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Commissioner of Income-tax Vs. Hemant Bhagubhai Mafatlal - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 39 of 1972
Judge
Reported in(1982)26CTR(Bom)276; [1982]135ITR768(Bom)
ActsIncome Tax Act, 1922 - Sections 41(1) and 66(1); Indian Trusts Act, 1882
AppellantCommissioner of Income-tax
RespondentHemant Bhagubhai Mafatlal
Excerpt:
.....income of trust was includible in assessable income of assessee or was it assessable in hands of trust - trustees could apply whole or part of net income for support, maintenance, education and advancement of respondent - trustees are under no obligation to apply whole income or to handover whole income to respondent for purpose indicated in trust - neither beneficiary nor persons interested in corpus or income after beneficiary can legally question decision of trustees - amount actually paid over to beneficiary by trustees in any particular year cannot be included in income of beneficiary - entire income of trust was to be assessed in hands of trust under first proviso to section 41 (1) and beneficiary could not be assessed in respect of same or even in respect of actual amount..........periods relevant to the assessment years under consideration. according to the tribunal, the trust in question was discretionary trust where income was not either specifically receivable on behalf of any one person or receivable on behalf of more than one beneficiary. thus, in the view of the tribunal, the entire income of the trust was to be assessed in the hands of the trust under the first proviso to s. 41(1).7. thus, the revenue failed in respect of both arguments. these are the two aspects raised in the questions referred to us.8. the question to be considered turns upon the phraseology of the first proviso to s. 41(1) of the indian i.t. act, 1922. the said statutory provision reads as under :'41. courts of wards, etc. - (1)... provided that where any such income, profits or.....
Judgment:

Desai, J.

1. In this reference, which is under s. 66(1) of the Indian I.T. Act, 1922, for the first four assessment years, namely, 1958-59, 1959-60, 1960-61 and under s. 256(1) of the I.T. Act, 1961, for the assessment year 1962-63, the following two questions stand referred to us :

'(1) Whether, on the facts and in the circumstances of the case and having regard to the relevant provisions of the trust deed dated 6th April, 1944, of the Hemant Bhagubhai Trust, the income of the trust was includible in the assessable income of the assessee or was it assessable in the hands of the trust ?

(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 30,000, actually received by the assessee in each of the assessment years in question from the trust, was assessable in the hands of the assessee for all or any of the assessment years in question ?'

2. The matter lies within a very narrow compass, and the facts may be briefly stated. We are concerned with the Indenture of Trust dated 6th April, 1944. This was executed by Bhagubhai Mafatlal, the father of the assessee. It appears to be the agreed position that the settlor died in September, 1944. By the Indenture of Trust the settlor had appointed two persons, namely, himself and his brother, Navinchandra, as trustees, and the trust property consisted of 250 shares of Mafatlal Gagalbhai and Co. Pvt. Ltd. and 100 shares of Surat cotton Spg. & Wvg. Mills ltd. We are concerned with the directions given to the trustees by cl. 2 of the Indenture of Trust. By the said clause the trustees are enjoined :

'(a) To collect and recover the dividends, interest, rents, profits and income of the Trust Fund and to pay thereout all outgoings and charges for collection, if any.

(b) To accumulate the balance of the dividends, interest, rents, profits and income of the Trust Fund for a period of 18 years from the date hereof or until the death of the Settlor, whichever event shall first happen, and to add the accumulations to the corpus of the Trust Fund.

(c) If at the expiration of the said period of 18 years or the death of the Settlor, whichever event shall happen first, the Settlor's son, Hemant (hereinafter for brevity's sake referred to as 'the said Hemant'), shall be alive, then, and in that event, to hold the accumulated Trust Fund (i.e., the original Trust Fund plus the accumulated income thereof under sub-clause (b) hereof) upon Trust to apply the net income of the accumulated Trust Fund for the support, maintenance, education and advancement of the said Hemant in such manner as to enable the said Hemant to live as far as possible with the same comfort and to enjoy life in the same manner as he has been accustomed to do in the lifetime of the Settlor PROVIDED that in applying the income as aforesaid, the Trustees shall not be entitled to take into account any other income from any other source that the said Hemant may be receiving at the time PROVIDED FURTHER that the Trustees shall in their absolute discretion be at liberty to pay the whole or any part of the income to the said Hemant during his lifetime for any period or periods during his lifetime instead of applying the same for his benefit as aforesaid AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED that the Trustees shall not be liable to account to anyone for any bona fide done by them, or for any payment bona fide made by them in pursuance of this clause, and in particular they shall not be accountable or responsible for the amount so expended or applied by them or the manner in which or the purpose for which the same shall be applied, and all moneys so expended or applied by the Trustees in their absolute discretion as aforesaid shall not be questioned by any party in any court of law or otherwise howsoever.

