1. This reference under section 66 (1) of the Indian Income-tax Act raises a question, which is common to the Tribunal's orders relating to the assessment years 1956-57 to 1959-60. The question arises in the following manner : Seth Walchand and his wife, Bai Kasturbai, both of whom were possessed of their own properties, decided to settle some of the properties possessed by them upon trust. They accordingly executed a trust deed on the 25th of November, 1946. Under the said trust deed they constituted themselves and three brothers of Seth Walchand as the trustees. The properties comprised in this trust were certain shares and policies of insurance on the life of Seth Walchand and also some shares, some house property and lands belonging to Bai Kasturbai. After providing for the management expenses of the trust, clause 7 of the trust deed provided that the net income arising from the trust funds was to be paid to Bai Kasturbai during her lifetime and it also gave liberty to the settlors or any one of them to occupy and enjoy the house property and the lands comprised in the trust deed rent-free and without any obligation for payment of any out goings or moneys in respect thereof. Clause 8 of the deed provided that from and after the death of Bai Kasturbai the trustees shall apply the said net rents, profits and income of the said immovable properties and trust funds to charitable purposes which were further set out in detail in the said clause. The purposes so stated are undisputably charitable purposes within the meaning of section 4 (3) (i) of the Act. In accordance with the trusts created by the trust deed Bai Kasturbai continued to receive the net income of the trust properties as the first beneficiary thereunder in accordance with clause 7 of the said deed. Seth Walchand died on the 8th of April, 1953, and in July, 1955, Bai Kasturbai thought of surrendering her beneficial made a declaration to that effect. In the preamble of the said document of declaration after having referred to the trust deed and clause 7 thereof, to the death of Seth Walchand Hirachand, the present trustees and to the trust funds, it was stated :
'And whereas Bai Kasturbai Walchand out of her regard to the charities mentioned in the said Indenture of Settlement and to expedite the benefit accruing to the said charities is desirous of surrendering and releasing the beneficial life interest in her favour under the said indenture of settlement and the trust funds representing the same including the liberty to occupy and enjoy rent free of the lands, hereditaments, messages and premises described in the First and Second Schedule hereto Now this indenture witnesseth as follows : Bai Kasturbai doth hereby surrender, release, quit, claim, transfer and assign unto the trustees all the income to arise as from the 21st day of July one thousand nine hundred and fifty-five from the trust funds or the investments for the time being representing the same and her beneficial life interest and all her rights claims and demands under the said indenture of settlement including the liberty to occupy and enjoy rent-free of the lands, hereditaments, messages and premises described in the First and Second Schedules hereto to the intent that her beneficial interest may be determined as aforesaid and that the same may be immediately vested in the trustees and that the trustees may utilise the same for charitable purposes mentioned in the said indenture of settlement.'
2. In the assessment for the assessment year 1956-57 for which the previous year was the financial year ending on the 31st of March, 1956, the assessee trust claimed that all the income derived from the trust properties subsequent to the 21st July, 1955, was exempt under section 4 (3) (i). For the subsequent assessment years 1957-58 to 1959-60 the claim for exemption under section 4 (3) (i) was set up by the assessee in respect of the income for the entire period of the assessment years in each case. The claim for the assessee for exemption was based on the argument that on the surrender of her beneficial interest by Kasturbai clause 8 of the trust deed came into operation immediately and the entire income of the trust properties was held thereafter by the trustees for charitable purposes and the said income, therefore, was exempt under section 4 (3) (i). The claim of the assessee was rejected by the Income-tax Officer, who took the view that by the renunciation of her beneficial interest by Bai Kasturbai, no income accrued to her as a beneficiary from the trust from 21st July, 1955, onwards, but clause 8 of the trust settlement could not come into operation immediately on the said renunciation because, under the said clause, the benefit to the charity was only to commence on and after the death of Kasturbai and not while she was alive. According to the Income-tax Officer, therefore, the result was that the income arising from the trust properties from and after the 21st July, 1955, in the relevant assessment years was not being received by the trustees on behalf of any beneficiary and it was also not exempt under section 4 (3) (i). Under the first proviso to section 41 (1), therefore, the income relating to the said periods was liable to be taxed at the maximum rate of income-tax and at the appropriate rate of income-tax and at the appropriate rate of super-tax in the hands of the trustees themselves. In accordance with this view, the Income-tax Officer made the assessment orders for these years. Against these orders appeals were taken by the assessee to the Appellate Assistant Commissioner. These appeals were allowed by the Appellate