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H.H. Maharani Shri Vijaykunverba Saheb of Morvi and ors. Vs. Commissioner of Income-tax, Bombay City-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 14 of 1965
Judge
Reported in[1975]99ITR162(Bom)
ActsIncome Tax Act, 1922 - Sections 16(3)
AppellantH.H. Maharani Shri Vijaykunverba Saheb of Morvi and ors.; Commissioner of Income-tax, Bombay City-i
RespondentCommissioner of Income-tax, Bombay City-i; H.H. Maharani Shri Vijaykunverba Saheb of Morvi and ors.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateB.A. Palkhivala, Adv.
Excerpt:
direct taxation - assessment - sections 16 (3), 41 and 41(3) of income tax act, 1922 - whether income of trust in assessable in hands of 'maharaja of morvi' by applying section 16 (3) or in hands of trustees under section 41 - tribunal was right in making view that for three assessment years income of trust cannot be included in income of settlor under clause (a) or (b) of section 16 (3) - so income has to be assessed in hands of trustees under section 41 (3) - held, question answered in negative. - - 1. in this reference a consolidated question has been referred to us for our determination under section 66(1) of the indian income-tax act, 1922 (hereinafter referred to as 'the act'), both at the instance of the revenue as well as the assessee. the assessee out of natural love and.....kantawala, c.j. 1. in this reference a consolidated question has been referred to us for our determination under section 66(1) of the indian income-tax act, 1922 (hereinafter referred to as 'the act'), both at the instance of the revenue as well as the assessee. the question referred to us is as under : 'whether, on the facts and in the circumstances of the case and on a proper construction of annexure 'a', the income of the trust in assessable in the hands of h. h. mahendrasinhji maharaja of morvi by applying section 16(3) of the indian income-tax act, 1922, or in the hands of the trustees under section 41 of the indian income-tax act, 1922 ?' 2. the question under reference relates to the assessment years 1956-57, to 1958-59, for which the relevant previous years ended on march 31,.....
Judgment:

Kantawala, C.J.

1. In this reference a consolidated question has been referred to us for our determination under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), both at the instance of the revenue as well as the assessee. The question referred to us is as under :

'Whether, on the facts and in the circumstances of the case and on a proper construction of annexure 'A', the income of the trust in assessable in the hands of H. H. Mahendrasinhji Maharaja of Morvi by applying section 16(3) of the Indian Income-tax Act, 1922, or in the hands of the trustees under section 41 of the Indian Income-tax Act, 1922 ?'

2. The question under reference relates to the assessment years 1956-57, to 1958-59, for which the relevant previous years ended on March 31, 1956, March 31, 1957, and March 31, 1958, respectively. The assessee out of natural love and affection for his minor son, Prince Mayurdhavsjsinhji, executed a deed of trust on October 6, 1955. The minor son was born on November 29, 1953. Under the deed of trust three trustees were appointed and they were, Her Highness Vijaykunverba Saheb of Morvi, the Bank of India Ltd. and Dadachanji, solicitor. The settler died on August 17, 1957 and his executrix and executors are parties to this reference.

3. The relevant clauses of the deed of trust are as under :

'4. Subject to clause 3 hereof the trustees shall till the said Prince Mayurdhavsjsinhji attains the age of 21 years accumulate the net income of the trust funds or so much as may not have been applied under clause 5 hereof at compound interest by investing the same and the resulting income thereof in any of the investments hereby authorised with power from time to time to vary such investments at discretion until the termination of the said period of accumulation.

5. The trustees may during the period of accumulation apply the whole or any part at their discretion of the net income of the trust funds for and towards the maintenance education or benefit of the said Prince Mayurdhavsjsinhji and may either themselves so apply the same or may pay the same to the mother Her Highness Maharani Vijaykunverba... for the purposes aforesaid without seeing to the application thereof and so that the receipt of such guardians or any person or persons shall be a complete discharge to the trustees.

6. The trustees shall on the occasion of the 'betrothal' and marriage of the said Prince Mayurdhavsjsinhji spend out of the accumulation of the net income and the investments representing the same and if necessary out of the corpus of the trust funds a sum not exceeding rupees three lakhs for all purposes connected with the betrothal and marriage... The amount to be so expended shall be in the sole discretion of the said Her Highness Maharani Vijaykunverba and the trustees shall carry out all directions given by the said Her Highness Maharani Vijaykunverba in that behalf...

7. On the said Prince Mayurdhavsjsinhji attaining the age of 21 years, the trustees shall deliver transfer and hand over the trust funds with all accumulations of income and the investments representing the same to the said Prince Mayurdhavsjsinhji absolutely.'

