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Premraj Rakesh Gupta Trust Vs. Income-tax Officer. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Nagpur
Decided On
Reported in(1984)10ITD442(Nag.)
AppellantPremraj Rakesh Gupta Trust
Respondentincome-tax Officer.
Excerpt:
.....of the income of the trust in the hands of the settler, as also against the assessment of the trust income at the maximum rate of 65 per cent. while dealing with the first contention, the aac held that the minors were not in receipt of any tangible benefits during the year under consideration, they did not have any vested interest in the income of trust or corpus thereof, reliance placed by the ito on clause 3(a) of the trust deed, by virtue of which, the trustees could allow the beneficiaries to reside from time to time in the property owned or taken on lease by the trust was irrelevant, inasmuch as, the trust had not acquired any house property which was allowed to be used by the beneficiaries during the relevant provisions years, the trust could not be held as a sham transaction.....
Judgment:
Per Shri G. R. Raghavan, Accountant Member - These three appeals by the assessee-trust arise out of the orders of the AAC in his Appeal Nos. 54 TC of 1979-80, 25 TC of 1980-81 and 28-TC of 1981-82 dated 22-10-1982 for the assessment years 1977-78, 1978-79 and 1979-80 confirming the action of the ITO in applying the provisions of section 164 of the Income-tax Act, 1961 (the Act) to the income of the trust and thereby subjecting the same to tax at 65 per cent. The facts in this regard are as follows : 2. The assessee is a trust. The trust was created by indenture dated 12-5-1976 by Shri Ashokkumar Khandelwal. The settler appointed three trustees, namely, Shri Ashokkumar Khandelwal, Smt. Rajshree Khandelwal and Smt. Sharda Bhimwal. A sum of Rs. 1,000 was settled on trust, the objects of which were declared to be the following. The relevant clause being clause 3 of the trust deed, declared as follows : 3. 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), (d) and (e) hereof, from time to time and for a period of 30 years from the date hereof invest and accumulate all and every part of the income out of trust fund by investing the same and the resulting income thereof in or upon any investments hereby authorised which shall thereupon become part of and subject to the trusts effecting the trust funds.

(b) During the periods 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 10 per cent (ten 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. Jagdamba Bai, widow of Late Shyam Sunder Khandelwal, residing at 22, Alipore Road, Calcutta-27 and shall pay over the same to her.

(c) If until expiry of the period referred to in sub-clause (a) above the said Jagdamba Bai dies then in such an event the trust contained in sub-clause (b) shall determine from such date and notwithstanding anything contained in sub-clause (a) the trustees shall hold and stand possessed of the trust fund as mentioned in sub-clause (b) for the benefit of Smt. Anupama Khandelwal (now minor daughter of Shri Raj Nath Khandelwal) for the unexpired period of the said 30 years and shall pay the amount of the trust fund and the balance of the accumulated income to her or to her legal guardian on the expiry of the aforesaid period of 30 years.

(d) If, at any time during the period referred to in sub-clause (a) above, Rakesh Gupta (now minor son of Shri Premraj Gupta) residing at 67, Mall Road, Kamptee Dist. Nagpur, Maharashtra, shall marry a woman, acceptable to the trustees, then the trust contained in sub-clause (b) of this clause shall determine from the date of such marriage 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 wife of said Rakesh Gupta and shall pay the entire trust fund and the balance of the accumulated income to her.

(e) If until the expiry of the period referred to in sub-clause (a) above, the said Rakesh Gupta does not marry a woman, acceptable to the trustees, or during the period referred to in sub-clause (a) above, be dies without having so married, 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 30 years or the date of such death with the period of foresaid 30 years, as the case may be, and the trust fund and the balance of the accumulated income shall be distributed amongst Rajeev and Udayan, both sons of Shri Ashok Khandelwal, residing at 6, Carmichael Road, Bombay-26 in equal shares.

In case of death of any of them, his of their shares shall be paid to his or their legal heirs." The other clauses of the trust deed are not relevant for the purpose of deciding these appeals as they are of the routine nature as found in all private trust deeds.

3. The ITO held with reference to the above clauses that the real beneficiaries were the minor sons of the settler and he, therefore, invoked the provisions of section 64(1) (vii) of the Act and assessed the income of the trust in the hands of the settler. He also made a protective assessment on the trust in the status of AOP and applying the provisions of section 164, he taxed the income of the trust at 65 per cent on the ground that the shares of the beneficiaries were indeterminate after, however, excluding 10 per cent of the total income allotted to Jagdamba Bai by virtue of sub-clause (b) of clause 3 of the trust deed.

4. The assessee filed appeals both against the application of section 64(1) (vii) and inclusion of the income of the trust in the hands of the settler, as also against the assessment of the trust income at the maximum rate of 65 per cent. While dealing with the first contention, the AAC held that the minors were not in receipt of any tangible benefits during the year under consideration, they did not have any vested interest in the income of trust or corpus thereof, reliance placed by the ITO on clause 3(a) of the trust deed, by virtue of which, the trustees could allow the beneficiaries to reside from time to time in the property owned or taken on lease by the trust was irrelevant, inasmuch as, the trust had not acquired any house property which was allowed to be used by the beneficiaries during the relevant provisions years, the trust could not be held as a sham transaction merely on the strength of certain surmises based on probable future action of the trustees and, therefore, relying on CIT v. Manilal Dhanji [1962] 44 ITR 876 (SC) he did not agree with the action of the ITO in invoking the provisions of section 64(1) (vii) and including the income of the trust in the hands of settler. This decision of the AAC should be considered to have become final, inasmuch as, the department has not contested the same.

As regards the major contention that the provisions of section 164 have no application to the facts of the case, the AAC negatived the same and upheld the action of the ITO in subjecting the income of the trust at the maximum rate invoking the provisions of section 164. Before the AAC, it was argued that there was no indefiniteness or uncertainty about the beneficiaries under the trust deed or as regards their shares as would be evident from clause 3 of the trust deed which was the relevant clause. The arguments in this behalf may be summarised as under.

5. Clause 3(a), (b), (c), (d) and (e) of the trust deed specified the beneficiaries under the trust. According to this clause, the trustees were required to accumulate for a period of 30 years the income of the trust arising out to accumulate for a period of 30 years the income of the trust arising out of the corpus or reinvestment of the income. As per sub-clause (b), 10 per cent of the income of the trust for each year during this period was to be held for the benefit of Smt. Jagdamba Bai, a relation of the settler and was to be paid to her from time to time. In the event of death of this lady within the aforesaid period, sub-clause (c) specified that the above specified portion of the income of the trust was to be held and accumulated for the benefit of Smt.

Anupama Khandelwal, a minor daughter of Raj Nath Khandelwal, a relation of the settler, for the unexpired period of the said 30 years and paid to her or her legal guardian on the expiry of the said period.

Regarding 90 per cent of the income of the trust and the corpus thereof, sub-clause (d) provided that if Shri Rakesh Gupta, a minor son of a relative of the settler, married a woman acceptable to the trustees at any time within the said period of 30 years, the accumulated income of the trust and the corpus would be made over to the wife of Shri Rakesh Gupta from the date of the marriage. Sub-clause (e) provided that if Shri Rakesh Gupta did not marry a woman acceptable to the trustees until the expiry of the period of 30 years or he died without having so married during that period, then in such an event, the trust would be determined, respectively either on the date of the expiry of the aforesaid period of 30 years or the date of such death within the period of 30 years, as the case may be, and the accumulated income and the corpus would be distributed amongst the minor sons of the settlers, Rajeev and Udayan, in equal shares or to their legal heirs in the event of their death. On the basis of the above elucidation of the relevant clauses of the trust deed, it was contended that the beneficiaries of the trust were clearly indicated in the trust deed and there was not a single contingency which was not provided for in the trust deed. It was submitted that the trustees had no discretion to change the beneficiaries during the relevant previous years and the trust funds were to be distributed If Rakesh Gupta died at any time during the previous year. Attention was drawn to clause 3(e) of the trust deed, which provided that the trust would determine on the death of Rakesh Gupta and it further provided that in the event of such a happening, the trust fund and the balance of the accumulated income should be distributed amongst the minor sons of the settler in equal shares. It was, therefore, submitted that there was certainty and definiteness as to who would be the beneficiaries and in what shares, if the event on the happening of which the distribution was to take place. Reliance was placed on the decision of the Tribunal, Special Bench in ITO v. C. L. Sadani Family Trust [1982] 1 ITD 223 (Cal.) and also, that of the Madras Bench A of the Tribunal in 8 TTJ 369.

