1. The assessee is a trust. The trust was created by indenture dated 13-3-1975 by Shri N.D. Sadani. The settlor appointed two trustees, viz., his wife Smt. Sohan Devi Sadani and his son Shri C.L. Sadani.
Clause 3 of the trust deed declared : The Trustees shall hold and stand possessed of the Trust Fund and of any additions or accretions thereto upon the following trusts :- (a) The Trustees shall, subject to the provisions of Sub-clauses (b), (c) and (d) hereof, from time to time and for a period of 21 years from the date hereof invest and accumulate all and every part of the income out of the Trust Fund by investing the same and the resulting income thereof in or upon any investment hereby authorised which shall thereupon become part of and subject to the Trusts affecting the Trust Fund, (b) During the period aforesaid, but subject to the provisions of Sub-clauses (c) and (d) hereof, the Trustees shall set apart in every year an amount equal to 5 per cent of the Income of the Trust Fund in that year and shall hold and stand possessed of the same for the benefit of Smt. Laxmi Devi Sadani, wife of Shri C.L. Sadani of 12 and 13, Jackson Lane, Calcutta-1, and shall pay over the same to her.
(c) If, at any time during the period referred to in Sub-clause (a) above a son is born to the said Smt. Laxmi Devi Sadani, then the Trust contained in Sub-clause (c) of this clause shall determine from the date of such birth and notwithstanding anything contained in Sub-clause (a) hereof, the Trustees shall hold and stand possessed of the Trust Fund and the balance of the accumulated income upon Trust for the benefit of the said first son of the said Smt. Laxmi Devi Sadani for the unexpired period out of the said 21 years and shall pay the entire Trust Fund and the balance of the accumulated income to him or to his legal guardian on the expiry of the aforesaid period of 21 years.
(d) If until the expiry of the period referred to in Sub-clause (a) above, the said Smt. Laxmi Devi Sadani does not have a son, or during the period referred to in Sub-clause (a) above, she dies without having a son then and in such event, the Trust contained in Sub-clause (b) above shall determine respectively from the date of expiry of the aforesaid period of 21 years or the date of such death within the period of the aforesaid 21 years, as the case may be, and the Trust Fund and the balance of the accumulated income shall be distributed amongst the heirs of the said Smt. Laxmi Devi Sadani excluding the Settlor in equal shares.
Other clauses of the trust deed are not very relevant for our purpose as they are usual and routine clauses that appear in private trust. The trustees filed a return on 28-6-1976 showing a total income of Rs. 864 for the year ending 31-3-1976. The claim on behalf of the assessee-trust was that the higher rate of tax contemplated by Section 164 of the Income-tax Act, 1961 ("the Act") is not leviable as the beneficiaries are known and determinate. The ITO, however, held that Section 164 would apply as a part of the income is not specifically receivable on behalf of or for the benefit of any one person. Evidently he found that only 5 per cent of the income is payable to Smt. Laxmi Devi Sadani under Clause 3(b) of the trust deed and the balance of 95 per cent is not specifically receivable on behalf of or for the benefit of any one person. Then the matter came before the A AC. In a rather cryptic order the AAC held that Section 164 would not apply since the provisions of the trust are clear, specified, non-discretionary and irrevocable.
2. The revenue has come up in appeal before the Tribunal. The matter was originally argued before a Bench and before that Bench judgment of the Tribunal in IT Appeal No. 1463 (Cal.) of 1979 in the case of another trust was relied on by the assessee. Obviously the facts relating to that trust are almost identical with the facts of the present assessee-trust. The revenue, however, appears to have argued that the decision of the Tribunal requires reconsideration in view of the decision of the Calcutta High Court in the case of Nirmala Bala Sarkar v. CIT  74 ITR 268. The Bench hearing this appeal felt that the matter requires fresh consideration and, therefore, is a fit case for referring the same to a Special Bench. Thereupon, the President, in exercise of his power under Section 255(3) of the Act, constituted the Special Bench to hear and dispose of the appeal. That is how the present Special Bench is in seisin of the appeal.
3. The learned departmental representative earlier filed an application to admit the following additional ground : That the AAC should have held that the Trust is void and that it is a resulting trust.
