1963 PLP 170 (PTD)

S.Y. 2007‑2008 1952‑53 2,073 S.Y. 2008‑2009 1953‑54 2,188 The Income‑tax Officer disallowed these claims in both the aforesaid years holding that no proper trust has been brought into existence under the Annexure "A" for the follow ing reasons, extracted from his order, dated May 19, 1953, relating to the 1952‑53 assessment year; "The assessee has claimed an interest payment of Rs. 2,072‑14‑0. This interest has been credited by the assessee to a trust account credited in the name of the karta's wife Manbari, who died on May 19, 1945. The trust was created on April 5, 1951. In the first instance the trust has been brought into existence from out of the funds standing in her name in the books of account of the assessee. At no time has the department conceded the ‑fact that the amount standing in her name belonged to her in her individual capa city. It was treated as a family fund and the interest accruing on it was added back every time. Now to ensure that the deduction is given this trust has been brought into existence. The author of the trust is no other than the karta of the family, viz., Dalooram Jayanarain. The trustee is also the same gentleman. The objects of the trust have not so far been given effect to. Moneys remain in the business. In terest is just being credited. Therefore, the alienation of the amount in favour of the trust is just a make‑believe entry in the books of account of the assessee. I, therefore, hold that no trust has come into existence and add back the interest of Rs. 2,073..." 9. The Appellate Assistant Commissioner in the appeal against both the aforesaid assessments held that though the trust was valid, since the settlor was deriving indirect benefit in the income of the trust by virtue of the borrowing re maining' in the books of the assessee family, section 16(1)(c) applied so that such interest payments even if allowable required, on the other hard, to be aggregated with the income of the family. He accordingly dismissed both the assessee's appeals. A copy of paragraph 3 of his order, dated 12th April, 1955, relating to 1952‑53 assessment is annexed hereunto as Annexure "B" and forms part of the case. 10. Both the appeals that followed to the Tribunal were dismissed by it for the following reasons reproduced from paragraph 2 of its order : "No specific assets or funds of the Hindu undivided family have been taken out and the trust in question created. The trust actually has been created only in' respect of the credit balance in favour of Manbari already existing in its books. These facts are identical to those covered by the decision of Madras High Court in In re: Mathappa Chettiar ((1945), 3 I T R 311 (Mad )) Respectfully following the decision therein, we held that no genuine liability has arisen in favour of the trust as claimed and accordingly the interest thereon is not deductible." In view of the aforesaid decision of the Tribunal, it did not consider the applicability of section 16(1)(c). 11. From out of the foregoing facts, the questions of law that arise are; "(1) Whether the trust deed, Annexure `A' aforesaid, has created a valid trust in respect of the aforesaid ledger balance in the books of the assessee ? (2) Whether the interest credits of Rs. 2,083 and Rs. 2,188 to the aforesaid ledger account are permissible deductions in the assessments of 1952‑53 and 1953‑54 respectively ?" T. V. Viswanatha Aiyar, P. S. Sarangapani and T. V. Rama nathan for the Assessee. C. S. Rama Rao Sahib for the Commissioner. RAJGOPALAN, J.‑The assessee, a Hindu undivided family, of which Dalooram Jayanarain was the karta, carried on extensive business in Madras. The business books of the assessee carried a credit of Rs. 75,000 in the name of Manbari, the wife of Dalooram Jayanarain. The assessee treated that as her money which the assessee had borrowed and invested in his business. Manbari was credited every year with interest on the loan. She died on May 19, 1945. On November 2, 1948, a sum of Rs. 31,000 out of what stood to her credit was transferred by Dalooram Jayanarain to the credit of the Dalooram Jayanarain Trust Account, and the balance, with which we are not concerned was left in the account of Manbari. The Dalooram Jayanarain Trust account was credited with interest year after year, calculated on the amount to the credit of the account. On April 5, 1951, Dalooram Jayanarain executed a registered deed of trust, Annexure "A". The preamble in that document ran : "Whereas my wife, Manbari, who died on or about May 19, 1945, had some time prior to her death declared to me her desire that a sum of Rs. 31,000, out of the amount belonging to her in my business and standing to her credit in my account books should be utilised by me for the creation of a permanent trust for the carrying on of a Sanskrit patasala in her name, and enjoined me to take the necessary steps for the starting of the said patasala during my lifetime and to ensure its being carried on successfully after my lifetime on a permanent basis, and .whereas in pursuance to the said directions I have caused the necessary adjustments to be made on November 2, 1948, in my books of account transferring the said sum of Rs. 31,000 to the account of Dalooram Jayanarainji Trust account, pending the execution of a formal deed of trust . . . and whereas I have decided . . . . the balance of the income realised from the investment of the said amount in the business of Dalooram Jayanarain carried on by me to carry interest at the rate of six per cent. per annum should be utilised for carrying on the said patasala . . ." The declaration of trust was in the following terms : "I hereby declare that myself, my heirs, executors and assigns and others, the trustees for the time being of these presents, hereafter called the `trustees', shall and will at all times hereafter stand seized and possessed of the said amount of Rs. 31,000 invested in my business of Dalooram Jayanarain in the name of Sri