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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: AMBALAL SARABHAI D. TRUST N0.5.
1999 P T D 4166
1999 P T D 4166
[231 I T R 540]
[Gujarat High Court (India)]
Before R. K. Abichandani and Kundan Singh, JJ
COMMISSIONER OF INCOME-TAX
Versus
AMBALAL SARABHAI D. TRUST N0.5.
Income-tax Reference No. 1 of 1997, decided on 26th February, 1998.
Income-tax---
----Representative assessee---Trust---Discretionary trust---Trustees empowered to pay net income of trust to beneficiaries in their absolute discretion---Trustees passing resolution that net income of trust shall be paid to one of beneficiaries---Character of discretionary trust cannot be changed by resolution---Trust assessable under 5.164---Income-tax Officer justified in applying rate of 65 % of tax---Indian Income Tax Act, 1961, Ss. 161 & 14.
Where the trust deed does not define the individual shares of the beneficiaries, the provisions of section 164 of the Income Tax Act, 1961, would get attracted. In the case of discretionary trust, where it is entirely left to the discretion of the trustees to distribute among the beneficiaries the net income of the trust in such proportions as it pleases them, the shares of the beneficiaries would be indeterminate. The representative assessee falling in clause (iv) of section 160(1) who is entitled to receive income on behalf of or for the benefit of any person, is liable under section 161(1) to be assessed in his own name, as regards the income in respect of which he is a representative assessee as if the income were income accruing to him. It would, therefore, follow that merely because a trustee who is liable to be assessed as a representative assessee has a discretion to distribute the income to any one of the beneficiaries, his liability to be assessed as a representative assessee does not vanish on his paying the net income to a particular beneficiary. The real question is whether the representative assessee, i.e., the trustees, could themselves have known the shares of the beneficiaries at the time when they received the income during the previous year. The knowledge whether the shares are fixed could be derived by them only from the contents of the trust deed. If the shares are not fixed in the instrument under which the trust is created, so far as the trustees are concerned, the shares of the beneficiaries would be indeterminate or unknown and that is why by the discretion given to them they would be in a position to allot any portion of the income to any one of the beneficiaries or to more than one. When the entire income accruing to the trustees is not passed on to the beneficiaries but administrative charges and expenses are paid out of the trust's income, the entire trust income would be assessable in the hands of the trust as a representative assessee and not merely the net income which reaches the beneficiary, just as the entire income would have been assessed in the hands of the beneficiary if he had been in direct receipt of such income.
The assessee was a discretionary trust constituted under a deed of settlement, dated March 27, 1961. Under the trust deed, it was stipulated in clause 1(a) that the trustees shall pay in the first instance, all costs, charges and expenses incidental to the administration of the trust funds out of the income of the trust funds, and during the period of 18 years from the date of the trust deed they were authorised either to accumulate the net income of the trust funds or at their discretion, pay the same to the settlor's Son arid the settlor's daughters or the survivors or survivor of them or any one. or more of them or to the exclusion of the others for their absolute use and benefit in such proportions and manner as the trustees may in their absolute discretion think fit. The net, income of the trust funds that may not have been distributed by the trustees in any year, was required at the end of the year to be added to and held as an accretion to capital and form part of the corpus of the trust funds. A resolution was passed by the trustees on January 24, 1976. In exercise of their discretion under clause (1) of the trust deed, to the effect that the trustees shall pay the net income of the trust funds accruing on arising during the period from April 1, 1976, up to and including March 31, 2001, to one of the beneficiaries, namely. B, one of the settler daughters, for her absolute use and benefit. For the assessment year l979-80 the assessee claimed that the income was required to the assessed in the hands of the beneficiary and that there should be no assessment under section 164 of the Act. The Income-tax Officer, however, held that the character of the trust remained discretionary and, therefore, the assessment was required to be made under section 164 of the Act. Accordingly the total income of the assessee was computed and it was taxed at the flat rate of 65 per cent. The Tribunal held in favour of the assessee. On a reference:
Held, (i) that admittedly, the assessee-trust was formed as a discretionary trust under the deed of settlement executed on March 27. 1961. Clause (1)(a) authorised the trustees to pay in the first instance all costs, charges and expenses incidental to the administration of the trust funds out of the income of the trust funds. The trustees were further authorised to either accumulate the net income of the trust funds or at their discretion pay the same to the beneficiaries named therein or any one or more of them to the exclusion of others. The shares of these beneficiaries were not at all indicated and it was specifically left to the absolute discretion of the trustees to decide upon the proportions in which the amount may be paid by them. It was clear from the provisions on the trust deed that the shares of the beneficiaries were indeterminate and unknown. The word "indeterminate" would mean not fixed in extent or character. The shares of the beneficiaries were clearly not fixed either in extent or character in the said writing executed for creating the trust. The decision to disburse the amount of net income to the beneficiary named in the resolution was taken not because her share was already fixed, but because the shares of the beneficiaries were not fixed and it was left to the trustees to disburse the income the way they liked. The provisions of section 164(1) were, therefore, clearly attracted in the case of the assessee trust. The Income-tax Officer was justified in applying the rate of 65 percent under section 164 of the Income Tax Act, 1961.
. (ii) That the representative assessee continued to be a discretionary trust despite the resolution passed by the trustees for distribution of the net income of the trust to one of the beneficiaries.
CIT v. Kamalini Khatau (1994) 209 ITR 101 (SC) explained and applied
Mrs. Arundhati Balkrisha v. CIT (1989) 177 ITR 275 (SC); CIT v. Ambalal Sarabhai D. Trust (1998) 231 ITR 528 (SC); CIT v. Gosar Family Trust (1991) 189 ITR 18 (Guj.); CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust (1977) 108 ITR 555 (SC); C. R. Nagappa v. CIT (1969) 73 ITR 626 (SC) and Trustees of Putlibai R. F. Mulla Trust v. CWT (1967) 66 ITR 653 (Born.) ref.
B. B. Nayak and Manish R. Bhatt for the Commissioner.
R. K. Patel and D. A. Mehta for the Assessee.
JUDGMENT
R. K. ABICHANDANI, J.---In this reference, the following two questions have arisen for the consideration of this Court:
"(1) Whether the character of a discretionary trust can be changed by a resolution passed by the trustees?
(2) Whether the Appellate Tribunal has been right in law in holding that the income-tax Officer was not justified in applying the rate of 65 per cent. under section 164 of the Income Tax Act, 1961?"
Earlier, the application made by the Revenue under section 256(2) of the Income Tax Act, 1961, seeking to call for the statement of case in respect of these two questions was rejected by a Division Bench of this Court against which the Revenue had preferred Civil Appeal No. 5194 of 1996 (CIT v. Ambalal Sarabhi D. Trust (1998) 231 ITR 528) before the Supreme Court of India and the Supreme Court, by order, dated March 21, 1996, had set aside that earlier order and directed this Court to examine the question in the light of the judgment of the Supreme Court in the case of CIT v. Kamalini Khatau (1994) 209 ITR 101. Accordingly, by order, dated November 27, 1996, snack to Income-tax Application No. 59 of 1989, the 'Tribunal was directed to furnish a statement of case in respect of the said two questions. When the matter came up for hearing before this Bench, it was noted that the Tribunal had allowed the appeals of the assessee following its earlier decision in Gira Sarabhai (G-12) D Trust for the assessment year 1977-78, but without disclosing the reasons that it adopted. The Tribunal was, therefore directed to forward the reasoned order on which it had placed reliance and accordingly, a further statement of case was forwarded to this Court.
