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Commissioner of Wealth-tax, Gujarat Ii Vs. Arvind Narottam - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberWealth-tax Reference No. 16 of 1971
Judge
Reported in[1976]102ITR232(Guj)
ActsIncome Tax Act, 1961 - Sections 2(1B); Wealth Tax Act, 1957 - Sections 3, 21, 21(1), 21(2), 21(4) and 41(1)
AppellantCommissioner of Wealth-tax, Gujarat Ii
RespondentArvind Narottam
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate J.P. Shah, Adv.
Cases ReferredChintamani Ghosh Trust v. Commissioner of Wealth
Excerpt:
direct taxation - net wealth - section 2 (1b) of income tax act, 1961 and sections 3, 21 and 41 of wealth tax act, 1957 - assessment orders by which assessee assessed for entire value of assets held by trustees of trusts created by his father challenged - assessment made on ground that he was sole beneficiary of all assets on valuation date - at valuation date assessee had no right or interest in income of trust property except to extent of minimum annual payment to be made by trustees - as regards corpus neither assessee nor his family or accumulation beneficiaries can claim any right in same - cannot said that because assessee was sole beneficiary at relevant date value of entire estate of trust could be included in net wealth of assessee - held, only capitalised value of interest of.....b.k. mehta, j.1. this reference arises out of the assessment orders for assessment years 1962-63, 1963-64 and 1964-65, passed by the wealth-tax officer, group circle ii (1), ahmedabad, assessing the assessee-respondent herein for the entire value of the assets held by the trustees under three discretionary trusts and created by the father of the assessee on the ground that he was the sole beneficiary at the valuation date of the aforesaid respective assessment years. the wealth-tax officer has passed the said orders under section 21(2) of the wealth-tax act for the said respective assessment years on february 16, 1963, july 25, 1964, and march 5, 1965, respectively, including rs. 24,15,641, rs. 19,64,352 and rs. 19,25,655, being the valuation of the entire trust estate in the net wealth.....
Judgment:

B.K. Mehta, J.

1. This reference arises out of the assessment orders for assessment years 1962-63, 1963-64 and 1964-65, passed by the Wealth-tax Officer, Group Circle II (1), Ahmedabad, assessing the assessee-respondent herein for the entire value of the assets held by the trustees under three discretionary trusts and created by the father of the assessee on the ground that he was the sole beneficiary at the valuation date of the aforesaid respective assessment years. The Wealth-tax Officer has passed the said orders under section 21(2) of the Wealth-tax Act for the said respective assessment years on February 16, 1963, July 25, 1964, and March 5, 1965, respectively, including Rs. 24,15,641, Rs. 19,64,352 and Rs. 19,25,655, being the valuation of the entire trust estate in the net wealth of the respondent-assessee. These orders, it is so claimed by the revenue, were made by the Wealth-tax Officer in the nature of protective assessment, though the assets of the three discretionary trusts were assessed to wealth-tax in the hands of the trustees as association of persons under section 21(4) of the said Act. The Appellate Assistant Commissioner, however, in appeals preferred by the respondent-assessee, was of the opinion that the respondent-assessee could be assessed only for the minimum amounts payable under the said three discretionary trusts to him for his maintenance, namely, Rs. 250, Rs. 150 and Rs. 250, respectively, per year and he, therefore, included the capitalised value thereof in the net wealth of the assessee. In appeal by the Wealth-tax Officer before the Appellate Tribunal, the Tribunal, having regard to the fact that the interest of the assessee in the assets held by the trustees on his behalf was indeterminate and unknown, held that only the capitalised value of the minimum amounts payable as aforesaid was liable to be included in his net wealth. The Tribunal, in that view of the matter, did not consider the grievance of the assessee that the Wealth-tax Officer was incompetent to assess the same assets twice. It is, therefore, at the instance of the Commissioner that the following question has been referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the finding that it is only the capitalised value of the interest of the assessee that has to be included in the net wealth of the assessee is in law justified ?'

