K.K. DESAI, J.
1. This is a consolidated reference arising out of the Income-tax Appellate Tribunal's three orders dated April 3, 1963. The question of law referred to us under section 66(1) of the Indian Income-tax Act, 1922, is as follows :
'Whether the capital gain of Rs. 41,085 is to be taxed at the rate provided under section 17(6) of the Income-tax Act, 1922, as contended by the assessee or at the maximum rate as contended by the department ?'.
2. The facts appear in the statement of the case. The facts which need to be noticed are as follows :
One Mrs. Sharda R. Pandit executed three deeds of trust, dated June 27, 1943, thereunder settling certain shares of joint-stock companies. These three respective trusts were respectively for the benefit of the settlor's three sons, Vasantkumar, Rajendrakumar and Krishnakumar, and their wives and issues. All the three deeds of trust are in similar language and one specimen deed of trust is annexure 'A' to the statement of the case.
3. The assessees are the trustees appointed under each of the deeds of trust. In the year of account ending March 31, 1957, the assessment year being 1957-58, the trustees, as holders of the shares of Tata Iron and Steel Co. Ltd., and Associated Cement Co. Ltd., received rights-coupons for new shares. Some of these coupons were sold by the trustees and in the result in each of the trusts the trustees made capital gains which in the aggregate came to Rs. 41,085. In the deeds of trust the three sons of the settlor, being Vasantkumar, Rajendrakumar and Krishnakumar, were life-tenants being entitled to net income for the duration of their lives. Under the deed of trust in which he was the beneficiary, Krishnakumar was assessed in respect of the capital gains of Rs. 41,085 on February 26, 1958. Similarly, in respect of the capital gains made in the trust in which Vasantkumar was the beneficiary, he was assessed to tax in respect of the capital gains made in that trust. Same was done under the trust in favour of Rajendrakumar. These assessments were challenged and ultimately in the matter of all the three trusts, the Income-tax Appellate Tribunal by its separate orders dated January 2, 1961, held that these beneficiaries where under the deeds of trust entitled to the income only and not to the surplus (capital gains) resulting from the sale of the trust assets. They were not liable to pay tax in respect of the capital gains made by the trustees. In the result, in connection with the capital gains made by the trustees of each of the above deeds of trust, reassessment proceedings were started. In the proceedings for reassessment the Income-tax Officer rejected the submission made on behalf of the trustees that the proviso the section 41 was not applicable and the tax in respect of capital gains could not be at the maximum rate as mentioned in the proviso to section 41. The submission of the trustees was that they were liable to be taxed in respect of the capital gains at the rate fixed under section 17(6). The submission was rejected by the Income-tax Officer as well as the Appellate Assistant Commissioner and also by the three different appellate orders of the Income-tax Appellate Tribunal dated April 3, 1963.
4. On behalf of the assessee, Mr. Kaka made the following two submissions;
(1) The provisions in section 17(6) are special and self-contained provisions for determining the rates at which capital gains are to be taxed. In the levy and computation of tax on capital gains regard must be had only to these provisions. In the result, the provisions in section 41 of the Act are irrelevant in connection with levy and computation of tax on capital gains.
