TMI Blog1967 (10) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... daughters. There were five trustees appointed for each trust and all the five persons were the same in respect of all the trusts, J. J. Kapadia being himself one of the trustees. The terms of the trusts in favour of the sons were identical and so were the terms of the trusts of the daughters also. Under clause (1) of each of the trusts, the property transferred under the trust, which, as we have already pointed out, was shares, debentures and securities in the case of the sons and debentures in the case of the daughters were to be held by the trustees subject to the powers, provisions, agreements, and declarations contained in the trust deed. In the trusts in favour of the sons it was provided that the trustees shall pay the net income of the trust to the son during his lifetime and after the death of the son, the property would be held for such persons as were specified in the trust deed. It was further provided that during the minority of the son, the income to which he was entitled under the trust would be applied towards the maintenance, education, advancement or benefit of the minor and the balance would be accumulated. In the case of the daughters, the trustees were directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not revocable for a period of six years and two months from the date of their execution. In the course of the assessment for the assessment year 1944-45, for which the corresponding account year of the assessee was the Samvat Year 1999, the Income-tax Officer found that the trustees were themselves dealing in shares and the income earned by them would be income includible in the assessment of the settlor, J. J. Kapadia, under section 16(3)(b) of the Indian Income-tax Act. This decision of the Income-tax Officer, however, was reversed by the Appellate Assistant Commissioner in appeal, who took the view that it was not possible to hold that the trustees were dealing in shares. No appeal was taken to the Tribunal by the department against the decision of the Appellate Assistant Commissioner. It appears that for the next two years, i.e., for the assessment years 1945-46 and 1946-47, the department followed the view taken by the Appellate Assistant Commissioner in the assessment for the year 1944-45. For the assessment years 1947-48 and 1948-49, however, which corresponded to the previous years, viz., Samvat years 2002 and 2003, respectively, the Income-tax Officer scrutinized the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on business in shares ? 2. Whether the finding of the Tribunal that the income-tax authorities were right in including under section 16(3) of the Income-tax Act, income in respect of dealing in shares in the appellants' assessment is justified in law ?" The Tribunal accordingly drew up a statement of the case and referred the said questions to this court. The reference first came before us on the 3rd of March, 1967, when it was found that a further statement will have to be called for from the Tribunal for the proper disposal of the reference, inasmuch as neither the order of the Tribunal nor the statement of the case drawn up by it supplied the material on which the conclusions of the Tribunal were arrived at. This court accordingly directed the Tribunal to submit a further supplemental statement of the case and, in pursuance of the said direction, the Tribunal has submitted a further statement of the case. Now, the first question relates to the Tribunal's finding that the trustees of the trusts created by the late Mr. J. J. Kapadia were carrying on business in shares. The material relating to the said question consists of the transactions in shares carried on by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness activity, had not properly scrutinised the material on record and had omitted to consider several important and material circumstances which indicated that there was no business activity involved in the transactions of the trustees. It was thus pointed out that the trustees all along had nursed the investments, which had been transferred to them on trust : disposing of some of them and going in for others in the best interest of the trust. The sale proceeds realised by the sale of the shares were reinvested in purchase of other shares and the holding was augmented from year to year. The course of dealings would also show that a consistent attitude was maintained in all the trusts under their management which indicated that what was being done by the trustees was not with a view to doing business but with a view to safeguarding the interests of the trusts. The course of the transactions also indicated, it was urged, that the shares and securities were not being dealt with as stock-in-trade in the manner in which a person dealing in them would do, inasmuch as there was no fluctuation either way in the holding but the holding has only steadily increased during the course of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not from the original holding but from the later purchases, which would mean that the shares sold were those which had been freshly purchased by the trustees after the execution of the trust. This conduct is hardly consistent with the conduct of an investor in shares, and, on the other hand, is quite consistent with the conduct of a dealer. It would be seen from the statement submitted that shares of the Belapur Sugar, which were purchased in the Samvat year 2002 have been sold out at a loss in the Samvat year 2003. If the said shares were purchased in Samvat year 2002 by way of investment, there is hardly any reason why they should have been sold out in Samvat year 2003 at a loss. In view of the short interval between the purchase and the sale, it would appear that the transaction is not consistent with its being a transaction of investment. In the case of the trusts in favour of the daughters, the assets settled were debentures of 3 scrips. It appears from the statements furnished that in the first year, i.e., Samvat year 1999, a few new scrips were purchased by the trustees and the total holding augmented from Rs. 1,50,000 to Rs. 1,57,681. In the Samvat year 2000, there was no a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Income-tax Act. That section provides as follows : " In computing the total income of any individual for the purpose of assessment, there shall be included--- (a) so much of the income of a wife or minor child of such individual as arises directly or indirectly----... (iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart or (iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration ; and (b) so much of the income of any person or association of persons as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both." What we have to consider in the present case is whether the income from business of dealing in shares and securities carried on by the trustees can be said to be the income arising from the assets transferred by J. J. Kapadia to the trustees for the benefit of his minor children. It is argued by Mr. Mehta, the learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to determine whether the income arises from the transferred assets, it would be relevant and necessary to consider the intention of the transferor in transferring the assets and what he contemplated should be done with the transferred assets. The transferor, in the present case, was himself one of the trustees. He was himself a dealer in shares and he had directed the trustees if they chose to deal in the transferred assets, which were shares and securities, to do so. Mr. Joshi has argued that in these circumstances the transfer of assets was intended to enable the transferee to employ the transferred assets as stock-in-trade and carry on dealings with them, and in view of this intention of the transferor, the income which has been earned by the employment of the transferred assets in the manner intended and indicated by the settlor, would be income from the transferred assets. Now, in our opinion, income arising from the assets within the meaning of section 16(3)(b) must be income, which directly arises from the assets as its source and not income, which is obtained by a process of a complex activity in which aid or help of the transferred assets is taken. It may be po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning of the income would not be sufficient to treat it as the income arising from the transferred assets. If, under the trust, the business as a going concern was itself transferred and the trustees had carried on the said business and earned income, the said income could have been qualified as income arising from the transferred assets. There is, however, no doubt that there has been no transfer of the business under any of the trust deeds and, consequently, the business carried on by the trustees could not be treated as business, which was transferred to them on trust. In our opinion, therefore, the Tribunal was not right in taking the view that the income in respect of the dealings in shares carried on by the trustees under the trusts could be included under section 16(3) of the Indian Income-tax Act in the assessment of the settlor. Our answer to the second question, therefore, must be in favour of the assessee and against the department. In the result, therefore, our answer to the 1st question is in the affirmative and to the 2nd question in the negative. Since out of the two questions referred to us, one has been answered in favour of the assessee and the other in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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