1961 (1) TMI 5 - SC - Income Tax

Husband transferring assets to himself as trustee for wife creates taxable transfer under section 16(3)(b)

Tulsidas Kilachand Versus Commissioner Of Income-Tax, Bombay City I

SC held that transfer of assets by husband to himself as trustee for wife's benefit constitutes taxable transfer under section 16(3)(b). Court ruled that ... Taxability of income accrued from settlements or dispositions - Transfer of assets to spouses - conditions under which the income of a wife is treated as the income of the settlor or disponer or as the income of the husband - Interpretation of provisions under section 16(1)(c) and section 16(3) - word 'adequate consideration' - HELD THAT:- Under the Transfer of Property Act, there can be a transfer by a person to himself or to himself and another person or persons. In our opinion, there was in this case a transfer by Mr. Tulsidas Kilachand to himself as a trustee, though there was no formal transfer. The assessee also stresses the words 'any person or association of persons' in section 16(3)(b) and contends that such a person must be other than the husband, who transfers. The word 'any person' is wide enough to include the husband, when he transfers property to himself in another capacity. The change of capacity makes him answer the description 'any person'. In our opinion, this deed must be regarded as involving a transfer by the husband to a trustee, and, even though the husband is the same individual, in his capacity as a trustee he must be regarded as a person distinct from the transferor. In our opinion, section 16(3)(b) covers the case. The words 'adequate consideration' denote consideration other than mere love and affection, which, in the case of a wife, may be presumed. When the law insists that there should be 'adequate consideration' and not 'good consideration', it excludes mere love and affection. They may be good consideration to support a contract; but adequate consideration to avoid tax is quite a different thing. To insist on the other meaning is really to say that consideration must only be looked for, when love and affection cease to exist. In our opinion, this case falls within the special rules concerning wife and minor child, laid down in section 16(3)(b), and not within the third proviso to section 16(1)(c). It must thus be held that there was a transfer of the assets to the husband-trustee for the benefit of the wife. The answer given by the High Court was thus correct. Appeals dismissed. The core legal questions considered by the Court include:1. Whether the income arising from shares held under a declaration of trust in favor of the wife is exempt from inclusion in the settlor's total income under the third proviso to section 16(1)(c) of the Indian Income-tax Act.2. Whether the income falls within the ambit of section 16(3)(a)(iii) or section 16(3)(b), which provide for inclusion of income arising from assets transferred to the wife or for her benefit in the husband's total income.3. Whether there was a transfer of assets to the wife or to any person for the benefit of the wife within the meaning of section 16(3)(b).4. Whether the transfer, if any, was made for adequate consideration, thus excluding the operation of section 16(3)(a)(iii) and (b).Issue-wise Detailed AnalysisIssue 1: Applicability of the third proviso to section 16(1)(c) regarding income from a trust declared in favor of the wifeThe relevant legal framework includes section 16(1)(c), which states that all income arising to any person by virtue of a settlement or disposition from assets remaining the property of the settlor or disponer shall be deemed to be the income of the settlor, with a proviso excluding income arising to any person by virtue of a non-revocable settlement or disposition exceeding six years or during the lifetime of the person, provided the settlor derives no direct or indirect benefit.The Court referred to the declaration of trust where the settlor held shares in trust for his wife for seven years or her lifetime, declaring the trust irrevocable for that period. The assessee contended that this trust arrangement fell within the third proviso, exempting the income from inclusion in his total income.The Court observed that since the shares were held by the settlor as trustee, they did not remain his property. The proviso applies only where the assets remain the property of the settlor. Consequently, section 16(1)(c) was held inapplicable, and the proviso did not attract exemption. The Court distinguished this from cases where only the income (dividends) was assigned without transfer of the underlying asset.Issue 2: Applicability of sections 16(3)(a)(iii) and 16(3)(b) concerning transfers to wife or for her benefitSection 16(3)(a)(iii) includes income of a wife arising from assets transferred directly or indirectly to her by the husband otherwise than for adequate consideration, and section 16(3)(b) includes income arising from assets transferred otherwise than for adequate consideration to any person or association for the benefit of the wife or