TULSIDAS KILACHAND versus THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY I.

3 S.C.R. SUPREME COURT REPORTS

351

TULSIDAS KILACHAND v. THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY I. [And connected appeals]

January J.

(J. L. KAPUR, M. HIDAYATULLAH and J. C. SHAH, JJ.) Income Tax-Holder of shares becoming trustee for the benefit of wife-Liability to tax of such shareholder-" Adequate considera tion", meaning of-Indian Income-tax Act, I9Z2 (II of 1922), SS. I6(I)(c), I6{J)(a)(iii), l6(J)(b).

By a deed dated March s. 1951, the appellant made a decla ration of trust in favour of his wife as follows: "I.. ....... hereby declare that I hold 244 shares ............ upon trust to pay the income thereof to my wife ......... for a period of seven years from the date hereof or her death (whichever event may be earlier) · and I hereby declare that this trust shall not be revocable". In the year of account, 1951, a sum of Rs. 30,404 was received as dividend income on those shares and the appellant claimed before the income-tax authorities that this sum was not liable to be included in his total income in view of the third proviso to s~ r6(r)(c) of the Indian-Income-tax Act, 1922, but this claim was rejected on the ground that th~ case was covered either by s. 16(3)(a)(iii) or by s. r6(3)lb) of the Act. The appellant's con· tention was that under the deed of trust there was no transfer of assets either to the wife or to any person for the benefit of the wife but merely a creation of a trust in respect of the shares, the dividends from which were payable to the wife, that even if it be held that there was such a transfer, it was for ade~ quate consideration being for love and affection which was a good consideration, and that thus s. 16(3)(a){iii) or s. 16(3)(b) was not applicable.

Held, that on a true construction of the deed dated March 15, 1951, there was a transfer of the shares by the husband to himself as a trustee for the benefit of the wife and that even though .the husband was the same individual, in his capacity .. as a trustee he must be regarded as a person distinct from the . transferor.

· Held, further, that the words "adequate consideration" in · s. r6(3) ·of the Indian Income-tax Act, 1922, denoted considera +tion other than mere love and affection, which, in the case.of a wife; may be presumed.

Accordingly, the present case fell within s. r6(3}{b) of the

Act and not within the third proviso to s. I6(r)(c).

P~ovat Kuma~ Mitter v. Commissioner ' of Income-tax, [rg6r]

3 S.C.R. 37, distinguished. .

· "

·

352

SUPREME COURT REPORTS

(1961]

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos.

134 to 137 of 1959.

Appeals by spema eave

f rom t e Judgment and order dated September 20, 1957, of the Bombay High

• l l

h

.

:r96r

Tt<l~idas Kilachand v.

Commissiouer of Court in Income Tax Reference No. 14 of 1957. N

Income-la:o

..

R . J. Kolah, S.

. Andley, J. B. DadachanJt, Ramesh-

Hsdayatrrllals ].

.

'

I !l

! .

l :

! \ I

:

war Nath and P. L. Voltra, for the appellants.

K. N. Rajagopal Sastri and D. Gupta, for the res

pondent.

1961. January 3. The Judgment of the Court

was delivered by

HIDAYATULLAH, J.-Tbis judgment governs the disposal of Civil Appeals N'os. 134 to 137 of 1959. They have been filed by four assessees with special leave, and adse out of similar facts, and it is not necessary to refer to more than one case to consider the point in question.

The assessment year under con,;idoratlon is 1952-53, and the previous year, the Calendar yea.r, 1951. In that year, ~k Tulsidas Kilachand, one of the four appellant~, made a dPclaration of trust in favour of his wife, a portion of which may be quoted here:

" .......•. I, Tuh;idas Kilacho.nd ......... hereby de- clare that I hold 244 shares of Kesa.r Corporation Ltd. and 120 shares of Kilachand Dovchand & Co., Ltd .......... upon trust to pay the income thereof to my wife Vimla. for a period of seven years from the date hereof or he.r death (whichever event may be earlier) and I hereby declare that this trust shall not be revocable."

