1972 (9) TMI 20 - HC - Income Tax

Whether the surrender, release and yielding up of his life interest by the assessee in the Neville Ness Trust Fund No. 2, created by late Sir Nusserwanjee Nowrosjee Wadia in 1947 amounted to a transfer of assets to Miss Diana Wadia and Master Nusli Wadia within the meaning of section 16(3)(a)(iv) of the Indian Income-tax Act? Whether the expenditure incurred on the education of the minor children of the assessee out of their income which they derived from the trust made by their grandfather, late Sir Nusserwanjee Nowrosjee Wadia, in 1947 is liable to be added and included in the expenditure of the assessee under section 4 and if so, under which sub-section of section 4 of the Expenditure-tax Act

Summary

Issues Involved:
1. Whether the surrender, release, and yielding up of the life interest by the assessee in the Neville Ness Trust Fund No. 2 amounted to a transfer of assets to the minor children under section 16(3)(a)(iv) of the Indian Income-tax Act.
2. Whether the expenditure incurred on the education of the minor children of the assessee out of their income from the trust is liable to be included in the expenditure of the assessee under section 4 of the Expenditure-tax Act.

Issue 1: Transfer of Assets under Section 16(3)(a)(iv) of the Indian Income-tax Act

Facts:
By a deed of settlement dated January 30, 1947, Sir Ness Wadia settled shares upon trusts, with the net dividends, interest, and income initially payable to his son (the assessee) for life. After his death, the income was to be divided equally between his daughter, Diana, and son, Nusli, for their lifetimes, with the corpus eventually passing to their children. On March 30, 1957, the assessee executed a deed to accelerate the life estates of Diana and Nusli by surrendering his life interest.

Income-tax Officer's Findings:
The Income-tax Officer included the income from the trust in the assessee's income for the years 1958-59 and 1959-60 under section 16(3)(a)(iv), arguing that the surrender constituted a direct transfer of assets to the minor children without consideration.

Tribunal's Findings:
The Tribunal rejected the revenue's contention, stating that the minor children were not parties to the deed of release and that the surrender merely accelerated the subsequent life interests without constituting a transfer of property by the assessee.

Court's Analysis:
The court evaluated the deed and relevant case law, including Provident Investment Co. Ltd. v. Commissioner of Income-tax, Makhan Lal v. Nagendra Nath, and Commissioner of Income-tax v. Dadabhoy G. Broacha. The court emphasized that the deed's operative clause (1) provided for the complete surrender and release of the assessee's interests, and any benefit to the children arose from the original settlement deed of January 30, 1947, not from a transfer by the assessee. The court concluded that the deed did not create any new interest in favor of the children but merely accelerated their pre-existing interests.

Conclusion:
The court confirmed the Tribunal's findings and answered the first question in the negative, ruling that the surrender did not amount to a transfer of assets under section 16(3)(a)(iv).

Issue 2: Inclusion of Educational Expenditure under Section 4 of the Expenditure-tax Act

Facts:
In the year 1958-59, Diana and Nusli incurred expenses for education abroad. The Expenditure-tax Officer included a portion of these expenses in the assessee's expenditure under section 4(ii). The Appellate Assistant Commissioner modified this, applying section 4(i) instead.

Tribunal's Findings:
The Tribunal held that neither section 4(i) nor section 4(ii) was applicable, as the minor children were not dependants of the assessee within the meaning of section 2(g)(i).

Court's Analysis:
The court acknowledged the Tribunal's finding that the children were not dependants and noted that this finding could not be altered in the present reference. The court accepted the revenue's concession that without a finding of dependency, the expenditure could not be included in the assessee's expenditure.

Conclusion:
The court answered the second question in the negative, ruling that the educational expenses could not be included in the assessee's expenditure.

Summary:
The court ruled that the surrender of life interest by the assessee did not constitute a transfer of assets to his minor children under section 16(3)(a)(iv) of the Indian Income-tax Act. Additionally, the educational expenses incurred by the children were not includible in the assessee's expenditure under section 4 of the Expenditure-tax Act, as the children were not dependants of the assessee. The revenue was ordered to pay the costs of the assessee.