COMMISSIONER OF INCOME TAX Vs. SURAJBA PATEL TRUST

JUDGEMENT

(1.) The petitioner has prayed for an order directing the Income-tax Appellate Tribunal, Bombay, to state the case and to raise and refer to this court the following questions:

(2.) This application is made to us upon the refusal of the Tribunal to state the case and refer these questions to us. The relevant facts are as follows : The respondent-trust was created under a deed of trust dated April 27, 1984( ), by Sarojben Jhaverbhai Patel for the benefit of her three granddaughters, Nina, Varsha and Bharati. She set aside a sum of Rs. 1,00,000 for this purpose. Under the terms of the deed of trust, the three beneficiaries have an equal share in the income and corpus of the trust. As per clauses 4(b) and (c) of the trust deed, the net income of the trust was to be divided in three equal shares and applied for the benefit of the three beneficiaries. This arrangement was to continue till Bharati attained the age of 35 years. In 1976, the three beneficiaries, who were all majors, entered into three different agreements dated March 15, 1976, under which the trustees were to grant to each of the three beneficiaries annuities of the value of Rs. 5,000 per month. The beneficiaries also executed deeds of assignments dated March 19, 1976, under which the three beneficiaries assigned their rights and shares in the residuary income, after payment of the above annuities, to the Jhaverbai Patel Charitable Trust No. II. On the same day, the three beneficiaries, by three separate deeds of gift, also gifted their interest in the corpus of the trust property to another trust.

(3.) For the assessment years 1977-78 and 1978- 79, the Income-tax Officer has held that the entire income of the trust corpus is liable to be taxed in the hands of the beneficiaries. The assessee-trust preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), by his order dated February 27, 1982, partly allowed the appeal. The Income-tax Appellate Tribunal, by its common order dated December 21, 1984, dismissed the appeal filed by the petitioner from the order of the Commissioner of Income-tax (Appeals). Thereafter, on the refusal of the Tribunal to refer the above questions to us, the present application has been made. Under section 58 of the Indian Trusts Act, 1882, the beneficiary, if competent to contract, may transfer his interest, but subject to the law for the time being in force as to the circumstances and extent in and to which he may dispose of such interest. In the present case, all the three beneficiaries, who are competent to contract, were in a position to transfer their interest or any part of it in the trust properties or income from the trust properties. The beneficiaries have, by a deed of assignment of March 29, 1976, assigned their interest and shares in a portion of the income, as set out earlier, in favour of the Jhaverbai Patel Charitable Trust No. II. Once the beneficiaries have given up their right, title and interest in a portion of the income in favour of the said Jhaverbai Patel Charitable Trust No. II, it cannot be said that in fact they are entitled to receive the entire income and it is the beneficiaries who thereafter diverted a part of their income in favour of the said charitable trust. The beneficiaries have divested themselves of this part of the income at source. Hence, the income so given up and assigned to the said charitable trust cannot be taxed in the hands of the beneficiaries as this income has not accrued to them.