such individual, from assets transferred directly or indirectly to the minor child by such individual otherwise than for adequate consideration ; and (v) to any person or association of persons from assets transferred 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." The case of the department is that the transactions in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the moneys transferred from the capital accounts of the partners were for the purpose of the trust fund, i.e., it is not a straight gift to the minors and later this being made a subject-matter of the trust. It is not a case of two different transactions as viewed by the department. There is no initial gift to the minor and later a transfer to the trust. There is only one transaction, a transfer from the capital account to the trust fund. So the settlor in respect of these amounts is really the four partners whose accounts have been debited. The minors did not at all come into the picture. These amounts had been given by the four partners to a trust which is going to be formed on the next day. For the one day, i.e., 31-3-1972 when the debits were really made the four partners were holding these funds as trustees to be handed over to a trust which is to formed on the next day. On this account we are unable to see any invalidity in the trust." The matter went up before the Hon'ble High Court in reference and the decision in the case of V.S. Kumaraswamy Reddiar Trust. The High Court held the provisions of the various agreements and the trust deed, in our opinion, make it clear th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the wife and children. This was followed by the Bombay High Court in the case of Keshavji Morarji. The ruling of the Calcutta High Court in the case of A.N. Chowdhury, is also to the same effect. It is true that the Calcutta High Court has taken a different view in Sital Chowdhury v. CIT [1979] 119 ITR 698. But it is found that the High Court has not entered a clear finding whether the matter falls under clause (v) or the matter falls under clause (iii) and has treated the matter as concluded by the decision of the Supreme Court in C.M. Kothari's case. Before us, the learned departmental representative had relied upon the said decision of the Supreme Court. But in the case before the Supreme Court, the cross transfer of the assets was to the wife and children and it was not a case of transfer to a trust. The Supreme Court ruling has been distinguished for this reason by the Bombay High Court in the rulings referred to above. With great respect, we are inclined to follow the decision of the Bombay High Court and to hold that when the transfer is not to the wife and children but to a trust, only clause (v) will be attracted, in which case, the contentions of the department has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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