K T DOCTOR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this reference, at the instance of the assessee, the following three question have been referred to this High Court for its opinion :

(2.) THE facts leading to this reference are as follows : We are concerned with asst. yrs. 1972-73 and 1973-74. THE assessee before us is an individual and he derives income from house property, salary, interest, etc. Financial year 1971-72 is the relevant previous year for asst. yr. 1972-73 and financial year 1972-73 is the previous year for asst. yr. 1973-74. For the purposes of this judgment so far as asst. yr. 1972-73 is concerned, the relevant period is 1st Oct., 1971, to 31st March, 1972. By a deed of irrevocable trust dt. 30th Sept., 1971, Savitaben Tapidas, the mother of the assessee, settled in trust in the first instance Rs. 1,000 for the benefit of four persons named in the trust deed. THE assessee and his wife, Mala, were appointed trustees of this trust. THE assessee, his wife Mala, and their two sons, Kedar and Kashmalan, were the only four beneficiaries under this trust. THE assessee was to get 40 per cent share both in the income and in the ultimate distribution of the corpus of the trust and the three other beneficiaries, namely, Mala, Kedar and Kashmalan, were given 20 per cent share each. Under cl. V(7) of the deed, the trustees were authorised to start certain business or industry and by their resolution dt. 18th Oct., 1971, the trustees resolved to start a business in the name and style of K.T. Doctor Enterprise. It may be pointed out that after the creation of the trust, a further amount of Rs. 4,000 was paid by the settlor, Savitaben Tapidas, to the trustees for the purposes of this trust and the question that arose for consideration is regarding the income from this trust. THE assessee is a chemical engineer and till 4th July, 1972, he was working as a chemical engineer with Alembic Industries at Baroda. On 4th July, 1972, he resigned his job and thereafter devoted himself exclusively to the work of K. Doctor Enterprise which was the business started in pursuance of the resolution of the trustees. It was found that for the previous year relevant to the asst. yr. 1972-73, an amount of Rs. 3,391 was earned by K. Doctor Enterprise as income and during the previous year relevant to the asst. yr. 1973-74, an amount of Rs. 22,376 was earned by K. Doctor Enterprise. THE assessee contended that out of this amount of income, only 40 per cent being his share in the income of the trust should be treated as part of the income of the assessee in his individual capacity and the balance for the two relevant previous years should be treated as income in the hands of the respective other beneficiaries, namely, Mala, Kedar and Kashmalan. THE contention of the assessee before the IT authorities was that income from the said business constituted income of the trust created by Savitaben Tapidas and it could not be treated as the income of the assessee in his individual capacity. He was contending all along that out of the income of the trust for the relevant year, only 40 per cent should be treated as his income. THE ITO rejected this contention of the assessee and held that the entire business income of K. Doctor Enterprise would be taxable in the hands of the assessee. THE ITO relied upon the provisions of S. 60 of the IT Act. He held that the income derived by the wife and minor children of the assessee from the trust was includible in the income of the assessee in the light of the provisions of S. 60 of the IT Act. In the course of the assessment proceedings, the assessee was examined on oath and his statement was recorded. He stated before the ITO that, as a trustee, he could not be required to give any know-how, intelligence and mental services to the trust in terms of the trust deed and further that the income was earned because of intelligence and technical know-how and that no trust fund was required for the business which was being carried on by the trust except for and by way of expenses. THE ITO came to the conclusion that the assessee had created a device to transfer his own earnings to the trust and thus had transferred 60 per cent of his professional income to his wife and children through the trust so as to avoid the mischief of S. 64 of the IT Act. According to the ITO, even though the trust empowered the trustees to carry on the business of consulting engineers, the direction in the trust deed would be effective only in so far as his business could be carried on with the aid of the trust fund and resources of the trust, not with the personal ability, know-how and technical knowledge of the trustees or of one of the trustees. According to the ITO, the personal ability and know-how and technical knowledge of the trustee were the mental equipment of the trustee himself and that the trustee was not an employee of the trust. No remuneration had been paid to the trustee for the services rendered by him to the trust and hence the ITO, according to him, came to the conclusion that this was a case of throwing one's own earning in the trust for which there was no legal obligation to be seen.

(3.) IN order to understand the approach of the Tribunal and in order to answer the question that have been referred to us, it is necessary to refer to the deed of trust created by Savitaben, the mother of the assessee. The deed of settlement mentions in the recital clause that the settlor was desirous of settling in trust the cash amount of Rs. 1,000 out of natural love and affection towards her son, Kumudkant (the assessee herein), the daughter-in-law and son's children and for various other considerations stated in the deed of trust. "The trust fund" under the interpretation cl. I in the deed of trust means the cash amount of Rs. 1,000 in respect of which the settlement was created and all moneys, investments and donation paid or transferred to and accepted by the trustees either from the settlor or anyone else. Under cl. II of the deed of trust, the trustees were to hold and stand possessed of the said trust fund and income thereof upon trust with and subject to the powers and provisions contained in the deed of trust. The net balance of the income remaining after providing for the contingencies mentioned in sub-cl. (a) of cl. II were to be distributed in the proportion which we have mentioned earlier, namely, 40 per cent to the assessee, 20 per cent to the assessee's wife and 20 per cent to Kedar, the son of the assessee, and the remaining 20 per cent to Kashmalan, the second son of the assessee. The period of distribution of the corpus of the trust was to be 20 years from the execution of the trust deed. The assessee was appointed as chairman and managing trustee and in case of difference of opinion between the trustees the trustees were to act by majority and the assessee was to have a casting vote in case of a tie. Clause V provided as follows :