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First Income-tax Officer Vs. Surajba Patel Trust - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)13ITD447(Mum.)
AppellantFirst Income-tax Officer
RespondentSurajba Patel Trust
Excerpt:
.....have equal shares in the income and corpus of the trust. as per clauses 4(b) and (c) of the trust deed which are reproduced by the ito in his assessment order, the net income of the trust was to be divided in three equal parts and be applied for the benefit of the three beneficiaries and this was to operate till kumari bharati completes the age of 35 years. after the trust worked in this manner for about 12 years the beneficiaries and the trustees have entered into three different agreements: by these deeds of covenant, the trustees decided to grant annuities of rs. 5,000 per month to each of the three beneficiaries and by the above deeds of assignment, the three beneficiaries have assigned their rights and shares in the residuary income after the payment of the aforesaid.....
Judgment:
1. These two appeals field by the department relate to the same assessee and so they are heard together and disposed of by this common order for the sake of convenience. The assessment years involved are 1977-78 and 1978-79 for which the previous years ended on 31-3-1977 and 31-3-1978.

2. The assessee is a trust assessed under the status of an AOP. The only ground taken in these appeals states that the Commissioner (Appeals) erred in directing that only an amount of Rs. 1,80,000 should be considered as the income of the three beneficiaries of the assessee-trust to be shared equally amongst themselves and that the balance income of the assessee-trust should be allocated to Jhaverbhai Patel Charitable Trust No. II.3. The facts of the case leading to the dispute in these appeals can be briefly stated as follows: The assessee-trust was created by a deed of the trust dated 27-4-1964 by Mrs. Surajben Javerbhai Patel for the benefit of her three grand-daughters, Kumari Nina, Kumari Varsha and Kumari Bharati, by setting aside a sum of Rs. 1 lakh. The three beneficiaries have equal shares in the income and corpus of the trust. As per Clauses 4(b) and (c) of the trust deed which are reproduced by the ITO in his assessment order, the net income of the trust was to be divided in three equal parts and be applied for the benefit of the three beneficiaries and this was to operate till Kumari Bharati completes the age of 35 years. After the trust worked in this manner for about 12 years the beneficiaries and the trustees have entered into three different agreements: By these deeds of covenant, the trustees decided to grant annuities of Rs. 5,000 per month to each of the three beneficiaries and by the above deeds of assignment, the three beneficiaries have assigned their rights and shares in the residuary income after the payment of the aforesaid annuities to Jhaverbhai Patel Charitable Trust No. II. Accordingly, it was contended that only an amount of Rs. 1,80,000 should be apportioned amongst the three beneficiaries and the balance of income to the Jhaverbhai Patel Charitable Trust No. II. On the same date, i.e., on 29-3-1976, the three beneficiaries by three separate deeds of gift gifted away their interest in the corpus of the trust property of the assessee-trust. The ITO did not agree. According to him, this arrangement was made to reduce the incidence of Income-tax and wealth-tax on the beneficiaries. The ITO further argued that the arrangement by way of the above-mentioned three agreements has exceeded the provisions of Clauses 4(b) and (c) whereby the trustees were directed to divide the net income equally amongst the beneficiaries.

Under Section 144B of the Income-tax Act, 1961 ('the Act') also the IAC, before whom also the assessee had raised objections, agreed with the ITO that he did not accept that the trustees or the beneficiaries can among themselves come to an agreement to give to the beneficiaries any other thing in lieu of the benefits laid down in the trust deed. He argued that the deeds of covenant resulted in the beneficiaries drawing more benefit than contemplated under the trust deed. For this purpose, he has pointed out the figures of income for the assessment year 1978-79. The IAC also referred to clause 2 of the deed of covenant dated 15-3-1976 and argued that the beneficiaries are also to participate to the extent of one-third in the balance of the net income of the family trust after meeting the liability of the annuities payable to the three beneficiaries. Thus, the income first accrues to the beneficiaries and thereafter applied for charitable purposes and, hence, it is a clear case of application of income and not of an overriding title in favour of the Jhaverbhai Patel Charitable Trust No.II. The IAC distinguished the case of CIT v. Smt. Kastwbai Walchand Trust [1967] 63 ITR 656 (SC) on the ground that in that case by a subsequent deed, the beneficiary surrendered her life interest and thus, the beneficial interest shifted towards charitable purposes.

According to the IAC, there was no stipulation in the trust deed of the assessee and such an effect is sought to be created only by the deeds of assignment executed, subsequently. Thus, according to the IAC, there was nothing in the original trust deed which could have been assigned subsequently. The IAC also argued that the fact that the assessee claimed the payment made to the charitable trust for relief under Section 80G of the Act goes to show that the overriding title was not initially intended but it was only an afterthought.

4. The assessee appealed to the Commissioner (Appeals) and contended that the income of the assessee-trust so far as it exceeds the sum of Rs. 1,80,000 no longer belonged to the original three beneficiaries, but they were effectively transferred to the Jhaverbhai Patel Charitable Trust No. II, which, in effect, became a fourth beneficiary of the trust. It was pointed out that by the deed of assignment, the three beneficiaries diverted the right to receive a share in the income in excess of Rs. 1,80,000 to the aforesaid charitable trust before they were received by them as income. Even their right in the corpus which produced the said income, was also transferred by the separate deeds of gift. Regarding the power of the beneficiaries to do so, reliance was placed on Section 11 and Section 58 of the Indian Trusts Act, 1882, which read as follows: The trustee is bound to fulfil the purpose of the trust, and to obey the directions of the author of the trust given at the time of its creation, except as modified by the consent of all the beneficiaries being competent to contract.

Where the beneficiary is incompetent to contract, his consent may, for the purposes of this section, be given by a principal Civil Court of original jurisdiction.

Nothing in this section shall be deemed to require a trustee to obey any direction when to do so would be impracticable, illegal or manifestly injurious to the beneficiaries.

Explanation: Unless a contrary intention be expressed, the purpose of a trust for the payment of debts shall be deemed to be (a) to pay only the debts of the author of the trust existing and recoverable at the date of the instrument of trust, or, when such instrument is a will, at the date of his death, and (b) in the case of debts not bearing interest, to make such payment without interest.

58. The beneficiary, if competent to contract, may transfer his interest, but subject to the law for the time being in force as to the circumstances and extent in and to which he may dispose of such interest: Provided that when property is transferred or bequeathed for the benefit of a married woman, so that she shall not have power to deprive herself of her beneficial interest, nothing in this section shall authorise her to transfer such interest during her marriage.

In other words, the argument was that the interests of the beneficiaries in the balance of the income of the assessee-trust were effectively diverted at source before they became their income and so they no longer belonged to them. Reliance was placed on the case of Smt. Kasturbai Walchand Trust (supra) for the proposition that a beneficiary can surrender her interest under the trust in terms of Section 58 and that such a transfer is valid; and that if such a valid transfer takes place, the income so transferred could no longer be assessed in the hands of the beneficiary. It was further urged before the Commissioner (Appeals) that the facts of this case were similar to the case of Smt. Kasturbai Walchand Trust (supra) and the distinction drawn by the assessing officer was without a distinction, because there was no material difference between surrendering the interest of the beneficiaries as happened in the case of Smt. Kasturbai Walchand Trust (supra) and the gifting away by a deed of the same interest as happened in the instant case. The Commissioner (Appeals) agreed with the contentions of the assessee and directed that the income in excess of Rs. 1,80,000 should not be apportioned to the three original beneficiaries, but should be allocated to the aforesaid charitable trust in favour of which the income stood effectively diverted prior to its becoming the income of the original beneficiaries.

5. Aggrieved by the above order of the Commissioner (Appeals) the department is in appeal before us. Shri P.L. Roongta, the learned representative for the department, urged before us that the Commissioner (Appeals) erred in his decision. According to him, the different deeds executed by the beneficiaries were a part of a tax planning in order to reduce the tax liability and so they should have been ignored. He explained that there was no dispute regarding the sum of Rs. 1,80,000 which is admitted by the assessee to be allocable to the three original beneficiaries. The dispute in these appeals relates to the excess, if any, of income of the assessee-trust over and above the aforesaid sum of Rs. 1,80,000 which had to be paid to the three beneficiaries. According to him, the beneficiaries were not empowered to part with any portion of their rights under the original trust deed, because no such power was given to them under the original trust deed.

Ha contended that this fact distinguished the present case from the case of Smt. Kasturbai Walchand Trust (supra). In this connection, he referred to the direction of the IAC under Section 144B and pointed out that the corpus, from which the income arose, was not transferred by the same deed to the said transferee and so the income should continue to be regarded as belonging to the transferor, which in this case, are the beneficiaries. He referred to the decision in the cases of CIT v.Sitaldas Tirathdas [1961] 41 ITR 367 (SC) and Provat Kumar Mitter v.CIT [1961] 41 ITR 624 (SC) in this connection. The proposition canvassed by him was that, as held in these cases, the beneficiaries in the case before us merely applied their income towards charity after it accrued to them as their income. Hence, he urged that the decision of the Commissioner (Appeals) deserved to be reversed and those of the ITO deserved to be restored.

6. Shri S.E. Dastur, the learned representative for the assessee, on the other hand, supported the order of the Commissioner (Appeals). He pointed out that the original trust was created in 1964 when the three beneficiaries were minor unmarried girls so that the proviso to Section 58 did not apply to the facts of this case. He pointed out to the observations at page 660 of the Report in the case of Sitaldas Tirathdas (supra) wherein their Lordships of the Supreme Court have held that the surrender by the beneficiary of her rights under the trust was valid under the law and it extinguished the right of the beneficiary after the surrender. He pointed out that in the case of Sitaldas Tirathdas (supra), the assessee was required to pay maintenance to his wife out of his income which fact clearly showed that the payment of maintenance was an application of income after it accrued as such to the assessee. The facts of the present case are different, because on the date of assignment the right to receive income has not yet arisen and that stayed still in the womb of the future. He urged that the case of Sitaldas Tirathdas (supra) actually supports the case of the assessee. Regarding the case of Provat Kumar Mitter (supra) he pointed out that under the Companies Act, 1956, the company was obliged to pay the dividend only to the registered shareholder, but to none else. The shareholder assigned the dividend income to another party, but there was no change in the shareholders' register of the company. That was a case of transfer of the income without the transfer of the asset, which produced that income. Hence, the facts of that case were squarely hit by Section 16(1)(c) of the Indian Income-tax Act, 1922 corresponding to Section 60 of the 1961 Act. The facts of the present case are different. Here, there is no restriction for transferring the rights under the trust by the beneficiaries to any party they like subject to Section 58 as held by the Supreme Court in the case of Smt. Kasturbai Walchand Trust (supra).

Apart from the above, the beneficiaries have also transferred their interest in the corpus of the trust by separate deeds of assignment of the same date though not to the same charitable trust. As the corpus producing the income under consideration has also been transferred, the facts of the case are out of Section 60. In this view of the matter, he urged that the order of the Commissioner (Appeals) deserved to be upheld.7. We have considered the contentions of both the parties as well as the facts on record. In our opinion, the contentions raised for the assessee carry force. As has been held in the case of Smt. Kasturbai Walchand Trust (supra), the beneficiaries were indeed empowered by Section 58 to transfer their interest. The proviso to Section 58 does not apply to the facts of this case, because none of the beneficiaries was a married woman when the settlor created the trust in their favour.

There is indeed no material to distinguish between the surrender of the right as in the case of Smt. Kasturbai Walchand Trust (supra) and the assignments in the present case, because in both the cases the beneficiaries, in effect, gave away their rights. After they did it effectively in the eye of law, which we, on the authority of Smt.

Kasturbai Walchand Trust's case (supra), hold that they have done, the income so diverted could no longer be assessed as their income. This is not a case of application of income, because the amounts assigned did not go out of the income of the beneficiaries unlike the case of Sitaldas Tirathdas (supra). Nor are the facts of the case hit by Section 60 because, unlike the case of Provat Kumar Mitter (supra) even the corpus, producing the income under consideration, has been transferred by the beneficiaries. Thus, we find that none of the reasons given in support of the case of the revenue stands a scrutiny and the decision of the Commissioner (Appeals) is based on sound reasoning and good authority. We, therefore, uphold the order of the Commissioner (Appeals).


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