Tulsidas Kilachand vs The Commissioner Of Income Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeals Nos. 134 to 137 of 1959

Decision Date: 3 January 1961

Coram: M. Hidayatullah, J.L. Kapur, J.C. Shah

In the matter titled Tulsidas Kilachand versus The Commissioner of Income‑Tax, Bombay, the Supreme Court delivered its judgment on 3 January 1961. The opinion was authored by Justice M. Hidayatullah, with Justices J. L. Kapur and J. C. Shah forming the bench. The case is reported in 1961 AIR 1023 and in the 1961 S.C.R. (3) 351, with related citations including RF 1961 SC 1059, RF 1968 SC 189, R 1972 SC 7, and R 1981 SC 1274. The dispute concerned the interpretation of sections 16(1)(c), 16(3)(a)(iii) and 16(3)(b) of the Indian Income‑Tax Act, 1922 (Eleventh Amendment). By a deed dated 5 March 1951, the appellant declared a trust in favour of his wife, stating: “I hereby declare that I hold 244 shares upon trust to pay the income thereof to my wife for a period of seven years from the date hereof or her death (whichever event may be earlier) and I hereby declare that this trust shall not be revocable.” In the assessment year 1951, a dividend of Rs 30,404 was received on those shares. The appellant argued before the tax authorities that the dividend should not be included in his total income, relying on the third proviso to section 16(1)(c) of the Act. The tax officials rejected this claim, contending that the transaction fell within either section 16(3)(a)(iii) or section 16(3)(b). The appellant maintained that the deed did not effect a transfer of assets to his wife or to any other person; it merely created a trust over the shares, with dividends payable to the wife. Even assuming a transfer, he argued that the consideration was adequate, being love and affection, which he asserted satisfied the statutory requirement, thereby rendering sections 16(3)(a)(iii) and 16(3)(b) inapplicable.

The Court, after examining the deed dated 5 March 1951, concluded that a transfer of the shares had indeed taken place, with the appellant becoming a trustee for the benefit of his wife. Although the appellant and the trustee were the same individual, the Court held that in his capacity as trustee he must be regarded as a distinct person from the transferor. Regarding the term “adequate consideration” in section 16(3), the Court interpreted it to mean consideration other than mere love and affection, which may be presumed in the case of a wife but does not, by itself, satisfy the statutory requirement. Consequently, the Court found that the present case fell within the ambit of section 16(3)(b) of the Act and not within the third proviso to section 16(1)(c). The Court distinguished the earlier decision in Provat Kumar Mitter v. Commissioner of Income‑Tax, [1961] 3 S.C.R. 37, and affirmed that the dividend was taxable in the hands of the appellant under the provisions of section 16(3)(b). The judgment thus clarified the tax treatment of income derived from shares held in trust for a spouse when adequate consideration is not present.

In 1959 special leave was granted to hear the appeals arising from the judgment and order dated 20 September 1957 of the Bombay High Court in Income Tax Reference No. 14 of 1957. The appeals were presented before the Supreme Court by counsel for the appellants, while counsel for the respondent appeared on behalf of the tax department. On 3 January 1961 Justice Hidayatullah delivered the judgment that would dispose of Civil Appeals Nos. 134 to 137 of 1959. These four appeals were filed by four assessors who had obtained special leave, and all of them were based on essentially the same factual matrix, thereby allowing the Court to consider the legal question without the need to reference each appeal separately. The year of assessment that was under consideration was the fiscal year 1952‑53, which corresponded to the calendar year 1951. During that calendar year one of the appellants, Mr Tulsidas Kilachand, executed a declaration of trust in favour of his wife, Vimla. The trust declaration contained the following material provision: “I, Tulsidas Kilachand, hereby declare that I hold 244 shares of Kesar Corporation Ltd. and 120 shares of Kilachand Devchand & Co., Ltd. upon trust to pay the income thereof to my wife Vimla for a period of seven years from the date hereof or her death, whichever occurs first, and I hereby declare that this trust shall not be revocable.” In the relevant accounting year a sum of Rs 30,404 was received as dividend income on those shares. The assessee maintained that, once the dividend was grossed up, the amount should not be taken into account in his total income because the third proviso to section 16(1)(c) of the Indian Income‑Tax Act provided an exemption in such circumstances.

The Income‑Tax Officer rejected the assessee’s contention. Although the assessment order itself was not placed before the Court, the record indicated that the Officer’s rationale was that the dividend income had accrued to, or arisen in, the hands of Mr Kilachand and had subsequently been paid by him to his wife. Consequently, the Officer held that the language of the proviso—“income arising to any person by virtue of a settlement or disposition”—did not apply to the dividend in question. Upon appeal, the Appellate Assistant Commissioner determined that the matter fell within section 16(3)(b) of the Act and therefore need not be examined under the third proviso of section 16(1)(c). It appeared that the Commissioner had conceded that, had the former provision been applicable, the proviso would not have saved the dividend from being assessed in the hands of Mr Kilachand, and the appeal was accordingly dismissed. When the appeal proceeded before the Tribunal, Mr Kilachand once again relied on the third proviso to section 16(1)(c) and argued that the case should be governed by section 16(3)(b), contending that the dividend income could not be included in his assessment. The Tribunal concluded that the case was covered either by section 16(3)(a)(iii) or by section 16(3)(b), and accordingly held that the income derived from the shares was liable to be included in the total income of Mr Kilachand.

