2010 (9) TMI 27 - HC - Income Tax

Total Income- Inclusion - The assessee and her husband created a private trust settling a sum of Rs. 10,000 each in trust for the benefit of the daughter in law of the settlers and the grandchildren of the settlers. The officer examined the trust deed and held under that under the provision of section 64(1)(vi) of the Act, 50 percent. Of the income from the trust was includible in the total income of the assessee. The Assistant Commissioner held that section 64(1)(vi) was not applicable. The Tribunal upheld the view taken by the Assistant Commissioner holding that the transfer of money by the two settler was not made directly or indirectly to the daughter in law or her grandchildren but to an association of person for the benefit of his daughter in law or her grandchildren. Held that - Tribunal is right. Answer the questions in favour of the assessee and against the Revenue.

Summary

Issues:
1. Interpretation of section 64(1)(vi) of the Income-tax Act regarding the inclusion of income from a trust in the total income of an individual.
2. Application of section 64(1)(vi) to transfers made to a trust for the benefit of specific individuals.

Detailed Analysis:
Issue 1: The primary issue in this case revolves around the interpretation of section 64(1)(vi) of the Income-tax Act, which pertains to the inclusion of income from assets transferred to specific individuals in the total income of the transferor. The court examined the provisions of clauses (vi), (vii), and (viii) of section 64 to understand the scope of the legislation. It was noted that clause (vi) specifically addresses transfers to a son's wife or son's minor child, while clause (vii) and the subsequent insertion of clause (viii) broaden the scope to include transfers to any person or association of persons for the benefit of specific individuals. The court emphasized that the expression "directly or indirectly" in these clauses refers to the transfer of assets and the accrual of income therefrom.

Issue 2: The court delved into the application of section 64(1)(vi) to the transfers made by the assessee to a trust for the benefit of her daughter-in-law and minor grandchildren. The Tribunal had previously held that the transfer to the trust did not constitute an indirect transfer to the specific individuals mentioned in clause (vi) as the trust was considered an independent legal entity with the trustee being the legal owner of the trust property. The court cited precedent to support this view, highlighting the distinction between transfers to individuals versus associations of persons. Additionally, the court considered the retrospective application of clause (viii) from April 1, 1985, and the absence of such provision during the relevant assessment years.

Conclusion:
The court ultimately sided with the assessee, upholding the Tribunal's decision that the income derived by the trust was not includible in the hands of the assessee under section 64(1)(vi). The court rejected the Revenue's arguments and cited various judgments to support its conclusion that the transfers to the trust did not fall within the ambit of section 64(1)(vi). The judgment clarified the legal position regarding indirect transfers and the inclusion of income in the total income of the transferor, providing a comprehensive analysis of the relevant provisions and precedents to arrive at its decision in favor of the assessee.