2003 (10) TMI 33 - HC - Income Tax

Whether, the Tribunal erred in holding that the provisions of section 64(1)(iii) read with the Explanation 2A were attracted particularly when the minor children of the assessee were not entitled to any right to the trust funds including the income from the trusts until they attained the age of majority? - Whether, Tribunal erred in coming to the conclusion that section 64(1)(iii) read with the Explanation 2A was attracted? - Whether, the Tribunal erred in not holding that the reassessment proceedings were without jurisdiction and that no income had escaped assessment so as to attract section 147/148? - All the questions are answered in the negative, i.e., in favour of the Department and against the assessee

Summary

Issues:
- Reopening of assessment for the assessment year 1980-81 due to income from trusts for minor children.
- Applicability of Explanation 2A to section 64(1)(iii) of the Income-tax Act.
- Jurisdiction of reassessment proceedings under section 147/148 of the Income-tax Act.

Analysis:
The judgment delivered by the High Court of UTTARANCHAL involved two appeals filed by the assessee concerning the assessment year 1980-81. The core issue revolved around the reopening of assessment due to income earned by trusts created for minor children of the assessee. The trusts, Nidhi Life Trust and Ruchi Life Trust, generated income from partnership firms, leading to the reassessment of the assessee's income under Explanation 2A to section 64(1)(iii) of the Income-tax Act. The Commissioner of Income-tax (Appeals) initially ruled in favor of the assessee, stating that minors had no immediate right to the trust income. However, the Income-tax Appellate Tribunal upheld the reassessment, emphasizing that the income accrued to the minors indirectly and should be included in the assessee's total income.

The arguments presented by the counsels highlighted contrasting views. The assessee's counsel contended that the income did not accrue to the minors during the assessment year as per the trust deeds, thus Explanation 2A should not apply. Conversely, the Department's counsel argued that the right to receive income had vested in the minors during the assessment year, even though payment was deferred until they reached the age of 18. The Department emphasized that the specific clauses in the trust deeds indicated the accrual of income to the minors, justifying the inclusion of the income in the assessee's total income.

The questions referred to the court encompassed the applicability of section 64(1)(iii) and Explanation 2A, along with the jurisdiction of reassessment proceedings under section 147/148 of the Income-tax Act. The court's findings favored the Department, ruling that the income indirectly accrued to the minors through the trusts, aligning with the provisions of Explanation 2A. The court emphasized that the Finance Act of 1979, introducing Explanation 2A, was applicable to the assessment year in question. The judgment underscored the vested interest of minors in the trust fund, despite deferred payment until the age of 18, justifying the inclusion of the income in the assessee's total income.

In conclusion, the court dismissed both appeals, upholding the reassessment and the inclusion of the trust income in the assessee's total income.