At the time of hearing of this reference, the following two contentions were urged by the learned advocate on behalf of the revenue :

1. Having regard to the fact that the assessee was the sole beneficiary out of the class of beneficiaries at the valuation date of the respective assessment years, his share is both definite and known in the corpus as well as income of the trust assets held by the trustees on his behalf and the value of the entire assets was liable to be included in his net wealth.

2. In any case, the assessee having contingent interest in the corpus of the trust fund, the Tribunal was in error in rejecting the contention of the revenue that the Wealth-tax Officer was competent to assess the entire assets in the hands of the assessee under section 21(2).

2. On behalf of the respondent-assessee it was urged before us that on the true construction of the relevant clauses of the trust deeds which are in effect and substance discretionary trusts, the assessee had no interest other than that of minimum payments as aforesaid in the income and a fortiori in the corpus of the trust assets and the Tribunal was, therefore, justified in including merely the capitalised value of the said payment in the net wealth of the assessee.

3. The answer to the question which has been referred to us, therefore, depends on the interpretation of the three trust deeds with which we are concerned in this reference. One Shri Narottam Lalbhai who happened to be the father of the respondent-assessee executed three deeds of trust for the benefit of the assessee, his wife and his children and grand-children, one dated 19th March, 1955, in respect of Arvind Narottam Trust, second dated 9th April, 1955, in respect of Arvind Family Trust and the third dated 18th March, 1961, in respect of Arvind Kalyan Trust. All the three trust deeds are in identical terms except in respect of the minimum amounts payable to the beneficiaries out of the income of each year. The minimum annual payments to be made under the said trust deeds to the respondent-assessee by way of maintenance were Rs. 250, Rs. 150 and Rs. 250, respectively. By the said trust deeds, the assessee's father settled certain shares on the trust set out in clauses 7 and 8 of the deeds which run as follows :

'7. (a) Whatever income by way of interest or otherwise is received each year by the trustees from the trust fund should be first applied in meeting with the expenses of the management of the trust and the payment of taxes thereof. For a period of 18 years hereafter, the trustees may pay to Arvind or if Arvind gets married during the period to Arvind, his wife and children or to one or more of these persons, such portion of the net income remaining thereafter as the trustees deem fit. However, the trustees shall pay to Arvind and his wife at least Rs. 150 every year. After such distribution, if there remains any surplus from the income of any year, it shall be added to the corpus of the fund. If in any year the net income accruing to the fund is less than Rs. 300 the whole amount should be paid to Arvind and if Arvind gets married during the period to Arvind and his wife in equal shares. If Arvind expires during the period of 18 years hereafter or if Arvind gets married du ring the period and both Arvind and his wife expire, the whole of the net income of the trust fund should be added to the corpus for a period of 18 years hereafter.

(b) Whatever may be the corpus and the accumulated balance remaining undistributed out of the income of each year, shall be paid (as capital) at the end of 18 years hereafter to Arvind, his wife and his children or survivor or such of them in such proportion as the trustees deem fir. If the trustees are not able to decide upon the persons to whom or the proportion in which the said corpus and accumulated balance of income is be distributed or it is not possible legally to give effect to the decision of trustees or it is illegal to do so, then the proportion in which the distribution will be made will be an equal share for each of the persons or survivors comprising of Arvind, his wife and his children. If none of the said persons are alive at the time of distribution then the corpus and the balance of income will be given over by the trustees on such conditions as they deem fit as donation to the Gujarat University or any other educational institution or an institution giving medical aid or attending to the health of public in general.

8. If the trustees so think fit the trustees are hereby authorised to distribute as capital even before the expiry of 18 years whatever property and income is at the particular time accumulated in the trust fund to Arvind, his wife and his children or survivor or such of them in such proportion as the trustees deem fit. If the trustees are not able to decide upon the persons to whom or the proportion in which the said corpus and accumulated balance of income is to be distributed or it is not possible legally to give effect to the decision of trustees or it is illegal to do so, then the proportion in which the distribution will be made will be an equal share for each of the persons or survivors comprising of Arvind, his wife and his children. If none of the said persons are alive, at the time of distribution then the distribution will be made to Niranjan, his wife and his children or survivors, all or such of them and in such proportion as the trustees deem fit. If none of the said persons are alive at the time of distribution, then the corpus and the balance of income will be given over by the trustees on such conditions as they deem fit as donation to the Gujarat University or any other educational institution or an institution giving medical aid or attending to the health of public in general. But if Arvind and his wife are the trustees at that time then they have no right to give vote in the above matter. But if the other trustees unanimously agree to allow them to vote then they can.'

