Skip to content


Bai Savitabai Maganlal 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. 5 of 1968
Judge
Reported in[1978]113ITR240(Bom)
ActsIncome-tax Act, 1922 - Sections 41(1)
AppellantBai Savitabai Maganlal and ors.
RespondentCommissioner of Income-tax, Bombay City-i
Appellant AdvocateC.B. Mehta, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
direct taxation - assessment - section 41 (1) of income tax act, 1922 - whether balance of income from suit property after payment contemplated in will and income from residuary estate assessable in hands of trustees and executors at minimum rate under first proviso to section 41 (1) - shares of individual beneficiaries in income of first estate during relevant accounting year were indeterminate and unknown - held, above income assessable at minimum rate under first proviso to section 41 (1). - - the expenses relating to the wearing apparel of my children as well as my wife shall be defrayed out of the monthly sum of rs. 600 (in words six hundred) per year in giving help to deserving and poor students, brahmins, religious mendicants and the destitutes but such expenses shall be made.....kantawala, c.j.1. at the instance of the assessee, the following question has been referred to us for our determination : 'whether, on the facts and in the circumstances of the case, are not the incomes from dadar property and the balance of the residuary income assessable in the hands of the trustees and executors at the maximum rate under the second (sic. 'first') proviso to section 41(1) of the indian income-tax act, 1922 ?' 2. if regard be had to the findings of the tribunal the wording of this question is not precise and we accordingly modify the same as under : 'whether, on the facts and in the circumstances of the case, are not balance of the income from dadar property after the payments contemplated in clause 9(e) of the will and the income from the residuary estate assessable in.....
Judgment:

Kantawala, C.J.

1. At the instance of the assessee, the following question has been referred to us for our determination :

'Whether, on the facts and in the circumstances of the case, are not the incomes from Dadar property and the balance of the residuary income assessable in the hands of the trustees and executors at the maximum rate under the second (sic. 'first') proviso to section 41(1) of the Indian Income-tax Act, 1922 ?'

2. If regard be had to the findings of the tribunal the wording of this question is not precise and we accordingly modify the same as under :

'Whether, on the facts and in the circumstances of the case, are not balance of the income from Dadar property after the payments contemplated in clause 9(e) of the will and the income from the residuary estate assessable in the hands of the trustees and executors at the maximum rate under the first proviso to section 41(1) of the Indian Income-tax Act, 1922. ?'

3. The question relates to the assessment year 1961-62, for which the accounting year is the financial year 1960-61. One Maganlal Dayabhai died on March 21, 1945, leaving a will executed on July 5, 1943, and leaving him surviving his widow, Savitagouri, two minor sons, Jayendrakumar and Mahendrakumar, and six daughters, three of whom were married. Under the will Savitagouri and four others were appointed as executors and trustees. The deceased left a fairly large state and the sources of income of the estate were : (1) interest on securities, (2) income from property, (3) dividends, and (4) interest. By the said will the deceased directed the executors by clause 5 thereof to spend certain amounts in connection with his funeral ceremonies, pilgrimage expenses of his wife and children and to pay certain sums to the Lohana Boardings and Lohana Balashram. By clause 6 thereof he directed the executors and trustees to set apart a sum of Rs. 10,000 in trust and to utilise its income for helping the Lohana community and for payment to Anandashram. Certain specific legacies of various amounts were directed to be paid to the various legatees as provided in clause 7 of the will. By clause 8 thereof he made provisions for the marriage expenses of his sons and unmarried daughters. Clause 9 of the will dealt with the immovable property at Dadar owned by the deceased which consisted of a building with shops and a chawl containing 50 rooms. This property was to be managed by the executors and the trustees as directed in the will. Sub-clause (e) of clause 9 provided that each of his surviving daughters during her lifetime will be paid Rs. 40 per month, i.e., Rs. 480 per year. Besides one Deveben, daughter of his father's sister, was directed to be paid during her lifetime Rs. 10 per month, i.e., Rs. 120 annually, and Bachu, son of his servant, Bai Diwali, was directed to be paid Rs. 10 per month, i.e., Rs. 120 annually, for expenses of his education until he completed his school or college education. The said amounts were directed to be paid in three monthly instalments, that is to say, in four instalments in a year. Sub-clause (f) of clause 9 reads as under :

