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Commissioner of Wealth-tax, Mysore Vs. H.H. Yeshwant Rao Ghorpade - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberTax Referred Case No. 4 of 1964
Judge
Reported in[1965]58ITR492(KAR); [1965]58ITR492(Karn)
ActsWealth Tax Act, 1957 - Sections 2, 3, 4(1) and 27(1)
AppellantCommissioner of Wealth-tax, Mysore
RespondentH.H. Yeshwant Rao Ghorpade
Respondent AdvocateR. Venkataram, Adv.
Excerpt:
.....to make provision for them. ..(the other portion of the preamble is not necessary for our present purpose). 11. from the above statement, it is clear that the assessee out of natural love and affection for is minor children has created the trust in question. the deed clearly speaks in two voice. 20. strong reliance on behalf of the assessee was placed on the decision of the supreme court in commissioner of income-tax v......said finding is binding on us. 9. we may now proceed to consider the relevant provisions in the trust deed in question. the provisions that are material for our present purpose are those contained in the preamble and clauses 1, 2, 3, 9, 20, 21 to 26. 10. the preamble to the deed say : 'this deed of settlement and trust is made this 24th day of august, 1957, between his highness maharaj yeshwant rao hindu rao ghorpade, ruler of sandur now residing at sandur house, palace road, bangalore, hereinafter called the settlor, of the one part and his highness maharaj shri yeshwant hindu rao ghorpade, ruler of sandur and captain sardar dattaji rao chender rao ranavare, both of whom are hereinafter collectively called the trustees, of the other par : whereas the settlor is absolutely entitled.....
Judgment:

Hedge, J.

1. This is a reference under section 27(1) of the Wealth-tax Act, 1957 (27 of 1957), to be hereinafter referred to as 'the Act'. The question referred for our opinion i :

'Whether the sums of Rs. 4,30,684 and Rs. 4,13,353 being value of the shares transferred by the assessee to the Sandur Ruler's Family (Second) Trust could be included in the net wealth of the assessee for the assessment years 1958-59 and 1959-60 under the provisions of section 4(1)(a)(iii) of the Wealth-tax Ac ?'

2. The material facts are these : The assessee held 12,750 shares in the Sandur Manganese & Iron Ores (P.) Ltd., as on March 31, 1957. He transferred some of those shares to his wife, some to the Sandur Ruler's Family First Trust and 3,030 shares to Sandur Ruler's Family (Second) Trust which came into being on 24th August, 1957. The said trust will be hereinafter referred to as the second trust. The question for our decision is whether the value of the shares transferred to the second trust have to be taken into consideration in computing the net value of the assets of the assessee for the assessment years 1958-59 and 1959-60.

3. Before considering the relevant provisions of the second trust, it is desirable to refer to the relevant provisions in the Act. Section 3 of the Act is the charging section. It say :

'Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on an from the first day of April, 1957, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the schedule.'

4. The next section that is relevant for our present purpose is section 4(1). The relevant portion of that section read :

'4. (1) In computing the net wealth of an individual there shall be included as belonging to him -

(a) the value of assets which on the valuation date are held -....

(iii) by a person or association of persons to whom such assets have been transferred by the individual otherwise than for adequate consideration for the benefit of the individual or his wife or minor child.....' 'Valuation date' is defined in section 2(q) thu : 'Valuation date' in relation to any year for which an assessment is to be made under this Act, means the last day of the previous year as defined in clause (II) of section 2 of the Income-tax Act if an assessment were to be made under that Act for that year...' (The remaining portion of the definition is not necessary for our present purpose).

5. From the foregoing it follows that in computing the net wealth of the assessee on March 31, 1958, and March 31, 1959, these being the relevant valuation dates, the value of the assets held by a person or association of persons to whom such assets have been transferred by him otherwise than for adequate consideration for his benefit or for the benefit of his wife or minor child have to be included. In the instant case, the case for the revenue is that the value of the shares transferred by the assessee to the second trust have to be taken into consideration in computing his net wealth.

