NETARWALLA D M Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee D. M. Netarwala (hereinafter referred to as "Netarwala") had along with his father-in-law Bharucha (hereinafter referred to as "Bharucha") executed a trust deed, the subject-matter of the trust being securities worth Rs. 50,000, out of which securities worth Rs. 40,000 belonged to the assessee, Netarwala, and Rs. 10,000 to Bharucha. Apart from the two settlors, who also became the trustees, the Imperial Bank of India was also constituted a trustee by the trust deed. According to the recitals in the trust deed, the trustees were to pay the balance of interest, dividend and other income out of the trust funds remaining after all the proper costs, charges and expenses of and incidental to the collection of the income of the trust funds were defrayed, to the child of Netarwala and his wife who was already born on 24th January, 1946. THE trust deed was executed on 24th April, 1946. THE payment to the child was to be made for ten years from the date of the trust deed. A further direction in the trust deed was that if the said child died during the said period of 10 years, then the trustees were to accumulate the net income for the remaining period of ten years from the date of the trust deed. THE trust deed then provided as follows :

(2.) SOME other contingencies were also provided for in the trust deed such as that if any one of the two persons mentioned above, i.e., Netarwala and his wife was dead at the expiration of the period of ten years, the trust funds were to be given to the survivor and if none of them was alive, then the trust funds were to be paid to the child of Netarwala and his wife or if more than two, to all of them in equal shares. A further provision was made that if there were no children or child of the Netarwalas on the expiration of the said period of ten years, then 1/5th of the trust funds was to be paid to the heirs of Bharucha according to the law of succession and the balance of 4/5ths of the trust funds to the heirs of Netarwala according to the law of succession applicable to Parsis. The trust came to be determined on 24th April, 1956, i.e., in the accounting year relevant for the asst. yr. 1957-58, and the trust funds were divided between the assessee and his wife. During the asst. yr. 1958-59, the securities received by Netarwala and his wife from the trustees were sold by them and each of them deposited a sum of Rs. 25,000 with one Habib Hussein of Liberty Cinema at 9 per cent. per annum. This interest was sought to be brought to tax by the ITO. The interest earned on the deposit made by the wife was sought to be taxed by the ITO in the hands of Netarwala and the ITO included in the income of the assessee interest received from Habib Hussein to the extent of 4/5ths of the money invested from the sale proceeds of the securities.

(3.) IN order to appreciate the contentions raised by Mr. Khanna, it would be necessary to refer to the provisions of s. 16(3)(a) and (b) as they were in force at the material time. These provisions read as follows :