JUDGMENT
S. Rajendra Babu, J.
1. The Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, has referred at the instance of the Department, the following question under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), for the opinion of this court :
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the provisions of section 64(1)(vii) do not apply in the present case ?”
2. The assessee in this reference is an individual. D. L. Narasimhaiah Family Trust and M. D. Veeranarasimhaiah Family Trust are partners in the registered firms of Jaya & Co. and D. L. Narasimhaiah & Bros. D. L. Narasimhaiah is the other partner in the firm, D. L. Narasimhaiah & Bros. while M. D. Veeranarasimhaiah is the other partner in the firm, Jaya & Co. In the D. L. Narasimhaiah Family Trust, the beneficiaries are the five minor children of the said Narasimhaiah represented by their mother, trustee, in the firm of Jaya & Co. Similarly, in the Veeranarasimhaiah trust, the three minor children of Veeranarasimhaiah are represented by their mother as the trustee in the registered firm of Narasimhaiah & Bros. The said two trusts were created on November 29, 1969, and they were registered on December 4, 1969.
3. A sum of Rs. 10,000 was settled by M. D. Veeranarasimhaiah in favour of the trust created by him, while D. L. Narasimhaiah settled a sum of Rs. 9,999 in favour of the other trust. The trust funds were invested in the said two firms and the two trusts became partners in the respective firms. For the assessment year 1976-77, the share income received by the respective trusts from the firms were apportioned equally among the respective beneficiaries and taxed in their hands.
4. The trust deed provided that the income arising from the property of the trust shall be accumulated until the termination of the trust. It is only on the determination of the trust that the monies accumulated and the trust fund are to be distributed among the beneficiaries. The beneficiaries were minors. However, the assessee in this case did not return the income from the share of the firm as arising directly or indirectly to the minors from the assets transferred to them. This sum was also not assessed by the Income-tax Officer. But the Commissioner of Income-tax, in exercise of his suo motu powers of revision under section 263 of the Act, set aside the assessments and directed the Assessing Officer to add the said sums of money. The Commissioner was of the view that even the deferred payment to the minors would be income arising indirectly to the assessee and therefore, should be added under section 64(1)(vii) of the Act.
5. The assessee filed an appeal before the Tribunal contending that, inasmuch as the trust was to last for a period of 20 years, all the beneficiaries would be majors by the time they receive the benefit and they would have passed the stage of minority by then and hence the same is not liable to tax in the hands of the assessee.
6. The Revenue took the stand that the benefit, though not immediate, was a deferred one arising out of an asset. The transfer was for the benefit of minors and such income should be added back notwithstanding that the money would not be received by the minor children before they become major. But the Tribunal, following a decision of the Gujarat High Court in the case of Addl. CIT v. M. K. Doshi and of the Bombay High Court in H. H. Maharani Shri Vijaykunverba Saheb of Morvi v. CIT [1975] 99 ITR 162, took the view that where the benefit is received only after attaining majority, the provisions of section 64(1)(vii) of the Act cannot be applied. The Tribunal observed that, admittedly, on the facts of this case, the minor children of the assessee can receive no benefit during their minority, and in that view of the matter, allowed the appeals and reversed the order of the Commissioner. Thus, the crucial question that falls for consideration is whether, on a proper construction of section 64(1)(vii) of the Act, any benefit that accrued to the minor children of the respective assessees could be included in the total income of the assessee.