4. It is common ground that only the minimum payment as indicated in paragraph 7 of the respective trust deeds was to be made to the respondent-assessee, who was a bachelor at all the relevant times of these assessment years. It is also an admitted position that the trustees have complete discretion regarding the remaining income of the trust assets for purposes of accumulation and also in respect of distribution of corpus at the end of 30 years or at an earlier period as may be advanced by the trustees within their discretion as empowered under clause 8 of the said deeds.

5. The contention of the revenue is that the respondent-assessee was the sole beneficiary in the relevant assessment years and, therefore, what the court was to consider under the Wealth-tax Act, while determining what assets should be included in the net wealth for purposes of assessment, is the state of affairs at the crucial date known as valuation date which is the last day of the previous year relevant to the assessment year. It is further contended on behalf of the revenue that if the state of affairs at the valuation date of the assessment year was the relevant consideration for purposes of assessing the wealth of an assessee, it cannot be gainsaid that the respondent-assessee was entitled to the entire interest and the corpus of the trust fund. In support of this contention reliance was placed on two decisions of the Bombay High Court in Commissioner of Wealth-tax v. Trustees of Mrs. Hansabhai Tribhuwandas Trust, and Trustees of Putlibai R. F. Mulla Trust v. Commissioner of Wealth-tax.

6. The question, therefore, which arises for our consideration is whether on the true construction and effect of the relevant clauses of the true construction and effect of the relevant clauses of the trust deeds, it can be said that qua these trust assets held by trustees on behalf of the respondent-assessee, the shares of the beneficiaries were definite and known. If the shares in such assets are indeterminate and unknown, the assets in the hands of the trustees are liable to be assessed as if the trustees are individuals under section 21(4) of the Wealth-tax Act. It is only if the shares of beneficiaries in the trust assets held by the trustees on their behalf are either determinate or known, that the Wealth-tax Officer can proceed either against the trustees or against the assessee under section 21(1) or (2) of the said Act. In Padmavati Jaykrishna Trust v. Commissioner of Wealth-tax, the Division Bench constisting of Shelat C. J. and Bhagwati J. (as they then were) was concerned with a trust deed of one Mahalaxmibai, the widow of Harivallabhdas Kalidas, whereunder the income from the trust properties was made payable to the daughter-in-law of the settlor for life and thereafter the corpus was to be divided and distributed in equal shares amongst the male child or children of the settlor's sons. During the accounting year relevant to assessment year 1958-59, the settlor's son had two sons. The Wealth-tax Officer assessed the trustee under section 21(4) on the ground that there was a possibility of the settlor's son having more sons in future and, therefore, the shares of the beneficiaries in the assets were indeterminate and unknown. On a reference to the Gujarat High Court, the Division Bench held that as on the relevant date, namely December 31, 1957, the number of beneficiaries was definite and their shares were equal, there was no question of their shares being indeterminate or unknown and, consequently the provisions of sub-section (4) of section 21 would not apply, as mere possibility of a variation in the constitution of the family in future was immaterial and, therefore, the assessment should have been made under section 21(1). Shelat C. J. (as he then was) considered the relevant provisions of the Wealth-tax Act and particularly section 21 of the said Act. Speaking for the court, he observed :

