Dividends on trust-held shares for a wife are taxable under section 16(3)(b) because trustee capacity effects a transfer.

Whether dividends on shares declared in trust for a wife are taxable was addressed by treating the declaration as a transfer effected by the settlor acting in a different capacity; the change of capacity to trustee constitutes a transfer for the purposes of section 16(3)(b), so the dividends are includible in the settlor's income. The third proviso to clause (c) does not apply because the assets ceased to be the settlor's property when held by him as trustee. Presumed love and affection is not adequate consideration.

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Issues: Whether dividends received on shares held by the assessee after a declaration of trust in favour of his wife are includible in the assessee's total income under section 16(3)(b) of the Income-tax Act, 1922, or excluded by the third proviso to section 16(1)(c) of the Income-tax Act, 1922.

Analysis: The Court examined the nature of the declaration of trust and held that by declaring himself trustee the assessee effected a transfer of the shares to himself in his capacity as trustee; the capacity change suffices to characterise the transaction as a transfer for the purposes of section 16(3)(b). The third proviso to section 16(1)(c) applies where income arises to another person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which the settlor derives no direct or indirect benefit, but it presupposes that clause (c) applies (i.e., assets remain the property of the settlor). Here the shares were held by the settlor as trustee and did not remain as the settlor's property; consequently clause (c) and its proviso do not apply. Sub-section (3) deals specifically with transfers to the wife or to any person for the benefit of the wife; the words "any person" include the husband acting in a different capacity (husband as trustee). The Court further considered the question of consideration and held that presumed love and affection does not amount to "adequate consideration" for the purposes of excluding the operation of section 16(3). The Tribunal and High Court correctly concluded that the income falls within section 16(3)(b).

Conclusion: The dividends are includible in the assessee's total income under section 16(3)(b) of the Income-tax Act, 1922; the plea based on the third proviso to section 16(1)(c) fails and the appeals are dismissed.

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