He pressed his application for admitting the additional ground during the course of hearing of the appeal. He contended that the ground raised by him goes to the root of the matter and it being a pure question of law should be admitted. _The learned counsel appearing for the assessee opposed the admission of the additional ground. Initially the matter was argued on merits also to some extent. But having considered the matter carefully, we are not inclined to admit the additional ground. Firstly, the entire matter proceeded on the basis of a valid trust. There was never any doubt regarding its validity. It was not the case of the ITO. By admitting the additional ground the entire complexion of the matter would change. Secondly, if the additional ground were to be admitted and ultimately finding is given that the trust is invalid, the entire assessment may have to be struck down. In this appeal the only point is about the question as to whether the maximum rate is to be applied or not. By the admission of the additional ground the scope of the appeal would get enlarged and the result may be that the assessment would be struck down and the revenue, who is the appellant, would be worse of than what it was before filing the appeal. Such a consequence should not be allowed to flow. Thus, we decline to admit the additional ground in exercise of our discretion.
4. Before we come down to the respective arguments of the parties we have elicited one fact. That fact is whether there was any legal heir of Smt. Laxmi Devi Sadani as on 31-3-1976. This fact should have been elicited by the ITO for a proper understanding of the matter. Since that has not been done we got this fact brought on record by way of an affidavit from the respondent. No objection has been raised by the learned departmental representative and rightly so. We, therefore, proceed to deal with the matter on the basis of the fact that as on 31-3-1967 no son was born to Smt. Laxmi Devi Sadani but a daughter was born to her.
5. The learned departmental representative, Shri Ghosh, contended that upon reading Clause 3 carefully, there is no possibility of any inference other than the inference that Section 164 would be attracted as the beneficiaries are not determinate and known. His further point was that 95 per cent of the income is not receivable by a specified person. He further contended that an unborn person cannot be a specified person within the meaning of Section 164. He placed reliance on a number of authorities in support of his contention and finally referred to us a decision of the Tribunal in IT Appeal Nos. 51, 52 and 53 (Cal.) of 1981 dated 18-6-1981. Mr. Ghosh also argued that the interest of the unborn son was only contingent and there is no vested interest. He very strongly relied on the decision of the Calcutta High Court in the case of Nirmala Bala Sarkar (supra).
In reply Mr. Chaturvedi, learned counsel for the assessee, contended that the facts of the case completely fit in with the principle laid down by the Supreme Court in the case of CWT v. Trustees of H.E.H.Nizam's Family (Remainder Wealth) Trust (supra). He argued that there is no uncertainty or indeterminateness regarding the beneficiaries. His point is that as on 31-3-1976 in respect of 5 per cent of the income the beneficiary is known and determinate and in respect of 95 per cent also the beneficiary is known. He contended that as on 31-3-1976 it must be assumed that the contingencies contemplated in the trust deed happened in which case it is very evident as to who are the beneficiaries and their shares. He has also argued that a trust in favour of an unborn person is quite valid and there is nothing in law by which an unborn person cannot be a beneficiary under a trust.
6. At the outset we may mention that though the point to be decided in this appeal appears to be simple as to whether Section 164 is attracted to the facts of the case, the arguments cover a wide gamut involving interesting questions. The first question that requires answer is whether an unborn person can be a beneficiary. The learned departmental representative, relying on Section 5 of the Transfer of Property Act and Section 112 of the Indian Succession Act, argued that the beneficiary should be an existing person. In other words, a person who is non-existent, viz., unborn person, cannot be a beneficiary. He has also referred to us Section 9 of the Indian Trust Act pointing out that a beneficiary can be a person capable of holding property, in which case an unborn person cannot be a person capable of holding property.
We may at once say that this argument as to whether an unborn person can be a beneficiary or not has been made to support the point of view of the revenue that Section 164 is attracted. The endeavour of the learned departmental representative has been that if the beneficiary in this case is non-existent, it would mean that the beneficiary is not known within the terms of Section 164. In our opinion, the argument of the learned departmental representative does not stand scrutiny.
Reference to the provisions of the Transfer of Property Act or the Indian Succession Act is not very relevant. The learned departmental representative obviously is carried away by the fact that creation of a trust is also a transfer. But he overlooks that in India so far as private trusts are concerned they are governed by the Indian Trusts Act, 1882. The Indian Trusts Act is a complete code by itself governing private trusts. It has no application to public or private religious or charitable trusts. The Trusts Act provides as to how a trust can be created, who can be the beneficiary, who can be a trustee and so on and so forth. Section 5 of the Trusts Act specifically enjoins that a trust in relation to an immovable property should be in writing and registered. Section 9 of the Trusts Act stipulates as to who can be a beneficiary. An unborn child can be a beneficiary and there is no contravention of Section 9. The only controversy that may arise with regard to the unborn child as if he as the sole beneficiary. The opinion is divided in such a situation. But in a case where there is an existent beneficiary no problem would arise nor is there any doubt about the creation of a trust in favour of an unborn child. That a beneficiary can be an unborn child has been taken for granted in quite a number of cases. At this stage we would like to refer only to one decision and that is that of the Allahabad High Court in the case of Addl. CIT v. Ram Krishna Gupta  117 ITR 218. "There requires to be only one condition in order that a trust in favour of an unborn beneficiary is valid. Section 4 of the Trusts Act lays down that the purpose of the trust should be lawful. In enumerating the purposes it is mentioned that the object of the trust should not be opposed to public policy. In considering the question as to whether a particular object is opposed to public policy or not the rule against perpetuity is applied. This rule is also enjoined in the Transfer of Property Act.
