1. This is a common order in respect of nine appeals--five by Smt. A.V.Rajani Reddy for the assessment years 1977-78 to 1981-82 and four on behalf of Ku. Shanti Priyadarshini Reddy for the assessment years 1978-79 to 1981-82. These appeals are against common orders of the Commissioner (Appeals).
2. Both the assessees herein are grand-daughters of Shri A.V. Reddy, who had settled some properties on each of them, among others, by separate but identical trusts for the benefit of the assessees, each assessee being the sole beneficiary under the separate trust meant for her. The benefits for the sole beneficiary in both trusts were spelt out in identical terms in Clauses 18, 20 and 21 of the trust deeds as under: 18. The trustee for the time being may, at his discretion, apply the whole or any portion of the income of the trust fund for the maintenance, education or advancement in life of the beneficiary and shall accumulate all the residue by investing the same in the aforesaid manner.
20. On the beneficiary completing the age of 25 years, the trustee shall transfer and make over to the beneficiary all the trust funds and on so transferring this trust deed shall stand cancelled and be of no effect.
21. If the object for which the trust has been created fails and cannot be fulfilled, the trustee for the time being shall be at liberty to apply the trust property to the benefit of the sons of my son.
It is the claim on behalf of the assessee, therefore, that the benefit to the beneficiaries is a matter of discretion on the part of the trustee and that the beneficiaries are entitled to receive the funds representing the amount settled along with the accretions on them reaching the age of 25 years and that, in the event of the beneficiary predeceasing the determination of the trust (i.e., before the beneficiary reaches 25), the benefit goes to son's sons. It is the assessee's case that there was no claim on behalf of the beneficiary for any payment for any of the purposes listed in the trust deed and that there was no receipt at all from the trust during the years under consideration. The benefit is not receivable till the beneficiary reaches 25. The beneficiary has no right to will it or otherwise dispose of it as the trust may fail as regards the assessee in the event of predecease (sic) prior to realisation of her right. Hence, she has no vested right in the same. It is, therefore, claimed that the income, if at all, is assessable in the hands of the trustee and not the beneficiary.
3. Ordinarily, the issue as to whether beneficiary or trustee should be assessed should be decided on the basis of convenience and should, therefore, be academic but for the departmental view that the assessment of the income in the hands of the beneficiary attracts a higher effective rate of tax because of the other incomes of the beneficiaries. In fact, the liability of a trustee on an assessment on him under Section 161 of the Income-tax Act, 1961 ('the Act'), is "in like manner and to the same extent" as on beneficiary and should not ordinarily make any difference especially in the light of clarification by the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust  108 ITR 555 to the effect that "the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly". But the revenue has bound itself by Circular No. F. 45/78/ITJ(5), dated 24-2-1967, reiterated in Circular No. 157 dated 26-12-1974, issued by the CBDT to the view that an assessment on the trustee cannot be at the rate applicable to the beneficiary. The CBDT further directed that, while it is open to the ITO to assess either trustee or beneficiary and not both in respect of such income, the ITO, it was advised, should adopt a course 'more beneficial to revenue'. If he makes the first assessment 'wrongly' (i.e., in the hands where the rate of tax is less), it warned the officer that it will not be open to him to make the assessment in 'right' hands thereafter. It is in view of this line of thinking, "that problems had arisen in this and many other groups of such cases. The ITO wants the income to be assessed in the hands of the beneficiaries 'directly', while the assessee wants the assessments in the hands of the trustees of respective trusts. The controversy regarding 'rate of tax' could not have been solved in this group of cases even if the CBDT had not categorically expressed a view which gives up the ITO's powers to apply the rate applicable to beneficiary in an assessment, as the trustee. It is because, it is the assessee's case that beneficiary had no right to receive any income during the year and had also not actually received any income. If there was no assessment possible on such income in beneficiary's hands, the question of application of the beneficiary's rate would not arise.
4. To revert to the issue before us, the learned Counsel argued that interest of the beneficiaries being discretionary and even otherwise capable of cessation without being an interest in possession in case of deceased prior to 25 (in which case it goes for the benefit of other named beneficiaries), there is no assessment possible. It was argued that the beneficiary's interest is contingent. Neither beneficiary received any income during any of the years, since the trustee had no occasion for exercising discretion during the years. It was also pointed out that the department was content to assess the trustee(s) directly on the income from the trust and that, notwithstanding non-applicability of rules of estoppel and res judicata to tax proceedings, there was no warrant for upsetting the existing practice.
The decision of the Patna High Court in the case of Deoniti Prasad Singh v. CIT  15 ITR 165, and the Punjab and Haryana High Court in CIT v. Dalmia Dadri Cement Ltd.  77 ITR 410 were cited for this proposition. The learned Counsel for the assessee cited a number of other decisions for the proposition that on the facts and in the circumstances of the assessee's case, the beneficiaries had no interest or income during the year and that no assessment was, therefore, possible except in the hands of the trustee. He referred to the decision of the Gujarat High Court in CWT v. Kum. Manna G. Sarabhai  86 ITR 153, where it was held that a provision of benefit on attaining a certain age likely to be divested for the benefit of a survivor in the event of predeceased prior to that date was not a 'vested' but a contingent interest and, therefore, not includible in beneficiary's hands in a direct assessment on the beneficiary for wealth-tax purposes. A Full Bench of the Gujarat High Court in the case of CIT v. Smt. Kamalini Khatau  112 ITR 652 applied this principle for income-tax purposes as well. It was held that the income under a discretionary trust is only assessable in the hands of the representative assessee as if it were the total income of a fictional AOP. It is not assessable in the hands of a beneficiary even if the amount is paid to beneficiary, though, on this point, there is some controversy. It was pointed out in this decision that the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra) had approved the decision of the Gujarat High Court in Smt. Kamalini Khatau's case (supra) [at page 668]. The decision in Smt.
Kamalini Khatau's case (supra) was followed by the Gujarat High Court in Kum. Pallavi S. Mayor v. CIT  127 ITR 701 for capital gains purposes. The Gujarat High Court again in the case of Anarkali Sarabhai v. CIT  138 ITR 437 held, following the law in Kum. Pallavi S.Mayor's case (supra), that the capital gains on shares held by a trust as part of trust fund was not taxable in the assessee's hands, though the assessee was the sole beneficiary of the trust. He, thereupon, contended that all these decisions are squarely in favour of the assessee and that the appeals should be allowed. He also sought to distinguish the decisions relied upon by the revenue as on different facts. The case of Mahendra Rambhai Patel v. CED  63 ITR 645 (SC) rested on the language of estate duty law and also related to a case where there was a vested right to the beneficiary as there was no provision as in this case before us for an alternate beneficiary in the event of failure of the object prior to determination of trust. In the case before the Supreme Court, there was only postponement of possession. Hence, he contended that this decision, on which much reliance was placed by the revenue, cannot support it. He also referred to a common decision of this Tribunal in respect of identically worded trust in this group in WT Appeal Nos. 101 and others (Hyd.) of 1981, dated 28-4-1982, where the interest under consideration was treated as contingent interest.
5. The learned departmental representative, on the other hand, banked his case on Mahendra Rambhai Patel's case (supra), pointing out that it is a Supreme Court decision. He also stated that the decision of this Tribunal holding that the interest under the trust as a 'contingent' interest also suffered from another defect, inasmuch as it allegedly overlooked Section 19 of the Transfer of Property Act, 1882. He also relied upon the decision of the Calcutta High Court in the case of Chhaganlal Baid v. CIT  79 ITR 258, where it was held that the income from a discretionary trust to be accumulated till attainment of majority was includible in father's hand, under Section 16(3)(b) of the Indian Income-tax Act, 1922 ('the 1922 Act'). He claimed that it is open to the beneficiary to enforce the claim during the year if the money is required for the purpose to which it has been settled.
Alternatively, he contended that the trustees will be liable to be assessed at maximum rate as the shares of beneficiaries are claimed to be indeterminate depending on discretion of the trustee.
6. We have carefully considered the records as well as the arguments.
The relevant clauses (identical) reproduced in paragraph 2 supra clearly indicates that the benefit to the sole beneficiary in either of the trust under consideration is discretionary. No doubt, it may be possible to enforce a claim against the trustee on behalf of the beneficiary if such exercise of discretion is wrong and adverse to the beneficiary. But that does not make the trust any the less discretionary. It has also been the consistent case on behalf of the assessees that they had neither laid a claim for such benefit nor received any from the trust during the years under consideration. It is on the basis of this factual position, we have to come to a conclusion.
7. There was a serious and painstaking attempt on the part of the learned departmental representative to persuade us to the view that this Tribunal committed an error in its decision in IT Appeal Nos. 101 and others (Hyd.) of 1981, dated 28-4-1982, holding that the interest of the beneficiary in the trust on the relevant valuation dates was only 'contingent'. It was claimed that the decision overlooked Section 19 of the Transfer of Property Act, and estate duty decision in Mahendra Rambhai Patel's case (supra). We have given our earnest consideration to these arguments and reviewed our earlier decision in the light of these submissions. Section 19, no doubt, clearly stipulates that "A vested interest is not defeated by the death of the transferee before he obtains possession". Explanation thereto also provides that the provision of any alternative beneficiary does not make it a contingent one. Illustration (vi), reproduced below [Illustration (vi) to Section 119 of the Indian Succession Act, 1925] as pointed out by the learned departmental representative, is analogous to the facts of this case: A fund is bequeathed to A, B and C in equal shares to be paid to them on their attaining the age of 18, respectively, with a proviso, that, if all of them die under the age of 18, the legacy shall devolve upon D. On the death of the testator, the shares vested in interest in A, B and C, subject to be divested in case A, B and C shall die under 18, and, upon the death of any of them (except the last survivor) under the age of 18, his vested interest passes, so subject, to his representatives.
It also stands to reason that the Courts, it has been repeatedly pointed out, should approach the task of construction "with a bias in favour of a vested right unless a contrary intention is definite and clear". But what has been overlooked by him is that the provision makes creation of trust a transfer of a vested right in the settled property.
But as far as first named beneficiary in such cases is concerned, it is only contingent because here the case is not mere postponement of possession, but also the possible failure of the trust as far as the first beneficiary is concerned if the beneficiary does not survive the stipulated age of 25. Beneficiary's interest in this case is not heritable, divisible or otherwise transferable or saleable in execution of a decree and hence not a vested right with reference to these well known and well established indicia of what constitutes a contingent or vested right. It is in this context that this Tribunal found, with reference to Section 21 of the Transfer of Property Act, that it is a clear case of vested right. Illustration (ii) under Section 21 [Illustration (iv) to Section 120 of the Indian Succession Act, 1925] reads as under: A sum of money is bequeathed to A 'in case he shall attain the age of 18', or 'when he shall attain the age of 18', A's interest in the legacy is contingent until the condition is fulfilled by his attaining that age.
The above illustration, a simple example of contingent interest, is analogous to the assessees' case. A harmonious reading of both Sections 19 and 21 and interpreting the trust document before us, it is clear that there is transfer of vested right in the settled property by the settlor, but the sole beneficiary's interest in the settled property with accumulations is clearly contingent on his reaching 25 years, except to the extent of benefit actually availed prior to that date.
Again, even the Supreme Court decision in Mahendra Rambhai Patel's case (supra) is not a case of contingent interest because there was mere postponement of benefit to the beneficiary and the interest was otherwise heritable and does not fail as would in this case in the event of predecease prior to the beneficiary reaching 25 years. Hence, this decision also does not help the revenue. Actually, the question whether the interest is vested or contingent itself is not quite germane to an income-tax assessment as it would probably be for estate duty or wealth-tax assessment since for income-tax assessment, we are concerned more with the issue whether any income has accrued to the beneficiary during the year.