4. Besides there are certain provisions for contingency on the minor son not surviving the period of 21 years, but it is unnecessary to refer to the same in view of the question referred to us for our determination.

5. While assessing the settler for the relevant assessment years a question arose whether the income of the trust was assessable in the hands of the assessee having regard to the provisions of section 16(3) of the Act. The Income-tax Officer took the view that the provisions of section 16(3) were applicable and he added the income from the trust while calculating the income of the assessee for the relevant assessment years. The order passed by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. He took the view that since the trustees had been given full discretion to apply the income of the trust for the benefit of the minor Prince, the income at the point of receipt was for the benefit of the minor and the minor was not precluded from enjoying the income during the relevant period and on an appeal by the assessee the Tribunal took the view that there could be no dispute that the minor has not received any income, nor has any income been spent on his behalf, but the same has been accumulated; that the income did not occur to him because it is the trustees who own the investments and who have the right to the income from the investments; that the minor has no beneficial interest in the income in the relevant years as he cannot call upon the trustees to pay the amount to him; that according to the Tribunal the view taken by them was entirely in consonance with the principles laid down by the Supreme Court in Commissioner of Income-tax v. Manilal Dhanji.

6. There were protective orders so far as the trustees were concerned and having regard to the final view taken by the Tribunal the income of the trust for the relevant assessment years was assessed in the hands of the trustees under section 41(1) of the Act.

7. Mr. Joshi on behalf of the revenue contended that, having regard to the provisions of section 16(3) (b) of the Act, the income of the trust was for the benefit of the minor Prince and was clearly covered by the provisions of section 16(3) (b). His submission was that, if regard be had to the relevant clause of the deed of trust, then the minor Prince could have even compelled, if necessary, the trustees to utilise the income of the trust in consonance with the provisions of clause 5 of the deed of trust. He submitted that the Tribunal was in error in applying the principle laid down by the Supreme Court in Manilal Dhanji's case as it overlooked that the provisions of the deed of trust which came up for consideration before the Supreme Court were materially different from those in the present case. He emphasised that in Manilal Dhanji's case there were no provisions in the deed of trust corresponding to clauses 5 and 6 as they are existing in the present deed of trust. He strongly relied upon a decision of the Calcutta High Court in Chhaganlal Baid v. Commissioner of Income-tax. According to his submission, if regard be had to the provisions of the deed of trust in the present case, then the ratio of the Calcutta decision is clearly applicable to the present case and ought to be applied. As we are not impressed with the submissions made on behalf of the revenue, we have not considered it necessary to call upon the counsel for the assessee to reply. The counsel for the assessee fairly conceded that, if upon appreciation of the facts of the case for the relevant assessment years the income of the trust cannot be included in the income of the settler for the relevant assessment years, then naturally the order assessing the trustees under section 41(1) of the Act was justified.

8. Section 4, which is the charging section of the Act, makes it clear that what is taxed is the total income of the relevant accounting year and the total income according to section 2(15) is the income, profits and gains referred to in sub-section (1) of section 4 and computed in the manner laid down in the Act. In other words, the tax is levied on yearly basis. Section 16 of the Act provides for certain exemptions in determining the total income. We are concerned with sub-section (3) thereof and it is as under :

'16. (3) In computing the total income of any individual for the purpose of assessment, there shall be included -

(a) so much of the income of a wife or minor child of such individual as arises directly or indirectly -

(i) from the membership of the wife in a firm of which her husband is a partner;

(ii) from the admission of the minor to the benefits of partnership in a firm of which such individual is a partner;

(iii) from assets transferred directly or indirectly to the wife by the husband otherwise than for adequate consideration or in connection with an agreement to live apart; or

(iv) from assets transferred directly or indirectly to the minor child, not being a married daughter, by such individual otherwise than for adequate consideration; and

(b) so much of the income of any person as arises from assets transferred otherwise than for adequate consideration to the person or association by such individual for the benefit of his wife or a minor child or both.'

9. It is not the contention of Mr. Joshi on behalf of the revenue that any of the sub-clauses of clause (a) of sub-section (3) is attracted in the present case. Reliance is placed on behalf of the revenue upon the provisions of clause (b) of sub-section (3) and it is submitted that, if regard be had to the relevant clauses of the deed of trust above referred to, the income derived by the trustees arose from the assets transferred by the settler otherwise than for adequate consideration and such income was meant for the benefit of a minor child of the settler. According to his submission, the aforesaid four clauses of the deed of trust clearly brought the case within the ambit of the provisions of clause (b) of sub-section (3).