It is only in that limited way that the provisions of the Transfer of Property Act are brought in not because they apply to the trusts but because that rule which is based on public policy is also applied in considering the lawfulness of objects of the trust. Therefore, it is clear that an unborn child can also be a beneficiary subject to the applicability of the rule against perpetuity. There is no other prohibition either in law or otherwise. Therefore, the decisions relied on by the learned departmental representative which deal with gifts and other transfers have no application or relevance. In this view of the matter, it is unnecessary to deal with the decisions cited, viz., CGT v. Maharaja Pateshwari P.D. Singh  98 ITR 480 (All.), CGT v. G.G.Morarji  58 ITR 505 (Bom.) and Addl. CIT v. U.K. Doshi  122 ITR 499 (Guj.).
7. With the above background let us analyse Section 164. Obviously that section has application only in respect of assessment of income where there are trusts. It contains two limbs : (1) Where any income or any part thereof is not receivable on behalf of or for the benefit of any one person ; and (2) Where the individual shares of the persons in whose behalf or for whose benefit such income or part thereof is receivable are indeterminate or unknown.
The first question to be considered here is whether on the facts of this case the first limb would apply or the second limb. Much argument was advanced by the learned departmental representative that the first limb would apply. According to him, 95 per cent of the income is not specifically receivable on behalf of or for the benefit of any one person. We do not think that the first limb would at all apply to the facts of this case. There is no doubt that there are two beneficiaries in this case. One is Smt. Laxmi Devi Sadani entitled to 5 per cent of the income. This beneficiary is known and her share is determinate.
There is another beneficiary named in the trust deed in respect of 95 per cent of the income. Subject to the argument as to whether in respect of 95 per cent of the income there is any indeterminateness or indefiniteness, there is no doubt that the beneficiary is known though unborn at the time of execution of the trust deed. When there is more than one beneficiaries, we are of the view that the second limb only would apply. This aspect was considered by their Lordships of the Bombay High Court in the case of B.P. Mahalaxmiwala v. CIT  26 ITR 177. No doubt their Lordships were considering the provisions of Section 41 of the Indian Income-tax Act, 1922 and the proviso thereto but the language of that provision is in pan materia with Section 164 of the 1961 Act. At page 183 their Lordships formulated the test in applying the said provision as follows : The test really is to be applied according to whether there is one beneficiary or more than one beneficiary and the test in the two cases must be different and the two different tests are laid down in the first proviso...." Later on, in the same page it was observed : ... If the income cannot be predicated to belong to a particular individual the first proviso is satisfied because we are dealing only with a case of a particular individual, or, as the learned Judge again rightly points out, if the beneficiary is more than one then we are concerned with the determinate specified and individual shares and if these shares are not specific or determinate then again the proviso is satisfied....
We may incidentally mention that while deciding the above matter their Lordships of the Bombay High Court specifically dissented from the judgment of the same Court in the case of Yakub Versey Laljee v. CIT  14 ITR 548. We are mentioning this aspect to highlight the point that reliance by the departmental representative on Yakub Versey Laljee's case (supra) is misplaced. We will also refer to this aspect while considering another facet of the argument of the learned departmental representative. We may, however, add that the view taken by the Bombay High Court in the case of Yakub Versey Laljee (supra) has not been taken in any other decision and all other decisions proceeded on the basis that if there is more than one beneficiary the second limb would apply and the two limbs of Section 164 are disjunctive. At this stage it is sufficient for us to point out that the second limb of Section 164 should be considered.
8. This leads us to the consideration of crucial question as to whether in respect of 95 per cent it can be stated that the beneficiary is known and determinate inasmuch as at the time of execution of the deed there is no son in existence, Before we discuss the point a little more elaborately, we would like to point out one aspect here. Section 164 must be understood in the light of the provisions relating to trusts.
