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PETITIONER: TULSIDAS KILACHAND

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,BOMBAY CITY I.[And connected

DATE OF JUDGMENT: 03/01/1961

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. KAPUR, J.L. SHAH, J.C.

CITATION:  1961 AIR 1023            1961 SCR  (3) 351  CITATOR INFO :  RF         1961 SC1059  (6)  RF         1968 SC 189  (13)  R          1972 SC   7  (22)  R          1981 SC1274  (25)

ACT: Income Tax-Holder of shares becoming trustee for the benefit of  wife-Liability  to tax  of  such  shareholder--"Adequate consideration",  meaning of-Indian Income-tax Act, 1922  (11 of 1922), ss. 16(1)(c), 16(3)(a)(iii), 16(3)(b).

HEADNOTE: By  a  deed  dated  March 5,  1951,  the  appellant  made  a declaration of trust in favour of hiswife as follows:  "I hereby    declare that I hold 244 sharesupon  trust  to pay the   income thereof to my wifefor   a  period   of seven  years  from the date hereof or her  death  (whichever event  may be earlier) and I hereby declare that this  trust shall  not be revocable".  In the year of account,  1951,  a sum  of Rs. 30,404 was received as dividend income on  those shares  and  the  appellant claimed  before  the  income-tax authorities  that this sum was not liable to be included  in his total income in view of the third proviso to s. 16(1)(c) of  the  Indian-Income-tax  Act, 1922, but  this  claim  was rejected  on the ground that the case was covered either  by s.  16(3)(a)(iii)  or  by  s.  16(3)(b)  of  the  Act.   The appellant’s  contention  was that under the  deed  of  trust there was no transfer of assets either to the wife or to any person for the benefit of the wife but merely a creation  of a  trust in respect of the shares, the dividends from  which were payable to the wife, that even if it be held that there was such a transfer, it was for adequate consideration being for  love and affection which was a good consideration,  and that   thus  s.  16(3)(a)(iii)  or  s.  16(3)(b)   was   not applicable. Held,  that on a true construction of the deed  dated  March 15, 1951, there was a transfer of the shares by the  husband to himself as a trustee for the benefit of the wife and that even  though  the husband was the same  individual,  in  his capacity  as  a  trustee he must be  regarded  as  a  person distinct from the transferor.

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Held, further, that the words "adequate consideration" in s. 16(3) of the Indian Income-tax Act, 1922, denoted considera- tion other than mere love and affection, which, in the  case of a wife, may be presumed. Accordingly, the present case fell within s. 16(3)(b) of the Act and not within the third proviso to s. 16(i)(c). Provat Kumar Mitter v. Commissioner of ’Income-tax, [1961] 3 S.C.R. 37, distinguished. 352

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 134 to  137 of 1959. Appeals  by special leave from the judgment and order  dated September  20,1957, of the Bombay High  Court in Income  Tax Reference No. 14 of 1957. R....J.  Kolah,  S. N. Andley, J. B.  Dadachanji,  Rameshwar Nath and P. L. Vohra, for the appellants. K....N. Rajagopal Sastri and D. Gupta, for the respondent. 1961.  January 3. The Judgment of the Court was delivered by HIDAYATULLAH,  J. This judgment governs  the  disposal  of Civil Appeals Nos. 134 to 137 of 1959.  They have been filed by  four  assessees  with special leave, and  arise  out  of similar facts, and it is not necessary to refer to more than one case to consider the point in question. The assessment year under consideration is 1952-53, and  the previous  year, the Calendar year, 1951.  In that year,  Mr. Tulsidas  Kilachand,  one  of the four  appellants,  made  a declaration  of  trust in favour of his wife, a  portion  of which may be quoted here:               "........... 1, Tulsidas Kilachand hereby  de-               clare   that  I  hold  244  shares  of   Kesar               Corporation  Ltd. and 120 shares of  Kilachand               Devchand  &  Co., Ltd upon trust  to  pay  the               income  thereof to my wife Vimla for a  period               of  seven  years from the date hereof  or  her               death  (whichever event may be earlier) and  I               hereby  declare that this trust shall  not  be               revocable." In the year of account, a sum of Rs. 30,404 was received  as dividend income on those shares, and the assessee  contended that this income, after being grossed up, was not liable  to be  included  in  his total income, in  view  of  the  third proviso  to s. 16(1)(c) of the Indian Income-tax  Act.   The Income-tax  Officer  did  not accept  this  contention,  and though the assessment order is not before us, we gather from the  statement of the case that the reason he gave was  that the income had accrued to or had arisen in the hands of 353 Mr. Tulsidas Kilachand and had been paid by him to his wife. The  Income-tax Officer held that the words of  the  proviso "income  arising to any person by virtue of a settlement  or disposition" did not apply to this income. On  appeal, the Appellate Assistant Commissioner  held  that the  case  was  governed by s. 16(3)(b),  and  need  not  be considered  under the third proviso. to s. 16(1)(c)  of  the Act.   It appears to have been conceded before him  that  if the former provision applied, the proviso would not save the income  from  being assessed in the hands  of  Mr.  Tulsidas Kilachand.  The appeal was dismissed. In  the appeal before the Tribunal, Mr.  Tulsidas  Kilachand again  relied  upon the third proviso to  s.  16(1)(c),  and contended that the case was riot governed by s. 16(3)(b) and

