Book entries can validly create a trust; share-sale surplus is revenue income when dealings show business-like profit motive.
A trust may be validly constituted by book entries setting apart funds for religious and charitable purposes even where the settlor did not have equivalent ready cash, if the trust account is opened and credited so that the trust becomes owner of the amount reflected in the books. On the share transaction issue, surplus realised on sale of shares was treated as revenue income where the assessees were bankers and financiers and the surrounding facts showed purchase with borrowed funds, piecemeal sales, and an intention to profit in the course of business. The trust issue was resolved in favour of the assessee, while the share-surplus issue was held taxable.
Issues: (i) Whether a valid trust could be created by setting apart Rs. 5 lakhs for religious and charitable purposes through book entries even though the settlor did not have ready cash equal to that amount. (ii) Whether the surplus arising from the sale of shares of the three companies constituted revenue income liable to tax or a capital receipt.
Issue (i): Whether a valid trust could be created by setting apart Rs. 5 lakhs for religious and charitable purposes through book entries even though the settlor did not have ready cash equal to that amount.
Analysis: The absence of equivalent ready cash was held not to be ative of the legal effectiveness of the trust. What mattered was that the account in the name of the trust was opened and credited, and the trust thereby became the owner of the amount reflected in the books. A trust or transfer need not depend upon physical cash handling where the transaction is effectively carried out by entries in accounts.
Conclusion: The trust was validly created and the issue was answered in favour of the assessee.
Issue (ii): Whether the surplus arising from the sale of shares of the three companies constituted revenue income liable to tax or a capital receipt.
Analysis: The assessees were bankers and financiers, and the shares were acquired and disposed of in circumstances showing an intention to realise profits in the course of business. The Tribunal's findings showed purchase with borrowed funds, piecemeal sales over a period, and conduct consistent with trading rather than passive investment. On those facts, the surplus could not be treated as a mere capital accretion.
Conclusion: The surplus from the sale of shares was revenue income and was rightly brought to tax.
Final Conclusion: The reference was answered partly in favour of the assessees and partly in favour of the revenue, with the trust issue decided for the assessees and the share-surplus issue decided against them.
Ratio Decidendi: A trust may be effectively constituted by book entries even without equivalent ready cash, and surplus on sale of shares is taxable as revenue income where the surrounding facts show acquisition and sale as part of a business activity with an intention to profit.
TaxTMI 
AI Drafter ✕
TaxTMI 