The Tribunal affirmed that the dividend income in question formed part of the assessable income of Mr Tulsidas Kilachand. Nevertheless, the Tribunal identified an unresolved issue and referred a specific question to the High Court of Bombay under section 66(1) of the Income‑Tax Act. The question presented to the High Court was whether, upon a correct construction of the deed of declaration of trust dated 5 March 1951, the net dividend amounting to Rs 30,404 received on one hundred and twenty shares of Kilachand Devchand & Co., Ltd. and two hundred and forty‑four shares of Kesar Corporation Ltd., which were held by the assessee under trust for the benefit of his wife, should be treated as income chargeable to the assessee’s total income.

The High Court examined the applicability of the provisions of section 16 and held that, although section 16(1)(c) could not be satisfied because the third proviso excluded the case, section 16(3)(b) nonetheless applied. Accordingly, the Court answered the question in the affirmative, confirming that the dividend income was to be included in the assessee’s total income.

In the appeal before this Court, the Revenue Department based its arguments on both section 16(3)(a)(iii) and section 16(3)(b), while the appellants maintained that the disposition fell within the third proviso to section 16(1)(c). For clarity, the relevant statutory provisions were set out. Section 16, titled “Exemptions and exclusions in determining the total income,” begins with subsection (1) which provides that, in computing an assessee’s total income, clause (c) deems all income arising to any person by virtue of a settlement or disposition, whether revocable or irrevocable and irrespective of the date of the amendment Act, from assets that remain the property of the settlor or disponer, to be income of the settlor or disponer. The provision further states that any income arising from a revocable transfer of assets shall be deemed to be income of the transferor. A series of qualifications follow, including a provision that the clause shall not apply to income arising from a settlement or disposition that is not revocable for a period exceeding six years or during the lifetime of the person, from which the settlor derives no direct or indirect benefit; in such cases the settlor shall become liable to be assessed on that income when the power to revoke arises.

Subsection (3) of section 16 outlines the inclusion of certain incomes in the total income of an individual. Paragraph (a) provides that the income of a wife or minor child of the individual, arising directly or indirectly, shall be included when it originates from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart. Paragraph (b) adds that any income of a person or association of persons that arises from assets transferred otherwise than for adequate consideration to the person or association by the individual for the benefit of his wife or a minor child, or both, shall also be included. The underlying purpose of section 16 can be discerned from the observations of Lord Macmillan in Chamberlain v Inland Revenue Commissioners, where he explained that the legislation was designed “to overtake and circumvent a growing tendency on the part of taxpayers …” to avoid tax liability through settlements, thereby ensuring that income which a taxpayer attempts to disembarrass himself of remains taxable in his hands.

In this matter, the Court observed that the legislature had crafted the provision to stop taxpayers from reducing their tax burden by creating settlements in which they disposed of part of their property so that the income would no longer be payable to them, while at the same time they retained certain powers or interests over the property or its income. The statutory response was to declare that, notwithstanding such arrangements, the income that the taxpayer tried to free himself from should still be treated as his own income and taxed accordingly. The Court explained that these observations are equally relevant to the provision under examination, and that the Indian statute was enacted with the same purpose. Section 16 therefore sets out a number of exemptions and exclusions that are to be applied when the total income of a taxpayer is being determined. Some of the clauses prescribe when particular income must be taken into account, while other clauses specify when certain income must be excluded. The Court’s analysis was focused on income that arises from settlements and on the circumstances in which the income of a wife is to be regarded as the income of the settlor or disponer rather than as the income of the husband. The task was to decide whether the exclusion or inclusion rules in the section were applicable to the facts before the Court.

Section 16(1)(c) provides that income from assets that remain the property of the settlor or disponer, or that arises to any person by virtue of a revocable transfer of assets, shall be deemed to be the income of the transferor. The meaning of clause (c) had been explained by this Court in the decision of Provat Kumar Mitter v. Commissioner of Income‑tax. In that case, the appellant had assigned only the right to receive dividends and had not transferred the underlying shares. The Court held that this situation represented the application of one’s own income and not an assignment of the source of the income, and that such an arrangement could save the income from tax only insofar as sections 16(1)(c) and 16(3) were not attracted. The deed in favour of the wife in that case conveyed merely a right to dividends and, because there was no transfer of an existing asset of the assessee, sections 16(1)(c) and the third proviso did not apply. Consequently, that precedent could not be applied to the present facts, where the disposition was of a different character.

In the present case, the settlement was created for a period of seven years or for the life of the settlee, whichever was shorter. During that term, Mr Tulsidas Kilachand bound himself by trust to pay the dividends to his wife and expressly agreed not to revoke the settlement. The apparent intention was to bring the arrangement within the third proviso to section 16(1)(c), on the basis that clause (c) does not apply to any income that accrues to another person when the disponer derives no direct or indirect benefit, even though the assets remain his legal property. If the issue were solely whether the proviso applied, the settlement would have been exempt from tax. However, the deed of trust stipulated that the settlor held the shares in trust, meaning that the shares did not continue to be his property. Because the assets were no longer the settlor’s property, section 16(1)(c) was not triggered and the third proviso could not be invoked.

It was observed that, because the deed created a trust, the settlor did not continue to own the shares in his personal capacity; the shares were held by the settlor only in trust. Consequently, the provisions of section 16(1)(c) of the Income‑Tax Act could not be applied and the related proviso was not triggered. The statute, however, contains other provisions that address different circumstances, notably subsection (3), which deals expressly with assets transferred to a wife or a minor child. Subsection (3) provides that income arising from assets transferred to a wife must still be taken into account in the total income of the husband in two situations: first, when the assets have been transferred to the wife directly or indirectly by the husband without adequate consideration, as specified in sub‑subsection (3)(a)(iii); and second, when any portion of the income of a person or an association of persons originates from assets that have been transferred without adequate consideration by the individual for the benefit of his wife, as set out in sub‑subsection (3)(b). The issues that arose were, initially, whether any transfer of assets to the wife—or to any person—could be said to have occurred for the wife’s benefit, and, secondly, whether any such transfer, if it existed, was made for adequate consideration. The assessee argued that no transfer of assets had taken place at all. He explained that ownership of shares comprises a bundle of rights, typically including the right to vote at meetings, the right to share in the distribution of assets upon dissolution, and the right to receive profits such as dividends. He maintained that none of these rights was transferred to the wife, because a transfer of assets implies the creation of a present‑time right in the assets, which did not happen. According to his submission, the arrangement merely created a trust over the shares, with the dividends payable to the wife, and therefore neither subsection (3)(a)(iii) nor subsection (3)(b) should be invoked. He further contended that even if a transfer were deemed to have occurred, it was made for adequate consideration, namely love and affection, which he characterized as a valid form of consideration. The Court found this contention unsound. It noted that the shares had originally been held by Mr Tulsidas Kilachand in his own name. After he declared the trust, he continued to hold the shares, but not as a private owner; rather, he held them in the capacity of a trustee. Under sections 5 and 6 of the Indian Trusts Act, when the person who declares a trust is also the trustee, a formal transfer of the property to the trustee is not required; the law, however, presumes that such a transfer has taken place and that no additional overt act beyond the declaration of trust is necessary. Thus, the Court concluded that a transfer of the shares to Mr Kilachand in his trustee capacity had indeed occurred, even though no separate conveyance document was executed.

In this case, the Court observed that the capacity in which a person holds property as a trustee is distinct from the capacity in which he held it before the declaration of trust, and that after the declaration the assets were held by Mr. Kilachand in his fiduciary capacity. The Court noted that the Transfer of Property Act expressly permits a transfer by a person to himself, or to himself together with other persons. Applying that provision, the Court concluded that, although no formal instrument of conveyance was produced, a transfer had nevertheless occurred whereby Mr. Tulsidas Kilachand transferred the shares to himself in the capacity of trustee. The assessee relied on the wording “any person or association of persons” in section 16(3)(b) and argued that the term should be interpreted to exclude the husband who is the transferor. The Court rejected that narrow construction, holding that the phrase “any person” is sufficiently wide to embrace the husband when he transfers property to himself in a different legal capacity. By changing his capacity, the husband satisfies the description of “any person” under the statute. Consequently, the deed was to be treated as a transfer from the husband to a trustee, and the husband‑trustee, although the same individual, must be regarded as a distinct person from the transferor for the purposes of the provision. The Court therefore held that section 16(3)(b) applied to the facts. The Court then turned to the question of consideration. The assessee submitted that the only consideration was love and affection. The Court explained that the expression “adequate consideration” in the statute denotes consideration that is more than mere love and affection, which may be presumed in the case of a wife but does not satisfy the statutory requirement. The Court emphasized that the law requires “adequate consideration” and not merely “good consideration”; the latter may be sufficient for a contract but is insufficient to meet the tax provision. Accordingly, reliance on love and affection alone could not satisfy the requirement for adequate consideration. The Court concluded that the transaction fell within the special provisions of section 16(3)(b) that relate to transfers for the benefit of a wife or a minor child, and not within the third proviso to section 16(1)(c). Accordingly, the Court affirmed that there was a transfer of the assets to the husband‑trustee for the benefit of the wife. The Court held that the decision of the High Court was correct, dismissed the appeals, ordered the appellants to pay costs, and noted that one hearing fee was payable.