minor child.The Court analyzed whether the trust arrangement constituted a transfer of assets to the wife or to any person for her benefit. The assessee argued that the ownership rights in shares involve a bundle of rights (voting, participation in dissolution assets, and dividends), and since only the income (dividends) was payable to the wife, no transfer of assets occurred.The Court rejected this argument, holding that the settlor's declaration of trust constituted a transfer of the shares to himself as trustee, thereby effecting a transfer of assets. The change in capacity from settlor to trustee was sufficient to characterize the transfer to 'any person' under section 16(3)(b). The Court reasoned that the same individual acting as trustee is a distinct person in legal capacity from the settlor.Issue 3: Adequacy of consideration for the transferThe assessee contended that the transfer was made for adequate consideration, namely love and affection, which should exclude the operation of sections 16(3)(a)(iii) and (b).The Court clarified that 'adequate consideration' in the tax context excludes mere love and affection, even though the latter may be good consideration to support contracts. The Court emphasized that the statutory language demands consideration beyond mere love and affection to avoid inclusion of income in the transferor's total income. Therefore, the transfer was held to be without adequate consideration.Issue 4: Interpretation of relevant precedents and statutory purposeThe Court referred to the observations of Lord Macmillan in Chamberlain v. Inland Revenue Commissioners, highlighting the legislative intent behind provisions like section 16 to counteract tax avoidance by taxpayers who attempt to divest income while retaining control or benefit.The Court also distinguished the present case from Provat Kumar Mitter v. Commissioner of Income-tax, where only the right to dividends was assigned without transfer of shares, and the third proviso did not apply. In contrast, the present case involved a transfer of shares held in trust, which falls outside the scope of that precedent.Application of Law to Facts and Treatment of Competing ArgumentsThe Court applied the statutory provisions to the facts, concluding that the shares were transferred to the settlor in his capacity as trustee, constituting a transfer to 'any person' for the benefit of the wife under section 16(3)(b). The transfer was without adequate consideration, excluding the operation of the third proviso to section 16(1)(c).The competing argument that no transfer occurred because the wife received only income and not ownership rights was rejected. Similarly, the assertion that love and affection constituted adequate consideration was held insufficient for tax exemption purposes.ConclusionsThe Court concluded that the income arising from the shares held under the trust was liable to be included in the total income of the settlor (husband) under section 16(3)(b). The third proviso to section 16(1)(c) did not apply because the shares did not remain the property of the settlor but were transferred to him as trustee. The transfer was without adequate consideration, and the income could not be excluded from the settlor's total income.Significant Holdings'The shares were previously held by Mr. Tulsidas Kilachand for himself. After the declaration of trust by him, they were held by him not in his personal capacity but as a trustee... In our opinion, there was in this case a transfer by Mr. Tulsidas Kilachand to himself as a trustee, though there was no formal transfer.''The word 'any person' is wide enough to include the husband, when he transfers property to himself in another capacity. The change of capacity makes him answer the description 'any person'. In our opinion, this deed must be regarded as involving a transfer by the husband to a trustee, and, even though the husband is the same individual, in his capacity as a trustee he must be regarded as a person distinct from the transferor.''The words 'adequate consideration' denote consideration other than mere love and affection, which, in the case of a wife, may be presumed... When the law insists that there should be 'adequate consideration' and not 'good consideration', it excludes mere love and affection.''In our opinion, this case falls within the special rules concerning wife and minor child, laid down in section 16(3)(b), and not within the third proviso to section 16(1)(c). It must thus be held that there was a transfer of the assets to the husband-trustee for the benefit of the wife.'These holdings establish the principle that a declaration of trust by a husband in favor of his wife, where the shares are held by the husband as trustee, constitutes a transfer of assets to 'any person' for the benefit of the wife under section 16(3)(b). Such income is includible in the husband's total income unless the transfer is for adequate consideration, which excludes mere love and affection. The third proviso to section 16(1)(c) does not apply where the assets do not remain the property of the settlor.