6. The First Wealth-tax Officer, City Circle II, Bangalore, taxed the assessee on that basis. His order was confirmed in appeal by the Appellate Assistant Commissioner. But when the matter went up in appeal, the Appellate Tribunal reversed the decisions of the authorities below. It came to the conclusion that the value of those shares cannot be taken into consideration in computing the net wealth of the assessee under the Act. But the Tribunal at the instance of the department referred the question of law mentioned above for the opinion of this court. While answering that question, it is necessary to examine the correctness of the decision of that Tribunal.

7. The short question for our decision in this case is whether the shares in question were held by the second trust for the benefit of the minor children of the assessee on the valuation dates in question, namely, March 31, 1958, and March 31, 1959. To answer this question it is necessary to refer to the relevant provisions in the deed creating the second trust. It is trite to say that the said deed has to be construed as a whole to find out its true legal effect.

8. Before doing so, it necessary to deal with one of the contentions urged on behalf of the revenue. It was urged on its behalf that the second trust is merely a device created for the purpose of evading wealth-tax. In support of that contention, our attention was invited to the fact that the Wealth-tax Bill had been introduced in Parliament on May 15, 1957, the same became law after receiving the assent of the President on September 12, 1957, and the trust in question came into existence on August 24, 1957. We do not think that there is any force in this contention. It is open to any assessee to so arrange his affairs as to reduce the incidence of taxation so long as he does not contravene any provision of law. It is nobody's case that the deed in question evidences any illegal transaction. Its genuineness was not dispute at any time. The Tribunal had accepted that deed as a valid document. The said finding is binding on us.

9. We may now proceed to consider the relevant provisions in the trust deed in question. The provisions that are material for our present purpose are those contained in the preamble and clauses 1, 2, 3, 9, 20, 21 to 26.

10. The preamble to the deed say :

'THIS DEED OF SETTLEMENT AND TRUST is made this 24th day of August, 1957, between His Highness Maharaj Yeshwant Rao Hindu Rao Ghorpade, Ruler of Sandur now residing at Sandur House, Palace Road, Bangalore, hereinafter called the SETTLOR, OF THE ONE PART and His Highness Maharaj Shri Yeshwant Hindu Rao Ghorpade, Ruler of Sandur and Captain Sardar Dattaji Rao Chender Rao Ranavare, both of whom are hereinafter collectively called the TRUSTEES, OF THE OTHER PAR :

WHEREAS the SETTLOR is absolutely entitled to the shares, set out and described in Schedules A, B and C hereto, as sole and absolute owner thereof;

WHEREAS the SETTLOR has been and is desirous of making a settlement on his two minor sons, namely, Rajkumar Shri Shivarao Yeshwantrao Ghorpade, aged 16 years and Rajkumar Shri Venkatrao Yeshwantrao Ghorpade, aged 6 years hereinafter referred to as the FIRST and the SECOND BENEFICIARY and on his minor daughter, Rajkumari Shri Vijayadevi Yeshwantrao Ghorpade, aged 10 years, hereinafter referred to as the THIRD BENEFICIARY, out of natural love and affection towards them of the shares set out in Schedules A, B, and C hereto respectively, with a view to make provision for them....' (The other portion of the preamble is not necessary for our present purpose).

11. From the above statement, it is clear that the assessee out of natural love and affection for is minor children has created the trust in question. The deed also makes it clear that the three minor children of the settlor mentioned in the deed are the beneficiaries under that trust. Now we shall proceed to examine the terms of the deed.

12. Clause (1) of the trust deed say :

'(1) The SETTLOR doth hereby grant, transfer and convey unto the Trustees the shares set out and described in Schedule A hereto, to have and to hold the same in Trust, both as to the corpus and income therefrom, for a period of two years from the date of this indenture for the benefit of Shri Yeshwantrao Maharaj Charitable Trust and on the expiry of the said period of two years, to have and to hold the shares set out and described in Schedule A hereto in Trust both as to the corpus and income received after the expiry of the aforesaid period of two years from the date of this indenture for the benefit of Rajkumar Shri Shivrao Yeshwantrao Ghorpade, the First Beneficiary herein, as the full, absolute and beneficial owner thereof, but subject to the terms and conditions hereinafter set forth.'

13. Clause (2) says that the shares to which the second beneficiary is entitled on his attaining majority will be held in trust by the trustee during his minority for the benefit of the trust mentioned in clause (1). Similar is the provision as regards the shares to which the third beneficiary will be entitled to on her attaining majority. The next important clause is clause (9). It read :

'(9) This Settlement and Trust is hereby declared to be irrevocable and shall take effect immediately and all trusts, settlements and interests granted or created by these presents shall vest in the respective beneficiaries immediately (The underlining is ours.

