Tax relief to Nusli Wadia on sale of life interest in income from Trust property

1. This Reference under Section 256(1) of the Income Tax Act, 1961 (the Act) by the Income Tax Appellate Tribunal (the Tribunal) seeks our opinion on the following question of law : –

“(i) Whether on the facts and circumstances of the case, the Tribunal was right in holding that the life interest held by the assessee in Neville Wadia Trust No. 2 was an asset coming within the purview of Sec. 49(1)(ii) as it was acquired on the release executed by the previous life interest holder which amounted to a gift and therefore, the cost of the acquisition of asset would be deemed to be the cost of the original settler ?”

2. This Reference relates to the Assessment Year 1984-85. The brief facts leading to the present Reference as indicated in the statement of case are as under :

(a) By an indenture dated 30th January, 1947, Sir Nusserwanjee Nowrosjee Wadia (Sir Ness Wadia) created an irrevocable trust for the benefit of his son Neville Ness Wadia (Neville Wadia) and his children by settling 1001 fully paid shares of Bombay Dyeing and Manufacturing Co. on trustees of Neville Ness Trust Fund No. 2 (the Trust). The indenture of lease provided that Neville Wadia (son of the settlor) would have life interest in respect of the dividends, interest and income of the settlor for his life. After the death of said Neville Ness Wadia, the property is to be divided into two equal shares and held by another Trust.

(b) On 30th March, 1957, Mr. Neville Wadia relinquished his life interest in the Trust and life interest in the property belonging to the Trust. This on the ground that it did not amount towards transfer. The aforesaid issue was challenged in appeal before the authorities under the Act and finally referred to this Court by the Tribunal. This Court in the above Reference at the instance of the respondent – Revenue in Commissioner of Income Tax Vs. Neville Ness Wadia, [90 ITR 155] held that surrendering of life interest by the assessee would not amount to transfer of property to his children so as to attract the provisions of Section 16(3) (a)(iii) of the Indian Income Tax Act, 1922.

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