1979 (1) TMI 44 - HC - Income Tax

Summary

Issues Involved:
1. Whether the interest income from the trust fund received by the assessee's wife should be clubbed with the assessee's income under section 16(3)(a)(iii) of the Indian I.T. Act, 1922.

Issue-wise Detailed Analysis:

1. Applicability of Section 16(3)(a)(iii):
The primary issue was whether 4/5ths of the interest income from the trust fund received by the assessee's wife should be included in the assessee's income under section 16(3)(a)(iii) of the Indian I.T. Act, 1922. The trust deed executed by Netarwala and Bharucha stipulated that half of the trust funds would be paid to Netarwala's wife after ten years. The Tribunal upheld the inclusion of 4/5ths of the interest income in the assessee's income, considering it a transfer to an association of persons for the benefit of the wife.

2. Argument by the Assessee:
The assessee contended that the sum received by his wife was not by virtue of any transfer made by him but from the trustees, including his father-in-law Bharucha. The assessee argued that his wife received the amount in her own right and not from him, and thus, section 16(3)(b) should apply, not section 16(3)(a).

3. Court's Interpretation of Section 16(3)(a) and (b):
The court clarified that section 16(3)(b) was not relevant as it pertains to income from trust funds during the trust's existence. Since the trust had ended and the funds were distributed, section 16(3)(a)(iii) was applicable. The court emphasized that section 16(3)(a)(iii) covers direct and indirect transfers, and an indirect transfer involves multiple transactions aimed at transferring assets from the husband to the wife.

4. Analysis of the Trust Deed:
The court examined the trust deed and concluded that the dominant intention was to transfer part of the Rs. 40,000 contributed by Netarwala to his wife. The trust deed created a vested interest in favor of the wife, and the transfer was considered indirect. The court referred to the Supreme Court's interpretation in CIT v. C. M. Kothari, which highlighted that indirect transfers involve a chain of transactions aimed at transferring assets to the wife.

5. Consideration for the Transfer:
The court addressed the adequacy of consideration for the transfer. The assessee argued that Bharucha's contribution of Rs. 10,000 was the consideration for the transfer. The court found this inadequate, stating that paying Rs. 15,000 to the wife because the father-in-law paid Rs. 10,000 did not constitute adequate consideration. Thus, the transfer did not meet the requirement of adequate consideration under section 16(3)(a)(iii).

6. Quantum of Income to be Clubbed:
The court noted that only 3/5ths of the interest income should be clubbed with the assessee's income, as Rs. 25,000 received by the wife included Rs. 10,000 from her father. Therefore, the correct amount of interest to be clubbed was 3/5ths of the interest earned by the wife.

Conclusion:
The court held that 3/5ths of the interest income from the trust fund was rightly assessable in the hands of the assessee under section 16(3)(a)(iii) of the Indian I.T. Act, 1922. The assessee was directed to pay the costs of the reference to the revenue.