(d) In the event of the death of the said Hemant, leaving male issue in the male line him surviving, then subject to the provisions of sub-clause (b) thereof, on the death of the said Hemant, to divide the accumulated corpus of the Trust Fund amongst the male issue in the male line of the said Hemant living at the death of the said Hemant per stirpes in equal shares ....

(g) In the event of the death of the said Hemant without leaving any issue, male or female, him surviving, the Trustees shall, subject to the provisions of sub-clauses (b) and (c) hereof, hold the accumulated corpus of the Trust Fund upon trusts for the heirs of the said Hemant according to the law of intestate succession among the Hindus.'

3. In each of the accounting periods under consideration the assessee as the beneficiary received from the trustees of the said trust the sum of Rs. 30,000. The ITO, in the course of assessment proceedings for the assessment years 1958-59, 1959-60 and 1960-61, examined the terms and conditions of the said trust deed and was of the opinion that the assessee was the sole beneficiary entitled to demand that the entire income of the trust shall be applied for his support, maintenance, education and advancement. In his view, the trustees had no discretion to question any such demand nor had the trustees any discretion to define or limit the amount which they will apply for the above purposes. The ITO laid stress on the absence of any powers in the trustees to accumulate the income or any part thereof and add the same to the corpus of the trust.

4. Accordingly, the ITO held that the provisions of s. 41(1) of the Indian I.T. Act, 1922, were not applicable and the said income was assessable by including the same in the income of the assessee under s. 41(2) of the said Act.

5. For the following assessment years, the ITO followed his earlier view and held accordingly.

6. The assessee, aggrieved by the aforesaid assessments, filed appeals with the AAC, B Range, Bombay. The AAC went through the terms and conditions which we have earlier extracted. In his view, as to how much was to be spent for the benefit of the assessee or to be paid to him was at the discretion of the trustees. Accordingly, it was held that the assessee was not entitled to any specific amount in the trust and that he was entitled only to a fluctuating maintenance which was to be determined by the trustees in their discretion. Accordingly in the view of the AAC, the proviso to s. 41(1) of the Indian I.T. Act 1922, came into operation. The AAC also rejected the alternative contention of the revenue that the beneficiary should be taxed at least to the extent of the actual receipt in his hands. He, accordingly, allowed the appeal of the assessee. The ITO thereafter appealed to the Tribunal, and the Tribunal, after considering the provisions of the trust deed, held that the case was covered by the first proviso to s. 41(1). The Tribunal further took the view that the fact that an identical amount was paid during each of the five assessment years was wholly irrelevant. The Tribunal also rejected the alternative contention that the beneficiary should be taxed at least to the extent of the amount received by him from the trustees during each of the accounting periods relevant to the assessment years under consideration. According to the Tribunal, the trust in question was discretionary trust where income was not either specifically receivable on behalf of any one person or receivable on behalf of more than one beneficiary. Thus, in the view of the Tribunal, the entire income of the Trust was to be assessed in the hands of the trust under the first proviso to s. 41(1).

7. Thus, the revenue failed in respect of both arguments. These are the two aspects raised in the questions referred to us.

8. The question to be considered turns upon the phraseology of the first proviso to s. 41(1) of the Indian I.T. Act, 1922. The said statutory provision reads as under :

'41. Courts of Wards, etc. - (1)...

Provided that where any such income, profits or any gains or part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate, but, where such persons have no other personal income chargeable under this Act and none of them is an artificial juridical person, as if such income, profits or gains or such part thereof were the total income of an association of person.'

9. The question to be considered and answered is whether the income of the said trust or any part thereof is or is not specifically receivable on behalf of the beneficiary. The answer to be given to the question will turn on the phraseology employed in cl. 2 of the Indenture of Trust.

10. Mr. Joshi, on behalf of the revenue, strenuously contend that the Tribunal was in error in regarding the said trust as discretionary trust, and in his submission the trustees were obliged to utilise the entire net income for the support, maintenance, education and advancement of the beneficiary, Hemant. In connection with this argument he referred us to the trust considered by the Supreme Court in CIT v. Manilal Dhanji : [1962]44ITR876(SC) . He also referred us to the decision given by the Chancery Court in England in Tattersall v. Peel [1936] 1 Ch D 161.

