1969 (5) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of trust income in the assessee's total income under section 16(3)(b) of the Indian Income-tax Act, 1922.
2. Interpretation of clauses (2) and (4) of the trust deeds.
3. Determination of beneficial interest or benefit to minor beneficiaries.

Detailed Analysis:

1. Inclusion of Trust Income in the Assessee's Total Income under Section 16(3)(b) of the Indian Income-tax Act, 1922:

The primary issue was whether the income from the trust property should be included in the assessee's total income under section 16(3)(b) of the Indian Income-tax Act, 1922. The Income-tax Officer included the income on the grounds that the transfer of assets to the trustees was not for adequate consideration. The Appellate Assistant Commissioner upheld this decision, stating that the trusts were for the benefit of the minor children of the assessee. The Tribunal also agreed, noting that the minors had acquired beneficial interest in the income during the relevant years. The court examined the provisions of section 16(3)(b), which requires the inclusion of income from assets transferred for the benefit of a minor child in the total income of the transferor.

2. Interpretation of Clauses (2) and (4) of the Trust Deeds:

Clause (2) of the trust deed stipulates that the trustees shall hold the balance of the net income of the trust properties in trust for the benefit and absolute use of the beneficiary until the youngest son attains the age of 18 years. Upon reaching this age, the accumulated income and trust property are to be handed over to the beneficiary. Clause (4) allows trustees to advance and spend money from the income for the maintenance, education, advancement, or benefit of the beneficiary at their discretion, provided it does not exceed the income amount.

The court noted that under clause (2), the minor beneficiaries had a right to the accumulation of income year by year until they reached the age of 18. This right constituted a beneficial interest in the income. Clause (4) created a discretionary trust, allowing the trustees to spend income for the minors' benefit, thus giving the minors a right to compel the trustees to exercise their discretion properly.

3. Determination of Beneficial Interest or Benefit to Minor Beneficiaries:

The court referred to the Supreme Court case of Commissioner of Income-tax v. Manilal Dhanji, which held that an assessee could only be taxed on the income from a trust fund for the benefit of a minor child if the minor derived some benefit in the relevant year of account. In this case, the court found that the minor beneficiaries had a right to the accumulated income and could compel the trustees to use the income for their benefit, thus establishing a beneficial interest.

The court also examined English case law, such as In re Vestey's Settlement and In re Bryant, to support the interpretation that even in discretionary trusts, beneficiaries have a right to compel proper exercise of discretion by the trustees.

Conclusion:

The court concluded that the minor beneficiaries had a beneficial interest in the income of the trust property during the relevant years. Therefore, the income of the trustees under the trust deeds was correctly included in the assessee's total income under section 16(3)(b) of the Indian Income-tax Act, 1922. The Tribunal's decision was upheld, and the answer to the referred question was in the affirmative. The assessee was ordered to pay the costs of the reference.