As mentioned earlier, the beneficiaries named in the deed are the three minor children of the assessee.

Clause (9) specifically says that the trust shall take effect immediately and settlements and interest granted or created by that trust shall vest in the respective beneficiaries immediately.

Clause (20) of the deed provides that all expenses appropriately incurred for and on behalf of any particular beneficiary or in relation to the trust funds of the said beneficiary under the trust shall be defrayed and met out of the income of the said beneficiary accruing under the trust and all expenses that are common to all or some of the beneficiaries under the trust shall be apportioned among them in such proportion as the trustees may consider just and equitable. Clause (21) provide : 'The trustees may, in their absolute discretion, accumulate the income accruing under this settlement to the benefit of Shri Yeshwantrao Maharaj Charitable Trust for a period of two years from the date of this indenture as respects the shares set out and described in Schedule A hereto and for a period 12 years from the date of this indenture as respects the shares set out and described in Schedule B hereto and for a period of eight years from the date of this indenture as respects the shares set out and described in Schedule C hereto....' (The provisos to this clause are not necessary for our purpose).

14. From this provision it is seen that it was left to the absolute discretion of the trustees whether to accumulate the income of the trust property for the benefit of the family charitable trust or not.

15. Clause (22) to (24) say that the trustees in their absolute discretion may accumulate the income accruing under the settlement and trust for the benefit of the beneficiaries till 31st July, 1975, and them make over the same to the beneficial concerned. As mentioned earlier, the beneficiaries mentioned in the deed are the minor children of the settlor. The operation of these clauses appear to extend even to the period when those beneficiaries are minors. If so, they conflict with clauses (1) to (3) of the trust deed.

16. Clause (25) provides as to what should be done in the event of the death of any of the beneficiaries before 31st July, 1975. These provisions are not relevant for our present purpose. Then we come to the important clause, clause 26 which read :

'(26) Notwithstanding any thing contained in clauses (21) to (25), supra, the trustees shall have full power during the currency of this settlement and each of the beneficiaries herein such amount as the trustees may in their advancement of each of the beneficiaries herein.'

17. According to the learned counsel for the revenue, the only beneficiaries under the second trust are the three minor children of the settlor. The trust property vests with trustees for their benefit from the date the trust came into existence. The income of the trust property is intended to be expended for their maintenance, education, health, marriage and advancement. That according to him is the provision even during the minority of the beneficiaries and the family charitable trust world get only the unexpended income and the accumulated during the minority of the beneficiaries. But according to Sri R. Venkataram, the learned counsel for the beneficiaries. But according to Sri R. Venkataram, the learned counsel for the assessee, the true position under the deed is that during the minority of the beneficiaries mentioned in the trust deed, the trust properties vest with the trustees for the benefit of the family charitable trust. But they are given power to utilise a portion of the income of the trust properties for the benefit of the beneficiaries named in the deed. Naturally he relies strongly on clauses (1) to (3) of the deed. But these clauses cannot be isolated from the other provisions in the deed. All the provisions have to be read together. The deed clearly speaks in two voice. Clauses (1) to (3) of the deed are not consistent with clauses (9), (20), (22) to (24) and (26). There is hardly any doubt that the trust in question was created to escape wealth-tax. But the question is whether the assessee has succeeded in doing so. The assessee's difficulty appears to be that he wants to avoid tax but not give up the property. The family charitable trust is not mentioned as one of the beneficiaries in clause (9) which specifically says that the interests created by the deed shall vest in the respective beneficiaries immediately. This clause is unambiguous. The effect of that clause is that the assets made over to the trust vested in the trustees immediately on the execution of the trust deed for the benefit of the beneficiaries, namely, the three minor children of the settlor. We have earlier seen that clause 21 gives absolute discretion to the trustees to accumulate the income of the trust property during the minority of the beneficiaries and make to over to the charitable trust. It is merely a permissive provision. The strength of that provision is corroded by clause (26) which confers power on the trustees to spend out of the income of the trust properties even during the minority of the beneficiaries for their maintenance, education, health, marriage and advancement. The trust deed confers on the settlor (assessee) an effective control over the trust property. During his lifetime, he is the managing trustee. He had appointed the other trustee for a period of one year. Thereafter, it was open to him to appoint any other person as co-trustee for such period as he thinks fit. If we take into consideration all the provisions of the deed, there can be hardly any doubt that the settlor has a complete and effective control over the properties settled. To summarise, the settlements is made for the benefit of the minor children. The income of the property settled could be utilised for the benefit of the minors even during the period of their minority. The trust properties vested in the trustee for the benefit of the settlor's minor children even from the date of the trust. Only the income accumulated, if any, during the minority of the beneficiaries have to be made over to the family charitable trust. Hence, in substance the trust was created for the benefit of the minor children during their minority and pass over the assets to them after they become majors. The benefit to the family charitable trust, if any, is merely incidental.

18. From the foregoing it follows that the real beneficiaries under the second trust right from the date of that trust are the minor children of the settlor and not the family charitable trust. If that be the true position, as we think it is, them there could be hardly any doubt that the value of the assets made over to the second trust have to be included in the net wealth of the assessee in determining the wealth-tax due from him.

19. Sri Venkataram contended that there is no evidence on record to show that any amount from the trust fund had so far been spent for meeting the expenses of the maintenance, education health, marriage and advancement of the minor children of the settlor. This, in our opinion, is an irrelevant consideration. We are not now considering about the application of the income. We are on the question as to what is the true construction to be placed on the settlement deed. For that purpose the question how exactly the income had been expended in the past is beside the point.

20. Strong reliance on behalf of the assessee was placed on the decision of the Supreme Court in Commissioner of Income-tax v. Manilal Dhanji. The Appellate Tribunal thought that the question of law arising for decision in this case is concluded by that decision. Hence it is necessary to examine that decision. Hence it is necessary to examine that decision in some detail. In that case the Supreme Court was considering the scope of clause (b) of sub-section (3) of section 16 of the Indian Income-tax Act, 1922. Therein their Lordships laid down that provision must be read in the context of the scheme of section 16 and the two clauses (a) and (b) of sub-section (3) thereof must be read together. So read their Lordships held the only reasonable interpretation of section (3)(b)16 is that an assessee can only be taxed on the income from a trust fund for the benefit of his minor child, provided that in the year of account the minor child derives some benefit under deed - either he receives the income or he income accrues to him, or he has a beneficial interest in the income in the relevant year of account.

21. To appreciate the ratio of that decision it is necessary to set out briefly the facts of that case and the relevant provision of law.

22. The assessee therein was assessed to income-tax as an individual in respect of his income for the assessment year 1954-55. The taxing authorities included in the assessee's total income for the year a sum of Rs. 410. It was stated that sum accrued in the relevant account year in the following circumstances. On January 12, 1953, the assessee created a trust in respect of a sum of Rs. 25,000, the trustees whereof were the Central Bank Executor and Trustee Co., the assessee himself his wife and brother. The scheme of the trust deed was that the said sum of Rs. 25,000 was set apart by the assessee and it was provided that the interest on that amount should be accumulated and added to the corpus and a minor daughter of the assessee, named Chandrika, was to receive the income from the corpus increased by the addition of interest, when she attained the age of 18 on February 1, 1959. She was to receive the income during her lifetime and after her death the corpus was to go to some other persons. The income derived from the said trust amounted to Rs. 410 in the relevant account year and the taxing authorities included that amount in the income of the assessee, purporting to act under section 16(3)(b) and/or section 16(3)(a) of the Income-tax Act, 1922. The Income-tax Appellate Tribunal negatived the contention of the revenue. That decision was upheld by the High Court. It came to the conclusion that the amount in question could not be included in the income of the assessee. The said inclusion was justified before the Supreme Court of the basis of section 16(3)(b) and not on the basis of section 16(3)(a)(iv). Hence their Lordships had to consider the scope of section 16(3)(b). The said section read :

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

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

23. The argument before the court was that conditions laid down in clause (b) of sub-section (3) of section 16 were fulfilled in that case, and, therefore, the department was entitled to include in the total income of the assessee so much of the income in the hands of the trustees as arose from the assets transferred by the assessee for the benefit of the minor child. It was pointed out that the conditions laid down in clause (b) ar : (1) that there must be income in the hands of any person or association of persons (trustees in that case); (2) the income must arise from assets transferred otherwise than for adequate consideration is out of the way, clause (b) must apply and the department is entitled to include the income in the hands of the trustees in computing the total income of the individual assessee who made the transfer. Dealing with those contentions, this is what S. K. Das J. who spoke for the court, observe :

'At first sight the argument appears to be attractive and supported by the words used in the clauses. On a closer scrutiny, however, it seems to us that clause (b) must be read in the context of the scheme of section 16 and the two clauses (a) and (b) of sub-section (3) thereof, must be read together. So read, the only reasonable interpretation appears to be the one which the High Court accepted, namely, that the scheme of the section requires that an assessee can only be taxed on the income from a trust fund for the benefit under trust deed - either he receives the income, or the income accrues to him, or he has a beneficial interest in the income in the relevant year of account. But if no income accrues, or no. benefit is derived and there is no income at all (so far as the minor child is concerned). then it is not consistent with the scheme of section 16 that the income or benefit is derived and there is no income at all (so far as the minor child is concerned), then it is not consistent with the scheme of section 16 that the income or benefit which is non-existent so far as the minor child is concerned, will be included in the income of his father.... If the minor derives no benefit in the relevant year of account, it can hardly be said that for that year the transfer was for the benefit of the minor child. Section 4, the charging section, of the Income-tax Act makes it clear that what is taxed is the total income of the relevant account year and total income, according to section 2(15), is the income profits and gains referred to in sub-section (1) of section 4 and computed in the manner laid down in the Act. In other words, the tax is levied on a yearly basis. It is true that in the present case there was income in the hands of the trustees and the trustees were liable to pay tax thereon. That, however, is not the question before us. The question before us is whether such income in the hands of the trustees could be included in the total income of the assessee under clause (b) of sub-section (3) of section 16. In our opinion when clause (b) of sub-section (3) of section 16 talks of benefit of the minor child it refers to benefit which arises of accrues to the minor in the year of account. If there be no such benefit, the income cannot be included in the total income of the individual who made the transfer.'

24. From these observations it is clear that while interpreting the scope of section 16(3)(b) of the Indian Income-tax Act, 1922, their Lordships primarily took into consideration the scheme of the Act. According to their Lordships as per the scheme of the Act, only income received or arising or accrued for the benefit of the assessee's minor child in the relevant account year could be taken into consideration in computing his income. Similar is not the position under the Act. The language of section 4(1)(a)(iii) makes it clear that the real question for decision is whether the shares transferred to the trustees were held by them on the relevant valuation dates, for the benefit of the minor children of the assessee. We have answered that question in the affirmative. It was not contended before us that the scheme of the Act or any provision in it detracts from the plain language of the section. Further it may be noted that the language of section 16(3)(b) of the Indian Income-tax Act, 1922, is not similar to the language of section 4(1)(a)(iii) of the Act. Hence, the decision in question in our judgment, does not bear on the controversy in question.

25. For the reasons mentioned above, we are of the opinion that the contention advanced on behalf of the department is acceptable and that the decision referred to is that the sums of Rs. 4,30,684 and Rs. 4,13,353 being the value of the shares transferred by the assessee the Sandur Ruler's Family (Second) Trust should be included in the net wealth of the assessee for the assessment years 1958-59 and 1959-60 under the provisions of section 4(1)(a)(iii) of the Act.

26. Lastly, it was urged by Sri Venkataram that the assessee had contended before the Appellate Tribunal that the valuation placed on the shares in question was excessive but the Tribunal did not go into that contention in view of its findings that the value of those assets could not be taken into consideration for the purpose of determining the tax due from the assessee during the relevant assessment year and, therefore, the Tribunal should be directed to go into that question afresh. That question has not referred to us. Hence, we cannot go into that aspect. If it is open to the Tribunal to go into that question afresh, it can certainly do so. But we express no opinion on that point.

27. In the result we answer the question referred to us in the affirmative (in favour of the revenue).

28. The assessee shall pay the costs of the revenue. Advocate's fee Rs. 250.

29. Question answered in the affirmative.


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