1982 (6) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the trust created under the trust deed dated April 19, 1964, in light of the Indian Trusts Act, 1882.
2. Legality of the transfer of properties belonging to the Hindu Undivided Family (HUF) to the trust before partition among family members under Hindu law.
3. Allocation of income from trust properties among beneficiaries and its inclusion in the total income of the HUF under sections 161 and 164 of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the Trust:
The court examined whether the trust created under the trust deed dated April 19, 1964, was valid and consistent with the Indian Trusts Act, 1882. The trust deed was executed by the members of a Hindu Undivided Family (HUF) and included properties such as a rice mill and a building. The trust was named Gangadhar Sikaria Family Trust, with the trustees being the same family members who were the settlors. The Income Tax Officer (ITO) initially held the trust invalid, citing two reasons:
1. The joint family properties could not be alienated by creating a trust without partition.
2. Clause 5 of the trust deed, which excluded minor beneficiaries from loss liability, was inconsistent with the Trusts Act.

On appeal, the Appellate Assistant Commissioner (AAC) found the trust valid under sections 5 and 6 of the Indian Trusts Act, 1882, and held that the trustees became the owners of the trust properties upon execution of the deed. The Tribunal upheld this view, rejecting the Department's contention that the trust was a colorable transaction and violated public policy. The court agreed with the Tribunal, stating that the trust deed did not violate section 3 of the Trusts Act, as the minors were beneficiaries and not trustees, thus maintaining the distinction between ownership and beneficial interest.

2. Legality of Property Transfer:
The court addressed whether the transfer of HUF properties to the trust by the major family member and the karta on behalf of himself and the minor members was valid under Hindu law. The Tribunal held that alienation of joint family property, even without legal necessity, is voidable but not void. Such alienation can only be challenged by family members, not by outsiders, including the Revenue. The court supported this view, citing that the transfer was for the benefit of the estate and that the trust was not illegal under Hindu law. The court also noted that under the Hindu Minority and Guardianship Act, 1956, such alienation is voidable at the instance of the minor but not void ab initio. The Tribunal's finding that the trust was for the benefit of the estate was upheld.

3. Allocation of Income from Trust Properties:
The court examined whether the income from the trust properties should be allocated among the beneficiaries according to their respective shares and whether its inclusion in the total income of the HUF was justified. The ITO had assessed the income on a protective basis in the hands of both the trust and the HUF. The AAC and the Tribunal held that the income should be assessed in the hands of the trust, not the HUF. The court affirmed this, stating that under sections 160, 161, and 164 of the Income-tax Act, 1961, the income from the trust properties should be allocated among the beneficiaries with known and determinate shares. The assessment should be at the individual rates of tax applicable to each beneficiary, and section 164, which applies to cases where beneficiaries' shares are indeterminate, was not applicable here.

Conclusion:
The court answered all three questions in the affirmative, in favor of the assessee, and against the Department. The trust was held to be valid, the transfer of properties was legal, and the income from the trust properties should be allocated among the beneficiaries according to their respective shares, excluding it from the total income of the HUF. The petitioner was ordered to pay costs to the respondent-assessee.