Commissioner of Income Tax v. A. Savudappan — 1998 DIGILAW 589 (MAD)

Judgment :- Balasubramanian, J. It is a combined reference both under the Income-tax Act, 1961 and under the Wealth-tax Act, 1957. Insofar as the assessment under the Income-tax Act is concerned, the assessment years involved are 1978-79 to 1981-82 and under the Wealth-tax Act, the assessment years involved are 1978-79 and 1977-78. The facts are common and, hence, all the tax cases are dealt with together 2. One A. Savadappa Gounder, Dindigul died on 6-2-1967 leaving behind him a registered will in which his cousin brother Savadappan was appointed as an executor to supervise the estate. The legatees under the will are his wife and minor children. The executor under the will was empowered to manage the affairs of the estate consisting of movable and immovable properties described in Schedules 'A' to 'C' to the will. 'A' Schedule consisted of immovable properties as well as certain amounts standing in the capital and current accounts of the firm. 'A' Schedule was left to the wife of late Savadappa Gounder and his two minor children S. Ganesan and S. Savudeswari. 'B' Schedule was left to other relatives of the deceased. The executor Savadappan was empowered to continue the partnership business, to operate the business accounts in Lakshmi Vilas Bank, to invest in business and to improve the wealth of the estate with a condition that he should hand over the estate after the minor children attained majority. The minor children were admitted to the benefits of the partnership and the capital contribution for admission to the benefits of the partnership was made by withdrawing the accounts of the deceased in the firm 3. The executor filed the return of income 4dmittin only the interest income paid by the firm, viz., K. Nallayan Gounder and A. Savadappa Gounder and the credit balance in the books of the said firm in the name of the deceased. The ITO, however, included the share income arising to the minors from the sums along with the other income of the estate on the ground that the capital contribution for the minors to become the partners in the firm had flown from the estate. The ITO, however, included the share income arising to the minors from the sums along with the other income of the estate on the ground that the capital contribution for the minors to become the partners in the firm had flown from the estate. The ITO, thus, included the share income as well as the investment made in favour of minors on the ground that for the purpose of making the capital contribution on behalf of the minors for admission in the firm, the necessary amounts were withdrawn from the balance of capital account of the deceased in the firm and the capital contribution was made as required under the terms of the partnership. The ITO, thus, completed the assessment including the share income under the provisions of the Income-tax Act, and the investment under the provisions of the Wealth-tax Act along with the other income or properties of the estate 4. The assessee who is the executor of the will of late Savadappa Gounder took up the matter on appeal before the AAC. The AAC held that the capital was withdrawn from the estate account and as the investment of the capital was a condition of the deed of partnership and the capital of the minors flew from the funds of the estate, the share income due to the minors has to be included along with other income of the estate. He also held that only on behalf of the estate, the minors were admitted to the benefits of the partnership and, hence, the share income has to be included along with other income. The same view was adopted by the AAC for the purpose of deciding the appeals under the Wealth-tax Act also 5. The assessee carried the matter in appeal before the Tribunal. The main order of the Tribunal was passed for the assessment years 1978-79 and 1979-80, under the Income-tax Act. The Tribunal held that though the capital was contributed as required by the terms of the partnership deed, there is nothing in the deed to show that it was a condition precedent for admitting the minors to the benefits of the partnership. The Tribunal held that it was only as per the wishes of the testator that the minors were admitted to the benefits of the partnership and the admission of the minors was independent of capital contribution. The Tribunal held that it was only as per the wishes of the testator that the minors were admitted to the benefits of the partnership and the admission of the minors was independent of capital contribution. The Tribunal further held that there was no connection or nexus between the capital contribution and the profits earned, and even if there was nexus or connection, according to the Tribunal, the executor has assumed the character of a trustee in receiving the interest of the minors in the partnership. The Tribunal also noticed the fact that the share income was separately assessed in the hands of the minors subsequently. Placing reliance on the provisions of section 168(4) of the Income-tax Act, the Tribunal held that there was an application of income for the benefits of the legatees and the share income of the minors derived from the partnership could not be regarded as income derived by the executor in the course of administration of the estate. Applying the principle laid down in CIT v. Prem Bhai Parekh the Tribunal held that the connection between the income and the contribution was so remote that it would not justify their inclusion. The Tribunal, therefore, held that the ITO was not justified in holding that the minors' share income from the firm and the income of the estate should be clubbed. The order was followed by the Tribunal in deciding the wealth-tax assessments in favour of the assessee and in this view of the matter, the Tribunal allowed the appeals preferred by the assessee both under the Income-tax Act and the Wealth-tax Act 6. On applications filed by the revenue, following questions of law have been referred to us for our opinion T.C. Nos. 129 and 130 of 1985 "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 168(4) of the Income-tax Act, 1961 are applicable and that the share income from Nillayya Gounder and A. Savudda Gounder arising to the minor sons of Shri A. Savadappa (deceased) is not includible in the total income of the estate of the deceased assessee ?" T.C. Nos. 494 to 497 of 1986 " 1. 494 to 497 of 1986 " 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the value of interest of the minor children in the firms could not be regarded as wealth of the estate of late A. Savadappa Gounder and considered for assessments to wealth-tax ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the share income derived by the minor children in the firms could not be regarded as income derived by the executor in the course of administration of the estate of late A. Savadappa Gounder ?" 