COMMISSIONER OF INCOME TAX Vs. KAMLABAI JUTHALAL SMT

JUDGEMENT

(1.) THIS reference relates to the question whether there is a diversion of income by the assessee before it has reached her hands or whether this is a case where there is application of income by the assessee after it was received by her. The reference relates to the assessment year 1961 -62 and the short facts are as under : By a deed of settlement dated July 1, 1947, Lala Motilal Chimanram Jhunjhunwala, settled upon trust 225 shares of Motilal Padampat Sugar Mills Co. Ltd. of the face value of Rs. 1,000 each for the objects therein stated. By clause 2 of the deed of settlement the settlor directed the trustees to pay the net income from the trust to his daughter -in -law, Kamlabai Juthalal, the assessee for the term of her life, and after her, to hold the corpus of the trust fund upon trust and to divide the same in equal shares amongst all the sons of Juthalal Motilal (grand -sons of the settlor). After some years, on May 5, 1956, by a tripartite deed of assignment and gift, Kamlabai Juthalal, the assessee, who was the beneficiary under the earlier deed of settlement, assigned and transferred her right to receive the income from the trust in favour of four grandsons, Rajendrakumar, Virendrakumar, Gopalkrishna and Mahendrakumar. On these facts the question that arose for consideration which has been referred to for our determination is :

(2.) THE Income -tax Officer following his reasoning in a similar case held that the income of the trust should be included in the income of the assessee, Kamlabai Juthalal, for the relevant assessment year. He rejected the contention on behalf of the assessee that income was diverted at source before it reached the assessee as her income and was, therefore, not liable to be regarded as income and to be taxed. In the opinion of the Income -tax Officer the true effect of the deed of assignment and gift was that there was an application of income by the assessee after it was received by her, and, accordingly, it was liable to be assessed in the hands of the assessee. On construing clauses (b) and (c) of the deed of assignment and gift he held that what could be collected by the assignees was the income which would have been received by the assessee but for the deed of assignment. Logically, therefore, it followed that before the assignees could lay their claim, the income must have accrued to the assessee. The assignees could not derive the income direct from the trust without the instrument executed by the assessee. The Income -tax Officer further pointed out that the assessee had no interest in the corpus of the trust; that the properties that were assigned by her came into existence only when the income was found due to her under the deed of settlement dated July 1, 1947. On an appeal by the assessee the Appellate Assistant Commissioner rejected the contention of the assessee and dismissed the appeal. On a second appeal before the Tribunal it was contended on behalf of the assessee that the assessee had done everything that was possible in the circumstances of the case to divest herself of her right to participate in the income from the trust for all time to come and that the income did not pass to the donees through the assessee and hence the transfer amounted to a transfer of the source of income before the income reached her hands. The Tribunal, after referring to the provisions of sections 58 and 69 of the Indian Trusts Act, 1882, held that it was open to a beneficiary to transfer her interest or right to receive the income from the trust in favour of grandsons and the grandsons as assignees had thereafter the right to demand and to receive payment of the income from the trust from the trustees directly and the trustees were bound to pay the income to them and that the assignment in the present case by the assessee amounted to an assignment of the very source of income for two reasons : (1) The assignment was not subject to any conditions, restrictions or limitations such as that the income should be paid to the donees through the beneficiary or for a certain time, etc.; and (2) the trustees had notice of assignment by joining the gift deed as executants and by agreeing to pay the income to the donees. The Tribunal accordingly found that the obligation created by the assessee to pay the income from the trust to the donees under the terms of the deed of assignment and gift was one whereby the income was diverted before it reached her hands.

(3.) BY a deed of settlement dated July 1, 1947, Lala Motilal settled upon trust 225 shares of a limited company as therein mentioned. The relevant trust with which we are concerned is contained in clause 2 which is as under :