1985 (4) TMI 83 - AT - Income Tax

Tribunal upholds Lok Bharti income assessment under Income-tax Act; copyright income transfer deemed revocable

The Tribunal partly allowed the appeals, upholding the assessment of income from Lok Bharti in the appellant's hands under section 61 of the Income-tax ... Revocable transfer of assets - assignment of income without transfer of asset - chargeability of income to transferor on revocable transfer - method of accounting - cash system versus mercantile system - effect of reversion clause on transferabilityAssignment of income without transfer of asset - method of accounting - cash system versus mercantile system - Taxability of income assigned to Student Friends where only income (and not asset) was transferred and the assessee claimed cash system of accounting - HELD THAT: - The Tribunal agreed with the finding that the arrangement with Student Friends amounted only to an assignment of income without any transfer of the underlying asset and therefore fell within the mischief of the provision governing assignments of income. However, an assessee is assessable in accordance with the method of accounting he follows. The assessee had consistently claimed and produced no evidence contradicting that he followed the cash system of accounting. As no amount had actually been received by the assessee in the years under appeal, the income could not be taxed on an accrual basis in his hands. Consequently the deletion of that income from the assessee's assessments was upheld. [Paras 10]Income assigned by Student Friends was not taxable in the assessee's hands in the years under appeal because the assessee followed the cash system and had not received the amounts.Revocable transfer of assets - chargeability of income to transferor on revocable transfer - effect of reversion clause on transferability - Whether the assignment of copyright to daughters-in-law for fifteen years with a reversion clause was a revocable transfer and thus the income was assessable in the hands of the transferor - HELD THAT: - The deed transferring the copyright contained an express provision by which the copyright and accrued rights would revert to the transferor after fifteen years and granted the transferor the right to re-assume power over the income and asset. Under the relevant statutory scheme such a provision renders the transfer revocable. The exceptions for irrevocability (trusts not revocable during the beneficiary's life, transfers prior to a specified date not revocable for a period exceeding six years, and the proviso concerning direct or indirect benefit) did not apply here. Section dealing with revocable transfers therefore governs, and income arising under such a revocable transfer is chargeable as the income of the transferor. Applying that principle, the Tribunal set aside the appellate authority's finding and restored the assessment authority's view that the income from Lok Bharti was assessable in the assessee's hands. [Paras 11, 12]The copyright assignment to the daughters-in-law was a revocable transfer; income from Lok Bharti is assessable in the assessee's hands and the AAC's contrary view was set aside.Final Conclusion: The appeals are partly allowed: the deletion of income relating to Student Friends is sustained because the assessee followed the cash system and had not received the amounts; the AAC's deletion of income from Lok Bharti is reversed and the ITO's assessment restored because the copyright assignment was a revocable transfer and taxable in the assessee's hands. Issues:1. Transfer of copyright income to daughters-in-law and married daughters.2. Applicability of sections 60, 61, 62, and 63 of the Income-tax Act, 1961.3. Accounting method followed by the assessee.4. Revocable nature of the transfer of copyright income.Detailed Analysis:1. The appellant, a retired individual, transferred the copyright of his book to his daughters-in-law and married daughters for their maintenance and education. The deed specified a 15-year period for the transfer after which the copyright would revert back to the appellant. Another agreement assigned income from books published by Student Friends to the married daughters. The appellant contended that this income did not belong to him but to his daughters. The Income Tax Officer (ITO) disagreed and assessed the income in the appellant's hands.2. The ITO held that the income from both sources was assessable to the appellant under sections 60 and 61 of the Income-tax Act, 1961. Section 60 deals with income arising from the transfer of assets without transferring the assets themselves. Section 61 states that income from a revocable transfer of assets shall be included in the transferor's income. The Appellate Assistant Commissioner (AAC) upheld the assessment of income from Student Friends under section 60 but excluded it due to non-receipt in that year. However, he excluded the income from Lok Bharti based on a different interpretation.3. The appellant claimed to follow the cash system of accounting, arguing that income should only be taxed when received in cash. The AAC accepted this claim, leading to the exclusion of income from Student Friends. The ITO and the departmental representative argued that the appellant followed the mercantile system, making income assessable when due, not received.4. The department challenged the AAC's decision regarding income from Lok Bharti, claiming the transfer was revocable under section 63(a) and fell under section 61. The appellant argued that the transfer was irrevocable for 15 years, citing section 62(2) for the timing of taxability. The Tribunal analyzed sections 61 to 63 and determined the transfer as revocable, thus making the income assessable to the appellant under section 61.In conclusion, the Tribunal partly allowed the appeals, upholding the assessment of income from Lok Bharti in the appellant's hands under section 61, contrary to the AAC's decision.