No Clubbing of Income if Trust created for minor after Divorce

Parag Vyas for the Applicant. P.J. Pardiwala for the Respondent.

JUDGMENT

A.S. Aguiar, J. – The following common question of law is referred to under section 256(1) of the Income-tax Act for consideration of this Court by the Tribunal in ITA Nos. 3126/Bom/1983 and 446/Bom/1984 dated 17-9-1985, pertaining to assessment years 1978-79 and 1979-80, at the instance of the assessee :

“1. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the trust created by the assessee for the benefit of his minor daughter in obedience to the terms of decree of divorce passed against him under the provisions of Parsis Marriage & Divorce Act, 1936, in a suit brought against him by his wife, was for adequate consideration and, therefore, would not fall within the scope of section 64(1)(vii) of the Income-tax Act, 1961?”

2. The factual matrix giving rise to the question referred is as follows :

The assessee Behram B. Dubhash was married to one Mehroo according to Zorastrian rites on 12-5-1966. Both were Parsis. Out of the wedlock a female child, by name Farida, was born on 30-11-1970. A suit came to be filed by Mehroo for restitution of conjugal rights being suit No. 36 of 1974, before the Parsi Chief Matrimonial Court at Bombay. Pending the said suit she filed another suit for divorce being suit No. 13 of 1974 and a decree dissolving the marriage was passed on the ground of desertion. Under the terms of the decree dated 16th June, 1975, the assessee was directed to provide permanent alimony and the custody of the child to his wife as well as for their maintenance. Under the said decree the assessee was required to create a trust in a sum of Rs. 5,50,000 by appointing the Central Bank Executor & Trustee Co. Ltd., as Trustees. The custody of the female child, Farida, was to be with the mother. The trustees had to pay the net income of the trust fund to Mehroo till the child attained eighteen years of age on 30-11-1968. Thereafter the income was to be directly paid to Farida till she completed thirty years of age. On her completing the age of thirty years, the trustees were to deliver the entire trust fund to the said Farida. During the minority of Farida, Mehroo had to spend 5/11th of the income received by her from the trustees for the education of the said child and the balance for her benefit and maintenance in such manner as the mother deemed fit and she was not accountable to anybody in that behalf. For the accounting year 1978-79, Mehroo received a sum of Rs. 36,230 from the trustees as per the directions of the settler (the assessee). In the next year she received a similar amount viz., Rs. 33,950. As per the terms of the settlement Mehroo was required to spend the said amount on the child. The Income-tax Officer brought these amounts to charge by including them in the net income of the assessee under section 64(1)(vii). The assessee appealed, and the Commissioner of Income-tax (A) sustained the order. Aggrieved by the findings of the aforesaid authorities the assessee filed ITA Nos. 3126/Bom/1983 and 446/Bom/1984. The Tribunal passed a detailed order, after hearing the parties at length, holding that the trust created by the assessee did not fall within the scope of section 64(1)(vii) and reversed the concurrent findings. The Tribunal held that the trust was for adequate consideration inasmuch as it was to discharge a pre-existing liability on his part.

3. Section 64(1)(vii) of the Income-tax Act, reads as follows :

“64. Income of individual to include income of spouse, minor child, etc.—(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly—

(i )to (vi)******

(vii)to any person or association of persons from assets transferred directly or indirectly otherwise than for adequate consideration to the person or association of persons by such individual, to the extent to which the income from such assets is for the immediate or deferred benefit of his or her spouse or minor child (not being a married daughter) or both.”

4. The Income-tax Officer by order dated 26th September, 1981 held that the income was liable to tax as it fell within the ambit of section 64(1)(vii) on the ground that the assessee had settled an amount of Rs. 5,50,000 in trust for the maintenance of his minor daughter without any consideration. The Commissioner of Income-tax in his order dated 19-4-1983 upheld the finding of the Income-tax Officer. The concurrent finding of the two authorities below has been set aside by the Income-tax Appellate Tribunal, holding that section 64(1)(vii) was not attracted and the assessee was therefore not liable to pay tax in respect of the amounts provided for the maintenance of the minor child Farida.
5. The Tribunal accepted the contention of the learned counsel appearing for the assessee that the assessee was under a decree, compelled to create a trust for the benefit of the minor child ensuring her proper maintenance and education and that there was a legal obligation on the assessee – father to maintain the minor daughter, irrespective of the suit filed by the mother of the minor child fordivorce. No doubt the decree was passed pursuant to the agreement between the assessee and his estranged wife with a condition to make provision for the minor child, but that did not mean that the assessee was under no obligation to make provision for the minor child. The only question was the manner of making such provision for the minor child. The conscious choice by the assessee to create a trust to provide for the maintenance of the minor child, from the income of the Trust was one of the safest and most acceptable modes for providing for the minor child’s maintenance. The same was found acceptable by the Court which therefore passed the decree incorporating directions in the decree that the assessee make provision for the minor child by creating a trust and giving specific directions for the creation of the trust. The decree for divorce dated 16-6-1975 upon which the Tribunal had relied, contains an order and direction to the assessee to deposit within one week from the date of the decree the sum of Rs. 5,50,000 with the bank and to appoint Central Bank Executor & Trustee Co. Ltd., as the Trustees and make a declaration of the said trust in respect of the said amount. It may be noted that the Income-tax Officer is of the opinion that the Trust has been created by the assessee in consideration of the wife Mehroo agreeing to grant divorce to the assessee and not per se for the benefit of the minor child Farida. The consideration is divorce between the assessee and his wife. There is no consideration between the settler and the trustees. The ITO has therefore arrived at the conclusion that the trust was created by the assessee in order to avoid payment of tax. It is the contention of the Income-tax Officer that the provisions of section 64 enjoin that there must be consideration for the transfer of assets between the settler and the association of personsi.e., the trustees to whom the asset (corpus fund) has been transferred. Since in this case consideration has passed between the settler and the trust and the question of excluding the income from the purview of section 64(1)(vii) does not arise.
6. From the order of the Income-tax Officer it is not clear whether he had perused the document creating the trust in favour of the minor child or the decree of the High Court dated 16-6-1975 in thedivorce petition, which specifically directs the settlement of a sum of Rs. 5,50,000 to be invested with Central Bank Executor & Trustee Co. Ltd., as the Trustees, for providing maintenance for the minor child Farida. On the other hand the order of the Tribunal clearly indicates that the Tribunal has perused the Trust Deed and the Decree of Divorce and came to the conclusion that there was consideration for creation of the trust in favour of Farida in view of the clear obligation on the part of the assessee to maintain the minor child and that it was not the settlement of the matrimonial dispute between the assessee and his wife that prompted the assessee to create the trust in favour of his minor daughter Farida. The trust was created pursuant to a legal obligation on the part of the assessee and this by itself was sufficient consideration for creation of the trust by way of settling a sum of Rs. 5,50,000, as corpus, the income from which is to be applied for the maintenance of the minor daughter Farida. We accept the finding of the Tribunal and answer the question of law, referred to, in the affirmative, that is, in favour of the assessee.