7. Mr. C. V. Rajan, the learned counsel for the revenue, submitted that the executor continued to be the executor and it is not correct to say that the executor shed his character as an executor and assumed the character of trustee when he received the share income on behalf of the minors, and the mere fact that the executor had contributed the capital with a view to implement the directions of the testator would not show that the share income was not a part of the income of the estate. According to the learned counsel for the revenue, under the terms of the will, the minors have no interest in the properties of the estate during their minority and the executor invested money in the name of minors and they were admitted to the benefits of the partnership because of the capital contribution and admittedly, the capital contribution came from the estate of the deceased and, therefore, the assessment of the share income in the hands of the executor along with other income of the estate was proper. The learned counsel for the revenue also submitted that section 168(4) has no application on the facts of the case as the said section deals with the income of the estate distributed or applied for the benefit of any specific legattee and in the instant case, the capital contributed cannot be regarded as income of the estate distributed to a specific legattee so as to attract the provisions of section 168(4). He further submitted that it is not a case falling within the scope of section 64 of the Income-tax Act, but it is a case under section 168(1) 8. Mr. He further submitted that it is not a case falling within the scope of section 64 of the Income-tax Act, but it is a case under section 168(1) 8. Mr. R. Janakiraman, the learned counsel for the assessee, on the other hand, submitted that the executor shed the character of the executor and received the share income in the capacity of trustee of the minors. He also submitted that the minors were admitted to the benefits of the partnership as per the wishes of the testator and it is not condition precedent for the minors for being admitted to the benefits of the partnership to contribute the capital and it is not correct to assume that share income accrued to the minors because of their capital contribution. He also submitted that if the executor was taken as a partner, he has to share the loss but when the minors were admitted to the benefits of the partnerships, they are not liable for loss. He also submitted that the connection between the contribution of capital and the share income derived from the partnership firm is remote and the Tribunal was justified in relying upon the decision in Prem Bhai Parekh's case (supra) and since there is no nexus between the share income and the capital contribution, the share income cannot be regarded as the income of the estate. He also submitted that since it is not the income of the estate, the provisions of section 168 are not applicable to the facts of the case. His main contention is that the minors were admitted to the benefits of the partnership on the specific wishes and the direction of the testator and when the executor joined as a partner and utilised the capital balance of the deceased in the partnership business, the executor had received the income as a trustee and the provisions of section 168(4) are applicable to the present case. He, therefore, submitted that the Tribunal was justified in holding that the share income of the minors from the firm cannot be clubbed along with other income of the estate 9. We have carefully considered the submissions of the learned counsels for the parties. He, therefore, submitted that the Tribunal was justified in holding that the share income of the minors from the firm cannot be clubbed along with other income of the estate 9. We have carefully considered the submissions of the learned counsels for the parties. The entire case has to be decided on the basis of the express finding recorded by the Tribunal, viz., "thus the admission of the minors for the benefits of partnership is independent of capital contribution." In view of the above specific finding, we are of the opinion that unless it is established that the contribution of capital was a condition for the p admission of the minors to the benefits of the partnership, the share income of the minors cannot be regarded as having arisen from the capital contribution. The minors were admitted to the benefits of the partnership and it was found that the deceased built up the business of the firm and the other partners agreed to take the minors to the benefits of the partnership in consideration of the services reridered by the deceased to the firm and to fulfil the wishes of the deceased. Therefore, the view of the ITO that because of the capital contribution, the minors were admitted to the benefits of the partnership cannot be sustained. It is, no doubt, true that under the will of the deceased, the executor was required to hand over the estate to the legatees when the minors attained majority, but the fact remains that the distribution of funds towards capital contribution of the minors was made in accordance with the wishes of the testator contained in the will. It was found that the funds left for the minors and their mother were laid partly in the capital accounts of the deceased and partly in the current accounts and by making necessary entries in the books of the account, the executor had given effect to the wishes of the testator. We are of the opinion that there is no nexus between the capital contribution and the profits earned by the firm. We are of the opinion that there is no nexus between the capital contribution and the profits earned by the firm. The share income to the minors arises not only by admission of the minors to the benefits of the partnership, but also by contribution of capital and physical labour of other partners and, therefore, it cannot be stated that from the mere fact that the funds for the capital contribution flew from the estate, the entire share income arose to the minors directly by virtue of admission to the benefits of the partnership. Further, by transferring a portion of the funds belonging to the deceased making it a part of the capital of the minors, the executor divested of his title in the funds in favour of the minors and after such divestiture of the funds the minors became the owners of the funds lying in the capital accounts as capital contribution. Therefore, the provisions of section 168 on which reliance was placed by the revenue have no application as those provisions deal with the income of the estate. The Tribunal, no doubt, relied upon the provisions of section 168(4), on the ground that an income had been