Assistant Commissioner, who took the view that it was permissible for Kasturbai under section 9 of the Indian Trust Act of 1882 to renounce her beneficial interest under the trust deed and this was what she had done by her declaration dated 21st July, 1955, and that the result of the said renunciation was that clause 8 of the trust settlement came into operation immediately notwithstanding the fact that Bai Kasturbai was living and the trust properties and the income arising therefrom were thereafter held by the trustees for charitable purposes. Since the charitable purposes, to which the income was to go, were such as came under section 4 (3) (i), the income was exempt under the said provision. He, accordingly, set aside the orders passed by the Income-tax Officer and directed him to modify the assessments. Against the decision of the Appellate Assistant Commissioner, the department went in appeal to the Income-tax Appellate Tribunal. It was contended before the Tribunal by the department that the Appellate Assistant Commissioner had erred in taking the view that section 9 of the Indian Trust Act, 1882, applied to the facts of the case; that on a true construction of the declaration made by Bai Kasturbai, the legal effect thereof was that Bai Kasturbai had directed that her income should be applied to certain purposes through the medium of trustees and, therefore, the said income was liable to be taxed since tax was attracted at the point when the income arose and the subsequent application thereof even for charitable purposes through the medium of the trustees did not make any difference and that in view of the express wording contained in clause 8, the settlement in favour of charities would not come into effect until the death of Bai Kasturbai and, consequently, the income thereof could not be said to have been held by the trustees for charitable purposes during the relevant assessment years. The Tribunal held that although section 9 of the Indian Trust Act was not applicable to the facts of the case, section 58 of the Trusts Act enable the beneficiary, Kasturbai, to transfer or surrender her beneficial interest and it was, therefore, competent for Kasturbai to transfer and thus renounce her beneficial interest in the trust properties by determining it in the manner she done. The Tribunal did not accept the department's contention as to the true construction and legal effect of the declaration and held that under the said declaration there was a renunciation of her beneficial interest by Kasturbai and not a direction for the application of the income thereof. The Tribunal further took the view that the surrender of her beneficial interest by Bai Kasturbai accelerated the interest of the next beneficiary and, therefore, the income from the trust properties subsequent to the date of the said declaration by Kasturbai was income derived from properties held under the trust wholly for religious or charitable purposes and, therefore, exempt under section 4 (3) (i). It accordingly confirmed the decision of the Appellate Assistant Commissioner and dismissed the department's appeals. Thereafter, at the instance of the department it has drawn up a statement of the case and referred the following question to this court :
'Whether clause 8 of the trust settlement made on the 25th November, 1946, came into operation immediately following the declaration made by Bai Kasturbai on the 21st July, 1955, and as such the income that accrued or arose to the trustees from the trust property from 21st July, 1955, onwards was exempt under section 4 (3) (i) of the Act ?'
3. Mr. Joshi, the learned counsel for the revenue, has argued that on the language of clause 8 of the trust deed a definite intention is indicated by the settlors that the benefit to charities will arise only from a given point of time and not before. That point of time is the death of Bai Kasturbai and the language used, viz., 'from and after the death of Bai Kasturbai', in clause 8 clearly indicates that the benefit is not intended to arise at any time anterior to the death of Bai Kasturbai. According to him, therefore, there could be no question of the benefit to charities being accelerated by the renunciation of her beneficial interest by Bai Kasturbai. Mr. Joshi has argued that it is in the first place difficult to see how the principle of acceleration to the subsequent beneficiary by the surrender of the interest by the prior beneficiary can apply to the settlement in the nature of trust. Even assuming that the said principle was capable of applying to settlements that would only be to cases where a contrary intention has not been expressed by the settlor and since in the present case a contrary intention has been clearly expressed by the language used in clause 8, the said principle can have no application. Mr. Joshi's further argument is that even if we hold against him that the language used in clause 8 did not express a clear intention to the contrary and the principle of acceleration may have application to the present case, there is in fact in the present case no surrender of the beneficial interest of the prior beneficiary. The declaration made by Kasturbai, on a proper construction thereof, is not a surrender of her beneficial interest under the trust deed, but the creation of a trust of the income coming to her under her beneficial interest under the trust deed. If that is the true legal effect of the declaration made by Kasturbai on 21st July, 1955, Mr. Joshi contends that the properties could not be said to have been held by the trustees for charitable purposes during the relevant assessment years.
