9911796707
TMI Blog1982 (7) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... any year or years for the benefit and maintenance of the beneficiaries. Amongst the heirs of the settlor, the trust shall divide corpus of the trust funds together will all accumulation of income, if any, amongst the heirs of the settlor according to the law of intestate succession amongst the Hindus. During the relevant accounting years, the ITO noticed that the trust had advanced the undermentioned amounts to the beneficiaries who in their turn deposited the said amounts with private concerns and earned interest as indicated in the following table : --------------------------------------------------------------------------------------------------------------------------------------------------- Name of the Amount of Date of Where Interest earned beneficiary advance advance invested by beneficiary upto 31-3-1977 --------------------------------------------------------------------------------------------------------------------------------------------------- Smt. Shanta- Rs. Gaekwad Rs. devi 2,00,000 4-7-1975 Investors 17,862 Smt. Shanta- Gaekwad devi 2,00,000 15-7-1975 Investors 17,128 ----------------------- 34,980 (sic) ---------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above footing, it was immaterial whether the beneficiaries have been taxed in respect of the same income. Lastly, the disallowance of interest was made only in case of one of the beneficiaries and, therefore, the argument in this regard was not tenable. In this view of the matter, the ITO brought to tax a sum of Rs. 36,380 (wrongly mentioned as Rs. 36,300 in the computation) in the hands of the assessee-trust for the assessment year 1976-77. 2. For the same reasons he brought to tax a sum of Rs. 52,800 for the assessment year 1977-78 and Rs. 51,123 for the year 1978-79, respectively in the hands of the trustees. 3. Being aggrieved the assessee carried the matter in appeal before the AAC. He observed that the amounts advanced to the beneficiaries were initially lying deposited with Gaekwad Investment Corpn. (P.) Co. Ltd. in which the Gaekwad family had control/substantial interest. These deposits were income yielding assets of the trust. The trust withdrew these interest bearing deposits from the said company and advanced the amounts free of interest to the beneficiaries who in turn deposited the amount with a firm styled Gaekwad Investors who in turn deposited the amount wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly hit by provisions of section 60. That apart the trustees had tried to divert the income which could have been legitimately earned by them. That apart the trustees were not authorised to make such interest-free advances in favour of the beneficiaries. It is true that the ITO could not step in the shoes of trustees. All the same, it was open to the ITO to bring to tax the income in the hands of the trustees if the provisions of the statute empowered him to do so. In this view of the matter, therefore, the AAC rejected the contentions as raised on behalf of the assessee and upheld the decision of the ITO to bring to tax the income from interest as aforesaid for all the years under appeal. 4. Being aggrieved the assessee has come up in appeal before us. Shri Patel, the learned counsel for the assessee, contended that the assessee is admittedly a discretionary trust. He next pointed out that the revenue has tried to tax the income from interest in the hands of the assessee-trust firstly, or ; the ground that there was a constructive receipt in the hands of the trust. Secondly, that the trust has advanced the amount free of interest to the beneficiaries with the object of avoidin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of assets. In other words, when an assessee transfers its right to receive income without parting with or transferring the assets, by operation of section 60, such income could be said to be deemed to arise to the transferor. In fact the scope of section 60 was sufficiently wide. It takes into its sweep not only any settlement trust or covenant or agreement but also covers arrangement. This is amply clear if we look at the definition of expression ' transfer ' as laid down in section 63 of the Act. The facts of the case show that by an arrangement the trustees had advanced tax free loans to the beneficiaries who in turn had earned interest on such interest-free advance. Since the trustees had not parted with the right over the amount so advanced inasmuch as they had claimed the debt as a deduction in their wealth-tax assessments. This was a clear case of transfer of income without transfer of assets. In fact, the assessee had adopted a device by which it had alienated its income without transfer of source. It is true that provisions of section 60 have to be strictly construed at the same time the fiction set out in section 60 has to be given full effect to. The purpose of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-trust had made certain interest-free advances to the beneficiaries. There was, therefore, no stipulation to receive any interest on the advances so made. The fact that the beneficiaries have utilised the advances for earning income from interest would not entitle the trustees to have a claim over such income from interest because as pointed out earlier there was no stipulation to receive any interest on the advances when they were so made to the beneficiaries. In other words, the beneficiaries received interest on the advances which were made by the trustees in their own right and the trustees could not be said to have exercised any domain over the income from interest. The beneficiaries are not the agents of trustees and they cannot, therefore, be said to have earned income on behalf of the trustees. In other words, the beneficiaries could not be said to have been any receipt of any income which in general law would belong to the trustees. The principle of constructive receipt has been erroneously applied in the instant case, therefore, the revenue authorities were not justified in including the income from interest in the hands of the trustees on the above footing. 6. Now w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising to him (but not the source of it) in such a way that under the instrument of transfer the income no longer arises to him or is received by him, such an arrangement is to be ignored for purposes of taxation. Though under the arrangement or transfer made by the assessee the income may in law arise to another person, it will be treated as continuing to arise to the transferor himself. A transfer of income alone without there being a transfer of the source of that income is a mere application of profits . . . [Emphasis supplied] This section deals with transfer of income without transfer of source of income. The above section would come into play when an assessee who is entitled to receive certain income purports to transfer such income without transfer of source then by fiction enacted in the said section such income is treated as income of the transferor. The material point for application of section 60 is whether the assessee who is the owner of source of income is entitled to receive income therefrom. If there is no right to receive any income from the source then section 60 would not come into play. To put it differently if an assessee transfers income which could have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by the transferor, that is the trustees, then only the trustees could be made liable to pay tax thereon. But as pointed out earlier there was no obligation on the part of the beneficiaries to make any payment of interest to the trustees nor there was any stipulation attached to the advances that interest would accrue or would be received on such advances by the trustees. There is no nexus between the advances made to the beneficiaries and their employment of the funds by the beneficiaries which resulted in earning of income. The concept of application of income postulates that income must accrue or must be received by the person who applies it in a particular manner. When the income so accrues to the transferor by operation of section 60, his liability to tax remains unaffected. But when there is no accrual or receipt of income by the trustees the question of application of income does not arise at all. If this much is clear then we have no hesitation in coming to the conclusion that provisions of section 60 cannot be invoked on the facts of the case. The inclusion of income in the hands of the trustees on the above basis is clearly unsustainable, in our opinion. 7. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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