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that  the  dividend  income could not  be  included  in  his assessment.   The Tribunal came to the conclusion  that  the case  was  covered  either  by s.  16(3)(a)(iii)  or  by  s. 16(3)(b),   and  that  the  income  from  the  shares   was, therefore,  liable  to  be included in  the  income  of  Mr. Tulsidas  Kilachand.   The  Tribunal,  however,  raised  and referred the following question under s. 66(1) of the Act to the High Court of Bombay:               "Whether on a true construction of the deed of               declaration  of trust dated 5th March ,  1951,               the  net dividend income of Rs. 30,404 on  120               shares  of Kilachand Devchand & Co., Ltd.  and               244  shares  of Kesar  Corporation  Ltd.  held               under trust by the assessee for the benefit of               his  wife was income liable to be included  in               the total income of the assessee? The High Court came to the conclusion that, though s.  16(1)(c) was not satisfied in view of the third proviso, s.     16(3)(b) was applicable to the case, and answered the question in the affirmative. In  the  appeal before us, the case for the  Department  was based  both on s. 16(3)(a)(iii) and s. 16(3)(b),  while  the appellants  contended that this disposition fell within  the third proviso to s. 16(1)(c).  The relevant provisions are: 45 354 "  16.  Exemptions and exclusions in determining the   total income.- (1)  In     computing    the    total    income    of     an assessee.................................................... (c)  all  income  arising  to any  person  by  virtue  of  a settlement  or  disposition whether revocable  or  not,  and whether  effected  before or after the commencement  of  the Indian  Income-tax (Amendment) Act, 1939 (7 of  1939),  from assets  remaining the property of the settlor  or  disponer, shall be deemed to be income of the settlor or disponer, and all  income arising to any person by virtue of  a  revocable transfer  of  assets  shall be deemed to be  income  of  the transferor: Provided.................................................... Provided further............................................ Provided  further  that this clause shall not apply  to  any income  arising to any person by virtue of a  settlement  or disposition  which is not revocable for a  period  exceeding six  years  or during the lifetime of the  person  and  from which  income the settlor or disponer derives no  direct  or indirect benefit but that the settlor shall be liable to  be assessed on the said income as and when the power to  revoke arises to him. (2)..............................................(omitted) (3)..In computing the total income of any individual for the purpose of assessment, there shall be included-- (a)  so much of the income of a wife or minor child of  such individual as arises directly or indirectly- (i)...................................................... (ii)..................................................... (iii) from assets transferred directly or indirectly to  the wife   by   the   husband  otherwise   than   for   adequate consideration  or  in connection with an agreement  to  live apart; or (b)..so  much of the income of any person or association  of persons as arises from assets transferred otherwise than for adequate consideration to the person or 355 association by such individual for the benefit of his

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wife or a minor child or both." The  object  of framing s. 16 can almost be taken  from  the observations  of  Lord Macmillan in  Chamberlain  v.  Inland Revenue Commissioners (1), where he stated as follows: "This   legislation  ...  (is)  designed  to  overtake   and circumvent  a growing tendency on the part of  taxpayers  to endeavour  to  avoid  or reduce tax liability  by  means  of settlements.   Stated quite generally, the method  consisted in  the disposal by the taxpayer of part of his property  in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or   interests  in,  the  property  or  its   income.    The legislature’s  counter  was to declare that  the  income  of which  the taxpayer had thus sought to disembarrass  himself should, notwithstanding, be treated as still his income  and taxed in his hands accordingly." These   observations  apply  also  to  the   section   under consideration, and the Indian provision is enacted with  the same intent and for the same purpose.  Section 16 thus  lays down  certain exemptions and exclusions in  determining  the total  income  of an assessee.  Some of the  provisions  lay down  the conditions for inclusion of certain income,  while others  lay  down  the conditions  for  exclusion  of  other income.   We are concerned with the income accruing in  case of  settlements and the conditions under which income  of  a wife is treated as the income of the settlor or disponer  or as  the income of the husband.  We have to see if  the  pro- visions for exclusion or inclusion apply to this case. Section 16(1)(c) provides that income from assets  remaining the  property of the settlor or disponer or arising  to  any person by virtue of a revocable transfer of assets shall  be deemed  to  be the income of the transferor.  What  cl.  (c) means  was decided by this Court in Provat Kumar  Mitter  v. Commissioner of Income-tax (2).  There, Provat Kumar  Mitter had assigned the dividends only, and had not transferred the relevant shares.  It was held by this Court that this (1) (1943) 25 T. C. 317, 329. (2) [1960] 3 S.C.R. 37. 356 was  a  case  of application of one’s  own  income  and  not assignment of the source from which the income was  derived, which alone saved the income from tax, subject, however,  to provisions  like  s.  16(1)(c) and s. 16(3).   The  deed  in favour  of  the wife in that case gave only a right  to  the dividends, and not being a transfer of an existing  property of the assessee, s. 16(1)(c) and the third proviso were  not attracted.   That case thus has no application to the  facts of  the present case, where the disposition  is  differently made. The  disposition here is for a period of seven years or  the life  of  the  settle’ whichever is  shorter.   During  that period  or the life of the settlee, Mr.  Tulsidas  Kilachand has  bound  himself upon trust to pay the dividends  to  his wife  and  not to revoke the settlement.  The  intention  is obviously  to put this case within the third proviso  to  s. 16(1)(c),  because  cl.  (c) does not apply  to  any  income arising to any other person provided the disponer derives no direct  or indirect benefit, even though the  assets  remain his property.  If it were only a question of the application of  the proviso, this disposition would be exempt.   But  by the  deed of trust, the settlor holds the shares  in  trust; the  shares  do  not remain the  property  of  the  settlor. Section  16(1)(c)  has, therefore, no application,  and  the proviso is not attracted. The  section  goes on to deal with other situations  and  to