(2) Having regard to the language in the proviso to section 41, tax at the maximum rate can only be levied and imposed in cases where income, profits or gains or any part thereof are not specifically receivable (by the trustees) on behalf of any one person or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknows. In the present case, the capital gains mentioned above were receivable by the trustees for the benefit of persons whose shares were determinate and known. He developed this submission by relying upon the decisions of this court in the case of Trustees of Putlibai R. F. Mulla Trust v. Commissioner of Wealth-tax and Commissioner of Wealth-tax v. Mrs. Hansabai Tribhuwandas Trust and submitted that in ascertaining the applicability of the proviso to section 41 to the facts of the case regard must be had to the accounting year alone. The fact that the birth or death of certain persons would alter shares of corpus and/or income payable in subsequent years would be irrelevant. His submission was that it was clear, on a reading of the relevant contents of each of the above deeds of trust, that the shares payable to the remainderman in the accounting year were determinate and known. Mr. Joshi for the revenue submitted that on a true construction of the provisions in these deeds of trust it was clear that the capital gains were received by the trustees in the present case for indeterminate and unknown persons. He submitted that the decisions on which Mr. Kaka for the assessee has relied arose in matters where the beneficiaries were entitled to vested interest. These cases were distinguishable, because the interests of the beneficiaries who were entitled to the benefit of the capital gains in question under the present deeds of trust were all contingent. The contingent interest being neither heritable nor transferable must be held to belong to indeterminate and unknown persons. The capital gains in all these three cases were received by the trustees for indeterminate and unknown persons. It was not possible to predict in the present case as to who were the beneficiaries who would be entitled to the corpus on the death of the life-tenants, i.e., the three sons of the settlor. Relying upon the observations in the case of Commissioner of Income-tax v. Balwantrai Jethalal Vaidya and the fact that section 41 was contained in Chapter V. which specifically dealt with liabilities in special cases, he submitted that in every case where the assessees where transferees, the provisions in section 41 would be compulsorily applicable. Assessment against trustees and computation of tax against trustees could only be made in accordance with the provisions of section 41. For these reasons, he submitted that in the present case in accordance with the proviso to section 41 tax was recoverable from the trustees in respect of the capital gains made at the maximum rate. The rate mentioned in section 17(6) was accordingly not applicable.
5. For the appreciation of the above rival contentions, the following facts require to be noticed :
As appears from the specimen deed of trust, dated October 2, 1943, annexure 'A' to the statement of the case, each of the deeds of trust was specifically made to make separate provision under each deed respectively for one of the three sons of the settlor and his wife and issued. The scheme of the deeds of trust relevant for the purposes of this reference is to be found in sub-clauses (b), (c), (d), (e) and (f) of clause 2 of the deeds of trust. Under sub-clauses (b), the net income of the deed of trust, which is annexure 'A', is payable to the settlor's son, Rajendrakumar, for and during the term of his natural life. Under sub-clause (c), upon the death of Rejendrakumar, the trustees are directed to set apart 1/8th of the corpus and to pay the income of such 1/8th to the widow of Rajendrakumar during her lifetime. Having regard to the present facts, the provisions in sub-clause (d) are not applicable. Under that sub-clause, in the event of Rajendrakumar leaving him surviving only one daughter or the issue of only one daughter, the provision made is that a moiety of the corpus should be paid over to this one daughter and/or her issues in the proportions mentioned in the first part of the sub-clause. The remaining moiety of the corpus is directed to be divided amongst the brothers and sisters of Rajendrakumar and/or their issue in such shares and proportions and on such terms as Rajendrakumar may by deed and/or will appoint and in default of such appointment, this one moiety of the corpus is directed to be paid over to the brothers of Rajendrakumar and/or their issues in the manner mentioned in the second part of sub-clause (d). Sub-clause (e) which is applicable to the facts existing in the accounting year provides that upon the death of Rajendrakumar leaving children or remoter issues, the trustees should divide the corpus of the trust fund amongst the children and/or the remoter issue 'living at the time of the death' of Rajendrakumar in the proportions mentioned in sub-clause (e). Under sub-clause (f), not withstanding the provisions in sub-clause (e), it is directed that in the event of Rajendrakumar dying after adopting a son and such son and/or his issue surviving Rejendrakumar, Rajendrakumar should have the right and power to give to such adopted son and/or his issue a share of the corpus not exceeding the share which such adopted son or issue would have received if he were a natural born legitimate son. Similar are the provisions in the other trust deeds which are made in favour of the families of the other two sons of the settlor.
6. In connection with the true effect of these sub-clauses in respect of each of the above deeds of trust, the following facts are admitted : Rajendrakumar's family consists of himself, his wife, one daughter and three sons. Vasantkumar's family consists of himself, his wife and three daughters. Having regard to the fact that in the families of Vasantkumar and Rajendrakumar there are sons, there is no question of their adopting a son in the year of account in question. Krishnakumar in fact did not adopt any son during the year of account in question. All the three life-tenants continued in existence during the year of account. The submission of Mr. Kaka was that having regard to the provisions in sub-clause (e) of the deeds of trust, the capital gains earned by the trustees were received by them in the year of account for the benefit of the beneficiaries mentioned in sub-clause (e) of each of the deeds of trust. That these beneficiaries may be held to have contingent interest was, having regard to decisions on which he relied, an irrelevant factor. These beneficiaries were known and determinate and their shares in the capital gains earned and the corpus were ascertainable. Mr. Joshi, on the contrary, submitted that the life-tenants were continuing in existence during the year of account in question. The beneficiaries who would be entitled to receive interest in the corpus could be ascertained under sub-clause (e) only by ascertaining facts that would come into existence at the date of the death of each of the life-tenants under each of the deeds of trust. He, therefore, submitted that these persons were unknown and indeterminate. Their interest, if at all, was contingent interest. Under those circumstances, the proviso to section 41 was applicable to the facts of the case and the tax was liable to be levied and computed at the maximum rate as mentioned in that proviso.
7. It is necessary to notice that sub-sections (5) and (6) of section 17 relate to levy and computation of tax on capital gains. It is not in dispute between the parties that prior to April 1, 1946, tax was not levied on capital gains. It was for the first time levied by the Income-tax and Excess Profits Tax (Amendment) Act, 1947. By the Finance Act of 1949, levy of tax on capital gains was removed as from March 31, 1948. Once again capital gains were taxed under the provisions of the Finance (No. 3) Act of 1956 as from April 1, 1957. In connection with the levy and computation of tax on capital gains, sub-sections (5) and (6) of section 17 were enacted. Under the sub-sections (6) and (7) as existing prior to the Finance (No. 3) Act, 1956, the rate of tax on capital gains was fixed between one anna in a rupee to give annas in a rupee in the proportion of the slab of gains fixed in these sub-sections. Under sub-section (6) as now amended by Finance (No. 3) Act, 1956, the rate of tax on capital gains is fixed in the following words :
'On the whole amount of such inclusion (capital gains), income-tax equal to the amount which bears to the income-tax which would have been payable on his total income as reduced by two-thirds of the amount of such inclusion (capital gains earned) the same proportion as the whole amount of such inclusion bears to such reduced total income.'
8. The rate of tax as levied by the above provision may be explained in the following words :
'The tax on capital gains payable by assessees..... is calculated by taking the average rate of income-tax applicable to the total income of the assessee as reduced by two-thirds of the amount of capital gains.'
9. Having regard to these provisions, Mr. Kaka made the first submission that these are special and self-contained provisions for determining the rates at which capital gains are to be taxed. For this reason, nothing in section 41 was applicable in connection with levy and computation of the tax on capital gains.
10. The relevant part of section 41 runs as follows :
'41. Courts of wards, etc. - (1) In the case of income, profits or gains chargeable under this Act which the courts of wards, the administrators-general, the official trustees or any receiver or manager (including any person whatever his designation who in fact manages property on behalf of another) appointed by or under any order of a court, or any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise...., are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such court of wards, administrator-general, official trustee, receiver or manager or trustee leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly : 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,.....'
11. The submission of the revenue as already stated and the finding of the Tribunal was that under the scheme of the above three deeds of trust the capital gains which were received by the trustees were received on behalf of indeterminate and unknown persons. Provisions similar to the provisions in section 41 of the Income-tax Act are contained in section 21 of the Wealth-tax Act. Under sub-section (1) of section 21 of that Act, Wealth-tax is levied upon and recoverable from trustees in the like manner and to the same extent as it would be leviable upon and recoverable from the persons on whose behalf the assets are held by the trustees. The sub-section (4) of section 21 of that Act is similar to the sub-section (1) of section 41 of section 21 of that Act is similar to the sub-section (1) of section 41 in the Income-tax Act. That sub-section (4), inter alia, provides that where the shares of the persons on whose behalf or for whose benefit any such asset are held are indeterminate and unknown, the wealth-tax may be levied upon and recovered from the trustees at a higher rate than could be levied in ordinary cases. The contentions similar to the contentions made on behalf of the revenue in this case arose in connection with the levy and collection of wealth-tax before a Division Bench of this court in the case of Commissioner of Wealth-tax v. Mrs. Hansabai Tribhuwandas Trust. The contention of the trustees-assessee was that wealth-tax at a higher rate under sub-section (4) of section 21 was not liable to be levied and collected from the trustees. The contention of the revenue was that the beneficiaries under the deed of trust in question were indeterminate and unknown and the interest of such beneficiaries was contingent interest and accordingly provisions in sub-section (4) were applicable. In connection with these rival submissions, the Division Bench in fact held that under the deed of trust in question, at the date when the wealth was to be valued, there was only one person who was the beneficiary entitled in interest in the entire corpus. His interest was to come into existence at an extremely later date and his interest was contingent interest. The submission made by Mr. G. N. Joshi in that case on behalf of the revenue was recorded in these words :
'Now, the Commissioner and on his behalf Mr. Joshi has strenuously contended that the shares of the beneficiaries are indeterminate and unknown. He first of all urged that Hansabai herself must be deemed to have a share in the corpus of the trust property along with the contingent interest of the other beneficiaries under the trust deeds. therefore, it is not possible to determine what is her interest and what is the interest of the other beneficiaries. Secondly, he urged that, even assuming that Hansabai had no interest in the corpus of the trust properties, still the other beneficiaries, the heirs of Tribhuwandas in the case of the first deed........ had interests which are not capable of being determinate or capable of being known. He urged that in any event these interests are dependent upon a number of events which may or may not happen and it was only contingent upon those events that the shares could come into being and, therefore, they are indeterminate and unknown.'
12. These submissions were negatived by the Division Bench. In that connection, the Division Bench referred to the case of Trustees of Putlibai R. F. Mulla Trust v. Commissioner of Wealth-tax and pointed out that in that case it was held :
'It was further urged that, so long as the shares themselves are liable to alteration or fluctuation, it cannot be said that those shares are determinate. No doubt it is possible upon the terms of the trust deed that even after becoming entitled to a share in the trust property after the lifetime of their parents, the share of the grandchildren may in certain contingencies be augmented, as for instance, at the death of the unmarried daughter. Such a contention cannot be sustained because, so far as the incidence of the wealth-tax is concerned, it is the incidence on the 'relevant date' that we have to consider. The question whether the shares of the beneficiaries are determinate or known has to be judged as on the relevant date in each respective year of taxation. therefore, whatever may be the position as the urged by Mr. Joshi as to any future date, so far as the relevant date in each year is concerned, it is upon the terms of the trust deed always possible to determine who are the sharers and what their shares respectively are.'
13. The Division Bench further referred to the case of Suhashini Karuri v. Wealth-tax Officer, and observed :
The Division clearly lays down the principle that the question whether the shares of the beneficiaries are indeterminate or unknown has to be judged as the facts stand on the relevant date in each assessment year.'
14. In spite of the fact that the ultimate beneficiary, Tribhuwandas, was held to have contingent interest in the corpus, in spite of the fact that there were intervening provisions in the deed of trust which may have affected the question, the Division Bench formed the view that in the case before them the share of the beneficiary for whom the assets were held (the corpus was held) by the trustees was determinate and known. In that connection, the Division Bench negatived the submission made by Mr. Joshi by relying upon the following phrases in sub-section (4) : 'shares of the persons on whose behalf or for whose benefit any such assets are held'. The observation was :
'No doubt, it would be perhaps a difficult thing to compute and determine the share in the case of a life interest or in the case of a contingent remainder but the difficulty of computation should not come in the way of the application of the law which speaks of 'the shares of the persons on whose behalf or for whose benefit any such assets are held 'being indeterminate or unknown.'
15. We are bound to follow the decision of the Division Bench in the above case. The words and/or the language which arose for construction and application to the fact before the Division Bench were the same as in sub-section (1) of section 41 of the Income-tax Act. Though there were complicated provisions regarding the interests of the ultimate beneficiary in the deed of trust and though in fact it was found that the beneficiary Tribhuvandas, had only a contingent interest in the corpus, the Division bench rejected the submission of the revenue that the persons for whom the assets were held by the trustees were indeterminate and unknows. The ratio of the decision appears to be that the number of the ultimate beneficiaries may increase and/or decrease by reason of death and other circumstances. The interests of the beneficiaries may at the relevant date be only contingent and may become vested interest at a much later date. Even so, the facts as existing at the relevant date must be considered. If at that date the beneficiaries can be ascertained, the court must hold that the beneficiaries are determinate and known and that the assets were held by the trustees for their benefit. The fact that these known beneficiaries are entitled only to a contingent interest was not sufficient to make a finding that the beneficiaries were indeterminate and unknown. It is necessary to find out the result of the application of the above ratio to the facts of the present case. It is clear that at the relevant date, i.e. March 31, 1957, the fact was that each life-tenant was in existence. Two of them, viz., Vasantkumar and Rajendrakumar, had sons and daughters. Krishnakumar had three daughters. In those circumstances, the provisions in sub-clause (e) of clause 2 of the deed of trust were the relevant provisions which arose for consideration. It is quite clear that under that sub-clause, the sons and daughters of these life tenants were the beneficiaries entitled to have the corpus of the trust divided between themselves upon the death of the above life tenants. The capital gains in question were received by the trustees on behalf of these sons and daughters of the life-tenants. Now, it is true that the date of distribution mentioned in the sub-clause provides that the children and/or remoter issues who would be entitled to the corpus would be those who were 'living at the time of the death' of each of the life-tenants. Now, this provision, possibly makes interest in favour of the sons and daughters of the life-tenant who were existing at the relevant date contingent interest. Following the ratio of the decision in the case of Commissioner of Wealth-tax v. Mrs. Hansabai Tribhuwandas Trust, the fact that these beneficiaries held contingent interest must be held to be an irrelevant fact. These persons were a determined group of persons and were known. The share that they has as beneficiaries under this clause was also such as could be easily ascertained and determined as on the date when capital gains accrued in the relevant year of account. Now, having regard to this finding, it is impossible to accept the submission made on behalf of the revenue that the proviso to section 41 was applicable to the facts of the case. As this proviso is not applicable, the capital gains tax could not be levied and/or computed at the maximum rate that is mentioned in the proviso.
16. Having come to this conclusion, we find it unnecessary to discuss the submission made by Mr. Kaka for the trustees that even the first part of the provisions in section 41 cannot be applied where trustees are assessed to tax in respect of capital gains. It is not necessary to discuss his submission that in connection with levy and computation of capital gains, provisions in section 17(6) only are relevant and provisions in the first part of section 41 are irrelevant. It requires to be recorded that in this connection Mr. Joshi relied upon the decision of a Division Bench of this court in the case of Commissioner of Income-tax v. Balwantrai Jethalal Vaidya, where, having regard to the scheme of Chapter V and other relevant factors, Chief Justice Chagla observed that in assessing trustees to income-tax it is mandatory to proceed in accordance with the provisions in section 41. Mr. Joshi also relied upon certain observations in the case of Commissioner of Income-tax v. Lady Ratanbai Mathuradas. In that case, the deed of trust provided for ultimate distribution upon the minor son of the settlor attaining the age of majority. The question related to the period, the trustees were given absolute discretion as regards the disbursements of the trust income. The income was not distributable except when the trustees decided to do so. Having regard to those facts, in connection with the question that had arisen for application of the provisions in sub-section (1) of section 41 and levy of income-tax at maximum rate, the Division Bench held that for the relevant period and at the relevant date '......... the children's shares are indeterminate and unknown'. That decision does not in any manner affect the decisions on which reliance has been placed by Mr. Kaka and which we have referred to above. The decision was made having regard to the peculiar facts which we have pointed out above in connection with the trustees having absolute discretion not to disburse the income in such manner as they thought fit. There is nothing in that decision which compels us to alter our findings as made above.
17. In the result, the answer to the question will be :
'The capital gain mentioned in the question cannot be taxed at the maximum rate as contended by the department.'
18. The commissioner will pay costs.