The relevant assessment year is 1979-80. The assessee was a discretionary trust-constituted under the deed of settlement, dated March 27, 1961 Under the said trust deed, it was stipulated in clause (1)(a) that the trustees shall pay in the first instance, all costs, charges and expenses incidental to the administration of the trust funds out of the income of the trust, funds, and during the period of 18 years from the date of the trust deed, they were authorised either to accumulate the net income of the trust funds or at their discretion, pay the same to the settlor's son, Vikram, and the settlor's daughters, Bharati, Gira and Mrudula, or the survivors or survivor of them or any one or more of them or to the exclusion of the others or other of them for their absolute use and benefit in such proportions and manner as the trustees may in their absolute discretion think fit. The net income of the trust funds that may not have been distributed by the trustees in any year, was required at the end of the year to be added to and held as an accretion to capital and form part of the corpus of the trust funds. A resolution was passed by the trustees on January 24, 1976, in exercise of their discretion under clause (1) of the trust deed, to the effect that the trustees shall pay the net income of the trust funds accruing or arising during the period from April 1, 1976, up to and including March 31, 2001, to one of the beneficiaries--namely, Bharatidevi Sarabhi, for her absolute use and benefit. In this background, the assessee-trust filed a return of income showing income as "nil" on August 9, 1979. The stand taken by the assessee before the Income-tax Officer was that the net surplus income of Rs.29,583 had been included in the total income of the beneficiary, Smt. Bharatidevi Sarabhai, and, hence, the total income of the assessee-trust was shown as "nil". It was the assessee's case that such inclusion of income in the hands of the beneficiaries was made pursuant to the resolution passed on January 24. 1976, and, therefore, the income was required to be assessed in the hands of the beneficiary and that there should be no assessment under section 164 of the Act. The Income-tax Officer negatived this contention holding that the character of the trust remained as discretionary and, therefore, the assessment was required to be made under section 164 of the Act. Accordingly, the total income of the assessee was computed at Rs.28,980 by applying the flat rate of 65 per cent. In appeal, the Appellate Assistant Commissioner of Income- tax held that the Income-tax Officer was justified in applying the rate of 65 percent under section 164 of the Act, following his earlier order dated March 5, 1982, .in the case of Gira Sarabhai (G-12) D Trust. The order of the Appellate Assistant Commissioner simply referred to reasons given in the earlier order without indicating those reasons. In the appeal which was carried to the Tribunal by the present assessee and other assessees of the same group, the Tribunal by its order, dated March 28, 1985, followed a similar practice of just referring to its earlier order and allowed the appeal in the following terms:
"The Appellate Assistant Commissioner has followed his order in the case of Gira Sarabhai (G-12) Trust for the assessment year 1977-78. This Tribunal, in the case of Gira Sarabhai (G-12) D. Trust for the assessment year 1977-78, has allowed the assessee's appeals. Therefore, consistently with that decision, these appeals are allowed."
Before we proceed to consider the questions which are referred to us, we are constrained to observe that when the Tribunal decides an appeal by relying on its earlier decision which contained reasons and chooses not to even indicate as to what those reasons were in its order, then that earlier decision which contained the reasons ought to be annexed with the decision of the Tribunal, so that when questions are required to be considered in a reference, the Court can have the benefit of the reasons which weighed with the Tribunal and to ascertain whether any error of law was committed. We expect that in future, in all such cases whenever the Tribunal decides any appeal merely on the basis of its earlier decision, without indicating any reasons in its order, then such earlier decision which contained reasons should invariably be annexed with the decision of the Tribunal while forwarding the statement of case to the High Court.
In the further statement of case forwarded to this Court pursuant to the directions given, the order on which reliance was placed by the Tribunal has been forwarded. That order was made by the Tribunal in Saraladevi Sarabhai (B-11) D. Trust, Ahmedabad v. ITO on April 26, 1984. It appears from that, decision that the Tribunal was concerned with a similar trust and also with a resolution of the same date, i.e., January 24, 1976, making identical provision in respect of one of the beneficiaries of that trust. It was contended before the Tribunal that section 164 was not applicable to the appellant trust. The relevant assessment year in that case was 1978-79. After referring to its earlier decision, the Tribunal proceeded to consider the Notes on Clauses regarding the amendment which came to be made in the year 1980 by which Explanation 1 was inserted to section 164 with effect from April 1, 1980 by the Finance (No. 2) Act, 1980. Relying upon the observations made in paragraph 49(iv) of the Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 1980 (see (1980) 123 ITR (St.) 159) to the effect "under the existing provisions, the flat rate of 65 percent is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the Court or wakf deed". The Tribunal held that the Legislature had conceded thereby that section 164(1) would not be applicable even in a case where the beneficiaries or their shares had not been specified in the trust deed and that the meaning of the section was not clear without the Explanation. It was held that when two interpretations were possible, the one in favour of the assessee was required to be taken, and therefore, section 164 (1) was not applicable to the assessee's case. This is the reasoning which was followed, by reference, by the Tribunal for its order, dated April 26, 1984, in the appeals of an assessee of the same group and that later non-speaking order was relied upon while allowing the appeal of the present assessee trust "consistently with that decision".
Learned counsel appearing for the Revenue contended before us that the provisions of section 164 of the Act were attracted in this case because the trust was a discretionary trust as reflected from the trust deed and the shares of the beneficiaries were indeterminate or unknown. It was submitted that mere passing of a resolution by the trustees to give income for a particular year to one of the beneficiaries will not change the nature of the trust which would none the less remain a discretionary trust and, therefore, the income will have to be assessed in the hands of the trust notwithstanding the payments made to one beneficiary. It was further submitted that Explanation 1(ii) though enacted with effect from April 1, 1980, was only clarificatory in nature and applied to pending cases. It was submitted that even without resorting to that Explanation on the plain reading of section 164 as it stood at the relevant time, it was open for the Income-tax Officer to assess the trust because the shares could not be said to have become determinate merely on a decision of the trustees to make payment of income to one of such beneficiaries. Reliance was placed on a decision of the Supreme Court in CIT v. Kamalini Khatun (1994) 209 ITR 101 in support of the submission that the Revenue had an option to assess and recover tax either from the discretionary trust or from the beneficiaries. Reliance was also placed on some observations made in a decision of this Court in CIT v. Gosar Family Trust (1991) 189 ITR 18 to the effect that it could not be the intention of the Legislature to leave it to the sweet-will of the trustees to subject the income to the maximum marginal limit or not simply by virtue of their decision to distribute the income amongst the beneficiaries.
Learned counsel appearing for the assessee-trust contended that the decision of the Supreme Court in CIT v. Kamalini Khatun (1994) 209 ITR 101 was given in the context of the provisions of section 164 as they stood in respect of the relevant assessment year 1969-70. It was submitted that the relevant provision (which is reproduced at page 107 of the report), contained two requirements, namely, that the income was not specifically receivable on behalf of or for the benefit of any one person, or where the individual: shares of the persons, on whose behalf or for whose benefit such income or part thereof was receivable, were indeterminate or unknown. It was submitted that it is only when these two requirements were satisfied, that the provisions of section 164 could be invoked for assessing the trust. The contention was that this basic requirement had remained the same even in the subsequent amended provision. It was pointed out that under the provision of section 164 with which the Supreme Court was concerned in Kamalini Khatau's case (1994) 209 ITR 101 the income of such representative assessee was required to be assessed as it was the total income of an association of persons, or where such income was actually received by the beneficiary, then at the rate or rates applicable to the total income or total world income of the beneficiary, if such course would result in a benefit to the Revenue. It was submitted that as soon as the trustees resolved to pay the net income arising from the trust funds to only one beneficiary, the two basic requirements which otherwise would have attracted the provision of section 164(1) ceased to exist. It was further submitted that a representative assessee is to be assessed only for the beneficial interest and once payment is made to the beneficiary, there would remain no beneficial interest in the hands of the representative assessee, which could be taxed. Reliance was placed by learned counsel in support of his submissions on a decision of the Supreme Court in CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust (1977) 108 ITR 555, which was rendered in the context of a similar provision contained in section 21 of the Wealth Tax Act. It was pointed out that the Supreme Court had held therein that so long as it is possible to say on the relevant valuation date that the beneficiaries are known and their shares are determined, the possibility that the beneficiaries may change, would not take the case out of the ambit of the provisions of section 21(1). It was submitted that even in the present case it was possible to say with certainty that at the end of the relevant previous year there was only one beneficiary who was required to be paid the entire income.
Learned counsel further argued that Explanation 1 could never be construed as a retrospective provision, pointing out from the Amendment Act and the Explanatory Notes, Objects and Reasons, etc., that they indicated that the new provision was required to be followed from April 1, 1980 onwards. It was submitted that the said provision was not merely a procedural provision, because, after the insertion of this Explanation, the Assessing Officer was not required to undertake the exercise of ascertaining whether at the end of the previous year, the shares of the beneficiaries had become determinate or not. It was submitted that the said Explanation had done away with the concept of the relevant date and such a provision cannot be construed as having a retrospective effect. The sum and substance of his contention was that the shares cannot be said to have remained indeterminate or unknown when by resolution the trustees had decided to give the entire net income to one beneficiary.
Admittedly, the assessee-trust was formed as a discretionary trust under the deed of settlement executed on March 27, 1961. Clause (1)(a) which is referred to hereinabove authorised the trustees to pay in the first instance all costs, charges and expenses incidental to the administration of the trust funds out of the income of the trust funds. The trustees were further authorised to either accumulate the net income of the trust funds or at their discretion pay the same to the beneficiaries named therein or any one or more of them to the exclusion of others. The shares of these beneficiaries were not at all indicated and it was specifically left to the absolute discretion of the trustees to decide upon the proportions in which the amount may be paid by them. It is clear from the provisions of the trust deed that the shares of the beneficiaries were indeterminate and unknown. The word indeterminate would mean not fixed in extent or character. The shares of the beneficiaries were clearly not fixed either in extent or character in the said writing executed for creating the trust.
The provision of section 164(1) to the extent it is relevant for the purpose of this reference and as it stood at the relevant time reads as under:
"164. Charge of tax where share of beneficiaries unknown.---(1) Subject to the provisions of subsections (2) and (3), where any income in respect of which the persons mentioned in. clauses (iii) and (iv) of subsection (1) of section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as 'relevant income', 'part of relevant income' and 'beneficiaries', respectively), tax shall be charged--
(i) as if the relevant income or part of relevant income were the total income of an association of persons, or
(ii) at the rate of sixty-five per cent., whichever course would be more beneficial to the Revenue: "
The above provision applies to all representative assessees mentioned in clauses (iii) and (iv) of section 160(1) of the Act if the income for which they were liable as representative assessees, was not receivable on behalf of or for the benefit of any one person or where the individual shares of the beneficiaries were indeterminate or unknown. Therefore, if there was only one beneficiary of the income or where the shares of the beneficiaries in that income were known or determinate, the provision of section 164 did not apply. If the trust deed did not define the individual shares of the beneficiaries, the provisions of section 164 would get attracted. In the case of a discretionary trust, where it is entirely left to the discretion of the trustees to distribute among the beneficiaries the net income of the trust in such proportions as it pleases them, the shares of the beneficiaries would be indeterminate. The representative assessee falling in clause (iv) of section 160(1) who is entitled to receive income on behalf of or for the benefit of any person, is liable under section 161(1) to be assessed in his own name, as regards the income in respect of which he is a representative assessee as if the income were income accruing to him. It would, therefore, follow that merely because a trustee who is -liable to be assessed as a representative assessee has a discretion to distribute the income to any one of the beneficiaries, his liability to be assessed as a representative assessee does not vanish on his paying the net income to a particular beneficiary. It is because the shares are not fixed, i.e., they are indeterminate or unknown that the trustees become enabled to exercise…
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