1976 (7) TMI 18 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the transfer of maternity homes and the Versova property named 'Abhay' to the trustees.
2. Tax assessment of the income from running the maternity homes in the hands of the trustees as an association of persons.
3. Allowability of the salary of Rs. 7,500 paid to Dr. Mrs. Nalini M. Divekar as a deduction in computing the income of the trustees.

Detailed Analysis:

Issue 1: Validity of the Transfer
The primary question was whether the maternity homes and the Versova property named 'Abhay' were duly transferred by Dr. M. R. Divekar and his wife to the trustees under the indenture of trust dated August 23, 1954. The court examined the indenture of trust and determined that it was drafted by an advocate and not an attorney, emphasizing that the substance of the deed should be considered rather than a rigid, technical approach. The court noted that the trust was created under sections 5 and 6 of the Indian Trusts Act, 1882, which requires a non-testamentary instrument in writing, signed by the author of the trust or the trustee, and duly registered. The indenture met these requirements, and the court concluded that a valid and effective trust was created by Dr. Divekar and his wife. The court found that the properties were indeed transferred to the trustees, as indicated by the recitals and the operative part of the indenture. Therefore, the court answered the first question in the affirmative, confirming the validity of the transfer.

Issue 2: Tax Assessment of Income
The second issue was whether the income from running the maternity homes was rightly assessed to tax in the hands of the trustees as an association of persons. The court analyzed whether the business of running the maternity homes was settled upon trust. It referred to the Supreme Court decision in Commissioner of Income-tax v. P. Krishna Warriar, which established that business held in trust falls under the substantive part of section 4(3)(i) of the Indian Income-tax Act, 1922, and is exempt from tax. The court found that the trust deed indicated that the business of conducting the two maternity homes was settled upon trust. Since the business was held in trust, the conditions laid down in proviso (b) to section 4(3)(i) were not applicable. Consequently, the court answered the second question in the negative, ruling that the income from the trust was exempt from tax.

Issue 3: Allowability of Salary Deduction
The final issue was whether the salary of Rs. 7,500 paid to Dr. Mrs. Nalini M. Divekar was allowable as an admissible deduction in the computation of the income of the trustees as an association of persons. The court noted that the trustees were assessed as an association of persons and that the salary paid to Dr. Mrs. Divekar was part of the normal expenditure for conducting and managing the maternity homes. The presence of a doctor was essential for running the maternity homes, and the payment was for her services as specified in the trust deed. Therefore, the court concluded that the salary was an allowable deduction in computing the income of the trustees. The court answered the third question in the affirmative, allowing the deduction.

Conclusion:
The court ruled in favor of the assessees on all three issues, confirming the validity of the transfer of properties to the trust, the tax exemption of the income from the trust, and the allowability of the salary deduction. Each party was ordered to bear its own costs.