Commissioner of Income Tax vs Dr. V. Srinivasan

A.K. Rajan, J.—All these references are at the instance of the Revenue. The assessment years are 1985-86, 1986-87, 1990-91 and 1989-

90.

The assessee, Dr. V. Srinivasan, is a practising doctor of medicine at Tiruchirapalli. He was the owner of a plot at Thillainagar, Tiruchirapalli. On

September 20, 1980, his father-in-law, Sri L. Rangamani, created a trust, viz., Ayyappa Family Trust, with a corpus of Rs. 10,000 for the benefit

of his two grandchildren, S. Venkatakrishnan and S. Rukmani. Their parents, Mrs. Usha Srinivasan and Dr. V. Srinivasan were made trustees. The

trust entered into an agreement with the assessee on April 13, 1981, by which the assessee permitted the trust to construct a building on the land

belonging to the assessee. In consideration of this permission, the trust allowed the assessee to conduct his clinic, and to use the facilities available

at the nursing home for his own patients. This agreement also recorded the willingness of the assessee to sell the land to the trust for Rs. 55,000 if

the transaction is concluded within three years. The land was not sold. Subsequently, the board of trustees resolved to let out the premises to the

assessee on a monthly rent of Rs. 15,000. On April 1, 1984, a lease deed was also executed between the trust, viz., Ayyappa Family Trust, and

the assessee.

The assessee claimed that in computing the income for the previous year ending March 31, 1985, relating to the assessment year 1985-86, Rs.

1,80,000 paid as rent to the trust should be allowed as deduction. The Income Tax Officer treated the property as the assessee''s own property

and disallowed the deduction. On appeal, the Commissioner confirmed the assessment. The Tribunal held the trust to be the owner of the building

and therefore, held that the rent paid by the assessee was an admissible deduction. The Appellate Tribunal also found that the contention of the

Revenue based on Sections 164 and 40A(2) was misconceived, as there was no transfer of any asset to the minor children either directly or

indirectly, and there was no payment to any relative of the assessee. Further, the Tribunal held that there was no objective standard to assess the

amount of rent paid and on the basis of which the rent paid could be regarded as exorbitant or for extra-commercial consideration and, hence

accepted the claim of the assessee for deduction of the entire amount.

The following questions have been referred to us, at the instance of the Revenue :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the rent of Rs. 1,80,000 paid

by the assessee to the trust consisting of the assessee''s minor children as beneficiaries was an admissible deduction in computing the income of the

assessee ?

(2) Whether, having regard to the facts and materials on record, the Tribunal was right in law in holding that Section 40A(2) did not stand attracted

?

For an earlier assessment year 1981-82 in the assessment of the Ayyappa Family Trust, it had been held by the Assessing Officer that:

The trust receives money from the rent from the building constructed and the trust distributes the money to the two beneficiaries assessed

individually in 1(4) Circle and wealth-tax is also assessed. It is an assessment to regularise the original return accepted u/s 143(3).

The trust also was found to have obtained loan from the bank for the purpose of construction of the building and the interest paid to the bank

has also been deducted, as an expense, in the assessment of the trust. Therefore, it has been recognised by the Income Tax authorities that the trust

received money as rent from the building constructed by it and the trust distributed money to the beneficiaries who were assessed individually for

wealth-tax also.

In the assessment order on the trust relating to the assessment year 1982-83, it is, inter alia, stated that :

The assessee is a private trust to which the provisions of Section 164 have no application as found in earlier years.

It is further stated therein that :

Since the provisions of Section 164 do not apply to the assessee, income earned by the trust is being considered for assessment in the individual

hands of the beneficiaries.

The beneficiaries are S. Venkatakrishnan and S. Rukmani, children of Usha and Srinivasan.

The Wealth-tax Officer, City Ward 1(4), Trichy, by order dated March 26, 1983, for the assessment year 1980-81 assessed the beneficiary S.

Rukmani as an individual and assessed her to wealth-tax. By another order of the same date, and for the same assessment year, the other

beneficiary S. Venkatakrishnan has also been assessed to wealth-tax. That is, both the beneficiaries, viz., S. Venkatakrishnan and S. Rukmani,

were assessed to wealth-tax as beneficiaries of the trust. Therefore, the trust has been recognised as a valid trust; the properties have been

recognised as trust properties; Section 164 was held not applicable for the purpose of levying Income Tax on the trust and tax was levied only in

the hands of the beneficiaries.

The Department having recognised the trust and taxed the beneficiaries under the Wealth-tax Act as well as under the Income Tax Act cannot

alter its stand and refuse to recognise the trust. The rent paid by the assessee has been treated as income for the trust.

The genuineness of the trust has not been doubted. The ownership of the land by the assessee does not disentitle the trust from being the owner

of the building, the assesses having consented to the trust putting up the building with its funds. Though the building licence had been obtained in the

name of the assessee, the assessee had not put up the building. The fact that the beneficiaries under the trust deed were his children does not efface

the reality of the trust being the owner of the building entitled to receive rent from those to whom it had let out the space. The rent paid by the

assessee was to the trust. The income of the beneficiaries cannot be added to his income, they having been assessed separately.

The first question is therefore answered against the Revenue and in favour of the assessee. In view of that answer to the first question, the

second question is also answered in favour of the assessee and against the Revenue. The questions referred in all these references are therefore

answered in favour of the assessee.