CHAKRAVARTTI, C.J. - This is a reference under section 66 (1) of the Indian Income-tax Act by the Calcutta Bench of the Income-tax Appellate Tribunal of three questions of law, arising out of the assessment of a part of the income of a trust fund. The assessment was made in the hands of the trustee who is the Official Trustee of West Bengal and it is at his instance that the reference has been made. His learned counsel stated before us that if he had been assessed at the appropriate rate applicable to the income, he would have submitted to the tax without question; but since the Department assessed him at the maximum rate, he thought he could retaliate by raising some fundamental questions which were open to him under the law. Accordingly, he raised three questions all of which have been referred.
The facts are as follows. On 21st September, 1943, the Maharajadhiraj of Darbhanga conveyed certain shares and securities unto a trust for the benefit of his step-mother, Maharani Rameshwarlata Saheba, shortly known as the Senior Rajmata. The terms of the deed will have to be referred to in some detail later and it will be sufficient at this stage to say that, by the deed, the trustee was directed to pay the Maharani an allowance of Rs. 12,000 per month and to hold any surplus that might be left as a part of the trust fund. In the accounting years 1944-45 and 1945-46, the full amount of the allowance was paid to the Rajmata and in each year a substantial balance was left in the hands of the Official trustee. It is that balance which has been assessed at the maximum rate under the first proviso to Section 41(1) of the Income-tax Act and it is the application of the maximum rate which is the principal grievance of the assessee.
The Tribunal upheld the application of the maximum rate on the ground that the sum which the Official Trustee might receive from year to year as the surplus was an indeterminate one and it could not be said either that the amount was specifically receivable on behalf of any one person. Since there was the possibility that in some years there might not be any surplus at all and in some years the income received might not even be sufficient to pay the lady, the Tribunal thought that the case was one where all that could be said to be receivable by the trustee was an indeterminate sum and even that sum was not receivable specifically on behalf of any one person. That situation, the Tribunal thought, attracted the first proviso to Section 41(1) of the Act.
As arising out of that order, the assessee formulated three questions of law to be referred to this Court and they have been referred in the following form :-
'(1) Whether on the facts and in the circumstances of this case the surplus in the hands of the Official Trustee, West Bengal, is taxable under the Indian Income-tax Act ?
(2) If so, are the provisions of Section 41(1) of the Indian Income-tax Act applicable to such surplus and is tax leviable at the maximum rate under proviso to Section 41(1) of the Indian Income-tax Act
(3) Is much surplus liable to super-tax ?'
The Tribunal does not deal, in its appellate order, with any question other than the one to which I have already referred. It would, therefore, seem that the first question referred to this Court does not arise out of the order at all. Mr. Mitra, who appears on behalf of the assessee, admitted that, as framed, the question seemed to suggest that, in the view of the assessee, the income received by him by way of a surplus was not taxable income at all and that, so read, the question certainly did not arise out of the Tribunals appellate order order. He, however, explained that the point which he had meant to raise by the first question was that if, contrary to his contention, it was held that the first proviso to Section 41(1) of the Income-tax Act was applicable to the surplus income, the consequence would be that the income would turn out to be not assessable at all under Section 41. It was such immunity from assessment that, Mr. Mitra explained, was intended to be raised by the first question. However, I shall deal with this matter further when taking up the questions for discussion.
The real question is the second one and that, as has been seen, bears upon the applicability or otherwise of the first proviso to Section 41(1) to the surplus income remaining in the hands of the Official Trustee after he had paid the allowance of the Rajmata. Before dealing with the question, it would be convenient to refer to the manner in which the actual assessment has been made.
