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Issues Involved:
1. Validity of the trust deed dated September 3, 1951. 2. Inclusion of dividend income from the shares in the assessee family's income. 3. Jurisdiction of the High Court to hear and dispose of the reference on the merits. Detailed Analysis: 1. Validity of the Trust Deed Dated September 3, 1951 The primary issue was whether the trust deed executed by Braham Dutt Bhargava, the manager of the Hindu undivided family (HUF), with the consent of the other adult member, Mahesh Dutt Bhargava, was lawful. The Income-tax Officer initially rejected the trust, stating it was defective under section 16(3) of the Income-tax Act and was a sham to reduce the HUF's income. However, the Appellate Assistant Commissioner found the trust valid, asserting that the assets were set apart for the education of the children and did not generate any direct or indirect income for the settlors. The Tribunal upheld this view, dismissing the appeal of the Income-tax Officer. The High Court examined whether the trust was valid under Hindu law. It was argued that the manager of a joint Hindu family could not make a gift of the family property. However, the court distinguished between the powers of an ordinary coparcener and those of a manager or karta. It cited legal precedents indicating that a gift by the manager is not void but voidable, and only the affected family members could challenge it. The court concluded that the trust deed was not void ab initio but, at worst, voidable, and remained valid until challenged by other family members. 2. Inclusion of Dividend Income from the Shares in the Assessee Family's Income The Income-tax Officer included the dividend income from the shares in the total income of the HUF, arguing that the trust was a sham. The Appellate Assistant Commissioner excluded this income, and the Tribunal upheld this exclusion, stating the shares no longer belonged to the family during the relevant accounting year. The High Court agreed with the Tribunal, noting that the trust's validity was not in dispute before the income-tax authorities. The court emphasized that the trust was created for the education of the children and did not benefit the settlors. Therefore, the dividend income from the shares settled in trust was not assessable in the hands of the HUF. 3. Jurisdiction of the High Court to Hear and Dispose of the Reference on the Merits The respondent assessee argued that the High Court had no jurisdiction to hear the reference on the merits, as the questions of law did not arise from the Tribunal's order. The court reviewed the procedural history, noting that the Tribunal and the income-tax authorities had not addressed the validity of the trust under Hindu law. The High Court reiterated that its jurisdiction under section 66 of the Income-tax Act is advisory and limited to questions of law arising from the Tribunal's order. It emphasized that a question of law must have been pleaded before the Tribunal and properly before it. The court found that the question of the karta's competence to create the trust was not raised before the Tribunal, and thus, it did not arise out of the Tribunal's order. The court acknowledged the procedural complexity but concluded that it was safer to address the reference on the merits. It held that the trust or gift made by the manager with the consent of the other adult member was not void ab initio but voidable, and the transaction was for the benefit of the family members. Conclusion: The High Court answered both questions against the department, holding that the trust deed was valid and the dividend income from the shares settled in trust was not assessable in the hands of the HUF. The court emphasized that the trust was created for the benefit of the family members and was not a sham transaction. The respondent was awarded costs from the petitioner.
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