COMMISSIONER OF WEALTH-TAX vs. MAHENDRABHAI D PARMAR

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WTR/20/1995HC GujaratGJHC24022702199517 July 2006Author: HONOURABLE MR. JUSTICE M.R. SHAH,HONOURABLE MR. JUSTICE R.S.GARG6 pages

AI SummaryAllowed

What did the High Court hold?

The High Court held that the Appellate Tribunal was right in directing the exclusion of the sum of Rs. 4,81,957/- from the net wealth of the assessee. The Court reasoned that the provisions of the Income Tax Act and the Wealth Tax Act are different. While Income Tax deals with who is entitled to receive income and its appropriation or application, Wealth Tax applies to wealth that belongs to a person and over which they have the power of disposition. In this case, if a part of the assessee's income went to the Trust, wealth was created in favour of the Trust. Since the assessee had no power of disposition or alienation over the Trust's assets, this property could not be included in the assessee's wealth. The Court noted that the Revenue's argument was contrary to the Supreme Court judgment in Commissioner of Wealth Tax v. Lov S. Kinariwala, reported in the same volume (259 ITR at page 440). Therefore, the Revenue's argument was rejected. The question was answered in favour of the assessee and against the Revenue.

What were the facts?

The Revenue (Commissioner of Wealth-Tax) is the applicant, and the assessee is Mahendrabhai D. Parmar. The case concerns the assessment year(s) not explicitly stated but implied to be related to the creation of a trust. The order under challenge is a reference made by the Appellate Tribunal to the High Court. The dispute revolves around the exclusion of Rs. 4,81,957/- from the net wealth of the assessee. The assessee, an individual and an 8% partner in M/s. Kinarivala R.J.K. Industries, created the "Mahendra Dhanjibhai Parmar Family Trust" and appropriated 4% of his share for the trust's benefit. The Revenue sought to include the assets of this trust in the assessee's net wealth.

What were the issues?

1. Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to exclude the sum of Rs. 4,81,957/- being assets of the Mahendra Dhanjibhai Parmar Family Trust, wherein the assessee was the beneficiary, from the net wealth of the assessee? (Question of law and fact, concerning the Wealth Tax Act). Assessee's Contention: Not recorded, but implied to support the Tribunal's direction for exclusion. Revenue's Contention: The Revenue argued that if the amount transferred to the Trust continued to be the assessee's income, then the wealth created by that amount should also be considered the assessee's wealth. The Revenue relied on the Supreme Court judgment in Commissioner of Income-Tax v. Sunil J. Kinariwala, [2003] 259 ITR 10, particularly the observation distinguishing between diversion of income by overriding title and application of income. The Revenue contended that the creation of the Trust was an application of income, not a diversion by overriding title, and therefore the wealth should be included in the assessee's net wealth.

Which sections of the Income-tax Act were involved?

Wealth Tax Act

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances

WTR/20/1995 1/6 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD WEALTH TAX REFERENCE No. 20 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE M.R. SHAH ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= COMMISSIONER OF WEALTH-TAX - Applicant(s) Versus MAHENDRABHAI D PARMAR - Respondent(s) ========================================================= Appearance : MR MANISH R BHATT for Applicant(s) : 1, NOTICE UNSERVED for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE M.R. SHAH Date : 17/07/2006

ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG)

WTR/20/1995 2/6 Mrs. Bhatt, learned counsel for the Revenue. The Tribunal has referred the following question to us for our answer; “Whether,

the Appellate Tribunal is right in law and on facts

in directing

the Assessing Officer to exclude the sum of Rs. 4,81,957/- being assets of Mahendra Dhanjibhai Parmar Family Trust, wherein the assessee

was the beneficiary from the net wealth of the assessee ?”.

Mrs. Bhatt, learned counsel for the applicant submits that the assessee is an individual and is partner to the extent of 8% profits in M/s. Kinarivala R.J.K. Industries, a partnership firm, he created a family Trust known as “Mahendra Dhanjibhai Parmar Family Trust”. She also submitted that out of 8% share, 4 per cent be appropriated in favour of the said Trust

WTR/20/1995 3/6 so that the money is used in the interest of the beneficiaries.

Relying upon the Judgment of the Supreme Court in the matter of Commissioner of Income-Tax Vs. Sunil J. Kinariwala, [2003] “259 ITR 10”, she submitted that in relation to another partner of the said firm the submission was that if because of the settlement the income does not come in the hands of the said partner it would not continue to be his income and could not be included in the returned income. In the said matter, she relied upon the following observation; “When a third person becomes entitled to receive the amount in question under an obligation of the assessee even before the assessee could lay a claim to receive it as his income, there

WTR/20/1995 4/6 would be a diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application by the assessee and not of diversion of income by overriding title.”

She submits that if the amount transferred in favour of the Trust would continue to be income of the assessee, then creation of the wealth by the said transferred amount would be wealth of the assessee.

We heard Mrs. Bhatt at length. We expressed our opinion that the provisions of the Income Tax Act and Wealth Tax Act are different. Income Tax refers to the income refers to a person who entitles to receive it and WTR/20/1995 5/6 appropriation of the income or its application, but Wealth Tax applies in a case where the wealth belongs to a particular person and he has a power of disposition. We pointed out to Mrs. Bhatt that, in the present case, if the part of the income of the assessee goes to the Trust, then the wealth would be created in favour of the Trust and as the assessee would have no power of disposition, transfer/alienation in any manner, WTR/20/1995 6/6 whole. The question is answered in favour of the assessee and against the Revenue. [ R.S. Garg, J. ] [ M.R. Shah, J. ] RMR.

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