'(f) After the dispositions made in sub-clause (d) and (e) above are carried out and subject to a charge on the aforesaid property for the payment of the monthly sums mentioned in clause (e) my aforesaid son, Jayendrakumar, and if I have more sons, then all my sons shall have a life interest in the said property, that is to say, I give my son, Jayendrakumar, or my sons a right to receive and utilise the income of the surplus rents from the said property during his or their lifetime. But until my son, Jayendrakumar, completes 21 (twenty-one) years or if I have more sons until my youngest son completes 21 years, my trustees shall amalgamate the surplus amount of the rents of the said property with the income of my residuary estate and deal with the same in the manner stated in para. 10 (ten) hereinbelow. After my son, Jayendrakumar, completes 21 years or if I have more sons, after the youngest son completes 21 years the income from my aforesaid property at Dadar, which may remain over shall be paid to my aforesaid son, Jayendrakumar, during his lifetime and if I have more sons, the same shall be paid to them during their lifetime in equal shares. Should any of the sons die during the lifetime of other sons, the income coming to his share shall be utilised for the maintenance of the wife and children of the deceased son during the lifetime of the other sons. But if the deceased son has not left a wife or children, then the income of his share shall be paid to the other surviving sons in equal shares.'

4. The other sub-clauses of 9 deal with the rights of the legatees in the immovable property at Dadar, but the said rights are not relevant for consideration for the assessment year with which we are concerned. Clause 10 of the will and its sub-clauses are as under :

'10(a) After the dispositions mentioned in paras. 6 to 9 above are carried out, my immovable and movable property which may remain over shall be treated as my residuary estate. Until my aforesaid son, Jayendrakumar, or if I have more than one son, then my youngest son completes the age of 21 years, my executors shall administer the whole of my residuary estate as the trustees of my property and until then my wife, my son or sons and my unmarried daughters shall live together in my bungalow at Rajkot or Malad and the expenses of their maintenance shall be defrayed out of the net income from the property situate on Dadar Road at Bombay, subject to the directions made in para. 9 above. For the maintenance of my aforesaid family and other expenses of (my) family a sum up to Rs. 650 (in words six hundred and fifty) shall be spent every month. So long as the administration of my residuary estate is in the hands of my trustees, all my married daughters shall have a right to come and stay with their children at my place and get their maintenance. And, accordingly, if any of my married daughters claims residence and maintenance, my trustees shall accept such claim and, if necessary, make separate arrangements for their residence in my bungalow at Rajkot. If looking to the circumstances, my trustees find it necessary to spend more than Rs. 150 (in words one hundred and fifty) per month at the most. Besides this my trustees shall make proper expenses for the education of my children.

(b) So long as my life Savitabai lives joint as stated above in clause (a) of the para. she shall be paid Rs. 50 (in words fifty) per month during her lifetime for her pocket expenses. The expenses relating to the wearing apparel of my children as well as my wife shall be defrayed out of the monthly sum of Rs. 650 (in words six hundred and fifty) referred to in clause (a) of the para. above.

(c) In case my wife, Savitabai, desires to live separate, necessary arrangement shall be made for her residence free of rent in my bungalow at Rajkot and for her maintenance, wearing apparel and other expenses, she shall be paid during her lifetime a further sum of Rs. 150 (in words one hundred fifty) per month out of the income of my residuary estate over and above the monthly sum of Rs. 50 (in words fifty) referred to in sub-clause (b) above and, in that event, a proportionate reduction shall be made in the monthly sum of Rs. 650 mentioned in sub-clause (a) above.

(d) If the income from my residuary estate diminishes and it is not sufficient to pay all the sums mentioned in sub-clauses (a) to (d), my trustees shall make proportionate reductions in the said sums.