The assessments for both the years in question are in the same form. The name of the assessee is 'Official Trustee, Bengal, for Trust of Maharajadhiraj Sir Kameswar Singh Bahadur of Darbhanga for the benefit Maharani Rameshwarlata Saheba (Residue income)'. The assessable income has been computed by taking first the total receipts during the relevant accounting year and then deducting from it the amount of the allowance paid to the Rajmata and the commission payable to the Official Trustee. The balance has been taken as the amount assessable in the hands of the Official Trustee as the 'residue income'. The sum of Rs. 1,44,000 paid to the Maharani and deducted in each of these assessments as expenditure, has been assessed separately but also in the hands of the Official Trustee as a representative of the Rajmata. The scheme of assessment followed by the Income-tax authorities seems to have been that they took the amount of the allowance paid to the Maharani and therefore liable to be and capable of being assessed separately in the hands of the trustee on her behalf, or it may be that they took the amount as diverted to the Rajmata, even before it became income in the hands of the Official Trustee and, on that footing, they deducted the amount from the total receipts which came to the hands of the trustee during the year. The first, however, is the likelier basis. No question arises in this reference as regards the assessment of the amount of Rs. 1,44,000 which was the subject-matter of a separate reference which we have already disposed of. The whole question in the present case is whether the maximum rate was rightly applied to the surplus of Rs. 2,65,676 in the assessment years 1945-46 and the sum of Rs. 1,19,684 in the assessment year 1946-47.
It will be convenient to refer briefly at this stage to the scheme of assessment under Section 41 of the Act. The section provides for representative or vicarious assessment. The main clause provides that in the case of income, profits or gains which any trustee or manger or receiver or any of the other varieties of persons mentioned in the clause is entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such receiver or manager or trustee or any other person who may have received the income on behalf of another 'in the like manner and to the same amount as it would leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly'.
Along with this clause must be read sub-section (2) which is in the following terms :-
'Nothing contained in sub-section (1) shall prevent either the direct assessment of the person on whose behalf income profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income, profits or gains'.
It will thus be seen that the main clause of sub-section (1) of Section 41 and sub-section (2) of the section provide for alternative forms of assessment in respect of the same income. Income which may be received by a receiver or a manager or a trustee or any other person on behalf of another, may be assessed in the hands of such person and it may also be assessed in the hands of the person on whose behalf the income is received. The important words in the main clause are that the tax shall be levied upon the manager or receiver or trustee 'in the like manner...... as it would be leviable upon....... the person on whose behalf such income, profits or gains are receivable'. The section provides for both levy and recovery of tax and obviously by levy, assessment is meant. If the income is to be levied, that is to say, assessed in the hands of the receiver, in the like manner as it would be leviable upon the person on whose behalf the income is received, it is clear that the assessment must be only of the income which is received on behalf of that person. In other words, if, for example, a trustee receives an amount of income on behalf of a number of persons, and I shall assume receives different portions of it specifically on behalf of one or other of those several persons, the proper form of assessing the trustee will be to assess him separately on behalf of each of those several persons on whose behalf he may have received the several sums contained in the total amount of the income. That conclusion is further supported by the provisions contained in sub-section (2) to which I have already referred and which provides for a direct assessment in the hands of the person on whose behalf of the income is received. The two types of assessment are alternatives and alternatives cannot be unequal or dissimilar. The effect of the main clause of Section 41, therefore, is that where there are no complications and income is received by a trustee or receiver or manager specifically on behalf of a single person, or specifically on behalf of each of a number of persons or on behalf of a number of person whose shares are determinate and known, there may be an assessment of such income in his hands and such assessment will be a separate assessment for each of the persons on whose behalf the income has been received.
Complications are provided for in the first proviso or rather some of the complications are provided for there. That proviso reads as follows :
'Provided that where any such income, profits or gains or any part thereof are 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, the tax shall be levied and recoverable at the maximum rate but, where such persons have no other personal income chargeable under this Act and none of them is an artificial juridical persons, as if such income, profits or gains or such part thereof were the total income of an association of persons'.