7. In order to appreciate the controversy in this case, it is necessary to summarise the material portions of the trust deed. The preamble of the trust deed declares that the trust is for the purpose of making a provision for giving a suitable start in life on or after the attainment of majority of the minor children. Clause 1 provides that the trustees shall hold the trust property for the benefit of the beneficiaries. The same idea is repeated in clause 2, while clause 5 makes a provision for a deferred payment, viz., that the net profit or loss shall be duly credited or debited respectively to the account of each of the beneficiaries in accordance with the share he is entitled to under these presents, the trustees shall only accumulate the income and shall not, during the existence of the trust, expend or authorise any expenditure from out of the trust funds including the accumulated income for the benefit of the beneficiaries or disburse, during the existence of the trust, any amounts, for any reason whatsoever to the beneficiaries or any of them. Clause 6 provides that the trust shall be in force till March 31, 1989, and thereafter shall get extinguished, whereupon, the sums due to the beneficiaries from the trust including the amounts, if any, standing to their credit in their respective accounts shall be paid off.
8. In the event of any of the beneficiaries dying before the trust is extinguished, the beneficial interest in the trust property shall stand vested in his legal heirs and that the trustee shall hold the trust property for the benefit of the surviving beneficiaries and the legal heirs of the deceased beneficiary until the extinguishment of the trust.
9. Sri K. Srinivasan, learned counsel for the Department, submitted that section 64(1) of the Act was attracted in case a minor child derives some benefit under the trust either by receipt of income or the income accrued to him or if he has a beneficial interest in the income. He submitted that while in the 1922 Act in the analogous section 16(3) the expression used is “benefit”, in section 64(1)(vii), the presence of the words “immediate or deferred” before the word “benefit” are significant. He further submitted that these words were added to overcome the effect of the decision in Manilal Dhanji v. CIT [1959] 35 ITR 467 of the Bombay High Court which has been affirmed by the Supreme Court in CIT v. Manilal Dhanji . It was held in those decisions that the minor daughter who was the beneficiary received no benefit from the trust during the entire period of her minority and it was only after she attained majority that she was given some benefit, namely, income, year after year. Such a benefit was a deferred benefit and deferred till the daughter attained majority and to such a situation the provisions of section 16(3)(ii) had no application. He contended that section 64(1) of the Act was attracted in case a minor child derives some benefit under the trust either by receipt of income or is entitled to income or has beneficial interest in the income during the relevant years of account. His submission is that though the minor child may not have received the income or the income accrued to him, he certainly has a beneficial interest in the income in the relevant year of account even though actual payment is postponed to a date beyond the age of minority of the child or when the child ceases to be a minor. His contention is that the income from accumulation of trust funds cannot be assessed in the hands of the beneficiaries since they have no right to get the income in any given year till the trust gets extinguished and such income cannot also be assessed in the hands of the father since nothing accrues to his minor children in that year and so the income escapes the tax net which is exactly what is sought to be remedied in the said section.
10. This court in the case of CIT v. A. B. V. Gowda [1986] 157 ITR 697 explained the meaning and distinction between the words “accrue”, “arise” and “received”. It was held therein that the income is said to accrue to a person when he has a right to the income and that right must be an enforceable right in regard to that income though actual quantification and receipt may follow in due course. Therefore, in the present case, the two aspects referred to by Sri Srinivasan, viz., “income received” or “income accrued” do not arise for consideration. The only question that falls for consideration is as to what beneficial interest the beneficiaries have in the income which is accumulated. The “beneficial interest” is defined in section 3 of the Indian Trusts Act, 1882, which reads as under :
“The ‘beneficial interest’ or ‘interest’ of the beneficiary is his right against the trustee as owner of the trust property.”
11. A careful reading of the provisions of the trust deed makes it clear that during the subsistence of the trust, the minor children have absolutely no right whatsoever to enforce against the trustee in respect of the accumulated income. Hence, by no stretch of interpretation can it be said that the minor children have any beneficial interest during the subsistence of the trust. However, Sri Srinivasan contended that in clauses 1 and 2, the trustees are directed to hold the trust property for the benefit of the beneficiaries and also that the amounts that are accumulated are to be kept in a separate account in respect of each of the beneficiaries and that such funds will pass on to the legal heirs of the beneficiaries in the event of his death and all these indicate that the beneficiaries have a beneficial interest even during their minority and when the trust is in force. This argument ignores the fact that whatever might have been said as to the nature of the holding of the trustees in respect of the income that arises, there is a specific clause indicating as to in what manner such income should be dealt with. Therefore, it cannot be said that the minor children have any beneficial interest under the trust deed during the subsistence of the trust.
