Kapoor Chand (Deceased) vs. ACIT (2015) 376 ITR 450 (SC)
The
brother-in-law of the appellant, namely Shri Ram Niwas Agarwal had
created two trusts for the benefit of two minor children of the
appellant, Kapoor Chand. One trust known as Priti Life Trust was for the
benefit of Kumari. Priti who was aged about 7 years and the other trust
was created by the name of Anuj Family Trust for the benefit of master
Anuj, minor son of the appellant, Kapoor Chand. One of the important
terms of both the trust deeds was that income so earned by the trusts
shall not be received by two minors during their minority and will be
spent for their benefits only once they attain the majority. Another
fundamental clause in both the trust deeds was that in case any of the
beneficiaries died before attaining majority, his/ her share would be
given to the other sibling. Both these trustees became partners in the
partnership firm. The said partnership firm earned profits in the year
1980-81 and share of the two trusts was given to them.
Since
these trusts were for the benefit of two minor children of the
appellant, invoking the provisions of section 64(1) (iii) of the
Income-tax Act, 1961 (“the Act”), the Assessing Officer included the
said income in the income of the assessee and taxed it as such.
The appellant contested the assessment by filing an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal holding that since the minors had no right to receive the income of the trusts till the time they were minors, the provisions of section 64(1)(iii) read with Explanation 2A of the Act would not be attracted.
The Department challenged the aforesaid order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Tribunal allowed the appeal and set aside the order of the Commissioner of Income-tax (Appeals).
Dissatisfied with the outcome, the appellant approached the High Court of Uttaranchal by way of an appeal filed u/s. 260A of the Act which appeal was dismissed by the High Court.
On further appeal, the Supreme Court held that it was clear from a plain reading of the aforesaid section that while computing the total income of any individual the income of a minor child of such individual from the admission of the minor to the benefits of partnership in a firm is to be included as the income of the said individual. Explanation 2A clarifies that if the minor child is a beneficiary under a trust, income arising to the trust from the membership of the trustee in a firm shall also be treated as income of the child and the provisions of sub-clause (iii) of section 64(1) shall get attracted even in that eventuality.
The Supreme Court noted that in the present case, it was clear from the facts narrated above, that two minor children of the appellant were the beneficiaries under the two trusts. The said trustees were the partners in the firm and had their shares in the income as partners in the said firm.
According to the Supreme Court, the entire controversy revolved around the question as to whether such income could be treated as income of a minor child. This controversy had arisen because of the reason that the income that had been earned by the trustees was not available to the two minor children till their attaining the age of majority.
The Supreme Court observed that this very question had come up before it in almost identical circumstances in the case of CIT vs. M. R. Doshi [1995] 211 ITR 1 (SC). The court, after taking note of some judgments of High Courts including the judgment of the High Court of Bombay in Yogindraprasad N. Mafatlal vs. CIT [1977] 109 ITR 602 (Bom) interpreted the provisions of section 64(1)(v) of the Act in the following manner (page 4 of 211 ITR):
“Section 64(1)(v) requires, in the computation of the total income of an assessee, the inclusion of such income as arises to the assessee from assets transferred, otherwise than for adequate consideration, to the extent to which the income from such assets is for the immediate or deferred benefit of, inter alia his minor children. The specific provision of the law, therefore, is that the immediate or deferred benefit should be for the benefit of a minor child. Inasmuch as in this case the deferment of the benefit is beyond the period of minority of the assessee’s three sons, since the assets are to be received by them when they attain majority, the provisions of section 64(1)(v) have no application.”
The Supreme Court held that in the present case, as pointed out above, specific stipulation which is contained in both the trust deeds is that in case of demise of any of the minors the income would accrue to the other child. Therefore, the receipt of the said income was also contingent upon the aforesaid eventuality and the two minors had not received the benefit immediately for the assessment year in question, viz., as “minor” children. Explanation was of no help to the Department. The provision that is contained in Explanation 2A is only to take care of the income even when a trust is created. It does not go further and make any provision to the effect that even when the income earned by the trust cannot be utilised for the benefit of the minor during his minority the Explanation 2A shall be attracted. There is no such stipulation in the said Explanation. Moreover, the language of section 64(1)(iii) is clear and categorical which makes the income of minor child taxable at the hands of individual. Thus, in the first instance it has to be shown that the share of income is in the hands of minor child which requirement was not satisfied in the present case.
The Supreme Court however observed that the Department was not without remedy inasmuch as the income earned by the two minors would not go untaxed. On attaining majority when the aforesaid money in the form of income is received by the two individuals it would be open to the Department to tax the income at that time. Or else, the Department could take up their cases u/s. 166 of the Act, if permissible.