It will be seen that the proviso provides for the application of the maximum rate in two cases, both expressed negatively. The first case is where the income is not specifically received on behalf of any one person, and the second case is where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown. Although the proviso is expressed in these negative forms, they are, if I may borrow an expression used by Lord Macmillan in one of the decisions of the Judicial Committee, 'pregnant negatives'. In other words, while the proviso says that the maximum rate shall be applicable if income is not specifically receivable on behalf of any one person, it says by implication that if it is received specifically on behalf of any one person, the maximum rate shall not be applicable. Similarly, while the proviso says that the maximum rate shall be applicable if the individual shares of the persons on whose behalf the income is received are indeterminate or unknown, it says by implication that where the shares are determinate or known, the maximum rate shall not be applicable.
But what exactly is the scope of the two alternative cases mentioned in the proviso The words of the first are : 'Where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person'. It will be noticed that the case contemplated here is not necessarily and always a case of the whole amount of the income receivable by the receiver or manager or trustee. If the words 'or any part thereof' had not been there, the first case contemplated by the proviso would mean that the maximum rate would be applicable to the entirety of the amount receivable by the representative, if it was received on behalf of a plurality of persons, and although separate portions of it might be receivable specifically on behalf of different person, the maximum rate would still apply, because such a case would not be a case where income is 'specifically receivable on behalf of any one person'. All cases where the income was received on behalf of a plurality of persons being thus covered by the first part of the proviso, the second part separated by the word 'or' and providing for a case where the individual shares of the person, on whose behalf the income is received, are indeterminate or unknown, would be redundant and even meaningless, because the maximum rate would be applicable on the ground of income not being receivable specifically on behalf of any one person irrespective of whether their individual shares were determinate or indeterminate or known or unknown. It was to avoid that apparently absurd result that the Bombay High Court in the case of Yakub Versey Laljee v. Commissioner of Income-tax, cited before us, took the view that the word 'or' should be read as 'and'. So read, the proviso would mean that not only would the income have to be receivable on behalf of a plurality of persons, but the shares of the different persons would also require to be indeterminate or unknown. With respect, however, it seems to me that the learned Judges of the Bombay High Court overlooked the presence of the words 'or any part thereof' in the proviso. The effect of those words is to limit the operation of the proviso, so far as the first part is concerned, only to that portion of the income which is not 'specifically receivable on behalf of any one person'. The proviso, therefore, isolates and demarcates such portion out of the entirety of the income received by the representative as is not specifically receivable on behalf, of any one person and to which alone, therefore, an uncertainty attaches. If, for example, an amount of income is received by a representative in specific shares or amounts of income is received by a representative in specific shares or amounts on behalf of two persons, the share or amount being specific in the case of each one of them, but a further amount is also received on behalf of no person or persons in particular, then under the first part of the proviso, it is to such further amount alone that the maximum rate will apply. If the first part of the proviso is read after giving due effect to the words 'or any part thereof', it will be seen that to read the word 'for' as 'or' will lead to no redundancy or absurdity. The proviso will in that event mean, or rather cover, by the first part, cases where no part of the income received by the representative was specifically receivable on behalf of any one person and also cases where, of the total amount of income received by the representative, only a part was not so specifically receivable. In the first case the maximum rate will apply to the whole of the income and in the second case, only to that part to which an uncertainty clung. The second part of proviso would cover cases where although the income might be receivable or even specifically receivable on behalf of a number of persons, still their shares were indeterminate or unknown, and in such a case, the maximum rate would apply to the whole of the income where the whole of the income was so receivable, or to a part of the income, where only a part was receivable on behalf of a number of persons whose shares were indeterminate or unknown. As far as I can see, such is the true import of the proviso.
Applying the section to the facts of the present case, it is necessary first to refer to the allowance paid to the Rajmata, although the amount of that allowance forms no part of this assessment. That is necessary, because in order to ascertain the true character of the surplus, the character of the deduction which yields the surplus has got to be examined.
Clause 2 of the deed of trust provides that the Official Trustee shall first pay out of the interest and profits derived from the Trust Fund, his own commission and other costs. Clause 3 provides that the trustee shall pay to the Senior Rajmata 'a sum up to Rs. 12,000 per month' and adds, 'if the income in the hands of the Official Trustee be not sufficient to pay the said sum of Rs. 12,000 in such mount and he may later on pay the balance in subsequent months if possible. The total amount of payment in a year will not exceed Rs. 1,44,000'. Stopping here for a moment, it will be noticed that the deed does not give the Rajmata a fixed allowance of Rs. 12,000 per month which must be paid to her in any event. All that it provides for is that she should be paid up to a sum of Rs. 12,000 per month. In other words, a maximum limit of Rs. 12,000 is laid down. Again, if the income be not sufficient to pay her the whole sum of Rs. 12,000 in any month, the deed provides that the trustee may make up the deficiency 'in subsequent months if possible'. Once again, there is no mandate to the trustee to pay the balance in any event, but only a direction to him to pay it if possible. What is more important, however, is the next provision which is to the effect that the total amount of payment in a year will not exceed Rs. 1,44,000. The effect of that provision is that the deficiency in the payment of the monthly allowance, occurring in any particular year, can be made good only in that year, but if the year passes without it being possible to make good the deficiency, it can no longer be made good. That effect follows from the provision that the total amount of payment in a year shall not exceed Rs. 1,44,000, because of, for example, in a particular year Rs. 20,000 remained unpaid and next year that amount of Rs. 20,000 was paid along with the sum of Rs. 1,44,000 due for the next year, the total amount of the payment will exceed Rs. 1,44,000 which the deed expressly forbids. In the next year, any payment up to Rs. 1,44,000 will be on account of that very year and that being so, no addition thereto can be made on the ground that some balance due for the previous year remains outstanding.
But while that may be the effect of clause 3 of the deed, the effect also is that it the income be sufficient, then out of it a sum of Rs. 1,44,000 shall be payable to the Rajmata before any amount can be transferred to the surplus. It, therefore, follows that in any accounting year, the first Rs. 1,44,000 of the income, after the deduction of the expenses, shall be receivable specifically on behalf of the Rajmata and till the full amount of Rs. 1,44,000 has been received, no question will arise of transferring any amount to the surplus, or the Income-tax authorities assessing any amount as residue income. In view of what I have already stated as to the true scope of the main clause of Section 41(1) and the first proviso thereto, it will be seen that the amount of Rs. 1,44,000 was rightly assessed in the hands of the Official Trustee in a separate assessment as income received specifically on behalf of the Rajmata.
The next important clause in the deed, which bears upon the true character of the residue is clause 4. It requires to be set out in full. Clause 4 reads thus :
'That the surplus, if any, of the income of the Trust Fund that may remain in the hands of the Official Trustee after providing for the payments mentioned in clauses 2 and 3 of these presents, will form part of the said Trust Fund and be added thereto and such additions shall be invested by the Official Trustee either in Government Securities or in such other manner as the Official Trustee may think proper'.
The rest of the clause bears on a slightly different point and will be quoted a little later. It will be seen that the surplus emerges only after the payments directed to be made by clauses 2 and 3 of the deed have been made. Clause 2 refers to the commission of the Official Trustee and to costs of management. Clause 3 refers to the allowances at any time, the surplus would always be affected by some uncertainty. The reason given was that there might not be any arrears due to the Rajmata up to a particular year and certain amounts might be transferred to the surplus fund, but if it became subsequently impossible to pay the full amount of the allowance out of the current income, the Official Trustee would be entitled to draw upon the surplus accumulated in his hands and pay out of it the amount of allowance which could not be paid out of the current income. As I have already point out, deficiencies in the payment of allowance can be made good under the terms of clause 3 only during the current year and, therefore, the contingency, on the basis of which the argument I have referred to was advanced, could never occur. Under clauses 2, 3 and 4 read together, the position is that if at the end of any year, a surplus transpired after the payment of the full amount of the allowance due to the Rajmata and after defraying all the expenses, the amount of such surplus would be transferred to the Trust Fund, to lie in the hands of the trustee as a part of the accumulations and it would not have to be drawn in upon again to pay the amount of allowance to the Rajmata.