(e) After the above-mentioned dispositions are carried out, if there is a surplus in the income of my said property, my trustees shall spend out of the same maximum sum of Rs. 600 (in words six hundred) per year in giving help to deserving and poor students, Brahmins, religious mendicants and the destitutes but such expenses shall be made so long as the administration of my residuary estate is in the hands of trustees and only if there is a surplus in the income after deduction of the expenses relating to the repairs, etc., of the properties.

11. If and when my aforesaid son, Jayendrakumar, or if I have more than one son, my youngest son completes twenty-one years, they are the absolute owners of my entire residuary estate; but if at that time, my wife, Savitabai, be alive, and any of my daughters be unmarried, there shall be a charge on my residuary estate for the monthly sums referred to in sub-clauses (b) and (c) of para. 10 and after a separate provision is made for the payment of the monthly sums thus directed to be paid, my trustees shall hand over my residuary estate to my aforesaid son or sons and if there be more sons, the same shall be distributed amongst all in equal shares.'

5. If regard be had to the provisions of sub-clause (f) of clause 9 of the will it is quite clear that having regard to the dispositions made by him, his two sons, Jayendrakumar and Mahendrakumar, had a life interest in the Dadar property. However, such life interest was not to commence without other limitations and it was to start after the youngest son, namely, Mahendrakumar, in the present case completed the age of 21 years which he did on September 14, 1964. For the assessment year 1961-62, with which we are concerned, we have to consider whether the individual shares of the person on whose behalf the income, profits and gains are receivable by the executors and trustees are indeterminate of unknown. If they are so indeterminate or unknown so far as the assessment year 1961-62 is concerned, the first proviso to section 41 of the Act will be attracted.

6. The Income-tax Officer took the view having regard to the provisions of clause 9(f) of the will, that the income from Dadar property without any deduction for sinking, repairs and reserves, was to be taxed in the hands of the trustees under section 9 of the Indian Income-tax Act, 1922. He further held that upon a reading of clause 10 of the will it was clear that the administration of the residuary estate would be complete only on the attainment of the age of 21 by Mahendrakumar, i.e., on September 14, 1964, and that till then the executors of the will were to receive the income from the residuary estate in their capacity as executors and not on behalf of the beneficiaries and section 41 of the Act was, therefore, not attracted. He took the view that since the incomes from the Dadar property and the residuary estate were received by the trustees and the executors not on behalf of the beneficiaries the entire income from the trust properties and the residuary estate was taxable in the hands of the trustees and the executors under section 3 of the Act and at the rate applicable and accordingly taxed it in the hands of the trustees and the executors in the status of association of persons.

7. In an appeal by the assessee before the Appellate Assistant Commissioner, two contentions were urged on behalf of the assessee. Firstly, it was urged that the income earned from the estate was to be divided between the beneficiaries in equal shares after setting apart certain charges on the property and as the shares of the beneficiaries were known and determinate the beneficiaries were to be assessed separately in their individual capacities to the extent of the share of income allotted to them. It was further contended that if the income was to be taxed in the hands of the trustees, it should be taxed according to the provisions of section 41 of the Act and the tax recoverable from the executors would be in the like manner and to the same extent as would be leviable upon and recoverable from the persons on whose behalf the income was earned. An alternative contention was urged on behalf of the assessee to the effect that the income from the Dadar property held upon trust should be assessed in the hands of the trustees and the income from the residuary estate in the hands of the executors both separately. It was further contended that the Income-tax Officer erred in clubbing both the incomes and assessing them in the hands of a single assessable unit. The argument was that both the estates were governed by section 41 of the Act as the shares of the beneficiaries in both the cases were known and determinate. Certain cases were also cited in support of this contention. Both these contentions urged on behalf of the assessee were rejected by the Appellate Assistant Commissioner and he agreed with the manner in which both the incomes were assessed by the Income-tax Officer and accordingly upheld the assessment.

