Jagmohandas Gokuldas Shah vs Commissioner of Income Tax

B.N. Srikrishna, J.—This reference, made at them instance of both the Department and the assessee under s. 256(1) of the IT Act, 1961, and pertaining to asst. yr. 1974-75, refers the following questions :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing the ITO to include in the assessee''s hands only a sum of Rs. 3,500 out of the gross dividend of Rs. 13,500 under the provisions of s. 64(1)(v) of the IT Act, 1961 ?

(Question by Revenue)"

"Whether, on the facts and in the circumstances of the case, the Tribunal were justified in holding that a part of the income realised out of the amount settled upon the trust by the applicant was not towards discharge of legal obligation under the Hindu Adoption and Maintenance Act, 1956, and that the same being not for adequate consideration was liable to be included in the applicant''s total income, under s. 64(1)(v) of the Act ?"

"Whether, on the facts and in the circumstances of the case, the Tribunal having accepted that by the creation of the trust the legal obligation on the assessee under the Hindu Adoption and Maintenance Act, 1956 was discharged was justified in holding that the value of the legal obligation could be equated to income earned by the trust at Rs. 10,000 per annum ?"

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the value of the legal obligation could be calculated only at Rs. 10,000 per annum for 14 years when the applicant''s total wealth was in excess of Rs. 40 lakhs ?"

The assessee was assessed as an individual, and the assessment year concerned is 1974-75, for which the relevant accounting period is Samvat Year 2029. The assessee was the registered owner of 150 equity shares of M/s. Lallubhai Amichand Pvt. Ltd. of the face value of Rs. 1,000 each. By an indenture dt. 26th Oct. 1970, he settled the said shares on trust in favour of his minor son, in accordance with the terms and conditions mentioned in the deed of indenture. This was purported to be in discharge of the assessee''s legal obligations under the Hindu Adoption and Maintenance Act, 1956, towards the maintenance of his minor son. The ITO taxed in the hands of the assessee the dividend income of Rs. 13,500 in respect of the said 150 shares thus settled on trust, on the ground that it was for inadequate or no consideration. Although the AAC agreed with the ITO''s view, the Tribunal, in appeal, took the view that, out of the total dividend income of Rs. 13,500, a sum of Rs. 10,000 should be considered as adequate for discharging the obligations towards maintenance of the minor child, and the balance of Rs. 3,500 had to be brought to tax under the provision of s. 64(1)(v) of the IT Act, 1961.

In somewhat similar circumstances, this Court, in K.M. Sheth Vs. Commissioner of Income Tax/wealth-tax, has taken the view that transfers of shares to a trust set up for the benefit of the minor child of the settlor would squarely fall within the mischief of s. 64 of the IT Act, 1961, and that the dividend income which arose from the settled shares was liable to be included in the total income of the settlor.

Following the law laid down in Sheth''s case (supra), the questions are answered as follows :

Question No. 1 : The Tribunal was not right in directing the ITO to include in the assessee''s hands only a sum of Rs. 3,500 out of the gross dividend of Rs. 13,500 under the provision of s. 64(1)(v) of the Act. The entire dividend income of Rs. 13,500 was liable to be included as income of the assessee by reason of s. 64(1)(v). Questions 2, 3 and 4 need not be answered in view of the categorical answer we have given to question No. 1.

In the circumstances, there will be no order as to costs.