8. It is doubtful whether there could be any inference of benefit during the year even if the trust had only 'accumulation' clause. The Supreme Court in the case of CIT v. Manilal Dhanji  44 ITR 876 has observed that in a case where income under trust is accumulated during minority, the income to be aggregated is only the income which "accrues to him or he has beneficial interest income in the relevant year of account". Though the decision was rendered in the context of Section 16(3)(a) and (b) and Section 41 of the 1922 Act, we do find that the trust is a similar one and that the inference on similar facts is that the beneficiary has no income accruing to him nor has he any beneficial interest in the relevant year of account. The same view was repeated by the Supreme Court in Col. H.H. Sir Harinder Singh v. CIT  83 ITR 416, in the same context to the effect that benefit for aggregation should be a benefit in the year of account. Even after the introduction of the words in aggregation provisions to justify inclusion of deferred benefit, the Bombay High Court in the case of Yogindraprasad N, Mafatlal v. CIT  109 ITR 602 considered the aggregation not possible as the interest was only 'contingent' and not vested in the light of Sections 19 and 21. The Gujarat High Court in Addl. CIT v. M.K. Dorhi  122 ITR 499 held that the aggregation was not possible where the income was accumulated beyond minority though there was a possible discretionary benefit (not actually realised) in this case as in the case before us. Though these decisions were in the context of aggregation provisions, they were with reference to the issue whether the beneficiary had income during the year in circumstances which were either similar or even more favourable to the revenue. Apart from these decisions, there are the series of decisions of the Gujarat High Court starting from the decision in Kum. Manna G.Sarabhai's case (supra), where the provisions of the trust, as pointed out by the learned Counsel for the assessee, were not dissimilar. This decision rendered for wealth-tax purposes was followed for income-tax purposes in Smt. Kamalini Khatau's case (supra), where it not only held that the income can be assessed in trustee's hands, but also stated how (at what rate) it should be assessed. This decision further pointed out that [decision in] Smt. Kamalini Khatau's case (supra) [at page 668] was approved by the Supreme Court in the case of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra). The further decisions of the Gujarat High Court in Kum. Pallavi S. Mayor's case (supra) and Anarkali Sarabhai's case (supra) also reiterate the same principle regarding assessability of profit (capital gains) in such cases in the hands of the trustee and not the beneficiary, even where the assessee (in the latter case) was a sole beneficiary of the trust as in this case.
Hence, there is preponderant authority in favour of the view canvassed on behalf of the assessees in this case and it was for this reason that this Tribunal had accepted such a plea in this group of cases in WT Appeal Nos. 101 and others (Hyd.) of 1981, dated 28-4-1982.
9. We have yet to consider one more decision cited by the learned departmental representative, who, with great diligence, has spotted, among the maze of authorities, this decision of the Calcutta High Court in the case of Chhaganlal Baid (supra), where an assessment aggregating income from a discretionary trust in the hands of father under Section 16(3)(b) was held justified. But we are unable to follow the said decision in view of the preponderant authority for the opposite view in a number of other decisions. In fact, there has been considerable development of law after the said decision even as noticed in the preceding paragraphs. The learned authors Kanga and Palkhivala in The Law and Practice on Income-tax, Vol. 1, 7th edn., p. 603, would say that the decision is incorrect. This was also specifically dissented from by the Bombay High Court in the case of H.H. Maharani Shri Vijaykunverba Saheb of Morvi v. CIT  99 ITR 162, 172, on the ground that the said decision is not in conformity with the decisions of the Supreme Court in Manilal Dhanji's case (supra) and Col. H.H. Sir Harinder Singh's case (supra). Even otherwise, the facts in the case before the Calcutta High Court were different from the assessee's case where there is not only accumulation clause but there is also the contingency of the interest failing before it becomes an interest in possession and such interest is also not divisible or transferable inter vivos, or heritable by the legal heirs on death. In any view of the matter, the reliance placed by the learned departmental representative on the decision of the Calcutta High Court cannot help him.
10. We, therefore, hold that in the facts of the assessee's case, the trustee alone is assessable and not the beneficiary inasmuch as the beneficiary has neither received any benefit nor had any right to receive any income during the relevant years and as such no income had accrued to the beneficiary. Hence, no direct assessment is possible in the hands of the beneficiary. In this view, we do not consider it necessary to deal with other arguments of the learned Counsel of the assessees based on past practice regarding alleged choice to be made in the event of an option to assess either trustee or beneficiary. We are of the view that it is settled law that where direct assessment is possible on beneficiary, it can well be made on the beneficiary directly notwithstanding the alternative course available to the revenue by way of an assessment in the hands of the trustee. But, it is our finding that no direct assessment is possible on beneficiary on the facts and in the circumstances of the case before us. Similarly, we do not consider it necessary to deal with the learned departmental representative's argument as to the rate which should apply in the assessment on the trustee as it cannot arise out of an assessment on the beneficiary.
11. In the result, the appeals are allowed and the ITO is directed to exclude the income from the trusts named from the assessments under appeals.