8. In a second appeal by the assessee before the Tribunal, the contention on behalf of the assessee was that the income-tax authorities were in error in coming to the conclusion that the income was not earned by the trustees and executors on behalf of the beneficiaries and it was urged that the shares of the beneficiaries were known and their shares were determinate and that merely because that being the year in which Mahendrakumar attained that age of 21, handing over of the estate was postponed to 1964, it could not be said that the trustees and executors were earning income right. In short, the contention was that the income should have been assessed under section 41 either in the hands of the beneficiaries in accordance with their respective shares of income or in the hands of the trustees at the rates applicable to the beneficiaries. Also an alternative contention was urged that the income from the Dadar property and that from the residuary estate should have been assessed separately. The Tribunal held that the income of the Dadar property to the extent to which the payments were required to be made under clause 9(e) of the will and the amounts of legacies, etc., paid out of the income of the residuary estate were received by the trustees and executors on behalf of the beneficiaries. Those beneficiaries were known and determinate and hence the Tribunal directed that the amounts so paid to them should be taxed in the hands of the beneficiaries under section 41 of the Act at the rates applicable to those incomes. With regard to the balance of the income from the Dadar property, i.e., after making the payments contemplated in clause 9(e) of the will and with regard to the balance of the income from the residuary estate, the Tribunal concurred with the view that was taken by the income-tax authorities that the income was not earned by the trustees on behalf of the beneficiaries, but it was only earned by the executors in their capacity as executors. The Tribunal further held that such balance of income after considering clauses 6 to 9 and 10 of the will was such that though the beneficiaries were known, their shares were not known or determinate. So the remaining income from the Dadar property after excluding the amounts payable to the daughters, Deviben, servant's son and the income from the residuary estate after paying the legacies had to be taxed in the hands of the trustees under the first proviso to section 41 of the Act at the maximum rate. It may be stated that in the order of the Tribunal reference is made to the second proviso to section 41, but that is a mistake for the first proviso. It is from this order of the Tribunal that the above modified question arises for our determination.

9. Mr. Mehta on behalf of the assessee submitted that the taxing authorities and the Tribunal were in error in taking the view that the whole of the balance of the income of the Dadar property after making the payments contemplated in clause 9(e) of the will and the income from the residuary estate have to be taxed in the hands of the trustees and assessed at the maximum rate as contemplated by the first proviso to section 41(1). He submitted that it may be that certain expenditure that may have been incurred by the trustees during the interval prior to September 14, 1964, that is the day on which the younger son, Mahendrakumar, attained the age of 21, may be indeterminate or unknown; still whatever surplus was left was definite and the shares therein were determinate, namely, for the benefit of the two sons, Jayendrakumar and Mahendrakumar. His submission was that the mere fact that certain indefinite expenditure was to be incurred during the relevant accounting year would not empower the taxing authorities and the Tribunal to treat the whole of the balance of the income from the Dadar property as mentioned above and the balance of the income of the residuary estate as taxable in the manner contemplated by the first proviso to section 41(1). His submission was that any excess amount that may remain after making payments as contemplated by the various sub-clauses of clause 10 of the will was definite and precise and the shares therein were only of the two sons, namely, Jayendrakumar and Mahendrakumar, and the same were equal and, therefore, they were definite and determinate. To that extent, according to his submission, the order passed by the taxing authorities and the Tribunal is bad in law.

10. Section 41(1) of the Act deals with taxation in the case of income, profits and gains which are received by the courts of wards, etc., and its material provisions are as under :

'41. (1)...... Provided that where any such income, profits or gains or any 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 persons :......'

11. There is a second proviso to sub-section (1) but its provisions are not relevant for the present purpose. Under the main body of section 41(1) the ordinary rule is that in the case of incomes of persons like trustees etc., therein enumerated the tax has to be levied and recoverable from the trustees in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable and all the provisions of the Act shall apply accordingly. This will be a general provision applicable if the case was not capable of being covered by the first proviso so for as the present case was concerned. The first proviso deals with a case where income, profits or gains or any 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. What we have to consider in the present case is, having regard to the various provisions in the will, whether in the relevant accounting year for the assessment year 1961-62, the individual shares of the persons on whose behalf income, profits or gains were receivable by the trustees and executors were indeterminate and unknown. If they were so indeterminate and unknown, then as contemplated by the first proviso, the tax shall be leviable and recoverable at the maximum rate.

