COMMISSIONER OF INCOME TAX v. K.J. RAMASWAMY
[Citation -2006-LL-0807]

Citation 2006-LL-0807
Appellant Name COMMISSIONER OF INCOME TAX
Respondent Name K.J. RAMASWAMY
Court ITAT
Relevant Act Income-tax
Date of Order 07/08/2006
Assessment Year 1983-84, 1985-86
Judgment View Judgment
Keyword Tags benefits of partnership • representative capacity • adequate consideration • specific provision • deferred benefit • registered firm • payment of tax • share income • tax evasion • future date • legal owner • minor child
Bot Summary: Explanation 2A to section 64 is extracted hereunder: For the purposes of clause, where the minor child of an individual is a beneficiary under a trust, the income arising to the trustee from the membership of the trustee in a firm shall, to the extent such income is for the benefit of the minor child, be deemed to be income arising indirectly to the minor child from the admission of the minor to the benefits of partnership in a firm. Share of minor from trust, where trustee is in partnership with any person, to be included in income of parent: Under the existing provisions of the Act, the income arising to a minor child from admission to the benefits of partnership is included in the income of that parent who has higher income, although neither of the parents is a partner in the firm to the benefits of which the minor is admitted. Reading section 64(1)(v) of the Act, as it originally stood,(vii , it is clear that if an individual transfers the assets directly or indirectly otherwise than for adequate consideration to any person or association of persons to the extent to which the income from such assets is for the immediate or deferred benefit of..., that such income either arising directly or indirectly shall be added to the income of the individual in computing his total income. Section 64(1)(v) requires, in the computation of the total income of an assessee, the inclusion of such income as arises to the assessee from assets transferred, otherwise than for adequate consideration, to the extent to which the income from such assets is for the immediate or deferred benefit of, inter alia, his minor children. From the judgment referred to above, it is clear that if the benefit has to reach a child only on the child attaining majority, namely, the benefit getting postponed to a definite future date the income earned by such beneficiary shall not be included in the income of the individual in computing his total income. In our considered opinion, the expression for the benefit of the minor found in Explanation 2A to section 64(1) of the Act would only mean that the minor should be the legal owner of the income mentioned in that Explanation, which alone would enable the Assessing Officer to include it in the income of the individual in computing his total income. We have no difficulty at all in holding that in such an event the income of the beneficiary from the partnership firm shall not be included in the income of the individual in computing his total income.


JUDGMENT judgment of court was delivered by R. Balasubramanian J. These two tax cases are before us on reference order dated February 25, 2002, made by Division Bench consisting of two learned judges of this court. question referred by Division Bench for answer is as hereunder: Whether on facts and in circumstances of case, Appellate Tribunal was right in law in holding that share income of minors who are beneficiaries of trust which was partner in registered firm cannot be clubbed in hands of assessee under section 64(1)(iii) of Income-tax Act? Before Division Bench, learned counsel for Revenue relied upon judgment of this court in case reported in CIT v. K. J. Ramaswamy [2002] 256 ITR 191 to contend that in computing total income of individual/assessee in this case, such income of minor should be included. abovereferred to judgment is in relation to assessee by name K. J. Ramaswamy, who is assessee in T. C. No. 55 of 1996 and similar are facts in that case. However, learned counsel for assessee contended that inasmuch as there is no dispute that under trust deed beneficiaries/minors cannot lay their hands on their share of income till they attain majority, it is not possible to include their share of income in computing total income of individual/assessee in this case. Learned counsel appears to have contended before Division Bench that though Supreme Court judgment reported in CIT v. M. R. Doshi [1995] 211 ITR 1 is in construing section 64(1)(v) of Income-tax Act, yet, principle laid down therein would enable this court to exclude minor's share in income from being included in computing total income of individual. Having regard to submissions made by learned counsel on either side, Division Bench reasoned as hereunder, requesting hon ble Chief Justice to constitute larger Bench. reasons given by Division Bench in making reference are extracted as hereunder: 10. It is quite apparent that both judgments of Karnataka High Court and Andhra Pradesh High Court are also specifically on Explanation 2A and they have followed earlier judgment of Supreme Court confirming Gujarat High Court decision. Be that as it may. In wake of direct decision of this court, we would be certainly bound by that decision. However, learned counsel for assessee points out that in that judgment, Supreme Court judgment has not been taken into consideration and, therefore, it would be for us to follow Supreme Court judgment instead of Division Bench judgment of this court. There can be no doubt that Supreme Court has in terms incorporated terminology of for benefit of minor child and, therefore, that judgment would be binding on us. Supreme Court judgment is direct and we do not think that any difference could be made by introduction of Explanation 2A. However, judicial propriety would require that we should not take contrary view to one which has been taken by earlier Division Bench of this court, which we have quoted earlier. Let us now look at facts. There are two trusts called Balan Trust and Janakiraman Trust , founder being Balan Janakiraman . beneficiaries of Balan Trust are two minor children of Ramaswamy and beneficiaries of latter trust are two minor children of Seetharaman. Ramaswamy and Seetharaman are brothers and they are assessees in this case. founder trustee of two trusts had become partner of M/s. International Clearing and Shipping Agencies in representative capacity. assessment year in T. C. No. 55 of 1996 is 1983-84 and assessment year in T. C. No. 107 of 1996 is 1985-86. assessee in each case is father of respective beneficiaries under two trusts. question arose as to whether income derived by trustee in representative capacity from partnership firm would be added on to income of respective parent of beneficiaries or not under section 64(1)(iii) of Income-tax Act read with Explanation 2A to very same section? It may be noted here that similar was situation before this court in respect of one of assessees in abovereferred to case viz., CIT v. K. J. Ramaswamy [2002] 256 ITR 191 (Mad) referred to supra, where Division Bench of this court, as already noted, held that income so derived from Bench of this court, as already noted, held that income so derived from partnership firm by representative trustee should be clubbed to income of individual namely, father of beneficiary. same issue cropped up for subsequent assessment years, namely, 1983-84 in T. C. No. 55 of 1996 and 1985-86 in T. C. No. 107 of 1996. Mrs. Pushya Sitaraman, learned senior standing counsel appearing for Revenue would contend that share of income of beneficiary from partnership firm at hands of representative trustee, who is partner of said firm, has to be necessarily included in computing total income of individual in this case namely, father of beneficiary/ assessee. Learned counsel heavily relied upon judgment of this court in case reported in CIT v. K. J. Ramaswamy [2002] 256 ITR 191 to sustain her argument. She would then contend that very purpose and object of introducing Explanation 2A to section 64(1) of Income-tax Act, hereinafter referred to as Act, is only to see that evasion of payment of tax is avoided. Contending contra, learned counsel appearing for assessee would contend, by drawing our attention to phrase used in Explanation 2A to section 64(1) of Act, namely, for benefit of minor child, that unless share income of minor/beneficiary from part nership firm is shown to be immediately available for use of minor, it cannot be held that such share of income should be added on in computing total income of assessee in this case. According to him, since in this case it is seen that entire share of income of minor/beneficiary from partnership firm stands transferred to trust account to be kept intact till beneficiary/minor attains majority, it must be necessarily held that from that income minor do not have any benefit for present. For this purpose, learned counsel heavily relied upon judgment of Supreme Court in case reported in CIT v. M. R. Doshi [1995] 211 ITR 1. Having regard to submissions made by learned counsel on either side, we went through entire materials found reflected in records. We also went through relevant provisions of law. Under section 64 of Income-tax Act, in computing total income of any individual, there shall be included all such income as arises directly or indirectly to minor child of such individual from admission of minor to benefits of partnership in firm. We extract relevant portion of section 64 hereunder: 64. Income of individual to include income of spouse, minor child, etc. (1) In computing total income of any individual, there shall be included all such income as arises directly or indirectly ... (iii) to minor child of such individual from admission of minor to benefits of partnership in firm. Explanation 2A to section 64 is extracted hereunder: For purposes of clause (iii), where minor child of individual is beneficiary under trust, income arising to trustee from membership of trustee in firm shall, to extent such income is for benefit of minor child, be deemed to be income arising indirectly to minor child from admission of minor to benefits of partnership in firm. We extract hereunder section 64(1)(vii) of Income-tax Act (section 64(1)(vii) was previously in statute book as section 64(1)(v)): (vii) to any person or association of persons from assets transferred directly or indirectly otherwise than for adequate consideration to person or association of persons by such individual, to extent to which income from such assets is for immediate or deferred benefit of his or her spouse or minor child (not being married daughter) or both. In our considered opinion, in understanding clause (iii) of sub section (1) of section 64 of Act, we have to necessarily look into Explanation 2A to that section. In other words, Explanation 2A would help court to understand scope of section 64(1)(iii) of Act. To find out why Explanation 2A was introduced, we perused Finance Act, 1979. reasons for bringing Explanation 2A to section 64(1) of Act by way of amendment are given in paragraph 20.2 of Finance Act, 1979. We extract paragraph 20.2 as hereunder: 20.2. Share of minor from trust, where trustee is in partnership with any person, to be included in income of parent: Under existing provisions of Act, income arising to minor child from admission to benefits of partnership is included in income of that parent who has higher income, although neither of parents is partner in firm to benefits of which minor is admitted. With view to countering device for circumventing this provision through interpolation of trust, new provision has been introduced by FA 79 to provide that where minor child of individual is beneficiary under trust and trustee joins in any partnership business with any person, income arising to trust, to extent it is for benefit of minor child, will be included in total income of that parent who has higher income: (Explanation 2A inserted in section 64(1) from April 1, 1980). Therefore Legislature was aware of fact that by creating trust, individual may exclude income, arising to minor child from his admission to benefits of partnership, from his income. Under these circumstances, we must give true meaning to Explanation 2A to section 64(1) of Act. Reading section 64(1)(v) of Act, as it originally stood, (now section 64(1)(vii)), it is clear that if individual transfers assets directly or indirectly otherwise than for adequate consideration to any person or association of persons, then, to extent to which income from such assets is for immediate or deferred benefit of..., that such income either arising directly or indirectly shall be added to income of individual in computing his total income. To put it in nutshell, if, from assets transferred by individual to persons mentioned in above sub-section income is generated and that income is for immediate or deferred benefit of person in whose favour transfer is made, then such income shall be lawfully included in income of individual in computing his total income. To attract section 64(1)(v) of Act, it must be seen that income generated from such assets is available for immediate or deferred benefit of persons mentioned in that sub-section. This sub-section came up for consideration before Supreme Court in judgment reported in CIT v. M. R. Doshi [1995] 211 ITR 1 referred to supra. facts in that case are as hereunder (page 2): assessee, individual, had executed two deeds of trust and supplementary deed, cumulative effect of which was that income from trusts was to be accumulated until attainment of majority by his three sons. cumulative income was then to be divided into three equal shares and respective 1/3rd share of each son was to be paid to him. question was whether income from trusts could be included in total income of assessee under provisions of section 64(1)(v) of Income-tax Act, as it then stood. hon ble Supreme Court then went on to hold as hereunder (page 3): In judgment in assessee s own case (Addl. CIT v. M. K. Doshi [1980] 122 ITR 499), Gujarat High Court held, on construction of section 64(1)(v), that income from transfer of assets can be included in income of transferor provided that, under transfer, benefit from such assets was immediately available or was deferred for spouse or minor children of settlor. In other words, mischief of tax evasion by assessees by transfer of their assets, such as by settlement or by trust, so as to make income of such transferred assets available to their spouses or minor children without subjecting same to tax in hands of settlors, was sought to be avoided by providing that such income would be includible in hands of settlors provided that benefit from income of such assets was either immediately available to or was deferred for benefit of their spouses or minor children. If child for whom benefit was provided was to receive it on attaining majority, provision contained in clause (v) was not attracted on plain reading of clause (v) itself, because, otherwise, Legislature would not have expressed itself in manner in which it did. Reliance was placed upon Yogindraprasad N. Mafatlal v. CIT [1977] 109 ITR 602 (Bom) where same view was taken. Supreme Court concluded on facts as hereunder (page 3): As facts show, trusts in present case have this cumulative effect, that income therefrom is to be accumulated until attainment of majority by assessee s three sons; cumulative income is then to be divided in three equal shares and one such share is to be paid to each son. payment, therefore, is to be made after each of sons attains majority. Section 64(1)(v) requires, in computation of total income of assessee, inclusion of such income as arises to assessee from assets transferred, otherwise than for adequate consideration, to extent to which income from such assets is for immediate or deferred benefit of, inter alia, his minor children. specific provision of law, therefore, is that immediate or deferred benefit should be for benefit of minor child. Inasmuch as in this case deferment of benefit is beyond period of minority of assessee's three sons, since assets are to be received by them when they attain majority, provisions of section 64(1)(v) have no application. From judgment referred to above, it is clear that if benefit has to reach child only on child attaining majority, namely, benefit getting postponed to definite future date, then, income earned by such beneficiary shall not be included in income of individual in computing his total income. words used in this sub-section is immediate or deferred benefit . In Explanation 2A, phrase used is for benefit of minor child . This means that minor should have benefit of income. In other words, income must be readily available for use of minor. If income is only to be credited to minor's account in trust and to remain there as it is till minor attains majority, then, it must be held that it is not for immediate use for minor, which means that minor do not get any benefit at all for present. He is not entitled to receive money till he attains majority. Therefore, in our considered opinion, expression for benefit of minor found in Explanation 2A to section 64(1) of Act would only mean that minor should be legal owner of income mentioned in that Explanation, which alone would enable Assessing Officer to include it in income of individual in computing his total income. case of assessee is that, share of income of minor from partnership firm has to be transferred to trust account and to be accumulated as it is till beneficiary/ minor attains majority. Therefore, we have no difficulty at all in holding that in such event income of beneficiary from partnership firm shall not be included in income of individual in computing his total income. Supreme Court, in M. R. Doshi s case [1995] 211 ITR 1 referred to supra, after considering expressions found in section 64(1)(v) of Income-tax Act namely, immediate or deferred benefit, went on to hold that if child, for whom namely, immediate or deferred benefit, went on to hold that if child, for whom benefit was provided, was to receive it on attaining majority, then, provision contained in clause (v) as it stood then, was not attracted at all on plain reading of clause (v) itself. Therefore, reading Explanation 2A to section 64(1) of Act, we want to fall in line with judgment of Supreme Court to hold that so long as it is shown that beneficiary/minor son of individual has to receive his share of income only on attaining majority, clause (iii) to section 64(1) of Act would not be attracted to case on hand. In T. C. No. 55 of 1996, we find that there is finding as hereunder in order dated January 3, 1991. in I. T. A. No. 1493/1987 on file of Income- tax Appellate Tribunal, Madras Bench B. On appeal, Commissioner of Income-tax (Appeals) had observed that income accrued to benefit of minor children was allowed to accumulate and accumulated amount was added to fund of trust till minor attains majority. Therefore there cannot be any difficulty at all, as far as reference made in T. C. No. 55 of 1996 is concerned, that income in hands of individual namely, assessee, representing income of minors which are shown to be added to fund of trust till minors attain majority, cannot be included in income of individual assessee/ respondent therein. In T. C. No. 107 of 1996, there is nothing on record to show as to how income of minor/beneficiary from partnership firm has to be treated. Therefore it is matter for verification. If, on verification, it is found that such income in hands of trustee stands transferred to trust account to be accumulated till minors/beneficiaries attain majority, then, it shall not be included in income of individual. If it is otherwise, it can be included. Accordingly, T. C. No. 107 of 1996 stands disposed of as hereunder: Assessing Officer will reopen assessment for period 1985-86; verify from records already available or to be produced by assessee as to manner of disposal of minors/beneficiaries share of income from partnership firm namely, whether it is available for their immediate benefit or it stands credited to trust account to be accumulated till beneficiaries attain majority and depending upon outcome of such finding, to proceed in accordance with law. We conclude as hereunder: To attract clause (iii) of section 64(1) of Income-tax Act read with Explanation 2A of same Act, unless it is found that minor, for whose benefit income is available, is shown to have absolute right of disposal in praesenti over same, it cannot be included in income of individual in computing his total income. In other words, if such income is to reach hands of minor/beneficiary only on attaining majority, then it cannot be included in income of individual in computing his total income. question referred to this court stands answered accordingly against Revenue and in favour of assessee. In view of judgment of Supreme Court reported in CIT v. M. R. Doshi [1995] 211 ITR 1 and in light of reasons given by us in this judgment, we declare that judgment of this court in CIT v. K. J. Ramaswamy [2002] 256 ITR 191 is no longer good law. *** COMMISSIONER OF INCOME TAX v. K.J. RAMASWAMY
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