6. The AAC agreed that the facts in the decisions cited were identical to those of the case under consideration. He, however, differed from the view taken by the Special Bench of the Tribunal, holding that the Bench went beyond the scope of the decision of the Supreme Court in CWT v. Trustees of H. E. H. Nizams Family (Remainder Wealth) Trust [1977] 108 ITR 555. He, accordingly, confirmed the ITOs order applying the provisions of section 164.

7. Being aggrieved with the same, the trust has filed these appeals before us. While summarising the arguments taken before the AAC, it was submitted that the test laid down by the Supreme Court in the case of Trustees of H. E. H. Nizams Family (Remainder Wealth) Trust (supra) for determining whether the trust is indeterminate, should be followed, to see whether on the relevant 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 specified, if the event on the happening of which the distribution is to take place occurred on that date. It was further submitted that the Supreme Court laid down that the event on the happening on which the distribution was to take place has to be presumed and on that hypothesis, it has to be seen, whether the shares of the beneficiaries would be determinate in the event of distribution. It was also submitted, that the trust deed in the case before the Special Bench in C. L. Sadani Family Trusts (supra) was identical as regards the relevant clauses and while interpreting the same on the basis of the criteria laid down by the Supreme Court in Trustees of H. E. H. Nizams Family (Remainder Wealth) Trusts case (supra), the Tribunal held, that the beneficiaries were known and determinate and, therefore, section 164 had no application. It was, therefore, argued that there being no difference between the facts of the case of the Special Bench and those of the case under consideration, the AAC was bound to follow the same and in not doing so, he has flouting judicial precedent of a higher Tribunal.

Accordingly, it was finally submitted that following the Special Benchs decision, it should be held, that the provisions of section 164 have no application to the trust under consideration. The departmental representative relied on the order of the AAC.8. We have considered the submissions on either side and also the authorities cited in this behalf. A comparative study of the facts in the assessees case and those in the case of C. L. Sadani Family Trust (supra) decided by the Special Bench reveals the identical nature of the same in all relevant respects. In the case of C. L. Sadani Family Trust (supra), the trust was for 21 years, whereas in the assessees case, it is for 30 years. In the case of C. L. Sadani Family Trust (supra), 5 per cent of the income from the trust fund was to be paid to one Smt. Laxmi Devi, wife of the settler, every year, the balance of the income and corpus being held for the benefit of the unborn son of Smt. Laxmi Devi on whose birth, the trust would be determined, resulting in the accumulated income and corpus being paid to him or his legal guardian on the expiry of the period of 21 years. If until the expiry of such period Smt. Laxmi Devi does not have a son or she dies without having a son, then in such an event the trust would be determined, respectively, from the date of expiry of the aforesaid period of 21 years or the date of death within such period, as the case may be, and the balance of the accumulated income shall be distributed among the legal heirs of Smt. Laxmi Devi. In the present case, the trust was for a period of 30 years. 10 per cent of the income of the trust was to be paid to Jagdamba Bai during each year and if she were to die, the trust fund relating to the 10 per cent was to be held for the benefit of Smt. Anupama Khandelwal, minor daughter of a relative, for the unexpired period and paid to her or her legal guardian on the expiry of the said period. Clause 3(d) provides that the trust relating to the balance of 90 per cent of the income and corpus of the trust fund shall be determined in the event of one Rakesh Gupta marrying a woman acceptable to the trustees and in such an event, the trustees are enjoined to make over the balance of the accumulated income of the trust as well as the corpus to the wife of Rakesh Gupta immediately thereafter. This clause is akin to sub-clause (c) of Sadani Trust.