12. Having regard to the provisions of the first proviso, what we have to consider in the present case is, are the individual shares of the persons on whose behalf income, profits and gains were receivable by the trustees and executors indeterminate or unknown If they were so indeterminate or unknown then tax has to be levied and recovered at the maximum rate. Whether the individual shares of the persons on whose behalf the income, profits and gains are receivable, are indeterminate or unknown will depend upon the provisions of the will for the relevant accounting period. Under the will made by the deceased on July 5, 1943, he gave certain specific pecuniary legacies to various persons as mentioned in clause 7 of the will. Qua such specific legacies the legatees' shares are determinate and known and the question of applying the provisions of the first proviso will not arise in the case of such legatees or the income so received. Similarly, in respect of the income of the Dadar property certain pecuniary legacies are required to be made to the daughters, niece and the servant's son as contemplated by sub-clause (e) of clause 9 of the will. Under sub-clause each of the daughter is to be paid Rs. 480 annually during her lifetime. Similarly, Deviben, the daughter of the deceased's father's sister, is to be paid Rs. 120 annually and Bachu, the servant's son, is to be paid Rs. 120 annually, for expenses of education until he completed his school or college education. Qua each one of these payments the legatee is specified and the individual share of the legatee is definite and so it is determinate and known. So even qua these payments, the first proviso will not be attracted. The rest of the income of the Dadar property and of the residuary estate has to be dealt with in the manner provided by clauses 9(f) and 10 of the will. The scheme of clause 9(f) is that each of the two sons, Jayendrakumar and Mahendrakumar, has a life interest in the Dadar property but such life interest is subject to a limitation as provided in the latter part of that sub-clause. The latter part of the said sub-clause provided that until the son, Jayendrakumar, or his younger brother completed 21 years, the trustees were under an obligation to amalgamate the surplus amount of the rents of the Dadar property with the income of the residuary estate and were directed to deal with the same in the manner stated in clause 10 of the will. Thus, the life interest of the sons was really to commence from and after the date when Mahendrakumar, the younger son, attained the age of 21 years, i.e., from and after September 14, 1964. What will be the position thereafter, we are not concerned in the present case as the present reference related to the assessment year 1961-62 for which the accounting year is the financial year 1960-61. For this accounting year the trustees were to deal with the income of the trust estate after making the various pecuniary legacies as contemplated by clauses 7 and 9(e) of the will in the manner contemplated by clause 10 of the will. The substance of that clause is that until the younger son, i.e., Mahendrakumar, attained the age of 21 years, the executors and the trustees were to administer the whole of the residuary estate in the manner as therein directed. The deceased owned a bungalow at Rajkot as well as at Malad and liberty under this clause was given to the wife, sons and unmarried daughters to live together in the bungalow either at Rajkot or at Malad. So far as expenses for maintenance, etc., are constitute at Dadar subject to the directions made in clause 9 of the will. The deceased by this clause further directed that for maintenance of the family a sum up to Rs. 650 per month was to be spent. Besides this, the will directed that so far as the administration of the residuary estate continued in the hands of the trustees, even the three married daughters had the right to come and stay with their children at the deceased's place and get their maintenance. If such a choice was made by the married daughters the trustees were under an obligation to accept the claim and to make separate arrangements for their residence in the bungalow at Rajkot. It is not clear from clause of 10(a) of the will whether the expenses for the maintenance of the three married daughters and their children were to be met out of Rs. 650 which was earlier set apart or the same was to be incurred our of the balance of the Dadar property. A possibility was felt by the deceased that the sum of Rs. 650 which was directed to be spent for the maintenance of the family might be insufficient and so he gave liberty to spend an additional sum of Rs. 150 for the maintenance in addition to this, the trustees were under an obligation to incur proper expenditure for the education of his children. Upon a plain reading of clause 10(a) of the will, the person who are the beneficiaries can be determined, namely, the members of the family, meaning thereby the widow, Savitagouri, namely, the members of the family, meaning thereby the widow, Savitagouri, the two sons, Jayendrakumar and Mahendrakumar, and the three unmarried daughters. Besides them, even the three married daughters with there children were amounts therein mentioned are to be utilised for each one of the members of the family nor does the clause does not specify in what proportion the amounts therein mentioned are to be utilised for each one of the members of the family nor does the clause specify the amount that is to be spent for the maintenance of the married daughters and their children, nor is there any limit provided for incurring expenditure for the education of the the residuary estate the shares of the members of the. Thus in the balance of the income of the Dadar property and of the residuary estate the shares of the members of the family, the married daughters and their children cannot be said to be determinate or known and having regard to the plain language of clause 10(a) much controversy qua this conclusion has not been raised by Mr. Mehta. Some alternative arrangement is also contemplated permitting the widow. Savitagouri, to stay separately and provision is made therefor but it is unnecessary for us to refer to the same for the present purpose. Sub-clause (e) of clause 10 provides that after the sums are used for the maintenance of the members of the family, the married daughters and their children and expenses are of the family, the married daughters and their children and expenses are incurred for education of the children if there is a surplus, then the trustees were under an obligation to spend out of such surplus amount a sum of Rs. 600 annually in giving help to deserving and poor students, Brahmins, religious mendicants and the destitutes. Having regard to this provision much controversy could not be raised upon the question whether in the accounting years 1960-61, the shares of the beneficiaries in the income utilised therefor were determinate or known. No member of the family could insist on a particular specific amount being utilised for his or her maintenance. Similarly, what amount should be set apart for the maintenance of the married daughters and their children was not specified. Thus, till Mahendrakumar attained 21 years, the administration of the trust estate was required was to be made in accordance with the provisions contained in clause 10. It is quite clear that it was not possible for any particular beneficiary to say and quantify whether his share was determinate or known.