11. Now, the operative clause in Peel's case [1936] 1 Ch D 161 to be found reproduced at page 163 of the report is in a language totally at variance with the language employed in cl. 2(c) of the Indenture of Trust which we have to consider. Similarly, the observations made in Manilal Dhanji's case : [1962]44ITR876(SC) pertain to the question whether by use of certain expressions there was binding and obligatory trust or whether these were mere words indicative of a mere desire or hope. The latter judgment does not deal with the question under consideration before us at all, namely, what is the extent of the obligation imposed on the trustees by the trust deed. In order to arrive at the proper conclusion in respect of such obligation the court is required to apply its mind to, and construe the phraseology of, the clause of the trust deed under consideration. In other words, what is the effect to be given to the following words :

'to apply the net income of the accumulated trust fund for the support, maintenance, education and advancement of the said Hemant in such manner.... life-time of the settlor.'

12. Is it possible to hold that by these words the trustees are compelled to apply the entire income for the support, maintenance education and advancement of Hemant To hold so would be to disregard the entire portion occurring after the words 'in such manner'. The matter dose not permit any other interpretation, particularly when the second proviso occurring thereafter is considered and properly understood. Under this proviso, the trustees are permitted to hand over to Hemant the whole or any part of the income instead of applying the same for his benefit as aforesaid

13. Thus, on a fair and proper construction of the clause of the trust deed, we find that the trustees may apply the whole or part of the net income for the support, maintenance, education and advancement of Hemant, and for so doing they are to keep before themselves the consideration, namely, that such income must enable Hemant to live as far as possible with the same comforts and to enjoy life in the same manner as he has been accustomed to do in the lifetime of the settlor. The proviso gives an option to the trustees that instead of the trustees applying the net income for this purpose, they may hand over the same in its entirety to Hemant or any part of the same. The proviso makes the position abundantly clear that the trustees are under no obligation either to apply the whole income or to hand over the whole income to Hemant for the purpose indicated in the trust.

14. That the discretion of the trustees is absolute and that they are not accountable to any one (including the beneficiary) is made clear by what is provided after the said proviso. It is very clear from the said provision that neither the beneficiary,nor the persons interested in the corpus or income, after the beneficiary, can legally question the decision of the trustees.

15. Once the scheme of the trust is properly understood, it is impossible to concur with the decision of the ITO or the argument of Mr. Joshi, which was similar, that under the trust deed Hemant was absolutely entitled to receive the whole of the income and that the trustees had no discretion to retain any part. We are really not concerned in putting any label on this trust, and it is unnecessary to opine whether this is a discretionary trust or not. The question is whether there is any discretion in the trustees or are they under any binding legal obligation to pay the entire net income to, or apply the same in its entirety for, the benefit of Hemant. Our view is that they are under no such obligation. They have a discretion to apply the whole or part of the income, although the discretion undoubtedly has to be exercised fairly and judicially and not arbitrarily or capriciously. In case the discretion is exercised arbitrarily or capriciously, the beneficiary may have his remedies under the Indian Trusts Act, 1882. However, there is undoubtedly a discretion in the trustees, which discretion is more than made clear by the phraseology employed in the proviso. If that be so, it must be held that the income is not specifically receivable in behalf of Hemant. Once the correct view of the matter is appreciated, then it would follow that the first proviso to s. 41(1) of the Indian I.T. Act, 1922, will clearly apply, and the question referred to us will have to be answered accordingly.

16. There is no warrant for holding that the amount actually paid over to the beneficiary by the trustees in any particular year can be included in the income of the beneficiary. The fact that an identical amount has been paid during all the five assessment years would not alter the legal position or affect the same in any manner.

17. In this view of the matter, in our opinion, the Tribunal was entirely right in holding that the entire income of the trust was to be assessed in the hands of the trust under the first proviso to s. 41(1) and that the beneficiary could not be assessed in respect of the same or even in respect of the actual amount received by him from the trustees. The two question are accordingly answered as follows.

Questions Nos. 1 and 2 - The entire income was assessable in the hands of the trust, and no part thereof was assessable in the hands of the beneficiary. The answer will apply to all the assessment years under consideration.

18. The Commissioner to pay cost of the reference to the assessee.


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