distributed or applied for the benefit of any specific legatee of the estate, that income should be excluded from the income of the estate, in the view we have taken above it is not the income of the estate and it is not necessary to consider the question whether the income had been applied for the benefit of a specific legatee of the estate. We have seen that there is no direct nexus between the capital contribution and the benefits that arose from the partnership and in this situation, there is hardly any way to invoke the provisions of section 168 10. The Tribunal found that the will executed by the deceased expressed his feelings of anguish over the fact that his wife and minor children were not capable of looking after the partnership business and the properties of the, deceased and for that purpose, the testator desired his cousin A. Savadappan to act as an executor and he was also empowered to carry on any other business out of the capital. It is also found from the will that the testator has expressed his desire that the executor should provide all necessary comforts without any let or hindrance and other partners have no right to object whatever done by the executor. Therefore, in view of the specific, directions and wishes of the teatator, the executor joined as a partner and utilised the capital balance of the deceased as part of his share capital and distributed a portion of the amount to the minors' share capital. Once it is found that the admission of minors to the benefits of partnership was made de hors the capital contribution, it is not open to the ITO to invoke section 168 to club the share income of the minors with the income of the estate. The same principle would equally apply for the inclusion of the amount standing in the current account in the wealth-tax proceedings of the estate. We are, therefore, of the opinion that the Tribunal was right in holding that the inclusion of share income from the firm in the estate was not justified and the Tribunal has come to the correct conclusion. Further, once we reach the conclusion that the capital contribution made on behalf of the minors was independent of the admission of the minors to the benefits of the partnership, it cannot also be stated that the executor received the income from the estate in his character or capacity only of an executor of the estate. The executor by making necessary transfers in favour of the minor children had transferred the money in favour of the minor children and the money ceased to be a part of the estate and the money cannot be said to have been received by him in his capacity as executor. In our opinion, the executor received the money as a trustee as he was not administering the properties of the estate and received the share income from the firm in his character as an executor 11. The learned counsel for the revenue relied upon a decision of this Court in CIT v. T. G. K. Raman and the decision of the Supreme Court in the case of CIT v. M. R. Doshi. In our opinion, those decisions have no application to the facts of the case. The learned counsel for the revenue relied upon a decision of this Court in CIT v. T. G. K. Raman and the decision of the Supreme Court in the case of CIT v. M. R. Doshi. In our opinion, those decisions have no application to the facts of the case. The question that was considered by the Apex Court was whether the provisions of section 64(1) can be invoked and it was held that it can be invoked when there was an immediate or deferred benefit for a minor child. The Supreme Court held that the deferment of benefit was beyond the period of minority of the assessee's three minor sons and the payment was to be made after each of the sons attained majority and, therefore, the incomes, of the trust could not be included in the total income of the minor sons. The point that arises in the instant case is entirely different in both the decision of this Court as well as that of the Apex Court and here the question that arises is whether it is open to the executor to transfer a portion of the amount belonging to the estate in favour of minor sons during their minority and whether the share income accrued to the minors by virtue of capital contribution or whether it accrued independent of the capital contribution made on behalf of the minor children. We hold that there is no nexus between the accrual of the share of profits and the contribution made as it was not a condition precedent that for the admission of the minor children to the benefits of the partnership there should be a contribution of capital. The finding of the Tribunal was that the minors were admitted because of the efforts of the deceased made by him during the period when he was a partner and in fulfilment of the wishes of the deceased, they became admitted, and, therefore, the question whether the executor had the power to transfer the money during the period of minority does not assume much importance in view of the finding that there was no connection between the capital contribution and the share income accrued on admission of the minor children to the benefits of the partnership firm 12. The learned counsel for the revenue also placed reliance on a decision of the Supreme Court in the case of S. P. Jaiswal v. CIT, wherein the Supreme Court held that the ITO has a right to tax the right person when that person is liable to be taxed according to law and merely because a wrong person was taxed with respect to a particular income, the Assessing Officer is not prevented from taxing the right person with respect to that income. The reliance was placed on the above decision by the counsel for the revenue because it was found that share income was assessed in the hands of minors separately. We have no difficulty in accepting the submission made on behalf of the revenue that merely because an assessment was made in the hands of the minors, it would not in any way preclude the department from taxing the right person, if the facts so warrant. We have held that there is no connection between the share income and the capital contribution and in the absence of any nexus, the decision relied upon by the learned counsel for the revenue need not be examined in detail except to state that they are not applicable to the facts of the case. The Tribunal, in our view, has come to the correct conclusion in holding that the ITO was not justified in clubbing the minors' share income from the firm with the income of the estate. We also hold that since section 168(1) is not applicable, it is not necessary to consider whether section 168(4) would apply to the facts of the case 13. Accordingly, we answer the questions of law in both the batches of cases in the affirmative and against the department. However, in the circumstances of the case, there will be no order as to costs.