1966 (12) TMI 6 - HC - Income Tax

Computation of income - minor child - having regard to the provisions of sub-s. (2) of section 161, section 64(v) of the IT Act was applicable to the assessee s case

Summary

Issues Involved:
1. Applicability of Section 64(v) of the Income-tax Act, 1961.
2. Impact of assessments on minor beneficiaries on the assessee's tax liability.

Detailed Analysis:

Issue 1: Applicability of Section 64(v) of the Income-tax Act, 1961

The primary issue was whether Section 64(v) of the Income-tax Act, 1961, was applicable to the assessee's case for the assessment year 1962-63, given the provisions of sub-section (2) of Section 161 of the same Act.

The assessee, who had executed trust deeds for the benefit of his minor children and unmarried daughter, argued that the new Act of 1961 altered the previous legal position established under the Indian Income-tax Act, 1922. Specifically, the assessee contended that sub-section (2) of Section 161 would prevent the inclusion of trust income in his assessable income, contrary to the earlier judgment where Section 16(3)(b) of the 1922 Act was applied.

The court noted that the new Section 64(v) of the 1961 Act explicitly included income arising from transferred assets for the immediate or deferred benefit of the settlor's spouse or minor children. The court emphasized that the language of Section 64(v) was clear in its intent to include such income in the total income of the settlor.

Further, the court examined the relationship between the old Section 41 and the new Section 161, concluding that the latter did not change the fundamental principle that income belonging to the beneficiary could be assessed in the hands of the trustee only to the extent it would be assessable to the beneficiary. The court clarified that sub-section (2) of Section 161 merely reiterated the original mandate of old Section 41, ensuring that the liability of the beneficiary could not be altered by treating the income as part of the trustee's income.

Thus, the court held that Section 64(v) was rightly applied to the assessee's case, and sub-section (2) of Section 161 did not make Section 64(v) inapplicable.

Issue 2: Impact of Assessments on Minor Beneficiaries on the Assessee's Tax Liability

The second issue was whether the assessments on the minor beneficiaries for the assessment year 1962-63 barred the inclusion of the trust income in the assessee's personal assessment.

The court asserted that the second question was consequential to the first. Since the court had determined that Section 64(v) was applicable, it followed that the trust income should be included in the assessee's total income. Consequently, the assessments on the minor beneficiaries were deemed illegal.

The court noted that the proper course of action for the Commissioner of Income-tax, under Section 263, should have been to cancel the assessments on the minors while directing the reassessment of the assessee by including the trust income in his total income. The court recorded the department's undertaking to annul the assessments on the minors and refund any tax recovered.

In conclusion, the court answered as follows:

1. Section 64(v) of the Income-tax Act, 1961, was rightly applied to the assessee's case for computing his income for the assessment year 1962-63. Sub-section (2) of Section 161 does not make Section 64(v) inapplicable.
2. The assessments on the minor beneficiaries for the assessment year 1962-63 do not operate as a bar to the application of Section 64(v) to the assessee's case, despite being illegal and subject to correction.