'But it is clear that if the Wealth-tax Officer has to assess either a trustee or a beneficiary under sub-section (1) or sub-section (2), as the case may be, he cannot do so unless the share of such a beneficiary is known and is definite, for even if the trustee were to be assessed he can be assessed in the like manner and to the same extent as the beneficiary....... If the shares of the beneficiaries in the assets held by a trustee or trustees are not known or determinate at the relevant date, the provisions of sub-section (1) or, where the Wealth-tax Officer decides to assess the beneficiaries directly under sub-section (2), the provisions of sub-section (2) cannot be worked out and complied with, for there would be no basis, i.e. the shares of the beneficiaries on which he can compute the value and arrive at the quantum of tax. In such a case, since he cannot act under these two sub-sections, the legislature has permitted him to assess under sub-section (4). In such a case, i.e. where the shares of the beneficiaries on whose behalf the assets liable to tax under the Act are held are either indeterminate or unknown, the tax can be levied on a trustee or trustees as if the beneficiaries on whose behalf the assets are held were an individual for the purposes of the Act. If the shares under the instrument of trust are not determinate or known, it means that the settlor has not determined or specified the shares. The result in such a case would be that the Wealth-tax Officer cannot determine the share of each individual beneficiary and the trustee cannot be assessed in the like manner and to the extent that such individual beneficiary would be liable to be assessed.'

7. It was, therefore, urged that merely because clauses 7 (a) and 7 (b) of the trust deeds in the present reference empower the trustees to pay whatever income they like to the respondent-assessee or his wife and children in case of his marriage and also empower them at the end of 30 years or at an earlier date as advanced by them to divide the corpus of the trust assets amongst the assessee, his wife and children, if there are any, in the proportion and in the manner which they like, it cannot be said that the share of the assessee was indeterminate or unknown. The contingency of his marriage and children and consequently under the relevant clauses the trustees having a discretion to be exercised, would not make the share of the respondent-assessee at the valuation date indeterminate or unknown. A great emphasis was laid on the fact by the learned advocate appearing on behalf of the revenue that at the relevant valuation date, the respondent-assessee was the sole beneficiary and, therefore, there was no question of his share being indeterminate or unknown on that date. The learned advocate tried to draw support to his submission from the aforesaid two decisions of the Bombay High Court. In Commissioner of Wealth-tax v. Trustees of Mrs. Hansabai Tribhuwandas Trust the net income of the trust fund was to be paid to Hansabai so long as the continued to be and remained the wife or widow of Tribhuwandas and in the event of a son or sons being born to her, then on the said Hansabai ceasing to be wife or widow of the said Tribhuwandas, the corpus was to be divided amongst all the sons of the said Hansabi, if more than one, in equal shares and in the absence of any children of Hansabai, amongst the heirs of Tribhuwandas. On the relevant valuation date in that case, Hansabai had no son and Tribhuwandas had only brother's son. The Wealth-tax Officer held on the construction of the provisions of the trust deed that the beneficiaries in the corpus were no known or determinate on the valuation date and that it all depended upon certain contingencies happing and that section 21(4) was attracted. The Tribunal, however, held that it would be clearly possible by any competent actuary to determine the interest of these persons as on respective valuation dates quite precisely and that, therefore, the property held under the deed should have been charged in the hands of the respective beneficiaries in respect of the value of interest which each one of them had in the corpus either in the hands of trustees or in their own hands. Kotval C. J. (as he then was), speaking for the Division Bench of the court, observed :

'Now, the provisions of the first trust deed are clear. After deducting the expenses for the management of the trust funds including the collection charges and other outgoings the balance of the income in the hands of the trustees which is called 'the net income' of the trust fund is to be paid to Hansabai 'as long as the said Hansa continues to be and remains the wife or widow of the said Tribhuwandas Haridas'. The words in the inverted commas would certainly include the contingency of Hansabai dying. After her lifetime, in the event of a son or sons being born to her, sub-clause (c) of clause 2 provides that the corpus of the trust fund is to go to her son or sons being divisible equally between them if more than one. Clause (d) provides that in the event of no son or sons being born, but in the event of a daughter or daughters being born to Hansa and Tribhuwandas, then on Hansa 'ceasing to be the wife or widow of the said Tribhuwandas Haridas' the corpus of the trust fund was to be divisible amongst all the daughters of Hansa and, if more than one, in equal shares. Lastly, clause (e) provides that if there is no child born to Hansa then the corpus of the trust fund is to be divided amongst the heirs of the said Tribhuwandas Haridas, husband of the said Hansa, according to law. Since Hansa had on the relevant date no child, it is only clause (e) that will apply and, therefore, having regard to the fact of the present case under clause (e) on the relevant date Hansa would be entitled to the entire income of the trust fund and the heirs of Tribhuwandas according to law would have a contingent interest in the corpus of the trust property. There was only one heir of Tribhuwandas on that date, namely, the son of Nanalal, and he, therefore, had the contingent interest in the entire corpus.

We do not see what was indeterminate or unknown in this trust deed as regards the shares. Hansa clearly had only the interest given to her in the net income and had no right in the corpus of the property whereas the son of Nanalal had on the relevant date a contingent interest in the corpus of the trust property, contingent upon Hansa 'ceasing to be the wife or widow of the said Tribhuwandas', which as we have said, in our opinion, would also cover the case of her death.'

8. In Trustees of Putlibai R. F. Mulla Trust v. Commissioner of Wealth-tax a Division Bench of the Bombay High Court was concerned with a trust deed created by the assessee, whereby the income from the properties of the trust had to be divided amongst her children who survived her in equal parts and after the death of each child the proportionate portion of the corpus was to be divided per stripes. The Wealth-tax Officer, in that case, assessed the trustees under section 21(4) of the Wealth-tax Act as in his view the shares of the persons on whose behalf the corpus of the assets was held were indeterminate and unknown. This view was affirmed by the Appellate Assistant Commissioner as well as by the Tribunal. On a reference to the High Court of Bombay, it was held that the shares of the persons on whose behalf the assets were held by the trustees on the valuation date were determinate and known and the case was, therefore, governed by section 21(1) and not by section 21(4). Kotval C. J., speaking for the Division Bench, referred to the contention of the counsel on behalf of the revenue while rejecting the contention that the provision in favour of a class of grand-children of the settlor existing or to be born was a fluctuating class and, therefore, necessarily indeterminate and their shares would be liable to variation. He observed :

'We are unable to construe the provision of clause (g) in that light. None of the provisions of the trust deed show that there is any benefit conferred upon a class as a whole without reference to individuals. On the other hand, the provisions of clauses (f) and (g) clearly indicate that they create benefits either for the children of the settlor or her grand-children, and even assuming that the share of one or more of the grand-children is susceptible of being augmented by the death of one of he own children and/or their spouses or her unmarried daughter as it was urged before us, none the less the class for whom the benefits have been created is a determinate and known class and the shares given to each one of these persons is a specific, determinate and known share.'

9. We have not been able to appreciate how these two authorities pressed into service by the learned advocate on behalf of the revenue can be of any assistance to his case. The contention on behalf of the revenue that the respondent-assessee was the sole beneficiary at the relevant valuation date is, in our opinion, misconceived. It should be noted in the first instance that the two decisions of the Bombay High Court on which reliance was placed on behalf of the revenue were not cases of discretionary trust where the trustees have a discretion to apply income of the trust fund in the manner in which they like subject to the only limitation that the respondent-assessee was entitled to certain minimum monthly payment and as regards the corpus the trustees had unfettered discretion to distribute the same at the end of 30 years or at an earlier date as may be advanced by them amongst the assessee, his wife and children, if any, in any proportion and manner they thought fit best in their discretion. The emphasis which has been placed by the learned advocate on behalf of the revenue on the fact of the respondent-assessee being the sole beneficiary is not well-founded.

