1977 (6) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 16(3)(a)(iv) of the Indian Income-tax Act, 1922, to the two trusts created by Keshavji Morarji and Jaysinh Keshavji.
2. Whether the creation of a trust by the assessee in favor of his minor grandchildren concurrently with the creation of a trust by the assessee's son in favor of the assessee's daughters constitutes an indirect transfer of assets to his children for the purposes of section 16(3)(a)(iv).

Detailed Analysis:

Issue 1: Applicability of section 16(3)(a)(iv) to the two trusts created by Keshavji Morarji and Jaysinh Keshavji

The Income-tax Officer initially held that the simultaneous execution of the two indentures of trust by Keshavji and his son Jaysinh constituted indirect transfers of assets by the assessee to his daughters and by Jaysinh to his minor children. This view was confirmed by the Appellate Assistant Commissioner, who observed that these transactions were sham and intended to evade income tax. The Tribunal upheld this decision, concluding that the gifts were mutually prompted, making them indirect transfers.

The High Court, however, previously ruled that there was no material evidence to conclude that there were indirect transfers of assets, and section 16(3)(a)(iv) was not applicable. This decision was challenged, and the Supreme Court remanded the case, directing the High Court to call upon the Tribunal to submit a statement of the case under section 66(4) of the Act. The Supreme Court noted several circumstances, such as the relationship between the settlors, the simultaneous execution of the deeds, and the lack of explanation for the simultaneous execution, which were not considered by the High Court.

Upon reconsideration, the High Court referenced a subsequent decision in Commissioner of Income-tax v. Framji H. Commissariat [1967] 64 ITR 588 (Bom), which held that section 16(3)(a)(iv) was not applicable to trusts. The court observed that section 16(3)(a)(iv) applies to assets transferred directly or indirectly to the minor child by the assessee, but in this case, the assets were transferred to trustees for the benefit of the minors. Therefore, section 16(3)(a)(iv) was not applicable, and the income from the trust could not be included in the assessee's total income.

Issue 2: Indirect transfer of assets to children for the purposes of section 16(3)(a)(iv)

The Tribunal and the Income-tax authorities initially considered the simultaneous execution of the trust deeds as evidence of indirect transfers aimed at evading income tax. However, the High Court, in its earlier decision, found no material evidence to support this conclusion. The Supreme Court, while remanding the case, pointed out that the simultaneous execution was not the only circumstance to be considered and highlighted other relevant factors.

After remand, the High Court reaffirmed its earlier stance, citing the decision in Framji Commissariat's case, which clarified that section 16(3)(a)(iv) was not applicable to trusts. The court emphasized that the mere simultaneous execution of trust deeds did not constitute a single transaction or indirect transfer aimed at evading tax. Each trust deed was executed independently out of natural love and affection for the beneficiaries.

Conclusion:

The High Court concluded that section 16(3)(a)(iv) was not applicable to the trusts created by Keshavji Morarji and Jaysinh Keshavji. The creation of the trusts did not constitute indirect transfers of assets to the assessee's children. Both questions referred to the High Court were answered in the negative, and the revenue was directed to pay the costs of the assessee throughout.