In the year of account, a. sum of Rs. 30,404 was receiv ed a8 dividend income on thmm Hharos, and the t\sscs· see contended that thiK income, after being grossed up, was not liable to be included in hiK ·total income, in viow of tho third proviso to 8. IG(l)(c) of tho Indin.u Income-tax Act. The Incomo-ta.x: Officer diJ not acct>pt thiR contt-ntion, and though the assessment order is not before us, we gather from the sta.teroeut of tho case that the reason he gave was that the income had accrued to or had arisen in the hands of

--·~----

··-·-·.

.-. -. -. -.

rulsidas

Ki."a~hand v. Commissioner o; I nconu·t(~"

Flidayatullah J

3 S.C.R. SUPRE~IE COURT REPORTS

353

.Mr. Tulsidas Kilacha.nd and had been pn.id by him to his wife. The Income-tax Officer held that the words of the proviso "income arising to any person by virtue ?fa settlement or disposition" did not apply to this mcome.

On appeal, the Appellate Assistant Commissioner held that the case was governed by s~ 16(3){b), and need not be considered under the third proviso to s. 16(l)(c) of the Act. It appears to have been con ceded before him that if the former provision <.1tpplied, the proviso would not save the income from being assessed in the hands of Mr. T'dsidas Kilachand. The appeal was dismissed.

.

In the appeal before the Tribunal, lVIr. Tulsidas Kilachand again relied upon the third proviso to s. l6(l)(c). and contended tha.b the case wa.s no~ govern ed by s. 16(3)(b) and that the dividend income cotlld not be included in his assessment. The Tribuna.} came to the conclusion t.hat the case was covered either by s. 16(3)(a)(iii) or by s. 16(3)(b ), and th<l.t the . income from the shares was, therefore, liable to be included in the income of Mr. Tulsidas Kilachand. The Tribunal, however, raised and referred the follow ing question under s. 66(1) of the Act to the High Court of Bombay:

"Whether on a true construction of the deed of declaration of trust dated 5th March, 1951, the net dividend income of Rs. 30,404 on 120 shares of Kila chand Devchand & Co., Ltd. and 244 shares of K.esar. Corporation Ltd. held under trust by the assessee for the benefit of his wife was income liable to be incJuded in the total income of the assessee?" 'l'he High Court came to the conclusion that, tliough s. 16(l)(c) was not satisfied in view of the third proviso, s. 16(3)(b) was applicable ~the . case, and answered the question in the a.ffirmativ;e..

·!

In the appeal before us, the case for the Department was based both on s. 16(3)(a)(iii) and s. 16(3)(b), while the appellants contended that this disposition fell within the third proviso to s. 16(l)(c). The relevant provisions a.re:

4S

·rulsidas f(ilachand v. Commi.>sim1er of lllcMnt- lax

Hidayntullah ].

354

SUPREME COURT REPORTS

[1961]

''16 .. Exemptions and exclusions in determining

the total mcome.-

·

( 1) In computing the total incon;w of an assessee-

• • • • • • • • • • • • • • • ' • • ' • • • • • • • • • • • • • • • • • • • • • • • '

' • • • • •

• ~ • • • • f • • • • • • • • • • •

(c) all income arising to any person by virtue of a settlement qr disposition whether revocable or not, and wh(;lther effected before or after the com mencement of the Indiu.n Income-tax (Amendment) Act, 1939 {7 of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revo cable transfer of assets shall be deemed to be income of the transferor:

'

Provided ... .................................................. . Provided further ..................................... ... .. .. . ,. Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person .and from which income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the ·~:;aid income as and when: the power to revoke arises ~h~.

.

.

(2) , .. .... ........... . ........ : .. .. :· .... ......... .. . .. (omitted) (3) In computing the ·~tal income of any indivi dual for the · purpoRe of assessment, there shall be included-

·

(a)· so much of the, in come of a V..-ife or minor child of ·such individual as arises directly . or in- · dlrectly-

.