4. We are not impressed by any of the submissions which Mr. Joshi has made before us and in our opinion the view taken by the Tribunal is correct. The trust deed executed by Seth Walchand and Bai Kasturbai on the 25th of November, 1946, intended to benefit Kasturbai during her lifetimes as the first beneficiary under the trust and the charitable purposes specified in clause 8 as the next, after the beneficial interest of the first beneficiary had come to an end. No doubt, the intention being to benefit the first beneficiary until she lived, the interest of the next beneficiary is expressed as 'commencing on or after the death of Bai Kasturbai', but the said expression could not be said to have been intended not to commence the benefit in favour of the charitable object until Kasturbai was dead even through her beneficial interest under the trust deed had come to an end by a voluntary surrender on her part even prior to her death. Both under the Transfer of Property Act as well as under the Succession Act, where on a transfer of property, or on a bequest thereof, an interest therein is created in favour of one person and by the same transaction an ulterior disposition of the same interest is made in favour of another, if the prior disposition under the transfer or bequest fails, the ulterior disposition takes effect although the failure of the prior disposition does not occur in the matter contemplated by the transferor or testator. Thus, where there is a transfer or bequest in favour of A for his life and on his death in favour of B, if the interest of A in the transfer or bequest fails or comes to an end not only by his death, but even by his renunciation or release of his interest, the transfer or bequest in favour of B immediately takes effect. In other words, surrender of an interest by a prior beneficiary accelerates the interest of the subsequent beneficiary both under the Transfer of Property Act as well as under the Succession Act and it has been held that the same principle would also be applicable to cases of settlements (see Halsbury's Laws of England, third edition, vol. 34, para. 1062 at page 607; Flower v. Inland Revenue Commissioners and In re Young's Settlement Trust : Royal Exchange Assurance v. Taylor-Young). It is in the cases where an intention is clearly expressed that it is only in the event of a prior disposition failing in a particular manner that the ulterior disposition will take place, that the failure or the coming to an end of the prior bequest in any other manner than contemplated by the transferor or the donor does not accelerate the ulterior disposition. In the present case the language of clause 8 does not, in our opinion, indicate an intention that in no event until the death of Kasturbai the benefit in favour of charities was to commence. The expression 'from and after the death of Bai Kasturbai' employed in clause 8 was for the purpose of indicating the natural and normal duration of the interest of the prior settlement of Bai Kasturbai. We are also not in agreement with Mr. Joshi as regards the construction which he has sought to put on the document of declaration. According to Mr. Joshi, the said declaration does not amount to a surrender or release but a transfer of the income due to Bai Kasturbai under the trust to the trustees for the purpose of utilisation for charitable purposes. Mr. Joshi has pointed out to us that the words 'transfer of the income' and the 'vesting of the said income in the trustees' for charitable purpose indicate the intention of the beneficiary. In our opinion what is contended by Mr. Joshi is neither the intention of Kasturbai as evidenced by the document or the meaning of the language employed by her. The intention of Bai Kasturbai has been clearly expressed by her in the following words :
'That she was making that declaration because out of her regard to the charities mentioned in the said indenture of settlement and to expedite the benefit accruing to the said charities she was desirous of surrendering and releasing the beneficial life interest in her favour under the said indenture of settlement.'
5. These words employed by her clearly indicate that she was accelerating the beneficial interest of the charities by surrendering and releasing her beneficial interest under the trust deed. The declaration, which has been made in view of the said intention again, in our opinion, states the same thing. It starts by saying that she was surrendering, releasing and thereafter come the words : 'quit, claim, transfer and assign'. What she was surrendering was the income which was to arise or accrue from the trust properties and which represented her beneficial life interest in the said trust deed. The further words used are that all this, the totality of her beneficial interest under the trust deed, was being surrendered by her 'to the intent that her beneficial interest may be determined as aforesaid and that the same may be immediately vested in the Trustees and that the Trustees may utilise the same for charitable purposes mentioned in the said indenture of settlement'. These words do not, in our opinion, mean as is contended by Mr. Joshi that she was transferring her interest under the trust to the trustees for being utilised for charitable purposes. What she was doing was that she was bringing to an end her beneficial interest in the trust properties so that the benefit of the charities may immediately commence and the trustees may be able to utilise the income for the purpose of the charities.
6. Mr. Joshi has argued that there is a distinction between transfer and relinquishment or surrender and where words are used in a document, which are words of transfer, the transaction could not be said to be a transaction of surrender. He has in that connection invited our attention to certain observations in Provident Investment Co. Ltd. v. Commissioner of Income-tax where their Lordships have pointed out a distinction between a transfer and relinquishment. In our opinion there is no transfer either intended or expressed in the document, which is before us. We have already dealt with that part of the document is one of transfer. In our opinion, the document of 21st July, 1955, is a document of surrender whereby Bai Kasturbai has relinquished her interest under the trust deed and has thus accelerated the benefit to the charities under the trust deed.
7. In our opinion, therefore, the answer to the question referred to us must be in the affirmative. We answer accordingly. Commissioner will pay the costs of the assessee. No order on the notice of motion. No order as to costs.
8. Question answered in the affirmative.