If an unborn person can be a beneficiary, as we have already indicated above, the word "person" used in Section 164 being one of the beneficiaries should be understood to include an unborn person as well.
The learned departmental representative has argued that the "person" is defined under Section 2(37) of the Act, and it can only mean an existing person. We are afraid that it is not the correct approach.
Section 2 defines various words and expressions. But the meaning to be ascribed to them is always subject to the context. In our opinion, the word "person" used in Section 164 must be understood in the light of the provisions relating to trusts and not by looking to the definition given under the Income-tax Act or definition under the General Clauses Act.
9. Let us now consider the most important aspect in this case argued by both the parties. The argument of the revenue is that because a person is non-existent at the time of execution of the trust deed the beneficiary is not known. We do not think that the proposition canvassed can be accepted. The beneficiary, according to us, is known and his interest is specified. There is no uncertainty about the beneficiary or his share. But the learned departmental representative pointing out Clause 3(d) states that the interest of the beneficiary is only contingent upon happening of the event mentioned therein. There is no vested interest in favour of a particular beneficiary, the learned departmental representative argued. The learned counsel for the assessee pointed out that what is to be seen is the position as on 31-3-1976 as laid down by various authorities culminating in the decision of the Supreme Court in the Nizam's case (supra). This at once leads us to a careful perusal of the judgment of their Lordships of the Supreme Court. Their Lordships were no doubt considering the provisions of Section 21(4) of the Wealth-tax Act but those provisions are analogous to the provisions under the Income-tax Act and they have full force at page 598 the dictum laid down can be better understood by quoting their Lordships : ...The Wealth-tax Officer has to determine who are the beneficiaries in respect of the remainder on the relevant date and whether their shares are indeterminate or unknown. It is not at all relevant whether the beneficiaries may change in subsequent years before the date of distribution, depending upon contingencies which may come to pass in future. So long as it is possible to say on the relevant valuation date that the beneficiaries are known and their shares are determinate, the possibility that the beneficiaries may change by reason of subsequent events such as birth or death would not take the case out of the ambit of Sub-section (1) of Section 21. It is no answer to the applicability of Sub-section (1) of Section 21 to say that the beneficiaries are indeterminate and unknown because it cannot be predicted who would be the beneficiaries in respect of the remainder on the death of the owner of the life interest. The position has to be seen in the relevant valuation date as if the proceeding life interest had come to an end on that date and if, on that hypothesis, it is possible to determine who precisely would be the beneficiaries and on what determinate shares, Sub-section (1) of Section 21 must apply and it would be a matter of no consequence that the number of beneficiaries may vary in the future either by reason of some beneficiaries ceasing to exist or some new beneficiaries coming into being. Not only does this appear to us to be the correct approach in the application of Sub-section (1) of Section 21, but we find that this has also been the general consensus of judicial opinion in this country in various High Courts during the last about thirty years ...
Again at page 600 while approving the judgment of the Gujarat High Court in the case of Padmavati Jaykrishna Trust's case (supra) their Fordships observed : ...We have no doubt that in order to determine the applicability of Sub-section (1) of Section 21, what has to be seen is whether on the relevant valuation date, it is possible to say with certainty and definiteness as to who would be the beneficiaries and whether their shares would be determinate and specific, if the event on the happening of which the distribution is to take place occurred on that date. If it is, Sub-section (1) of Section 21 would apply; if not, the case will be governed by Sub-section (4) of Section 21....
In that case also the beneficiaries depended on the happening of various contingencies. The beneficiaries were not having any vested right on the date of the execution of the trust. In fact, in the case also there were beneficiaries who are not born. From what their Lordships have enunciated it is clear that so far as the applicability of Section 164 is concerned one has to look to the position as at the end of the accounting year. It is to be found out as to who are the beneficiaries in case the trust is determined on that date. In other words, one has to assume and proceed on the hypothesis that the trust has come to an end. Now if we apply the above principles to the facts of the case the position that emerges is as follows : On 31-3-1976 Smt. Laxmi Devi Sadani was entitled to 5 per cent of the income. In respect of the balance of 95 per cent the beneficiary would be the daughter of Smt. Laxmi Devi Sadani in terms of Clause 3(d) of the trust deed. On 31-3-1975, as indicated earlier, we have to see who are the beneficiaries on the hypothesis that the trust is determined. Admittedly no son was born. If the son is not born the income would go to the heirs of Laxmi Devi Sadani in equal shares.
