- (1.) On April 10, 1953 the estate of the joint Hindu family of which the respondent was a member was partitioned, and the respondent was allotted, besides other properties, 400 shares of the Simbhaoli Sugar Mills Private Ltd., and was made liable to pay a business debt amounting to Rs. 3,91,875 due by the family to R. B. Seth Jessa Ram Fetch Chand of Delhi. On April 14, 1953 the respondent executed a deed of trust in respect of 300 out of the shares of the Simbhaoli Sugar Mills which fell to his share. The following are the material provisions of the deed of trust: "And whereas on partition, the author was allotted amongst other properties, four hundred shares of the Simbhaoli Sugar Mills Ltd. and fixed with liability for discharge of certain debts of the Joint Hindu Family and whereas for discharge of the debts detailed in the schedule appearing hereafter, the author now as absolute owner of the said shares has decided to settle on trust three hundred shares numbering 1 to 300 both inclusive, out of the said shares for the benefit of his creditors and other beneficiaries named hereafter and for the objects mentioned hereafter. That the author as holder of 300 shares x x x x x out of the capital of Simbhaoli Sugar Mills Ltd., divesting himself of all proprietary rights in the said shares, hereby declares that the said shares shall from this day be irrevocably held on Trust by the Trustees to be used by them for all or any of the purposes following that is to say: (a) To pay off the debts as detailed in Schedule 'A' attached hereto: These debts were incurred for the benefit of the Joint Hindu Family of the author and on disruption of the Joint Hindu Family and partition of properties among its members, made payable by the author. And after his debts are paid off. (b) To provide for the maintenance and education of the children and grand-children of the author. (c) To open and run Hospitals and Nursing Homes. (d) To open and run School or Schools for the education of boys or girls in scientific and technical subjects. (e) To open and maintain a reading room and a lending library. (f) To provide for the maintenance and education of orphans, widows and poor people and for that to give scholarships for inland and overseas studies, to found orphange, widow houses and poor houses and to do all other things that the trustees may deem fit for carrying out the objects of the Trust". By cl. 3 four persons including the respondent were appointed trustees, and the respondent was to hold the office of Chairman of the Trust during his lifetime. The trust deed then provided: "In the books of the Company, the shares will stand in the name of the Chairman for the time being who will have the power to operate the Bank accounts of the Trust, to preside at the meetings, exercise the right of the vote in respect of the shares of the Trust." Clause 5 provided: "It is hereby declared that the trustees shall have the following powers in addition to the powers and the authorities hereinbefore contained: (i) The trustees shall not be entitled to sell the shares except as provided hereafter but they can mortgage or pledge the same for raising funds as they may feel necessary for paying off the debts of the author, provided * (ii) * * * * (iii) * * * * (iv) * * * *" Clause 6 provided: "That in carrying out the objects of the trust the trustees shall keep in mind and abide by the following directions: (i) The payment of the debts of the author as detailed in Schedule 'A' referred to above shall receive the topmost priority and the trustees shall not spend any money out of the trust property or its income in any direction till they have paid off all the debts of the author provided always if the trustees are unable to pay off the debts, out of the income i.e. dividends, bonuses etc. of the shares within a period of ten years they shall be entitled to sell the same or part of it and thus pay off the debts that may be due at that time. (ii) After debts are discharged the trustees shall spend 80 per cent of the income of the trust property, remaining in their hands after full discharge of the debts, on the maintenance of the children and grand-children of the author and the remaining 20 per cent on all or any of the other objects of the trust as the Trustees may think best. (iii) * * * *"
(2.) The respondent claimed before the Income-tax Officer, E-Ward, Amritsar that the dividend received by the trustee in respect of 300 shares of the Simbhaoli Sugar Mills was the income of the Trust and that he had no concern with that income as he has "divested himself irrevocably of the ownership of the shares and that in any event of Rs.19,856 being the amount due as interest to R. B. Seth Jessa Ram Fateh Chaud should be allowed as a permissible deduction in computing the net income from dividend of the shares. The Income-tax Officer rejected the contentions of the respondent holding that the Trust was a 'fictitious transaction'. The Appellate Assistant Commissioner held that the respondent had not "irrevocably transferred the 300 shares of the Simbhmoli Sugar Mills" and therefore by virtue of S. 16(1)(c) proviso one the respondent could not escape liability to pay tax on the dividend from the share.
(3.) The respondent appealed to the Income-tax Appellate Tribunal, but without success. At the instance of the respondent the Tribunal drew up a statement of the case and referred the following questions to the High Court at Chandigarh: "(1) Whether the dividend income of 300 shares of the Simbhaoli Sugar Mills Private Ltd. transferred by the assessee to S. Raghbir Singh Trust was the income of the assessee liable to tax - (2) Whether the assessee was entitled to claim deduction of Rs. 19,856 paid as interest to R. B. Seth Jessa Ram Fateh Chand against the dividend income of the aforesaid 300 shares - The High Court answered the first question in the negative and declined to answer the second question. With special leave, the Commissioner of Income-tax has appealed to this Court.;