CHANDRASEKHARA SASTRI - This is a reference under section 66 (1) of the Indian Income-tax Act. The facts which give rise to this case are as follows :
On June 14, 1950, a trust called Sahebzadas of Sarf-e-khas Trust was created by H. E. M. the Nizam of Hyderabad. Securities of the face value of Rs. 2,50,00,000 were transferred to the trust. The relevant portion of the deed of trust was as follows :
'Whereas the settlor is the absolute owner and possessed of the Government securities specified in the first schedule hereunder written of the aggregate face value of Rs. 2,50,00,000 (Rupees two crores and fifty lakhs) and whereas the settlor as the head of his family has been maintaining certain descendants of the Nizam of Hyderabad known as Sahebzadas and Sahebazadis of Sarf-e-khas by sanctioning monthly allowances in favour of such descendants in keeping with the status and degree of relationship of such descendants with the settlor and whereas the estates comprised in the said Sarf-e-khas which formed part of the personal assets of the settlor together with the administration thereof was handed over by the settlor to the Government of Hyderabad in accordance with the Firman-e-Mubarak executed by the settlor on the 5th day of February, 1949, and whereas after the transfer of the estate comprised in the said Sarf-e-khas and the administration thereof to the Government of Hyderabad the income of Sarf-e-khas is no longer available for payment of allowances to such descendants and whereas out of the natural love and affection which the settlor bears for such descendants of the Nizam of Hyderabad from time to time whose names are particularly set out in the first column of the second schedule hereunder written and for diverse other good causes and considerations him there-unto moving he, the settlor is desirous of creating a wakf-ul-aulad of the said securities of the face value of Rs. 2,50,00,000 (Rupees two crores and fifty lakhs) in manner hereinafter appearing and whereas the trustees have agreed to become the first trustees of these presets and whereas prior to the execution of these presents the securities specified in the first schedule hereunder written have been handed over by the settlor to the trustees, now this indenture witnesseth as follows :
'1. In consideration of the premises and of the natural love and affection which the settlor bears towards certain descendants of the Nizams from time to time known as Sahebzadas and Sahebzadis of Sarf-e-khas whose names are particularly mentioned in the second schedule hereunder written and for diverse other good causes and considerations hum thereunto moving he the settlor both hereby transfer unto the trustees the said securities of the face value of Rs. 2,50,00,000 (Rupees two crores and fifty lakhs) specified in the first schedule hereunder written and which securities are hereinafter for brevitys sake referred to as the trust fund (which expression shall include all other properties and securities or investments of any kind whatsoever into which the same or any part thereof may be cavorted or varied from time to time and such as may be acquired by the trustees or come to their hands by virtues of these presents or by operation of law or otherwise howsoever in relation to these presents) and all the right title, interest, property claim and demand whatsoever at a law and in equity of the settlor into and upon the trust fund and every part thereof to have, receive and take all and singular the trust fund unto the trustees upon the trusts fund and every part thereof to have, receive and take all and singular the trust fund into the trustees upon the trusts and with and subject to the powers provisions, stipulations and declarations hereinafter appearing and contained of an concerning the same.
'2. The trust hereby created shall be down as the Sahebzadas of Sarf-e-khas Trust.
'3. The trustees shall hold and stand possessed of the trust fund upon trust : ....
(c) from and after the 1st day of July, 1950, to pay to each of the persons whose names are mentioned in the first column of the second schedule hereunder written every month out of the income of the trust fund the sum mentioned against their respective names for and during the term of their respective lives....
4. To pay out of the income of the trust fund to each of the persons whose names are mentioned in the first column of the third schedule hereunder written every month from the 1st day of July, 1950, the sum mentioned against their respective names in the second column of the third schedule hereunder written for and during the term of their natural life and on and after the death of any such person the amount payable to him or her shall be added to and form part of the balance of the income of the trust fund and shall be dealt with as provided in clause eight (8) hereof.
'6. To spend every year out of the income of the trust fund an equivalent to rupees fifty thousand Halli Sicca for giving scholarships to such of the Sahebzadas or Sahebzadis of Sarf-e-khas and their issue for education (primary, technical or otherwise) in the Madrassa-e-Aiza or any other educational institution in Hyderabad or for further or higher education anywhere in India or abroad, as the trustees in their absolute discretion think proper.
'7. Out of the balance of the income of the trust fund the trusts may in their absolute discretion spend such sum no exceeding rupees twenty-five thousand in any one calendar year towards payment of an increased monthly allowance to any Sahebzadas and Sahebzadis and their issue who may be in poor circumstances and deserving of monetary aid and whose monthly allowance is blow rupees one hundred and the decision of the trustees as to who are poor and deserving of monetary aid shall be final and binding on all persons claiming under this trust.
'8. Subject to the provisions of clause 3, 4, 5, 6 and 7 hereof the trustees shall hold and stand possessed of the balance of the income of the trust fund upon trust to utilise the same for all or any one or more of the following charitable objects and purposes for the benefit of the Mohamedan community in general and the Sunni Mohamedans in particular in such shares and proportions and in such manner in all respects as the trustees shall in their absolute discretion think fit, with liberty to the trustees in their absolute discretion to accumulate the income for any year or years and spend such accumulations or any part thereof in any subsequent year or years for the same purpose.'
To this deed of trust are attached schedules. The first schedule specifies the stock certificates of the total face value of Rs. 2,50,00,000 which constituted this trust fund. The second schedule consists of the list of 663 Sahebzadas and Sahebzadis of Sarf-e-khas showing the monthly allowances payable to each. The third schedule gives the names of 12 persons showing their pensions for life. The Income-tax Appellate Tribunal held that with regard to Rs. 50,000 mentioned in clause 6 and Rs. 25,000 mentioned in clause 7, income-tax has to be lived at the maximum rate under the first proviso to section 41, clause (1), of the Income-tax Act. On these facts, the question referred is as follows :
'Whether the levy of tax on the assessees at the maximum rate under the first proviso to section 41(1) of the Income-tax Act in respect of either or both of the amounts referred to in clauses 6 and 7 of the trust deed dated June 14, 1950, is valid ?'
On behalf of the assessee, three points are argued before us : (1) section 41 of the Indian Income-tax Act has no application to this case; (2) the beneficiaries who have received under this trust are specified in every accounting year and they have to be taxed individually; and (3) in any view, the amount of Rs. 50,000 specified in clause 6 and the amount of Rs. 25,000 specified in clause 7 have to be taxed separately as they are liable to be treated as separate trusts. We shall consider the first point. Section 41 and the first proviso thereto are as follows :
'In the case of the 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 any order of a court, or any trustee to trustees appointed under a trust declared by a duly executed instruments in writing whether testamentary or otherwise (including the trustee, or trustees under any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913), are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such Court of wards, Administrative-General, Official Trustee, receiver or manager or trustee or 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 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 : 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.'
It is argued for the assays that the expression 'entitled to receive on behalf of any person' in clause (1) means 'entitled to receive on behalf of any specified or named person or persons' because under this cause, the tax shall be levied upon and recoverable from such trustee in the like manner and to the same amount as it would be livable upon and recoverable from the person of whose behalf such income, profit and gains are receivable. It is common ground that the word 'person' in clause (1) of section 41 includes 'persons'. We have to refer to the decision in Commissioner of Income-tax v. Balwantrai Jethalal Vaidya, where it is pointed out that the object of section 41 is to assessee either the beneficiaries or the trustee and the liability of the trustee is co-extensive with that of the beneficiaries and cannot in the case be a larger or wider liability. In the present case, the department assessed income-tax under the first part of the first proviso to section 41, clause (1).
The argument of Sri Rajah Ayyar is as follows : the beneficiaries are not specified, i.e., it cannot be said who the beneficiaries are, as under the deed of trust it is left to the discretion of the trustees to nominate them. So, it cannot be said that the trustees are entitled : to receive the income on behalf of any specified person within the meaning of section 41, clause (1). The first proviso to section 41 (1) refers to 'such income' is entitled to receive on behalf of any specified persons or persons. Therefore, neither section 41, clause (1) nor the first proviso is applicable to this case. It follows that this income can be assessed only in the ordinary manner under the other provisions of the Act.
Section 41 of the Act is a special provision which prescribes that the authority shall assess the income received by a trustee or trustees who are entitled to receive the income on behalf of others. The section is not confined to income which a trustee is entitled to receive on behalf of a specified beneficiary or specified beneficiaries. The expression 'such income' in the first proviso to section 41, clause (1), refers to income which the trustee is entitled to receive as a trustee whether the beneficiaries are specified or not and is not confined to income which he is entitled to receive on behalf of any specified person or persons. As pointed out in the decisions referred to above, section 41 is mandatory and the assessment of the income returned of a trustee can only be made in accordance with these special provisions laid down in that section. For these reasons, we are unable to accept the contention that the tax in this case cannot be levied under section 41 of the Act.
Next, it is contended that the first part of the first proviso does not apply to this case. The first part of the first proviso reads as follows :
'Provided that where any such income, profit or gains or any part thereof were not specifically receivable on behalf of any one person, the tax shall be levied and recoverable at the maximum rate...'
It is argued that this applies only to a case where the income profit or gains are not specifically receivable on behalf of any one person, i.e., it must be receivable on behalf of only one person, who is not specified and that, in the case, the income is receivable on behalf of several persons, who are not specified and hence the first part of this proviso does not apply. In our view, the first part of this proviso applies to all income receivable bay a trustee which is not receivable by him on behalf of any person, who is designated or specified. It applies to income receivable on behalf of a single person, who is not specified or on behalf of several person, who are not specified or designated. The trustees may receive the income for the benefit of a poor student or poor students in general or person or persons belonging to or persons belonging to or possessing a particular faith or religion without it being specified who that person or persons are. In all such cases, it cannot be said that the income is 'specifically receivable by the trustee on behalf of any one persons'. The first part of the first proviso in our opinion applies to such case. If on the other hand, the income is receivable by the trustee on behalf of any specified person, section 41, clause (1), itself applies and not this proviso. Then, coming to the second part of the first proviso it is clear to us that it applies to a case where the income profit or gains are receivable by the trustees on half of several persons, specified, but whose individual shares in the income are indeterminate or unknown. The income may be receivable by the trustees for the benefit of a number of persons named or specified in the proviso, say A, B, C, D and E. If individual shares of A, B, C, D and E in the said income are indeterminate and unknown, then the tax is to be levied at the maximum rate under the second part of the first proviso to section 41 (1); but, if, on the other hand, the shares of the beneficiaries, A, B, C, D and E respectively are not indeterminate, but are specified or known, section 41, clause (1), itself applies and not the proviso. In the present case itself, the amounts referred to in the second and third schedules attached to the deed of trustees with cause 3, sub-clause (c), and clause (4), are covered by section 41, clause (1), itself and not by the first proviso. In our opinion, the present case clearly falls under the first part of the first proviso under section 41 (1). Even assuming that it falls under the second part of the first proviso to section 41, the results the same because the individual shares of the beneficiaries on whose behalf the income is receivable are indeterminate and the tax has to be levied under the proviso at the maximum rate.
It is next contended by Shri Rajah Ayyar, learned counsel for the assessee, that it is accounting year that will have to be looked into for the purpose of levying tax and in the particular case it is determined every year who the beneficiaries are and what are the amounts they have to receive for the next year, i.e., the assessment year, and that therefore the tax cannot be levied under the first proviso to section 41. Reliance is placed for this proposition on a decision in Habibur Rahman v. Commissioner of Income-tax. In that case, the deed of trust provided that the beneficiaries should be benefited concurrently and in the same proportion. The beneficiaries were stated to be ultimately the assessees children and descendants. The learned Judges held that it was rightly determined that there were 24 persons who are entitled to share the profits in the accounting year. In the deed of trust which was being considered by the earned Judges in that case, his beneficiaries are specified and their shares aerials specified. What had to be bones was to find out who the member of the family were in each accounting year. But it is not the situation here.
Next we have to refer to the decision in Yakub Versey Laljee v. Commissioner of Income-tax. Reliance is placed upon the following statement at page 553 of the report :
'The question before the court is necessarily in respect of the accounting year only and does not affect the rights of the parties in respect of the income which may accrue in a later year.'
We do not think that this observation in any way supports the contention of the learned counsel for the assessee. On the other hand, the learned judges in that case held that the test for the application of section 41, clause (1), is whether the shares and the beneficiaries are not indeterminate and unknown. As in that case, they being indeterminate, the learned Judges held that the case fell within the first proviso and that the tax was recovered at the maximum rate. In Mahalaxmiwala v. Commissioner of Income-tax Chagla and Tendolkar pointed out that the word 'or' used in the first proviso to section 41, clause (1), is disjunctive and not conjunctive. The learned judges referred to with approval the following statement in the decision in Yakub Versey Laljee v. Commissioner of Income-tax :
'Having regard to the facts found on the construction of the clause it is clear that within the meaning of section 41, proviso (1) in the accounting year the income cannot be predicated to belong to a particular individual, or if more than one with their determinate specific individual shares.'
This, it was pointed out, is the correct interpretation of the first proviso. In this case, what was considered was whether under the deed of trust, it could be said that the beneficiaries and their individual shares are specified. If the deed of trust does jot so specify the beneficiaries and their individual shares, then, in our opinion, the first proviso to section 41, clause (1), applies.
Next, it is contended By Rajah Ayyar, the learned counsel for the assessee, that the amount of Rs. 50,000 referred to in clause 6 of the trust deed and the amount of Rs. 25,000 referred to in clause 7 are separate and different trusts and have to be taxed separately. We cannot accept this contention. The trust is one trust and the trustees are the same. The amount of Rs. 2,50,00,000 is one trust fund. What the deed provides for is only that the different portions of the income from the trust fund have to be spent in different manner. The entire income received by the trustees under this trust is to be taxed each year.
For these reasons, we answer the question referred to this court against the assessee, advocates fee Rs. 250.
Reference answered accordingly.