10. It is unnecessary in the present case to scrutinies the scheme of clauses (a) and (b) of sub-section (3) of section 16, as in our opinion these clauses had come up for consideration more than once before the Supreme Court and the principles which are applicable in such a case are precisely and clearly laid down. In Manilal Dhanji's case above referred to, the provisions of the deed of trust were slightly different from those before us. It may be pointed out that in Manilal Dhanji's case there were no provisions corresponding to clauses 5 and 6 as they exist in the present deed of trust. The Supreme Court, however, interpreted and analysed the effect of clauses (a) and (b) of sub-section (3) of section 16 and the ratio of that case has to be applied when a contention is raised that the income of a minor should be included in the income of the assessee under any one of these two clauses. In Manilal Dhanji's case the Supreme Court laid down that clause (b) of section 16(3) of the Act must be read in the context of the scheme of section 16 and the two clauses (a) and (b) of sub-section (3) thereof must be read together. So read, the only reasonable interpretation is that an assessee can only be taxed on the income from a trust fund for the benefit of his minor child provided that in the year of account the minor child derives some benefit under the trust deed; either he receives the income, or the income accrues to him or he has a beneficial interest in the income in the relevant year of account. If no income accrues or no benefit is derived and there is no income at also far as the minor child is concerned, then it is not consistent with the scheme of section 16 that the income or benefit which is non-existent so far as the minor child is concerned should be included in the income of his father. According to the Supreme Court, clause (b) of section 16(3) creates an artificial liability to tax and must be construed strictly.

11. In Manilal Dhanji's case the assessee created a trust in 1953, in respect of a sum of Rs. 25,000, the trustees whereof were four persons including the assessee himself, his wife and brother. The scheme of the trust deed was that the said sum of Rs. 25,000 was set apart by the assessee and it was provided that the interest on that amount should be accumulated and added to the corpus and a minor daughter of the assessee was to receive the income from the corpus, increased by the addition of interest, when she attained the age of 18 on February 1, 1959. She was to receive the income during her lifetime and after her death the corpus was to go to persons with whom the court was not concerned. The income derived from the said trust fund amounted to Rs. 410 in the relevant account year 1953-54, and the taxing authorities included this amount in the total income of the assessee, purporting to act under section 16(3) (b) or section 16(3) (a) (iv) of the Act. The Supreme Court took the view that on a true construction of clause (b) of section 16(3) no benefit accrued to the minor daughter in the year of account and the sum of Rs. 410 could not be included in the total income of the assessee. It is further laid down in this case that in cases where property is given to a parent or other person standing or regarded as in loco parents, with a direction relating to the maintenance of the children, the question would arise whether the settlor intended to impose a trust by the direction or whether the direction was only the motive of the gift. The line between the two classes of cases has not been drawn always very firmly. It is, however, clear that in construing provisions of this kind the court will not enforce or treat as obligatory a mere wish or desire or hope on the part of the settlor that the donee of the fund should or would or ought to or is expected to apply it for the benefit of other persons. On the other hand, the court does regard as binding and obligatory and does enforce a direction or trust in favour of third parties if such a binding obligation can be clearly ascertained from the document. The object underlying sub-section (3) of section 16 is to foil an individual's attempt to avoid or reduce the incidence of tax by transferring his assets to his wife or minor child. It is clearly laid down that if the minor derives no benefit in the relevant year of account, it can hardly be said that for that year the transfer was for the benefit of the minor child. The obvious intention of the legislature in enacting clause (b) was to see that the provisions of clause (a) were not defeated by the assessee creating a trust, and, in order to deal with that mischief, it enacted clause (b). Instead of the expression 'as much of the income of any person or association of persons, etc.' Obviously, when a trust is created the income is income in the hands of the trustees. But the underlying principle in the two clauses (a) and (b) appears to be the same namely, there must be income of the wife or minor child under clause (a) and there must be some benefit derived by the wife or minor child in the year of account under clause (b). When the minor child derives no benefit under the trust deed in the year of account, it is not consistent with the scheme of section 16 to say that even though there is no accrual of any income or benefit in the year of account in favour of the minor child, yet the income must be included in the total income of the individual concerned.