Manbari Sanskrit Patasala Trust account and carrying interest at six per cent. per annum has been set apart for the purpose of the said trust . . . " Dalooram Jayanarain constituted himself the sole trustee for his lifetime, and he nominated five persons to succeed him to the office of trusteeship after his death. The trust was given effect to. In the S.Y. 2007 and 2008, which were the assessee's account ing years, the trust account was credited with the interest due-- Rs. 2,083 and Rs. 2,188 respectively. The assessee claimed these amounts as permissible deductions, obviously under section 10(2)(iii) of the Income‑tax Act, in the relevant assessment years 1952‑53 and 1953‑54. The Income‑tax Officer disallowed the claim. The appeals he assessee filed succes sively to the Assistant Commissioner and the Tribunal were dismissed. The Tribunal rested its decision on the ground that there was no valid trust. The two questions referred to this Court under section 66(1) of the Act were; "(1) Whether the trust deed, Annexure `A' aforesaid has created a valid trust in respect of the aforesaid ledger balance in the books of the assessee ? (2) Whether the interest credits of Rs. 2,083 and Rs. 2,188 to the aforesaid ledger account are permissible deductions in the assessment of 1952‑53 and 1953‑54 respec tively ?" Rupees 31,000 which constituted the corpus of the trust fund, was money that the assessee originally owed to his wife, Manbari, and which was due from the assessee after her death to the contemplated trust. The entry made in the books of the assessee on November 2, 1948, did not bring into existence any valid trust by itself. Had that been the claim, the principle laid down in Muthappa Chettiar v. Commissioner of Income‑tax ((1945) 13 I T R 311 (Mad).) would have applied. The validity of the trust, however, has to be decided with reference not to the entry in the account books dated November 2, 1948, but with reference to the declaration of trust in the registered deed of trust dated April 5, 1951, executed by Dalooram Jayanarain. The first question as framed, it should be noted, itself refers in specific terms to the trust deed. The corpus of the trust was still a debt due from the assessee. That would lawfully constitute the subject of a trust. In applying the principle laid down in Muthappa Chettiar's case the Tribunal overlooked the essential difference between the two cases, that the trust in this case was evidenced not by the credit entry alone in the account books of the assessee but by the registered deed of trust. The decision in Muthappa Chettiar's case was based on the application of the principle laid down earlier in Ramanathan Chettiar v. Palaniappa Chettiar (I L R 1945 Mad. 500) which itself followed the decision of the Privy Council in Chambers v. Chambers (I L R 1944 Mad 617 (P C)). In none of those three cases was there a registered deed to evidence the alleged trust. As pointed out by Patanjah Sastri J. in Ramanathan Chettiar v. Palaniappa Chettiar (1 L R 1945 Mad. 500, 513) : " . . property may be transferred by way of gift . . such a transfer, being one made to a living person, must comply with the requirements of section 123 of the Transfer of Property Act and can only be effected in the case of mov able property, by a registered instrument duly executed or by delivery". Execution of a registered document and delivery of the movable property, in this instance, cash were alternative methods to constitute a valid gift under the terms of section 123 of the Transfer of Property Act. The requirements of section 123 were satisfied in this case by execution of the registered deed of trust. The competence of Dalooram Jayanarain to execute that document was never in issue. On the execution of that docu ment, Rs. 31,000 vested in the trustee, that is, in Dalooram Jayanarain as a trustee. There could, therefore, be no further question of any delivery of the trust property from Daloorom Jayanarain to Dalooram Jayanarain, the trustee. We hold that a valid trust was created under the registered deed dated April 5, 1951. The first question is answered in the affirmative and in favour of the assessee. In dealing with the second question, we have to remember that the Tribunal disallowed the claim for deduction on the only ground that there was no valid trust. The Tribunal itself record ed : "We hold that no genuine liability has arisen in favour of the trust as claimed". Since we have upheld the validity of the trust, the second question will also have to be answered in the affirmative and in favour of the assessee. The Assistant Commissioner no doubt rested his disallowance on the provisions of section 16(1)(c) of the Act. Whether the claim of the assessee could be disallowed on that ground does not arise for consideration at this stage, as it does not arise on the order of the Appellate Tribunal. We must, therefore, decline the request of the learned counsel for the department that we should consider at this stage whether the assessee's claim falls within the mischief of section 16(1)(c). Apart from that, it was not a revocable trust at all. A further contention of the learned counsel for the depart ment was that the claim of the assessee did not satisfy the requirements of section 10(2)(iii) of the Act, because it was not a case of borrowed capital, that is, a loan borrowed for the business of the assessee. That question again does not arise for consideration on the order of the Appellate Tribunal. Such a contention was not examined or adjudicated upon by the departmental officers either. This contention, as we said, does not arise on the order of the Appellate Tribunal, and it is not open to the learned department to put forward that contention at this stage. We answer the second question also in the affirmative and in favour of the assessee. As the assessee has succeeded, he will be entitled to the costs of this reference. Counsel's fee Rs. 250. Questions answered in the affirmative.