10. In B. P. Mahalaxmiwala v. Commissioner of Income-tax, the court was concerned with a trust created by one P. D. Mahalaxmiwala under the provisions of which the trustees were to pay to the settlor's son and daughter-in-law until the death of the survivor of them such portion of income as may be necessary for their maintenance and to accumulate the balance of the income. After a period of 18 years the accumulated income was to be divided equally between the son and daughter of the settlor's son. Discretion was also given to the trustees to apply out of the corpus of accumulated income a prescribed sum for marriage expenses of the settlor's son's son and for higher education of the settlor's son's son or settlor's son's daughter. The Income-tax Officer assessed the trustees at the maximum rate, and the question that arose before the court was, whether the first proviso to section 41(1) was satisfied and the taxing department was entitled to tax the income in the hands of the trustees at the maximum rate. Chagla C. J. (as he then was), speaking for the court, observed as under :

'Turning to the proviso in question, the main section 41(1) makes the income of a beneficiary taxable in the hands of the trustee to the same amount and in the like manner as the beneficiary himself would have been taxed. But the first proviso imposes a heavier liability upon the income received from a trust under the circumstances mentioned in that proviso, and the circumstances are that if the income is 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, then the tax shall be levied and recoverable at the maximum rate. Therefore, the proviso clearly contemplates two cases. One case is where the trust is in favour of one beneficiary and if the trustees do not receive the income specifically for that person, then the liability is that the tax shall be paid at the maximum rate. The other case contemplated is where the beneficiary is more than one person and in such a case if the trustee do not receive the income for the beneficiaries in specific shares, then also the liability is to be taxed at the maximum rate. Therefore, the scheme of the proviso is clear that if there is one beneficiary no question of share arises and the income must be received specifically on behalf of that individual. But where there are more than one beneficiary, then the question of their shares arises and those shares must be determined and known.'

11. The real question, therefore, as urged by the learned advocate on behalf of the respondent-assessee was whether it can be said on the construction of the relevant clauses of the trust with which we are concerned here that the shares of the beneficiary were determined and known. As has been vehemently contended by the learned advocate on behalf of the assessee on the true construction of clause 7 (a) and (b), the respondent-assessee had no interest either in the income as well as the corpus except to the extent of receiving minimum payment of the amounts aforesaid, namely, Rs. 250, Rs. 150, and Rs. 250, respectively, under the said three trust deeds. Can it be said that the respondent-assessee has any right to the entire income or the corpus of the trust estate, or can he be excluded from the enjoyment of the entire income or a part of it or from the enjoyment of the corpus In Gartside v. Inland Revenue Commissioners the House of Lords had an occasion to consider what is the nature of interest in a discretionary trust. It was an appeal from an order of the Court of Appeal reversing an order of the Chancery Division of the High Court of Justice on an application by originating summons, taken out under section 3 of the Administration of Justice (Miscellaneous Provisions) Act, 1933, by the appellants, Edmund Travis Gartside, the testator, for the determination of a question of liability to estate duty on the death of the testator's son, John Travis Gartside. The Chancery Division had held that the trustees were not liable to estate duty as they had no 'interest in possession' in the income of the corpus of the trust estate. The Court of Appeal reversed that order and held that the trustees were liable to estate duty as the beneficiary had an interest within the meaning of section 43 (1) of the Finance Act, 1940. The trustees took the matter in appeal before the House of Lords. Lord Reid in his speech while considering what is the nature of interest of a beneficiary in a discretionary trust observed as under :

'I think that this idea of a group or class right must have arisen in this way. Where the trustees are bound to distribute the whole income among the discretionary beneficiaries and have no power to retain any part of it or use any part of it for any other purposes, you cannot tell what any one of the beneficiaries will receive until the trustees have exercised their discretion. But you can say with absolute certainty that the individual rights of the beneficiaries when added up or taken together will extend to the whole income..... There was also an intermediate argument that, although an object of a discretionary trust has an interest in the whole of the trust fund, he does not have any interest in either the whole or any part of the income accruing from the fund. That argument is too subtle for me to understand it. No object of a discretionary trust has, as such, any legal right to or in the capital. His sole interest, if it be an 'interest' within the scope of these provisions, is with regard to the income : he can require the trustee to exercise, in bona fide, their discretion as to how it shall be distributed, and he can take and enjoy whatever part of the income the trustees choose to give to him. I cannot see any ground for holding that he can have any 'interest' in the capital if he has no interest in the income. As I have already explained, his right to prevent misappropriation of the capital is not a separate interest.'