12. The principle laid down in Manilal Dhanji's case has been reiterated by the Supreme Court later on in the case of Col. H. H. Sir Harinder Singh v. Commissioner of Income-tax. It was held in this case that section 16(3) (b) of the Act creates an artificial liability to tax and must be strictly construed, but in construing the section the courts cannot ignore the clear and unambiguous expressions contained therein and all those expressions must receive a proper interpretation. Section 16(3) (b) makes it clear that the transfer of assets need not be to the wife or the minor child nor does the provision require that the corpus of the property so transferred to any person or association of persons should ultimately vest in the wife or the minor child. For the purpose of inclusion of the income of the wife or the minor child of the assessee from assets transferred by him to any person or association of persons for the benefit of the wife or minor child it is not necessary that the transfer should be to the wife or minor child either immediately or ultimately. The scheme of section 16(3) (b) requires that the assessee can only be taxed on the income from a trust fund created for the benefit of his wife or minor child or both if in the relevant year of account the wife or the minor child or both have derived some benefit under the trust deed. That is, the wife or the minor child either has received the income or the income has accrued to them or they have a beneficial interest in the income in the relevant year of account. It follows that if no income accrues or no benefit is derived and there is no income at all so far as the wife or minor child is concerned is to be included in the income of the assessee. What is to be included in the total income of the assessee under section 16(3) (b) in the case of such a trust is that part of the income of the trust which is received for the benefit of the wife or the minor child and not that of the trustee.

13. The principles that emerge from these two decisions of the Supreme Court are very clear. Even for attracting the provisions of section 16(3) (b) what is necessary is to show that in the year of account the wife or the minor child derived some benefit under the trust deed - either he receives the income or the accrues to him or he has a beneficial interest in the income in the relevant year of account. Applying those principles to the facts of the present case we have to consider whether the minor Prince has received any income in the relevant year of account. Clause 4 of the deed of trust only provides for accumulation of the income of the trust fund until the minor Prince attains the age of 21. At no time during the relevant accounting year for the assessment years with which we are concerned, it can ever be said that the minor Prince derived some benefit under the deed of trust either in the sense that he received the income or that the income accrued to him or that he had a beneficial interest in the income in the relevant year of account. Actually, the deed of trust contains provisions as to what is to happen in case the minor Prince did not survive the period of 21 years. Thus, clause 4 of the trust deed cannot be regarded as attracting the provisions of section 16(3) (b) of the Act.

14. Under clause 5 of the deed of trust during the period of accumulation at the discretion of the trustees the net income of the trust funds can be applied by the trustees for and towards the maintenance, education or benefit of the minor Prince. No part of the income during the relevant accounting year was so used for the benefit of the minor Prince. This clause undoubtedly confers a discretionary power upon the trustees to so utilise the trust funds if the facts and circumstances of the case so demand. No material is brought on record with a view to show that the financial condition of the minor Prince was such that he could have compelled the trustees to exercise the discretion conferred by clause 5 consistently with the well-settled principles in favour of the minor. Neither the income is so utilised nor a case is made out which would enable the minor Prince to compel the trustees to so utilise the trust funds for his maintenance education or benefit. When such is the position, it cannot be said that any beneficial interest is derived by the minor Prince in the relevant years of account for the three years.

15. Clause 6 provides for spending a sum, not exceeding Rs. 3,00,000, at the time of betrothal and marriage of the minor Prince. The Prince was born on November 29, 1953, and during the relevant accounting year he had not even completed 5 years of age. So there was no question, if regard be had to the common course of natural events, of either any ceremony of betrothal or marriage of the Prince taking place. In fact, neither of the two events has taken place. So clause 6 cannot be regarded as one under which the minor Prince has received any beneficial interest in the relevant accounting year. If during the relevant accounting year the minor has not derived any benefit from the trust funds because he has neither received the income thereof nor has income accrued to him nor any beneficial interest in the relevant accounting yea has been received by him then no case is made out to attract the provisions of clause (b) of section 16(3). In our opinion, the Tribunal was right in taking the view that in none of the three assessment years the income of the trust can be regarded as income of the assessee under the provisions of section 16(3) (b) of the Act.