·(i) . .... .. .. ~ ..... ...... : ..... ................. : ....... ... .. . .... . ~. (ii) · · ~ ......... ~ . .. ............ . ~ .. :i: ............ ;., .... ' .. · .. ~ ... . (iii) from assets transftwTed ' directly .or indir~ctly to the wife by the husband otherwise than·for ade . quate consid~z:ation or> in :connection with an !l'gree- · ·' . ment to live apart; oi' • ~ •• •• ; ••• ••• • : · .... ... ... .. ..... :~ •• : •••• ' •• ; .... . .. ... ~ ••• • £ , .•••• •••• (b) so much bfthe income o'f-any person or associa- ·

· ·

·

·

.

tion of persons as arises from assets transferred other wise than for ad equate consideration to the person or

I I

), where he Commissitmer of

1 96:

1·ulsida.1 Kilachand v.

blcome-lax ·a . - 11 II a}atu a

h

1 ,

3 S.C.R. SUPREME COURT REPORTS

355

association by such individual for the lJt·ndit of his wife or a minor child or both."

The object of framing s. 16 can almost be taken from the observations of Lord Macmillan in Chamber- lain v. Inland Revenue Commissioners (1 stated as follows:

.

"This legislation ... (is) designed to overtake and 1

f t

income. The

t th . d · e par o ax. Circumvent a growmg ten ency on payers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the dispo~al by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he r~taiued certain powers over, or interests legislature's in, the property or its counter· was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwith~tanding, be treated as still his income and taxed in his hands accordingly.)) These observations a.pply also to the section under consideration, and the Indian provision is enacted with the same intent and for the same purpose. Sec tion 16 thus lays down certain exemptions and exclu sions in determining the total income of an assessee. Some of the provisions lay down the conditions for inclusion of certain income, while others lay down the condi,tions for exclusion of other income. We are con cerned with the income accruing in case of settlements and the conditions under which income of a wife is treated as the income of the settlor or disponer or as the ,income of the husband. We have to see if the pro visions. for exclusion· or inclusion apply to this case.

Section 16(l)(c) provides that income from assets remaining the property of the settlor or disponer or arising to any person by virtue of a revocable trans fer of assets sha.ll be deemed to be the income of the transferor. ·what cl. (c) means. was decided by . .i)lis Court in Provat Kunw,?' Mitter v. Commissioner of:1n corn:e.tax (2)~ . There, Provat.· Kumar Mitter had assign ed\ the dividends only, and, h~d not transferred the rele.~~nt {f;lhares .. ,_It was he~d by this _Cou~t that this

(1) (l943} 25 T. C. 317, 329.

l2) [z¢oj 3 S.C.R. 37•

I

356

SUPREME COURT REPORTS

[1961]

6 I

I9

v.

Tulsidas

I<ilaclzand

Inca»te-tax

was a case of application of one's own income and not assignment of the source from which the income w·as deriyed, \vhich alone saved the income from tax, subject, however, to provisions likes. 16(l)(c) and Commissioner of s. 16(3). The deed in favour of the wife in that case grove. Ol]ly a right to the dividends, and not being a transfer of an existing property of the assessee, llidayatullah ] . s. 16(l)(c) and the third proviso were not attracted. That case thus has no application to t.he facts of the present. case, where the disposition is differently made. ~rhe disposition here is for a period of seven years or the life of the settlee, whichever is shorter. During that period or the life of the settlee, Mr. Tulsidas Kilachand has bound himself upon trust to pay the dividends to his wife and not to revoke the settlement. The inten- tion is obviously to put this case within the third pro- viso to s. 16(l)(c), because cl. (c) does not apply to any income a.rising to any other person provided the dis- poner derives no direct or indirect benefit, even though the assets remain his property. If it were only a ques- tion of the application of the provhw, this disposition would be exempt. But by the deed of trust., the settlor holds the shares in trust,; the shares do not remain the property of t.he settlor. Section 16(l)(c) has, therefore, no application, and the proviso is not attracted.