Lord Wilberforce in his speech observed as under :

'No doubt in a certain sense a beneficiary under a discretionary trust has an 'interest' : the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly, that is so, and when it is said that he has a right to have the trustees exercise their discretion 'fairly' or 'reasonable' or 'properly' that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust but latent in it) must be applied by the trustees and that the right is more than a mere stpes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund's income : it may be a right, with some degree of concreteness or solidity, one which attract the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be taxed. This may be illustrated by reference to the decision in Skinner v. Attorney-General on which the Crown relied. Whatever may be the correct explanation of that case, the existence of the element of extent was clearly apparent. In the present case its absence is equally noticeable, so that merely to show that 'interest' in section 2 (1) (b) has a 'popular' meaning-as Sir Wilfrid Greene M. R. described it in the Court of Appeal : In re White - fails to meet the critical difficulty in the revenue's way.

The Master of the Rolls and Salmon L. J. in the Court of Appeal were persuaded by an argument which was suggested to meet this difficulty. The beneficiary's right, it was claimed, is analogous to that of a competitor in a beauty competition; she has a right to be considered for the prize : if she is excluded, she can be awarded damages which a jury can assess. The analogy was invitably left at some distance because it could hardly be suggested that a charge for estate duty could be assessed by any similar procedure; and it is clear enough that it fails at the critical point, namely, of establishing that a person with a chance of success has an interest in more than the broadest popular sense, in the fund.'

At page 723 of the report, he has observed further as under :

'I now consider the position as regards the surplus income in each year, that is, the amount of income not distributed among the discretionary class. There is no difficulty here : in the first place (one may call this the primary trust) this income had to be added to capital and held upon trusts under which the testator's grand-children had contingent interests. In the second place (one may call this the secondary trust) the trustees had power to resort to any accumulations and to apply them as income, that is, to distribute them between the discretionary beneficiaries. The interests of the accumulation beneficiaries under the primary trust was, in the terminology of the Finance Act, 1894, an interest in expectancy (as contrasted with an interest in possession) : the discretionary beneficiaries under the secondary trust had, for the reasons already given, no 'interest' at all.'

12. In our opinion, the contention of the learned advocate on behalf of the respondent-assessee is well founded : On a true construction of clause 7 (a), we cannot accept the contention urged on behalf of the revenue that the respondent-assessee had a right or interest beyond payment of minimum amounts as prescribed therein. On a true construction of clause 7 (b), we do not think that it can be urged, successfully as sought to be done by the revenue, that the respondent-assessee has a right or interest in the distribution of the corpus. It has been fairly conceded by the learned advocate on behalf of the revenue that the respondent-assessee can be excluded by the trustees in their discretion at the time of distribution of the corpus at the end of the period of 30 years or at an earlier date, that may be advanced under clause 8. These very clauses have come up for consideration before a Division Bench of this High Court on a reference under the Income-tax Act in Commissioner of Income-tax v. Arvind Narottam. While construing these very clauses, viz., 7 (a) and (b), this is what Bhagwati C. J. (as he then was) observed while speaking for the court :