There is only one heir as on 31-3-1976 and that is the daughter.
There is no doubt that she is known and her share is known and determinate. Mr. Ghosh joins issue here and contends that the question of considering the legal heir of the beneficiary can come only upon the happening of the contingency as mentioned in Clause 3(d). According to the provision of the trust deed the income should be accumulated for a period of 21 years or for a lesser period till a son is born, whichever is earlier. Clause 3(c) is very clear on this point. Clause 3(d) mentions that till after the expiry of the period no son is born or Laxmi Devi Sadani dies during that period, the trust shall be determined in which case alone the legal heirs would be entitled to the income. What Mr. Ghosh, therefore, says is that it is only on the happening of contingencies mentioned above the legal heir would come as beneficiary and not otherwise. We, however, find that this argument cannot be accepted in view of what their Lordships of the Supreme Court laid down in Nizam's case (supra). When once we assume that on 31-3-1976 the trust is determined and then find out who are the beneficiaries the problem gets resolved. There is no scope for going into the happening of contingencies or not. The determinateness and the known character of the beneficiaries to be tested on the basis of certain assumed events. We do not think there is any scope for a different argument after the Supreme Court has considered the matter and decided it. In our view, therefore, the decision of the Supreme Court clearly applies and the beneficiaries are known and determinate. Section 164 has, therefore, no application.
Even assuming that the daughter was not born as on 31-3-1976, the position would be the same as above. On that date on the hypothesis that the trust came to an end the beneficiaries are determinate and known and their shares are also known. Once this is the approach there is no difficulty in accepting the assessee's plea that the assessment cannot be made under Section 164.
10. Mr. Ghosh very much relied on the decision of the Calcutta High Court in the case of Nirmala Bala Sarkar (supra). On a superficial reading of the decision it may appear to support his case but the decision has no application because the facts are quite different.
Secondly, the decision of the Calcutta High Court if it is found to be inconsistent with the dictum laid down by the Supreme Court in Nizam's case (supra) cannot be accepted as laying down the correct position in law. In this connection, we may indicate that their Lordships of the Supreme Court in Nizam's case (supra) referred to the decision of the Gujarat High Court in the case of Padmavati Jaykrishna Trust (supra) and the decision of the Bombay High Court in the case of Trustees of Puttibai R.F. Mula Trust v. CWT  66 ITR 653. These decisions were specifically approved by their Lordships as laying down the correct law. These decisions were referred to by the counsel for the assessee before the Calcutta High Court. Their Lordships, however, distinguished those cases and did not follow them.
11. Reference has also been made to a decision of the Bench of the Tribunal in another case vide IT Appeal Nos. 51, 52 and 53 (Cal.) of 1981 dated 18-6-1981. Apart from the fact that the facts of that case are different, the Bench proceeded with the matter on the basis of the decision of the Bombay High Court in the case of Yakub Versey Laljee (supra) which has not been accepted as laying down the correct law in the subsequent decision of the Bombay High Court in the case of Mahalaxmiwala (supra). Therefore, that decision of the Bench of the Tribunal cannot be brought in support of the contention raised by the revenue in this case.
12. Before we come to a close we would like to point out that there was an amendment to Section 164 with an addition of Explanation 1 to Sub-section (3) of Section 164. By this Explanation it has been brought that the beneficiaries should be determinate and known on the date of the deed creating a trust. When the above amendment has been brought about by the Finance (No. 2) Bill, 1980, the memorandum  123 ITR (St.) 159 explaining provisions records as follows : (iv) Under the existing provisions, the flat rate of 65 per cent is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the court or wakf deed. This provision has been misused in some cases by giving discretion to the trustees to decide the allocation of the income every year and in other ways. In such a situation, the trustees and beneficiaries are able to manipulate the arrangements in such a manner that a discretionary trust is converted into a specific trust whenever it suits them tax-wise. In order to prevent such manipulation, it is proposed to provide that unless the beneficiaries and their shares are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed, the trust will be regarded as a discretionary trust and assessed accordingly." From the above legislative intent it is clear as regards the provisions of Section 164 prior to the aforesaid amendment. Obviously the amendment has been brought about to overcome the decision in the Nizam's case (supra) referred to above. This further strengthens our viewpoint that as Section 164 existed prior to the amendment what is relevant to be seen is the position as at the end of the accounting year.
13. In the result, therefore, the assessee is not liable to be taxed at the maximum rate under Section 164. The appeal filed by the revenue is accordingly dismissed.