Absolute gift to trust excludes corpus from wealth and prevents tax on related income under revocable transfer rules.
An absolute transfer of funds to a trust without any power of revocation divests the transferor of ownership, so the gifted corpus is not includible in her wealth under section 4(1)(a)(iv) of the Wealth-tax Act, 1957. On the same footing, interest income arising from such irrevocable gifts cannot be assessed in the transferor's hands under section 61 of the Income-tax Act, 1961, because the transfer is not a revocable transfer attracting the anti-avoidance provision. The gifted amounts were therefore excluded from wealth computation, and the related income was not taxed in the transferor's hands.
Issues: (i) whether the funds transferred by the assessee to the trust were includible in her wealth under section 4(1)(a)(iv) of the Wealth-tax Act, 1957; (ii) whether the interest income attributable to those contributions was assessable in her hands under section 61 of the Income-tax Act, 1961.
Issue (i): whether the funds transferred by the assessee to the trust were includible in her wealth under section 4(1)(a)(iv) of the Wealth-tax Act, 1957.
Analysis: The contributions made to the trust were treated as gifts without any power of revocation. Once the monies were gifted away, the assessee ceased to be the owner of those amounts, and the corpus from which the income arose could not be treated as her wealth.
Conclusion: The funds transferred to the trust were not includible in the assessee's wealth and the issue was answered in favour of the assessee.
Issue (ii): whether the interest income attributable to those contributions was assessable in her hands under section 61 of the Income-tax Act, 1961.
Analysis: Since the contributions were absolute gifts and not revocable transfers, the interest income arising from those amounts could not be brought back to tax in the assessee's hands under section 61 of the Income-tax Act, 1961.
Conclusion: The interest income was not assessable in the assessee's hands and the issue was answered in favour of the assessee.
Final Conclusion: Both references were answered against the Revenue and in favour of the assessee, with the gifted amounts excluded from wealth computation and the related interest income not taxed in her hands.
Ratio Decidendi: A transfer made by way of an absolute gift, without any power of revocation, divests the transferor of ownership and prevents both inclusion of the corpus in wealth and assessment of the related income in the transferor's hands under the anti-avoidance provision for revocable transfers.