1981 (7) TMI 58 - HC - Income Tax

Issues Involved:
1. Applicability of clause (iii) of the proviso to section 164(1) of the Income Tax Act, 1961.
2. Determination of whether the beneficiaries were mainly dependent on the settlor for their support and maintenance.
3. Interpretation of the term "relative" under section 2(41) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of Clause (iii) of the Proviso to Section 164(1) of the Income Tax Act, 1961:

The primary issue was whether a trust created before March 1, 1970, for the benefit of the settlor's relatives, who were not dependent on the settlor for their support and maintenance at the time of the creation of the trust, would be covered by clause (iii) of the proviso to section 164(1) of the Income Tax Act, 1961. The court examined whether the trust met the conditions specified under clause (iii) of the proviso to section 164(1), which requires the trust to be created bona fide exclusively for the benefit of the settlor's relatives who were mainly dependent on the settlor for their support and maintenance.

2. Determination of Whether the Beneficiaries Were Mainly Dependent on the Settlor for Their Support and Maintenance:

The court analyzed whether the beneficiaries, specifically the minor sons and the major married daughter, were "mainly dependent" on the settlor for their support and maintenance at the time of the creation of the trust. The Tribunal had previously held that the minor children were mainly dependent on the settlor due to the legal obligation under section 20 of the Hindu Adoptions and Maintenance Act, 1956. However, the court disagreed, stating that the essential precondition of clause (iii) is that the trust must be created for the benefit of relatives who were "mainly dependent" on the settlor at the time of the creation of the trust. The court emphasized that the term "mainly dependent" must be judged with reference to the financial circumstances of the beneficiaries at the time the trust was created. Since the minor sons had their own income and the major daughter was married and not dependent on the settlor, the court concluded that the beneficiaries were not mainly dependent on the settlor for their support and maintenance.

3. Interpretation of the Term "Relative" under Section 2(41) of the Income Tax Act, 1961:

The court examined the definition of "relative" as provided under section 2(41) of the Income Tax Act, 1961, which includes the husband, wife, brother, sister, or any lineal ascendant or descendant of the individual. The court clarified that the term "relative" in clause (iii) of the proviso to section 164(1) refers to the relatives of the settlor and does not include the settlor himself. The court noted that since the settlors themselves were beneficiaries under the trust, the trust could not be said to be exclusively for the benefit of the settlor's relatives.

Conclusion:

The court concluded that the trust in question did not satisfy the conditions specified under clause (iii) of the proviso to section 164(1) of the Income Tax Act, 1961. The Tribunal erred in holding that the assessee-trust was liable to be taxed at the rate applicable to the association of persons and not at the rate of 65%. Consequently, the court answered the referred question in the negative and against the assessee, with no order as to costs.

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