Judgment:
K. Shivashankar Bhat, J.
1. The question of law referred for our opinion is as follows :
'Whether, on the facts, the Tribunal was right in holding that the share of income of the 'Tanga Family Trust' from the firms of M/s. R. A. Tanga and M/s. Tanga Agencies is includible in the applicant's total income under section 64(1)(iii) of the Income-tax Act, 1961, for the assessment year 1977-78 ?'
2. The relevant facts are that one Jaikumar Tanga created a trust under the name and style of 'Tanga Family Trust' by a deed dated February 1, 1976, with a view to providing education, medical aid and for marriage expenses, etc., for the named minor children of the assessee. The assessee was appointed as the trustee. The four beneficiaries who were minors were the to have the profit and bear the losses equally. Similarly, their interest in the corpus of the trust was also equal. The assessee as the trustee invested the trust funds in the firms called 'M/s. R. A. Tanga' and 'M/s. Tanga Agencies' and as such the trustee on behalf of the trust became a partner in those firms.
3. The assessment year in question is 1977-78. The income received by the trust thus was for the benefit of the minor beneficiaries. They are the children of the assessee-trustee.
4. The assessing authority held that actually the minors were receiving the profits of the partnership firms and they were inducted to the benefits of the partnership through the medium of the aforesaid trust. Therefore, section 64(1)(iii) of the Income-tax Act, 1961 ('the Act', for short), was applied. The amount received for the benefit of the minor children were assessed in the hands of the assessee. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the minors were not admitted to the benefits of the partnership. They were only beneficiaries under the trust. The trust was a partner and, therefore, section 64(1)(iii) of the Act had no application. On appeal by the Revenue to the Appellate Tribunal, the Tribunal restored the order of the assessing authority. The Tribunal held that the very minors were earlier admitted to the benefits of the partnership and, subsequently, the assessee resorted to the device of creating the trust and, therefore, it is clear that in reality the minors were admitted to the benefits of the partnership. However, nowhere in the order of the Tribunal, was it found that the trust lacked bona fides. Its genuineness was not questioned. Only because the very minors were earlier admitted to the benefits of the partnership and, subsequently, the trust was created, the Appellate Tribunal applied the provisions of section 64(1) of the Act to the facts of the case. Further, the Tribunal held that the assessee being a doctor, actually derived income from the medical firms. Paragraph 10 is the only relevant passage on this question where in the Tribunal states thus :
'As regards the assessment year 1977-78, the additional ground relates to application of section 64(1)(iii) and we having perused the orders of the lower authorities as also the paper book since placed on our file and after giving due consideration to the submissions made before us, are of the opinion that since the assessee is an individual, section 64 of Act has application to the facts of the case. We hold so, with the result, the impugned order of the Appellate Assistant Commissioner the above score also stands reversed and that of the Income-tax Officer stands restored.'
5. From the above, it is clear that there was no substantial discussion of the question by the Tribunal.
6. Section 64(1)(iii) reads thus :
'(1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly -
(i) and (ii) omitted as unnecessary.
(iii) to a minor child of such individual from the admission of the minor to the benefits of partnership in a firm.'
7. To attract this provision, the following conditions will have to be satisfied :
(1) The income to be computed is that of an individual;
(2) The income to be included in the said computation is the income that arises directly or indirectly to a minor child of such an individual; and
(3) Such arising of the income to the minor child is virtue of the admission of the minor to the benefits of partnership in a firm.
8. Mr. Sarangan, learned counsel for the assessee, contended that this is a case where the minors were not admitted to benefits of the partnership. The trust was a partner through the trustee. Mr. Chandrakumar, learned counsel for the Revenue, contended that so long as the benefit of the income goes to the minors, whether directly or indirectly, and the said income is derived from the partnership, the substance of the provision is satisfied and section 64 will be attracted.