Sub-clause (e) provides that in the event of Rakesh Gupta, not marrying a woman acceptable to the trustees during the period of 30 years or until the expiry thereof, or he dies without having so married during such period, then in such an event, the trust would be determined, either from the date of expiry of the period of 30 years, or the date of such death within such period, as the case may be, and in such an event, the balance of the accumulated income should be distributed among Rajeev and Udayan, both sons of the settler, in equal shares or to their legal heirs, as the case may be. This clause is akin to sub-clause (d) of the Sadani Trust, which provided for the payment of the trust funds to the legal heirs of Smt. Laxmi Devi in the event of her dying without a son. On the above facts, the Special Bench of the Tribunal held in para 9 of their order as under : "9. Let us now consider the most important aspect in this case argued by both the parties. The argument of the revenue in 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 Nizams 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 it, 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 Trusts case (supra) their Lordships 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 Amt. 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 Nizams 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 determinations 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 assessees plea that the assessment cannot be made under section 164'." (p. 229) While coming to the above conclusion, they relied on the decision of the Supreme Court in Trustees of H. E. H. Nizams Family (Remainder Wealth) Trust case (supra), which laid down the following proposition while interpreting section 21 of the Wealth-tax Act, 1957 corresponding to section 164 of the 1961 Act : "... The position has to be seen on the relevant valuation date as if the preceding 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." (p. 557) In that case also, the beneficiaries depended on the happening of various contingencies. They were not having vested rights on the date of execution of the trust. There were also beneficiaries who were not born. As held by the Tribunal, in the Special Benchs decision in C. L.

Sadani Family Trusts case (supra) 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." If the above principles are applied to the facts of the present case, the following position emerges : Jagdamba Bai was entitled to 10 per cent of the income of the trust in each of the years under consideration. In respect of the balance of 90 per cent, the beneficiaries would be Rajeev and Udayan, sons of Ashokkumar Khandelwal, in equal shares. We have to see who were the beneficiaries on the hypothesis that the trust is determined.

Admittedly, in this case Rakesh Gupta had not married. Sub-clause (e) also provides that in the event of his death within the stipulated period, the trust shall be determined and the accumulated income shall be distributed to the minor sons of the settler in equal shares or to his legal heirs. The possibility of the death of Rakesh Gupta or his marrying a person who is person-in-grata to the trustees during the stipulated period would also determine the trust, leading to the payment of the income from the trust to the settlers minor children in equal shares. Their number is definite and their shares are also specified. As a matter of fact, the minor sons of the settler were already born at the time of the execution of the trust deed. The Special Bench in their above-mentioned order have also mentioned that even if the beneficiary was not born, the position would not be different, as on the basis of the hypothesis, that the trust came to an end, the beneficiaries are determinate and known and their shares are also known. In the present case, there is no need to make this further hypothesis, inasmuch as, the settlers sons were born at the time when the trust deed was executed. Since the facts in the present case are absolutely in pari materia with those of C. L. Sadani Family Trust case (supra), we respectfully following the decision of the Special bench, hold that the provisions of section 164 have no application to the facts of this case. The Special Bench has also discussed the legal position after the amendment with effect from 1980-81 assessment year and held, that this fact further strengthened the viewpoint that, as section 164 existed prior to the amendment, what was relevant to be seen was the position at the end of the accounting year.


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