The section goes on to deal with. other situations and to provide for them specially. Sub-section (3) provides specially for assets transferred to the wife or minor child. Income from assets transferred to the wife is still to be included in the total income of the husband, (a) if the as·sets have been transferred direct ly or indiroctly to tho wife by the husband otherwise thP.:n for adequate consideration [vide sub-s. (3)( a.)(iii)], or (b) so much of the income of any person or associa tion of persons as ttrises from assets transferred other wise than for ade(tna,te consideration to the person or association by such indiviclnal for the benefit of his wife [vide sub-s. (3)(L )]. ' ·The first question is whether there cim be said to he transfer of assets to the wife or to 'any person' for the benefit of the wife. The second question is whether there was adequate consideration for the transfer, if

· ·

3 S.C.R. SUPREME COURT REPORTS

357

1 961

'Fl~lsidas Kilachand v.

there was one. The contention of the assessee is that there was no transfer of any assets at all. ·It is con- tended that the ownership of shares involves a bundle of rights, arid that they are, generally speaking, (a) right to vote, (b) right to participate in the distribu- Commissionlr of tion of assets on dissolution, and (c) right to partici- pate jn the profits, e. g., dividends which might be · 1 declared. It is pointed out t.hat none of these rights Hrdayatrr a' · · was transferred to the wife, because transfer of assets connotes a creation of a right in the assets in prae- senti. It is urged that there was no t,ransfer of assets either to the wife or to any person for the benefit of tho wife but merely a creation of a trust in respeet of the shares, the dividends from which were payaiJle to the wife, and that thus s. 16(3)(a)(iii) or s. 16(3)(b) 'vas not applicable. It is lastly contended t.hat even if it be held that there was such a transfer, it was for adequate consideration, being for love and affection, which is a good consideration.

Income-tax . -~~ ,.

,

The comcntion that there was no transfer at all in th1s case is not sound. The shares were previously held by Mr. Tulsidas Kilachand for himself. Aft.er the declaration of trust by him, they were held by him not in his personal capacity but as a trustee. No doubt, under ss. 5 and 6 of the Indian Trusts Act if the declarer of the trnst is himself the trnstee also, there is no need that he must transfor the property to himself as trustee; bnt the law implies that such a transfer has been made by him, and no overt act except a declaration of trust is necessary. The capa city of the declarer of trust and his capacit.y as trustee are different, and after the declaration of tmst, he holds the assets as a trustee. Under the Transfer of Property Act, there can be a transfer by a person to himself or to himself and another person or persons. ln our opinion, there was, in this case, a transfer by Mr. Tulsidas Kilachand to himself as a trustee, though thPre was no formal transfer.

The assessee also stresses tho words "any verson or association of persons" in s. 16(3 )(b), and cont.ends that such a person must be other than the husband, transfers. The word "any person" is wide who

358

SUPREME COURT REPOHTS

[1961]

z961

1'ulsidas Kilachand v.

enough to include the husband, when he tran~fers pro. Perty to himself in another capacity. The change of capacity makes him answer ~he description "any per- sonn. This deed must be _regarded as involving a Commissionet of transfer by the husband to a trustee, and even though the husband is the same individual, in his capacity as a trustee he must be regarded as a person distinct Hidayatullah J. from the transferor.· In our opinion, s. 16(3)(b) covers

Income-tu

-

the case.

It remains to consider whether there was adequate consideration for the transfer. Reliance has been placed only upon love and affection. The words "adequate consid~ration" denote consideration other than mere love and affection, which, in the case of a wife, may be presumed. When the la.w insists that there should be "adequate consideration'' and not · ugood consideration", it excludes mere love and affec tion. They may be good consideration to support a contract; but adequate con~ideration to avoid tax is quite a different thing. TQ insist on the other mean ing is really to say that consideration must only be looked for, when love and affection cease to exi~;t.

In our opinion, this case' falls within the special rules concerning wife and minor child, laid down in s. 16(3)(b) and not within to s . .I6(l)(c). It must thus be held that there was a "tra:hsi'er o.f the assets ~o the husband-frustee for the benefit of •the wife, 1,he answer given by the High Court was thus correct.

the third proviRo

The appeals fail, and are dismissed with costs. One

hearing fee.

Appeals dismissed.