9. Section 64 is an exception to the normal rule of taxing the income in the hands of the recipient of the income. Section 64 purports to gross up the income of the minor child in the hands of the parent. This being an exceptional measure will have to be strictly construed. Unless the language of the provision is clear, tax liability cannot be fastened on a person who is not legally the owner of the income. May be the device adopted in a particular case is such that income of the firm is shared by a minor child because of the beneficial provisions of the trust deed. But the question is whether the minor child who is a beneficiary under a trust deed can be held to have been admitted to the benefits of the partnership solely because the trust is a partner of the firm.
10. The relevant words under section 64(1)(iii) are 'admission of the minor to the benefits of the partnership'. These words are identical to the phraseology found in section 30 of the Partnership Act. The partnership Act is the general law governing partnerships. Therefore, when his Act refers to the admission of minors to the benefits of a firm', it will have to be understood in the sense the general law governing the partnership understands it to be. Nowhere does the Partnership Act treat the minor beneficiaries under a trust deed as those admitted to the benefits of the partnership just because the said trust is a partner of the firm through the trustee. It may be a case where the assessee resorted to a legal device to distribute the income and reduce the tax burden but there is no illegality unless it is a case of tax evasion. The imposition of the tax being strictly according to the letter of the taxing legislation, tax liability cannot be fastened in a given case only because the assessee may resort to tax avoidance by adopting legal devices.
11. Realising this situation the Legislature acted to rope in even such income for taxation in the hands of the assessee by adding an Explanation 2A was inserted. This clearly nets any such income as is involved in the present case for taxation in the hands of the parent (assessee here). It is also necessary to note that even though Explanation 2 A was added by the Finance Act of 1979, the said Explanation was brought into force only from April 1, 1980. The effect of this explanation is found in a circular issued by the Board, the relevant portion of which reads thus :
'Under clause (iii) of section 64(1) the income arising to a minor child from the admission to the benefits of partnership is included in the total income of that parent who has the higher income, although neither of the parents is a partner in the firm to the benefits of which the minor is admitted. In order to effectively counter the device of circumventing this provision through interpolation of a trust, the Finance Act, 1979 has inserted a new Explanation 2A to provide that where a minor child of an individual is a beneficiary under a trust and the trustee joins in any partnership business with any person, the income arising to the trust, to the extent it is for the benefit of the minor child, will be included in the total income of that parent who has the higher income.'
12. Mr. Chandrakumar contended that this Explanation 2A is only clarificatory in nature and reflects the law as it stood even before the Finance Act, 1979, was enacted. We do not think so. If the Explanation was clarificatory of the existing law, Parliament would not have postponed its operation only from April 1, 1980. Parliament obviously did not intend to affect the legal devices already resorted to by several assessees by declaring the said Explanation to be the law as it always stood. If the Explanation was clarificatory in nature, normally the legislative practice is to declare it as the law all along.
13. Mr. Chandrakumar cited a decision of the Madhya Pradesh High Court in Chandrakala Bai Naila v. CIT : [1989]178ITR341(MP) . The said decision, on facts, is distinguishable. The Madhya Pradesh High Court held that when a minor has been admitted to the benefits of the partnership firm, the source of investment is entirely irrelevant to apply section 64(1) of the Act. On this principle of law, there can be no doubt, having regard to the clear language of section 64 of the Act.
14. Mr. Chandrakumar then contended that the veil of trust should be lifted to find out the reality and if so it can be seen that, in reality, the minors are the beneficiaries who were admitted to the benefits of the partnership. We cannot agree with this contention because this contention implies suspicion about the genuineness of the trust. We do not find any factual foundation for any such suspicion. The burden is quite heavy on the Revenue to establish something as a fact, which otherwise is not found to be so. In other words, it is for the Revenue to conclusively establish that the trust should be ignored and the real partners are the minors by admitting the benefits of the partnership. Such a burden has not been discharged in this case.
15. For the reasons stated above, our answer to the question is in the negative and against the Revenue.