12. Now, the emerging position is that since the income has to be accumulated in the relevant year, the minor child has no right to receive that income and nothing has accrued to the minor child and hence nothing could be included in their father’s income. At best, there can be a deferred benefit which is payable on the extinguishment of the trust which is beyond the period of minority of the child. The deferred benefit not being for a minor child, the clubbing clause under section 64(1)(vii) is not attracted and cannot be applied at all to this case.
13. While considering a similar fact situation in Manilal Dhanji’s case [1962] 44 ITR 876, referred to above, the Supreme Court has observed as follows (p. 883) :
“Take, for example, a case where the assets were transferred otherwise than for adequate consideration for the benefit of a minor child, but the child has attained majority before the relevant year of account. After the child attains majority, the sub-section would cease to apply and the income from assets transferred for the benefit of the child would no longer be taxable in the parent’s hands …”
14. The clear effect of the ratio of the decision in Manilal Dhanji’s case is that to attract section 64(1)(vii) is that :
(i) the asset must have been transferred without consideration.
(ii) for the benefit of the minor child, and
(iii) the beneficiary must have received or derived some benefit in the relevant year either in the income or corpus or both.
15. The change in the language of section 64(1)(vii) by introducing the expression “immediate or deferred” will govern only the “benefit” and not the minority of the child. The fictional transfer in section 64(1)(vii) becomes applicable only if the enjoyment is deferred for any time when it can be taxed in the hands of the individual, that is, during the minority of the child. In a case where the enjoyment of benefit in the income or corpus is postponed beyond the period of minority, the provisions of the clause do not apply. Thus, where the income during the minority is to be accumulated and added to the corpus and income from the increased corpus is given to the child on attaining majority, that income cannot be assessed in the hands of the transferor. The deeming clause of section 64(1)(vii) can have effect in any of these situations :
(a) if the minor child receives or enjoys benefit from the transferred asset or if he is entitled to the enjoyment of some benefit though not actually availed of the same, or,
(b) when the enjoyment is postponed to a period within the minority of the child.
16. It is only in the last type of cases that the word “deferred” may have effect.
17. In Yogindraprasad N. Mafatlal v. CIT [1977] 109 ITR 602, Addl. CIT v. M. K. Doshi and CIT v. Ponnaiah (T.) the Bombay, Gujarat and Andhra Pradesh High Courts, respectively, have held that in cases of accumulation and payment being made to the minors only on their attaining majority, the income will have to be treated as deferred income and cannot be treated as having been received or accrued in the relevant year in question. It was held in these cases that the benefit, whether immediate or deferred, should be for the minor child in order to be hit by the clubbing clause. If the trust provides for accumulation beyond the date of minority of the child, no clubbing can take place since it would be a case of deferred benefit for a major and not a minor child. In the Bombay case, on the fact that the father provided that the income be accumulated for the benefit of his daughter, Kunti, till she attains the age of 18 years, it was held that clubbing cannot take place since there is no benefit which accrued to the minor child, and proceeded further to enunciate that deferred benefit here means that the benefit is deferred to a period subsequent to the accounting year in which the income is taxable, so long as it is not deferred beyond the minority of the child, the reason being that the section required the income to be for the benefit of the minor child. What is beneficial should go to the child now or later, but during minority. The Andhra Pradesh High Court and Gujarat High Court have merely followed the reasoning of the Bombay High Court.
18. In the light of the enunciation of law made by the Supreme Court, we have no option but to fall in line with the decisions rendered by the Bombay, Gujarat and Andhra Pradesh High Courts. Hence, our answer to the question referred to us is in the affirmative and against the Revenue.