1989 (10) TMI 107 - AT - Income Tax

Issues Involved:
1. Validity of the trust and its revocation under Section 40A(11).
2. Assessment of income accrued to the trust.
3. Application of the rule of ejusdem generis to the term "asset" in Section 40A(11)(ii).
4. Applicability of Section 61 of the Income-tax Act to the income earned by the trust.

Detailed Analysis:

1. Validity of the Trust and Its Revocation under Section 40A(11):
The trust, M/s. Tube Investments of India Ltd. Management Employees Welfare Trust, was established under a Trust Deed dated 27-12-1979. The primary objective of the trust was to promote the welfare of permanent management employees of the Settlor Company. Initially, Rs. 50,000 was contributed to the trust, which could invest in fixed deposits, debentures, shares, and other securities. By the Finance Act, 1984, Sections 40A(9), (10), and (11) were inserted retrospectively from 1-4-1980. As per Section 40A(11), the Company requested the trust to refund the unutilized amount of Rs. 30.50 lakhs. The trust resolved to refund the contributions and accretions as per the Company's request. The question arose whether the trust ceased to exist from 1-4-1980 due to the Company's recall of funds. The judgment held that the trust deed was effectively revoked to the extent of the unutilized amount, making the trust's income assessable in the Company's hands.

2. Assessment of Income Accrued to the Trust:
For the assessment year 1982-83, the trust disclosed an income of Rs. 31,770. The Income-tax Officer assessed the trust's total taxable income at Rs. 80,340, including interest and dividend income. The Appellate Assistant Commissioner (AAC) held that the income should be assessed in the hands of the Company, not the trust, as the Company had recalled the unutilized amount. The Tribunal upheld the AAC's decision, noting that the unutilized amount and the income derived from it belonged to the Company from 1-4-1980, making the income assessable in the Company's hands.

3. Application of the Rule of Ejusdem Generis to the Term "Asset" in Section 40A(11)(ii):
The Revenue argued that the term "asset" in Section 40A(11)(ii) should be interpreted using the rule of ejusdem generis, limiting it to assets similar to land, building, machinery, plant, or furniture. The Tribunal agreed, stating that money, interest income, or dividend income does not fall under the category of specified assets. However, it concluded that the interest and dividend income earned on the unutilized amount should be considered part of the unutilized amount, which the Company had the right to recover.

4. Applicability of Section 61 of the Income-tax Act to the Income Earned by the Trust:
Section 61 states that income arising from a revocable transfer of assets is chargeable to income-tax as the income of the transferor. The Tribunal held that the trust deed's revocation under Section 40A(11) made the unutilized amount and the income earned on it belong to the Company. Consequently, the interest and dividend income accrued during the relevant accounting year should be taxed as the Company's income, not the trust's. The Tribunal supported this interpretation by referencing Sampat Iyengar's Law of Income-tax and a Patna High Court decision, emphasizing that the income from revocable transfers should be assessed in the transferor's hands.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the income earned by the trust for the assessment year 1982-83 should be assessed in the hands of the Company, following the provisions of Section 40A(11) and Section 61 of the Income-tax Act. The trust's income, including interest and dividend, was deemed part of the unutilized amount rightfully belonging to the Company, thus making it assessable as the Company's income.

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