1996 (4) TMI 67 - HC - Income Tax

Summary

Issues:
1. Taxability of interest income attributable to contributions made to revocable trust.
2. Applicability of section 61 and section 64(v), (vi) of the Income-tax Act, 1961.

Analysis:

Issue 1: The primary issue in this case was whether the interest income attributable to the contributions made by the assessee to the revocable trust created by her husband for the benefit of his would-be son-in-law/daughter-in-law can be assessed to tax in her hands under section 61 of the Income-tax Act, 1961. The Income-tax Officer initially held that due to a clause in the trust deed, the trusts were not irrevocable, leading to the inclusion of interest income in the assessee's total income. However, the Appellate Assistant Commissioner overturned this decision, stating that the assessee was not the author of the trusts and had no power of revocation, hence deleting the interest income from her total income.

Issue 2: The second issue revolved around the interpretation of section 61 and section 64(v), (vi) of the Income-tax Act, 1961. The Appellate Tribunal held that the revocation clause in the trust deed only pertained to the trust property and reinvestment was in the settlor, not the assessee who contributed funds. The Tribunal concluded that the income arising from the transferred assets could not be assessed in the hands of the assessee, as she was not the transferor and had no power of revocation. The Tribunal's decision was based on the fact that the trusts were irrevocable and the contributions made by the mother of the minor children were considered as gifts with no power of revocation.

In conclusion, the High Court upheld the Tribunal's decision, stating that the income arising from the transferred assets to the trusts cannot be assessed to tax in the hands of the assessee. The Court clarified that under section 61 of the Income-tax Act, 1961, only the transferor who makes provisions for retransfer of trust funds can be held liable for tax on the income. Since the assessee was not the transferor and had no power of revocation, the inclusion of interest income in her total income was not justified. The Court answered the first question in favor of the assessee and did not address the second question as it did not arise from the Tribunal's order.