16. Strong reliance is placed by Mr. Joshi upon the decision of the Calcutta High Court in Chhaganlal Baid v. Commissioner of Income-tax. In this case the assessee had six sons, of whom the eldest two were majors and the others were minors in 1958. By four identical deeds of trust, all dated January 15, 1958, the assessee transferred unto his two major sons, K and B, 1/6th part of the share of furniture, goods, chattels, effects and machinery in and upon certain premises, as mentioned in the said deeds, for each of his four minor sons. Under clause (2) the trustees, K and B, were to hold the balance of the net income of the trust properties after defraying all expenses in trust for the benefit and absolute use of the beneficiary until the youngest son of the said settlor attains the age of 18 years. On the attainment of the age of 18 years by the said youngest son the accumulated income of the said property in the hands of the trustees (if any) after disbursement of such sums as might have been advanced by the trustees from time to time for the maintenance, education, advancement or benefit of the said beneficiary in terms of clause (4) thereof will be handed over to the said beneficiary by the said trustees for his absolute use and benefit and the trustees shall also convey and transfer the said trust property to the said beneficiary in terms of clause (4) of the said deed of trust provided that the trustees shall be entitled to advance and spend such sum or sums of money out of the income of the said trust property for the maintenance, education, advancement or benefit of the said beneficiary as the trustees may in their discretion deem fit. Having regard to the provisions of clause (2) and clause (4) of the deed of trust the Calcutta High Court took the view that under the terms of the trust deeds in that case the beneficiary had a right to get the income of the trust property accumulated year by year, and after the disbursements of all expenses and of such sums, if any, made by the trustees in their discretion under clause (4) of the trust deed; that benefit accrued or arises to the assessee, viz., the right to have the income accumulated, in the years relevant for the present assessments. It was not a case of deferred benefit; the benefit arose in the year of account but the enjoyment of that right was postponed. This was the view taken upon the construction of the provisions of clause (2) of the deed of trust. So far as clause (4) was concerned, the Calcutta High Court took the view that it created a discretionary trust, but even in a case where there is a discretionary trust, the beneficiary has a beneficial interest, in the sense of a right to compel proper exercise of discretion by the trustee if such a need arises. That right the minor beneficiary had even in the relevant accounting year; the minor beneficiary had also the right to enforce disbursement and compel exercise of discretion by the trustees in case there was need for his benefit, or education or advancement or maintenance. This, according to the High Court, would be benefit derived by the minor under the trust deed and the beneficial interest accrued to the minor is the income of the trust property in the relevant year of account. If this decision is accepted as lying down good law, then the contention of Mr. Joshi is right, but, in our opinion, this ratio of this decision is not in conformity with the principles laid down by the Supreme Court in Manilal Dhanji's case and Col. H. H. Sir Harinder Singh's case above referred to. As laid down by the Supreme Court, the fact to be determined is whether in the relevant accounting year the minor child derived some benefit under the trust deed, i.e., either he received the income or the income accrued to him or he has a beneficial interest in the income in the relevant year of account. It is not the case of Mr. Joshi that having regard to the facts of the present case the minor Prince received any income or any income accrued to him during the relevant accounting year. His submission was that, having regard to the provisions of clauses 4, 5, 6, and 7, the minor had a beneficial interest in the income in the relevant year of account. Simply because the deed of trust provides that upon completion of the age of 21 years, the accumulated income together with the corpus is to be handed over to the Prince, it cannot be said that in the relevant accounting year the minor had a beneficial interest in the income of the trust. It may be that, if the minor died before even attaining the age of 21 years, he will not get the benefit. So, in our opinion, the Calcutta High Court, with respect was not right in taking the view that when the corpus together with the accumulated income is to be handed over to a minor beneficiary, the benefit accrues or arises to the minor in the sense that the right to have the income accumulated in the years relevant for the present assessments, but there is a postponed enjoyment of that right. We are unable, with respect, to accept this view, because what is to be ascertained is whether in the relevant accounting year any benefit is derived by the minor and if regard be had to the facts of the case then the minor Prince derived by the minor and if regard be had to the facts of the case then the minor Prince derived no benefit whatsoever in the relevant accounting year. So far as clause 4 was concerned, undoubtedly it created a discretionary trust, but the question of a minor beneficiary deriving benefit under such a trust can arise if either when the trustees exercise the discretion and spend a part of the income of the trust for the maintenance, education, etc., of the minor beneficiary, or if circumstances exist which can enable the minor beneficiary to compel the trustees to judicially exercise the discretion in his favour consistently with the provisions of the trust deed. It is not disputed in the present case that the trustees have not exercised the discretion nor are any facts brought on record which would go to show that the financial position of the minor Prince was such that he could compel the trustees to judicially exercise the discretion in his favour by calling upon them to spend either the whole or part of the income of the trust funds for his maintenance, education, etc. With respect, we are unable to agree with the view taken by the Calcutta High Court in the above decision.

17. In our opinion, the Tribunal was right in taking the view that for the three assessment years the income of the trust cannot be included in the income of the settlor under clause (a) or (b) of section 16(3) of the Act. When such is the position, then naturally the income has to be assessed in the hands of the trustees under section 41(1) of the Act as that position has not been controverted by Mr. Palkhivala.

18. In the result, our answer to the question referred to us is as under :

On the facts and in the circumstances of the case and upon proper construction of annexure 'A' to the statement of the case, the income of the trust is not assessable in the hands of H. H. Mahendrasinhji Maharaja of Morvi under section 16(3) of the Indian Income-tax Act, 1922, but it is assessable in the hands of the trustees under section 41 of that Act. The revenue shall pay the costs of the assessee.


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