What, however, would be the character of such accumulations from the income-tax point of view appears from the remaining portion of clause 4 of the deed which I omitted to quote, but will quote now. The first part of the clause which I have already read provides that the surplus shall form a part of the Trust fund and shall be invested in certain ways and the clause ends by saying that the surplus shall 'be held by the said Official Trustee as part of the said Trust Fund during the lifetime of the Settlor or for a period of 18 years from the date of these presents, whichever is longer'.
Along with the concluding portion of clause 4, we may conveniently read clause 6 which is in the following terms :
'That upon the death of the beneficiary, the said Senior Rajmata Sahiba, the Trust under these presents shall terminate and come to an end and the Trust Fund, including accumulations thereto, shall revert to the Settlor or his successor'.
These two provisions, read together, disclose a somewhat extraordinary position. The concluding part of clause 4 provides for the contingency when the accumulations shall cease to be held as a part of the Trust Fund. Clause 6 provides for the contingency when the trust itself shall come to an end. It will be seen that although the concluding part of clause 4 says that the accumulations shall be held as a part of the Trust Fund up to a certain date, it does not say what will happen to the accumulations and how they will be disposed of when that date arrives.
Assuming, however, that they will revert to the settlor or his successors, as the case may be, even then the difficulty is not wholly solved. If the settlor does not die within eighteen years but lives on thereafter, it may be that so long as he is alive, the surplus shall be receivable, on the construction I have just suggested, on his behalf or, after the death, on behalf of his successors, as the case may be. But if he dies before eighteen years from the date of the deed, say in the tenth year, then the accumulations must continue to be held for the remainder of the eighteen years, but it is impossible to see on whose behalf they will be held or they will be receivable year after year during the period between the death of the settlor and the expiry of eighteen years. Even more curious will be the position if the settlor dies before eighteen years and then when eighteen years have expired. The trust will not come to an end till the beneficiary dies and in a case where the settlor may die, say, as I have once suggested, in the tenth year by the beneficiary lives on even after the expiry of eighteen years, the Trust Fund will remain under administration, surplus amounts will accrue every year, but there will be no fund to which the surplus amounts could go. It is noticeable that under the concluding part of clause 4, the surplus amounts are to be held as a part of the Trust Fund, not for eighteen years from the date on which the funds are received but for a period of eighteen years from the date of the deed. what will happen if the settlor dies before eighteen years, but the beneficiary continues to live after the expiry of that period and the Trust Fund continues to yield an accumulation Under the first part of clause 4, the surplus will go to the trustee, but under the concluding part of the clause, he will have no power to hold it as part of the rust Fund, because his power to hold any surplus as a part of the Trust Fund is limited to a period of eighteen years from the date of the deed of the settlor dies before the expiry of that period. The same will be the position if the settlor dies on some date after the expiry of eighteen years but the beneficiary lives on, because the right of the trustee to hold the accumulations will have ceased with the settlors death.
It will thus appear that when an amount of surplus emerges in any year out of the income of the Trust Fund and it is received by the Official Trustee, it is wholly impossible to say on whose behalf it is receivable by him or on whose behalf it is received. We are not concerned with actual receipt, for the section only speaks of receivability. The accumulations are subject to the various contingencies which I have analysed. In one contingency, they will pass to the settlor or his heirs. In another, for some years at least, that is, during the interval between the death of the settlor before eighteen years and the expiry of eighteen years, they will belong to and be held for no one. Even after the expiry of eighteen years or at the termination of the settlors life, they will go to either the settlor or his heirs, as the case may be, under the general law and not under the terms of the deed, for the deed does not provide what will happen to the surplus fund when the trustee ceases to hold it after the expiry of eighteen years under the imperative conditions of clause 4; and lastly, if the settlor should die before the expiry of eighteen years and the Rajmata should continue to live for many years thereafter, there would be no one at all on whose behalf the accumulations would be receivable and, indeed, the trustee would have no power to hold the accumulations at all, because the powers of the Official Trustee to receive and hold the accumulations are limited to a period of eighteen years. So will he have no power to hold the accumulations after the settlor had dies, if he dies before the Rajmata. The curious position will be that the trust will not end, but the provision for the accumulation of the surplus fund and the powers of the trustee in regard to that fund will cease to operate and to exist. In view of this third contingency as well, the surplus income, when received by the Official Trustee, cannot be said to be receivable on behalf of any one person, nor can it be said to be receivable on behalf of a number of persons whose shares are determinate or known.