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provide  for  them  specially.   Sub-section  (3)   provides specially for assets transferred to the wife or minor child. Income  from assets transferred to the wife is still  to  be included  in  the total income of the husband,  (a)  if  the assets  have been transferred directly or indirectly to  the wife   by   the   husband  otherwise   than   for   adequate consideration  [vide sub-s. (3)(a)(iii)], or (b) so much  of the income of any person or association of persons as arises from   assets  transferred  otherwise  than   for   adequate consideration   to  the  person  or  association   by   such individual for the benefit of his wife [vide sub-s. (3)(b)]. The  first  question  is whether there can  be  said  to  be transfer  of assets to the wife or to ’any person’  for  the benefit  of the wife.  The second question is whether  there was adequate consideration for the transfer, if 357 there  was one The contention of the assessee is that  there was no transfer of any assets at all.  It is contended  that the  ownership  of shares involves a bundle of  rights,  and that  they are, generally speaking, (a) right to  vote,  (b) right  to  participate  in the  distribution  of  assets  on dissolution, and (c) right to participate in the profits, e. g.,  dividends which might be Hi, .declared.  It is  pointed out  that none of these rights was transferred to the  wife, because transfer of assets connotes a creation of a right in the  assets  in praesenti.  It is urged that  there  was  no transfer  of assets either to the wife or to any person  for the benefit of the wife but merely a creation of a trust  in respect of the shares, the dividends from which were payable to  the wife, and that thus s. 16(3)(a)(iii) or s.  16(3)(b) was not applicable.  It is lastly contended that even if  it be held that there was such a transfer, it was for  adequate consideration, being for love and affection, which is a good consideration. The  contention  that there was no transfer at all  in  this case  is not sound.  The shares were previously held by  Mr. Tulsidas  Kilachand for himself.  After the  declaration  of trust  by  him, they were held by him not  in  his  personal capacity  but as a trustee.  No doubt, under ss. 5 and 6  of the  Indian  Trusts  Act if the declarer  of  the  trust  is himself  the  trustee also, there is no need  that  he  must transfer  the  property to himself as trustee; but  the  law implies  that such a transfer has been made by him,  and  no overt  act except a declaration of trust is necessary.   The capacity  of  the  declarer of trust  and  his  capacity  as trustee  are different, and after the declaration of  trust, he  holds  the assets as a trustee.  Under the  Transfer  of Property Act, there can be a transfer by a person to himself or  to  himself  and  another person  or  persons.   In  our opinion, there was, in this case, a transfer by Mr. Tulsidas Kilachand  to  himself  as a trustee, though  there  was  no formal transfer. The  assessee  also  stresses  the  words  "any  person   or association  of persons" in s. 16(3)(b), and  contends  that such a person must be other than the husband, who transfers. The word "any person" is wide 358 enough to include the husband, when he transfers property to himself  in another capacity.  The change of capacity  makes him answer the description "any person".  This deed must  be regarded as involving a       transfer  by the husband to  a trustee, and even though the husband is the same individual, in his capacity as a trustee he must be regarded as a person distinct       from  the  transferor.  In  our  opinion,  s. 16(3)(b) covers the case.

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It   remains   to  consider  whether  there   was   adequate consideration  for the transfer.  Reliance has  been  placed only   upon  love  and  affection.   The   words   "adequate consideration" denote Consideration other than mere love and affection,  which, in the case of a wife, may  be  presumed. When  the  law  insists  that  there  should  be   "adequate consideration" and not good consideration", it excludes mere love  and  affection.   They may be  good  consideration  to support a contract; but adequate consideration to avoid  tax is quite a different thing.  To insist on the other  meaning is really to say that consideration must only be looked for, when love and affection cease to exist. In  our  opinion, this case falls within the  special  rules concerning wife and minor child, laid down in s.  16(3)(b) and not within the third proviso to s.  16(1)(c).   It  must thus be held that there was a transfer of the assets to  the husband-trustee  for  the benefit of the  wife,  The  answer given by the High Court was thus correct. The appeals fail, and are dismissed with costs.  One hearing fee.                            Appeals dismissed.                         __________________ 359