1999 (10) TMI 3 - SC - Wealth-tax

Supreme Court: Trust beneficiary's interest, not trust corpus, included in net wealth for tax

AV Reddy Trust And Others Versus Commissioner of Wealth-Tax

The Supreme Court held that only the value of the interest of the beneficiary in the trust, and not the corpus of the trust itself, should be included in ... Whether Tribunal was justified in holding that only the value of the interest of the beneficiary in the trust could be included in the net wealth and not the value of the corpus of the trust itself - in the case of the appellant trust beneficial interest is to be assessed to wealth-tax in the hands of the trustee under section 21(4) -However, the direction given by HC that 'trustee will have to be assessed on the entire value of the trust fund as individual' is contrary - appeal partly allowed Issues Involved:1. Whether the Tribunal was justified in holding that only the value of the interest of the beneficiary in the trust could be included in the net wealth and not the value of the corpus of the trust itself.2. Applicability of sections 21(1), 21(2), and 21(4) of the Wealth-tax Act, 1957.3. Correct interpretation and application of the Wealth-tax Act in light of the Supreme Court's decision in CWT v. Trustees of H.E.H. the Nizam's Family (Reminder Wealth) Trust [1977] 108 ITR 555.Issue-wise Detailed Analysis:1. Whether the Tribunal was justified in holding that only the value of the interest of the beneficiary in the trust could be included in the net wealth and not the value of the corpus of the trust itself:The Tribunal concluded that the corpus of the trust was to be transferred to the beneficiary upon reaching a stipulated age, indicating that the settlor intended to vest the corpus in the beneficiary only upon reaching that age. Thus, it was held that there was only a contingent interest in the corpus until the beneficiary attained the stipulated age. Therefore, only the interest of the beneficiaries in the terms of the trust, and not the corpus of the trust fund, could be included in the net wealth. This decision was challenged in the High Court, which upheld the Wealth-tax Officer's assessment of the entire value of the trust fund, leading to the present appeals.2. Applicability of sections 21(1), 21(2), and 21(4) of the Wealth-tax Act, 1957:The High Court determined that the trust fund was held by the trustee on behalf of and for the benefit of the beneficiaries, whose interest would become definite at a future date based on the trust deed's conditions. As the shares of the beneficiaries were indeterminate and unknown on the valuation dates, the High Court held that section 21(4) of the Wealth-tax Act applied. Consequently, the trustee was to be assessed on the entire value of the trust fund in the status of an individual. However, the appellant's counsel contended that the assessment should be made under sections 21(1) or 21(2), and even if section 21(4) applied, the assessment should be based on the beneficiary's interest, not the corpus of the trust fund.3. Correct interpretation and application of the Wealth-tax Act in light of the Supreme Court's decision in CWT v. Trustees of H.E.H. the Nizam's Family (Reminder Wealth) Trust [1977] 108 ITR 555:The Supreme Court found merit in the appellant's contention that the High Court's direction to assess the entire value of the trust fund in the status of an individual was contrary to the ratio laid down in Nizam's Family Trust's case. The Supreme Court emphasized that under section 21(4), two assessments are required: one for the actuarial valuation of the life interest of the beneficiary under section 21(1) and another for the actuarial valuation of the total beneficial interest in the remainder as if it belonged to one individual under section 21(4). The trustee's liability cannot exceed the aggregate liability of the beneficiaries, and no part of the corpus of the trust property can be assessed in the trustee's hands under section 3.The Supreme Court reiterated that under sections 21(1) and 21(4), it is the beneficial interests that are taxable in the trustee's representative capacity, not the corpus of the trust properties. The court provided an illustration to clarify this interpretation, highlighting that even when beneficiaries of the remainder are indeterminate or unknown, the trustee can only be assessed in respect of the total beneficial interest in the remainder, treating the beneficiaries fictionally as an individual.Conclusion:The Supreme Court agreed with the High Court's finding that the beneficial interest is to be assessed to wealth-tax in the trustee's hands under section 21(4) of the Wealth-tax Act. However, it found the High Court's direction to assess the trustee on the entire value of the trust fund in the status of an individual to be contrary to the Supreme Court's decision in Nizam's case. Consequently, the Supreme Court answered the question partly in favor of the assessee and against the Revenue, allowing the appeal with costs.