Court excludes trust income from settlor's tax under Income Tax Act Section 64(v)

The court ruled in favor of the assessee, holding that the income from the trusts should not be included in the settlor's income under Section 64(v) of the Income Tax Act. The court determined that the beneficiaries' interest in the trust income was contingent, not vested, and that the term "deferred benefit" under Section 64(v) did not apply as the benefit was contingent upon the children attaining majority. The court concluded that the income, when distributed to the sons upon reaching majority, would lose its income character, making Section 64(v) inapplicable.

---

---

Issues Involved:
1. Inclusion of trust income in the hands of the settlor under Section 64(v) of the Income Tax Act.
2. Nature of the interest (contingent or vested) of the beneficiaries in the trust income.
3. Applicability of the term "deferred benefit" under Section 64(v).

Detailed Analysis:

1. Inclusion of Trust Income in the Hands of the Settlor under Section 64(v) of the Income Tax Act:
The primary issue was whether the income from the two trusts created by the assessee should be included in his income under Section 64(v) of the Income Tax Act for the assessment years 1963-64, 1964-65, and 1966-67. The assessee contended that no part of the income from the trusts should be added to his income under Section 64(v) as the income was to be accumulated and added to the trust corpus, which was to be divided among his three sons upon attaining majority. The Income Tax Officer (ITO) rejected this claim, arguing that the assets were transferred to the trust for the benefit of the minor sons and thus the income should be included in the settlor's income. The Appellate Assistant Commissioner (AAC) accepted the assessee's contention and deleted the addition, which was subsequently upheld by the Tribunal.

2. Nature of the Interest (Contingent or Vested) of the Beneficiaries in the Trust Income:
The Tribunal held that the interest or benefit enjoyed by the minor children was contingent and not vested. This was because, according to the trust deeds, if any minor child died before attaining majority, his share would go to the surviving brothers. Therefore, the Tribunal concluded that the minor children did not have a vested interest in the trust income but rather a contingent interest, which would only vest upon attaining majority.

3. Applicability of the Term "Deferred Benefit" under Section 64(v):
Section 64(v) stipulates that income from assets transferred otherwise than for adequate consideration should be included in the transferor's income if it is for the immediate or deferred benefit of the spouse or minor children. The Tribunal opined that for Section 64(v) to apply, the benefit must be either immediate or deferred for the minor children. In this case, since the benefit was contingent upon the children attaining majority, it was not considered a "deferred benefit" under Section 64(v). The Tribunal emphasized that the term "deferred benefit" could not be extended beyond the period of minority.

The court agreed with the Tribunal's interpretation, stating that the benefit could not be deferred beyond the minority of the child. The court further noted that the accumulated income, when paid to the sons upon attaining majority, would be capitalized and thus lose its characteristic of being income, making Section 64(v) inapplicable.

Conclusion:
The court answered the referred question in the affirmative, in favor of the assessee and against the revenue. The court held that the income of the two trusts was not includible in the hands of the settlor under Section 64(v) of the Income Tax Act. The Commissioner was directed to pay the costs of the reference to the assessee.

---