On the main contention of Mr. Mitra, therefore, I feel bond to hold that it is impossible to deal with the surplus income otherwise than under the proviso to Section 41(1) and therefore the maximum rate was rightly applied.
That, however, leads me to the first of the questions referred. Mr. Mitras contention was, as I have already indicated, that the question did not intend to put in issue the taxability of the amount under the Income-tax Act, but only the consequence of assessing it under the first proviso to section 41(1). If I understood him aright, his argument was that the proviso applied only to the kind of income dealt with by the main clause of the section, because it spoke of 'such income, profits or gains'. By the word 'such', one was referred back to the main clause of the section and if one went there, one found that the income, profits or gains which were contemplated by the main clause, were income, profits or gains which receivers or managers or 'trustees are entitled to receive on behalf of any person'. Mr. Mitras contention was that since no income received by a receiver or a manager or a trustee could come under the main clause, unless it was received on behalf of 'any person', the proviso must be taken to deal with such income only. If, however, the proviso was applied to a particular amount of income on the ground that it was not specifically receivable on behalf of any one person, then the consequence was that such income could not come under the main clause, because that clause contemplated income which was received 'on behalf of any person'. The short answer to that argument is that when the main clause of Section 41 speaks of income which certain persons 'are entitled to receive on behalf of any person', it is only referring to receipt, not on ones own account but on behalf of a different person, or, in other words, a representative receipt. The effect of the words is not to limit the application of the clause to amounts of income received on behalf of specified individuals, but only to refer to cases where one person receives income, not on behalf of himself but on behalf of another person or persons. If Mr. Mitras argument were correct, then it appears to me that there could never be any room for the application of the proviso. If no income came under the main clause of Section 41 unless it was received on behalf of a definite person, then it would be meaningless to provide by the proviso for cases where it was not received specifically on behalf of any one person or where the individual shares were unknown. I must add in fairness to Mr. Mitra that he himself conceded that he did not intend to advance that extreme contention, but what he meant was that if the Tribunal had intended to hold that in order to come under the main clause of Section 41, income need not be received on behalf of any one at all, the Tribunal was wrong. That proposition of Mr. Mitra can at once be conceded, but it does not lead to the position indicated in the first question.
The last question refers to super-tax. Although the maximum rate has been applied in the assessment to income-tax, super-tax has been levied at the normal rate. The question, however, challenges the application of even that normal are and does so on the basis of the supposed effect of Section 58 of the Act. The charge of super-tax is imposed by Section 55 which is a simple provision laying down in effect that super-tax shall follow income-tax. Section 58 contains certain exceptions and it says that all the provisions of the Act, relating to the charge, assessment, collection and recovery of tax shall apply to the charge, assessment, collection and recovery of super-tax, except those contained in certain sections, among which occurs 'the first proviso to sub-section (1) of Section 41'. Mr. Mitras contention was that the effect of the inclusion of the first proviso to section 41 in the list of exclusions in Section 58 was to exclude the charge of super-tax altogether in the case of income dealt with under the proviso to Section 41 (1). It is perfectly clear that Section 58 can have no such effect. Its simple meaning is that the maximum rate provided for in the first proviso to Section 41 shall not apply to the charge of super-tax, but it does not also mean that no super-tax shall at all be leviable.
I think I have dealt with now all the contentions raised at the Bar and all the provisions of the Act and of the deed which required consideration.
For the reasons I have already give, the answers to the questions referred should, in my opinion, be as follows :
(1) Does not arise out of the appellate order of the Tribunal and 'Yes', if read as explained by the learned counsel for the assessee.
The Commissioner of Income-tax will have his costs of this reference.
LAHIRI, J. - I agree.
Reference answered accordingly.