'Turning to the trust deeds it is clear on a reading of clauses 7A and 7B that the period of distribution provided under each trust deed is thirty years from the date of the trust deed. What is to be the disposition of the income of the trust funds until the expiration of the period of distribution is provided in clause 7A. That clause provides that until the expiration of the period of thirty years, that is, during the period up to distribution, the trustees shall, out of the net income of the trust funds, pay to the assessee or if, in the meantime the assessee gets married, then pay to the assessee, his wife, his children and grand-children or such one or more of them, as they in their discretion think fit, such amount as they think proper, subject to a minimum of Rs. 250 per year to be paid to the assessee and if the assessee gets married, then subject also to a minimum of Rs. 250 per year to the assessee and his wife, and the balance of the income shall be added to the trust funds as capital. It is also provided by clause 7A that if, prior to the expiration of the period of thirty years, the assessee dies unmarried or in case of his marriage, both he and his wife die, the income every year shall be added to the trust funds until the expiration of the period of thirty years. Clause 7B then proceeds to state as to what shall happen when the date of distribution arrives on the expiration of the period of thirty years. The trustees, says clause 7B, shall, on the expiration of the period of thirty years, distribute the corpus of the trust funds together with the undistributed income amongst such one or more out of the assessee, his wife and his children and grand-children who may be alive at that date as the trustees may think fit and in such proportion and in such manner as they may think proper. It is, therefore, clear that though the assessee being unmarried was the only beneficiary during the relevant years of account, he was not entitled to the entire income of the trust funds. It was open to the trustees to pay to the assessee such amount out of the income of the trust funds as they thought fit, subject only to a certain minimum amount per year. The assessee had no right to receive payment of the entire income of the trust funds. The assessee could receive only such amount as the trustees thought it fit to pay him out of the income of the trust funds subject to a minimum of Rs. 250 or Rs. 150 per year, as the case may be, and so far as the balance is concerned, the assessee was not as a matter of right entitled to receive it either during the relevant year of account or even at any future point of time. The balance of the income which was not paid by the trustees to the assessee was to be added to the corpus of the trust funds and on the expiration of the period of 30 years or even if the distribution took place at an earlier point of time, then at such date, the trustees could exclude the assessee from the distribution of the balance of the income. If the assessee was not alive at the date of distribution, then also, he could not get any part of the balance of the income. The assessee was, therefore, at no stage entitled to receive the balance of the income and it could not be said that the balance of the income accrued or arose to the assessee during the relevant years of account so as to be chargeable to tax as part of the total income of the assessee.'

13. On the true construction of these two clauses, we are in respectful agreement with what has been observed by the Division Bench in the above case, while dealing with same clauses of the respective trust deeds. It is clear to us that the discretionary object here, namely, the respondent-assessee, at the relevant valuation date had no right or interest qua the income of the trust property except to the extent of minimum annual payment to be made by the trustees thereunder. As regards the corpus also neither the discretionary object, namely, the respondent-assessee or his family, not the accumulation beneficiaries can claim any right or interest in the same at the end of thirty years or at an earlier date as may be advanced by trustees. In that view of the matter, therefore, it cannot be said that the shares of beneficiaries in the assets held in trust by the trustees on their behalf were determinate or known, except to the extent of the amount of minimum annual payment to be paid to the respondent-assessee. As far as this interest is concerned, the Appellate Assistance Commissioner as well as the Tribunal has capitalised the same and brought it to tax in the hands of the assessee. In this view of the matter, therefore, it cannot be said that because the assessee was the sole beneficiary at the relevant date, the value of the entire estate of the trust could be included in the net wealth of the assessee. The learned advocate on behalf of the revenue, therefore, urged that he assessee had contingent interest in the corpus and, therefore, the valuation of that contingent interest in the entire estate should be included in his net wealth. We are not inclined to accede to this submission of the learned advocate for the simple reason that in substance and effect clause 7 empowers the trustees to distribute the corpus at the end of the specified period or at an earlier date amongst the assessee, his wife and children in the manner and proportion in which they think best in their discretion. The question, therefore, of the division of the valuation of the corpus of the trust estate on the basis that the respondent-assessee had a contingent interest does not arise.

14. The learned advocate on behalf of the revenue has cited one decision of the Allahabad High Court in Chintamani Ghosh Trust v. Commissioner of Wealth-tax, where the Allahabad High Court, having regard to the provisions in the trust deed, with which it was concerned, held qua certain income and the corpus of the trust estate where shares of beneficiaries were determinate and known, the assessment should be made under either sub-section (1) or (2) of section 21, as the case may be, and qua the income of the corpus of the trust estate where the shares of the beneficiaries are indeterminate and unknown, the assessment should be made under section 21(4) of the Wealth-tax Act. This decision is not applicable to the facts of the present case. In that view of the matter, we answer the question referred to us as under :

On the facts and in the circumstances of the case, the finding that it is only the capitalised value of the interest of the assessee that has to be included in the net wealth of the assessee is justified.

15. The Commissioner will pay costs of this reference to the respondent-assessee.


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