2005 (6) TMI 37 - HC - Income Tax

Sufficient consideration for the transfer of assets - (1) Whether Tribunal was correct in law in holding that the trust created by the assessee for the benefit of his minor daughter in obedience to the terms of decree of divorce passed against him under the provisions of the Parsis Marriage & Divorce Act, 1936, in a suit brought against him by his wife, was for adequate consideration and, therefore, would not fall within the scope of section 64(1)(vii) of the Income-tax Act, 1961? - The trust was created pursuant to a legal obligation on the part of the assessee and this by itself was sufficient consideration for creation of the trust by way of settling a sum of Rs. 5,50,000, as corpus, the income from which is to be applied for the maintenance of the minor daughter Farida - Since in this case consideration has passed between the settlor and the trust the question of excluding the income from the purview of section 64(1)(vii) does not arise. no infirmity in tribunal s finding

Issues:
- Interpretation of section 64(1)(vii) of the Income-tax Act, 1961 regarding the creation of a trust for the benefit of a minor child in compliance with a divorce decree.
- Determining whether the trust created by the assessee was for adequate consideration and thus exempt from falling within the scope of section 64(1)(vii).

Analysis:

The High Court of BOMBAY considered a case where the assessee was directed by a divorce decree to create a trust for the maintenance of his minor daughter. The question at hand was whether this trust, created in compliance with the decree, was for adequate consideration and hence not covered under section 64(1)(vii) of the Income-tax Act, 1961. The court examined the facts of the case, which involved the assessee being obligated to provide permanent alimony and custody of the child to his wife under the divorce decree. The trust fund was to be managed by trustees, with income to be utilized for the daughter's maintenance until she reached a certain age. The Income-tax Officer initially included the trust income in the assessee's total income under section 64(1)(vii) for taxation. However, the Commissioner of Income-tax and the Tribunal later ruled in favor of the assessee, stating that the trust was created for adequate consideration as it was to fulfill a pre-existing liability of the assessee towards his daughter.

The court analyzed section 64(1)(vii) of the Income-tax Act, which includes income arising from assets transferred without adequate consideration for the benefit of a spouse or minor child in the individual's total income. The Income-tax Officer and the Commissioner initially held that the trust income was taxable under this section as it was settled for the maintenance of the minor daughter without consideration. However, the Tribunal overturned this decision, emphasizing that the trust was created to meet the legal obligation of the assessee towards his daughter's maintenance, as directed by the divorce decree. The court noted that the creation of the trust was a conscious choice by the assessee to ensure proper maintenance for his daughter, and the decree specifically mandated the establishment of the trust for this purpose.

The court further examined the contention of the Income-tax Officer that the trust was created solely to avoid tax liability, as per the divorce settlement between the assessee and his wife. However, the court found that the trust was established due to the legal obligation of the assessee to provide for his daughter, not merely as a result of the divorce agreement. The Tribunal's analysis of the trust deed and the divorce decree revealed that there was indeed consideration for the trust creation, as it was based on the obligation of the assessee to maintain his minor child. Therefore, the court upheld the Tribunal's decision, ruling in favor of the assessee and concluding that the trust was created with adequate consideration, exempting it from the purview of section 64(1)(vii) for taxation purposes.

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