13. It is, however, urged by Mr. Mehta that it may be that whatever expenditure was required to be incurred under clause 10 of the will may be regarded as indeterminate or unknown, but if there was any surplus, then having regard to the provisions of clause 11 of the will it was to be then having regard to the provisions of clues of 11 of the will upon Mahendrakumar attaining the age of 21 years He submitted that so far as this possible surplus was concerned, as the shares of Jayendrakumar and Mahendrakumar being equal were definite, at least qua that surplus the provisions of the first proviso the section 41(1) ought not to be applied. In support of this contention reliance was placed upon a decision of the Andhra Pradesh High Court in the case of Commissioner of Wealth-tax v. Trustees of H.E. Nizam's supplemental Family Trust : [1968]68ITR508(AP) . We have carefully gone through the facts of the case before the Andhra Pradesh High Court and the ratio of the that case, however, has no application to the facts of the present case. The Andhra Pradesh High court was not concerned with a case where an indefinite amount or income of the trust property was required to be spent and the balance was to be distributed. It was a simple case where during a specified time the net income of the trust was to be accumulated and ultimately it was to be distributed at a later date amongst the beneficiaries in the stated proportion. We are not concerned with a case of this type. As found by the Tribunal it is quite clear that having regard to the various provisions contained in clause 10 of the will, it is impossible for any beneficiary to say what specific shares he had in the income of the trust property received during the relevant accounting year. Thus, the shares of the individual beneficiaries in the income of the first estate during the relevant accounting year were indeterminate and unknown and, therefore, the Tribunal was right in applying the provisions of the first proviso to section 41(1) of the Act qua the balance of the income of the Dadar property after making the payments as contemplated by clause 9(e) of the will and the balance pecuniary legacies contemplated by clause 7 and clause 10(b) of the will.

14. Accordingly, our answer to the reframed question is that the above income is assessable at the maximum rate under the first proviso to section 41(1) of the Indian Income-tax Act, 1922. The assessee shall pay the costs of the revenue.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //