Case Note & Summary
The case pertains to an income tax reference under section 256(1) of the Income Tax Act, 1961, at the instance of the assessee, Behram B. Dubash. The assessee was married to Mehroo according to Zoroastrian rites on 12.5.1966, and a daughter, Farida, was born on 30.11.1970. Mehroo filed a suit for restitution of conjugal rights (Suit No. 36 of 1974) and later a divorce suit (Suit No. 13 of 1974) before the Parsi Chief Matrimonial Court at Bombay. A decree dissolving the marriage was passed on 16th June 1975 on the ground of desertion. Under the decree, the assessee was directed to create a trust of Rs. 5,50,000 with Central Bank Executor & Trustee Co. Ltd. as trustees. The trust provided that the net income be paid to Mehroo until Farida attained 18 years, then to Farida until she turned 30, and thereafter the corpus to Farida. The legal issue was whether the trust was for adequate consideration, thus excluding its income from clubbing under section 64(1)(vii) of the Income Tax Act. The Tribunal held in favor of the assessee, and the Revenue referred the question to the High Court. The High Court, per A.S. Aguiar J., upheld the Tribunal's view, holding that the trust created in compliance with a court decree under the Parsi Marriage & Divorce Act constitutes adequate consideration, and therefore the income is not includible under section 64(1)(vii). The question was answered in the affirmative, in favor of the assessee and against the Revenue.
Headnote
A) Income Tax - Clubbing of Income - Adequate Consideration - Trust created under decree of divorce under Parsi Marriage & Divorce Act, 1936, for benefit of minor daughter - Held that such trust is for adequate consideration and income therefrom is not includible in assessee's total income under section 64(1)(vii) of Income Tax Act, 1961 (Paras 1-3).
Issue of Consideration
Whether the trust created by the assessee for the benefit of his minor daughter in obedience to the terms of a decree of divorce passed under the Parsi Marriage & Divorce Act, 1936, was for adequate consideration and therefore not falling within the scope of section 64(1)(vii) of the Income Tax Act, 1961.
Final Decision
The question of law is answered in the affirmative, in favor of the assessee and against the Revenue. The Tribunal was correct in holding that the trust created by the assessee for the benefit of his minor daughter in obedience to the terms of the decree of divorce was for adequate consideration and does not fall within the scope of section 64(1)(vii) of the Income Tax Act, 1961.
Law Points
- Adequate consideration
- Trust created under court decree
- Section 64(1)(vii) Income Tax Act
- 1961
- Clubbing of income
- Parsi Marriage & Divorce Act
- 1936
Case Details
2005 LawText (BOM) (05) 154
Income Tax Reference No. 328 of 1988 and Income Tax Reference No. 21 of 1989
Mr. Parag Vyas for Applicant, Mr. P. J. Pardiwala i/b. Mulla & Mulla for Respondent
Commissioner of Income Tax
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Nature of Litigation
Income tax reference under section 256(1) of the Income Tax Act, 1961, regarding clubbing of trust income.
Remedy Sought
The Revenue sought a ruling that the trust income was includible in the assessee's total income under section 64(1)(vii).
Filing Reason
The Revenue challenged the Tribunal's decision that the trust created under a divorce decree was for adequate consideration.
Previous Decisions
The Income Tax Appellate Tribunal in ITA Nos. 3126/Bom/1983 and 446/Bom/1984 dated 17th September 1985 held in favor of the assessee.
Issues
Whether the trust created by the assessee for the benefit of his minor daughter in obedience to the terms of a decree of divorce passed under the Parsi Marriage & Divorce Act, 1936, was for adequate consideration and therefore not falling within the scope of section 64(1)(vii) of the Income Tax Act, 1961.
Submissions/Arguments
The Revenue argued that the trust was not for adequate consideration and thus income should be clubbed under section 64(1)(vii).
The assessee contended that the trust was created pursuant to a court decree, which constitutes adequate consideration.
Ratio Decidendi
A trust created in compliance with a decree of divorce under the Parsi Marriage & Divorce Act, 1936, constitutes adequate consideration, and therefore the income from such trust is not includible in the assessee's total income under section 64(1)(vii) of the Income Tax Act, 1961.
Judgment Excerpts
Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the trust created by the assessee for the benefit of his minor daughter in obedience to the terms of decree of divorce passed against him under the provisions of Parsis Marriage & Divorce Act, 1936, in a suit brought against him by his wife, was for adequate consideration and, therefore , would not fall within the scope of sec. 64(1)(vii) of the Income Tax Act , 1961?
Under the terms of the decree dated 16th June 1975, the assessee was directed to provide permanent alimony and the custody of the child to his wife as well as for their maintenance.
Procedural History
The assessee created a trust pursuant to a divorce decree dated 16th June 1975. The Income Tax Officer included the trust income in the assessee's total income under section 64(1)(vii). The assessee appealed to the Commissioner of Income Tax (Appeals) who upheld the inclusion. The assessee then appealed to the Income Tax Appellate Tribunal, which allowed the appeal, holding the trust was for adequate consideration. The Revenue then filed a reference under section 256(1) to the High Court, which was heard and decided on 30th June 2005.
Acts & Sections
- Income Tax Act, 1961: 256(1), 64(1)(vii)
- Parsi Marriage & Divorce Act, 1936:
