1967 (10) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Construction and effect of two trust documents dated 12th October 1941 and 13th November 1941.
2. Validity and effect of the "assignment of life interest" executed by Dadabhoy on 10th August 1954.
3. Application of Section 16(3) of the Income-tax Act, particularly sub-clauses (iii) and (iv).
4. Determination of whether the assignment constituted a transfer of assets or a mere surrender/relinquishment of interest.

Detailed Analysis:

1. Construction and Effect of Trust Documents:
The main question pertains to the interpretation of two trust documents executed by Mrs. Bhikhaiji H. Bennet on 12th October 1941 and 13th November 1941. These documents transferred certain properties in trust to trustees, with Dadabhoy G. Broacha, a relation of the settlor, receiving a life interest in the income from one-fourth of the properties. Upon Dadabhoy's death, his interest was to pass to his widow and children, provided they remained Zoroastrians and did not marry non-Zoroastrians. The income from these assets was assessed as Dadabhoy's individual income.

2. Validity and Effect of the "Assignment of Life Interest":
On 10th August 1954, Dadabhoy executed a document titled "assignment of life interest," purporting to assign his right, title, and interest in the trust fund and its net income to his wife and children. The document recited the provisions of the Bennet trusts and expressed Dadabhoy's desire to release and determine his life interest by way of absolute gift to accelerate the enjoyment thereof by the assignees. The income from the trust fund was transferred to the assignees effective from 1st September 1954.

3. Application of Section 16(3) of the Income-tax Act:
The Income-tax Officer treated the income arising from the Bennet trusts as Dadabhoy's individual income under section 16(3), sub-clauses (iii) and (iv), which include income of a wife or minor child arising directly or indirectly from assets transferred by the husband/father. The Tribunal, however, held that the document was a mere surrender or release of Dadabhoy's interest, thus not constituting a transfer of assets under section 16(3).

4. Determination of Whether the Assignment Constituted a Transfer of Assets or a Mere Surrender/Relinquishment of Interest:
The Tribunal's decision was challenged by the department, arguing that the deed of assignment was an independent disposition and not a mere acceleration of the Bennet trusts. The court examined the terms of the deed of assignment, noting that it clearly distinguished between Dadabhoy's life interest and the income arising from it. The court held that the life interest or the right to receive income was itself property or assets in Dadabhoy's hands. The assignment of future income indicated a transfer of an asset, thus attracting section 16(3)(a)(iii) and (iv).

The court concluded that the income received by Dadabhoy's wife and children arose from the transferred asset, not merely from the Bennet trusts. The deed of assignment created new rights for the assignees, independent of the Bennet trusts' provisions. Therefore, the Tribunal erred in its finding that the rights derived from the Bennet trusts rather than the deed of assignment.

Conclusion:
The court answered the question in the affirmative, holding that the income received by Dadabhoy's wife and children should be included in Dadabhoy's total income for tax purposes under section 16(3). The assessee was ordered to pay the costs of the Commissioner.