Valid trust creation and effective business transfer kept business income out of the assessee's hands.

A trust deed appointing two trustees and giving special powers to the managing trustee was held to validly constitute the trust, because a trust is not invalid merely because the trustee is not the owner at declaration and the deed may permit something other than joint action by all trustees. The business transfer to the trust was also held effective: the sale agreement conveyed the business assets, and the transfer was not vitiated by the assessee acting in a dual capacity where the trust was separately represented. Tax reduction alone did not make the transfer ineffective. The business income was therefore not assessable in the assessee's hands.

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Issues: (i) Whether the trust created by the deed was validly constituted in law; (ii) whether the transfer of the business to the trust was effective so that the income from the business could not be assessed in the assessee's hands.

Issue (i): Whether the trust created by the deed was validly constituted in law

Analysis: The trust deed appointed two trustees and conferred special powers on the managing trustee. A trust need not fail merely because the trustee is not the owner of the subject-matter at the time of declaration, and section 94 of the Indian Trusts Act, 1882 was relied on to support the validity of a trust declared for the benefit of another. The Court also held that section 48 of the Indian Trusts Act, 1882 permits the instrument of trust to provide otherwise than joint action by all trustees, and on the terms of the deed the trust was duly created and was not shown to be a sham.

Conclusion: The trust was validly constituted, in favour of the assessee.

Issue (ii): Whether the transfer of the business to the trust was effective so that the income from the business could not be assessed in the assessee's hands

Analysis: The agreement of sale transferred the business assets, including plant, machinery, stock, fittings, goodwill and other rights, to the trust for stated consideration. Section 5 of the Transfer of Property Act, 1882 recognises transfer by a person to himself and another, and the fact that the assessee acted in a dual capacity did not invalidate a transaction where the trust was separately represented by the other trustee. The Court held that the arrangement had been given effect to and that tax reduction by itself did not render an otherwise lawful transfer ineffective.

Conclusion: The transfer was effective and the business income was not assessable in the assessee's hands, in favour of the assessee.

Final Conclusion: The references were answered by upholding the validity of the trust and the effectiveness of the transfer, with the result that the Revenue's challenge failed.

Ratio Decidendi: A trust may be validly created for the benefit of another even where the trustee is not the owner, and a transfer to a trust is not invalid merely because the transferor acts in a different capacity, provided the instrument and transaction legally effect the transfer and are not shown to be sham.

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