TaxTMI 
TaxTMI 
1990 (10) TMI 162
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....kani Ummal, Ayisha Ummal and Safiya Ummal. Copies of the four instruments mentioned above were provided to us in the form of a paper book. Since many of the issues which arise for decision in these appeals depend upon the construction of the deeds as well as the correct interpretation of the recitals in the deeds we felt it essential to note the important clauses of each of these deeds. 3. The first of the deeds is dated 15-7-1970. The founder is one Shri M.M. Marican, aged about 80 years and the trustee appointed is Mohammed Idrees Marican, son of Shri M.M. Marican, aged about 50 years. Both the founder as well as the trustee are stated to have belonged to Karaikal, Pondicherry State. The trust is called "M.M. Marican Trust". The properties which were committed to the possession of the trustee and which were stated to have vested in the trustee were the same properties as were noted in Annexure-A of the order of the Wealth-tax Officer for the assessment year 1973-74. It is stated that the trustee was entitled to a remuneration of Rs. 600 per month, which was to be drawn out of the income of the trust. In case the trustees were more than one, they were asked to divide Rs. 600 eq....
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.... descendants disputes or does not want the benefits of this trust conferred upon him or her then his or her share shall be distributed in favour of the other beneficiaries or descendants as the case may be in accordance with the Muslim Law." 4. The second document executed by Sri M.M. Marican was the deed dated 15-12-1970. In that deed, Sri M.M. Marican described himself as the founder and Shri Mohammed Idrees Marican was described as the trustee. The properties which were transferred in favour of the trustee were the properties found in annexure 'B' to the Wealth-tax Officer's assessment order for the assessment year 1973-74. In the deed dated 15-12-1970, it was stated that previously the founder had executed a deed of trust on 15-7-1970 setting up a trust called 'M.M. Marican Trust' and by the present deed in question he wanted to convey more properties to the above trust. All the other important clauses of this deed are similar to the clauses found in the previous deed dated 15-7-1970 except the clause with regard to the payment of Rs. 25,000 to each of his named grandson/grand/daughter. Under this clause, with regard to the remuneration to the trustees, similar to the one fo....
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....erties conveyed under this deed a sum of Rs. 25,000 should be paid to Mohammed Mariam Beevi, daughter of Mohammed Idrees Marican (trustee) and another sum of Rs. 25,000 should be paid to Mohammed Ariff Marican, son of Mohammed Hameed Marican. The trustee's have the liberty to pay these amounts either in a lump sum or in instalments at any time they choose within 25 years as and when the funds of the trust are available. Clause 1(a) states that in case either or both of these beneficiaries predeceases the founder after the execution of the deed and before they realise the whole or part of Rs. 25,000 due to them then the whole or part of Rs. 25,000 due to them should pass to their real brothers and sisters in proportion of two shares to each brother and one share to each sister. This deed also contains the following important recital : " Whereas the donor founder desirous of having a private family trust have on the 15th day of July, 1970 executed a family trust called M.M. Marican Trust'." "The founder donor desirous of conveying more properties to the above trust hereby vests the properties described in the Schedule hereunder in possession of the trustee and he shall hold in tru....
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.... in this deed also it is stated that M.M. Marican was the founder and Mohammed Idrees Marican was the trustee. So also the following clause commonly occurring in the two predecessor deeds was also found in this deed, "Whereas the donor founder desirous of having a private family trust have on the 15th day of July, 1970 executed a family trust called 'M.M. Marican Trust'. The founder donor desirous of conveying more properties to the above trust hereby vests the properties described in the schedule hereunder in possession of the trustee and he shall hold in trust as and for the purposes of the trust hereinafter appearing." Clause 1 gives out the names of different beneficiaries. It is stated in clause No. 1 that from out of the net income derived over the schedule properties an amount of Rs. 25,000 should be paid to Mohammed Moosa Marican, son of Mohammed Idrees Marican (trustee) and another sum of Rs. 25,000 should be paid to Mohammed Ashraff Ali Marican, son of Mohammed Hameed Marican during the course of 25 years. However, the trustee or trustees shall have discretion to pay this amount as and when funds are available with the trust either in a lump sum or periodically as they de....
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....from out of which these appeals arose. The dates of the reopened assessments and the net wealth assessed under each of them are provided hereunder : --------------------------------------------------------------------------------------------------------------------------------------------------- Assessment year Valuation date Date of reopened Assessed net assessment wealth --------------------------------------------------------------------------------------------------------------------------------------------------- (1) (2) (3) (4) --------------------------------------------------------------------------------------------------------------------------------------------------- 1973-74 30-6-1972 27-3-1986 Rs. 3,43,800 1974-75 30-6-1973 27-3-1986 Rs. 3,46,400 1975-76 30-6-1974 27-3-1986 Rs. 3,37,800 1976-77 30-6-1975 27-3-1986 Rs. 6,43,400 1977-78 30-6-1976 27-3-1986 Rs. 6,34,400 1978-79 30-6-1977 27-3-1986 Rs. 6,27,000 1979-80 30-6-1978 27-3-1986 Rs. 11,79,800 1980-81 30-6-1979 27-3-1986 Rs. 11,46,900 1981-82 30-6-1980 27-3-1986 Rs. 10,09,600 While making the assessments in question the properties covered by all the four deeds were c....
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....o the assessee trust by letter dated 24-2-1988 on 18-4-1988. The authorised representative of the assessee trust gave counter comments dated 29-2-1988, which are fully extracted in the Deputy Commissioner (Appeals)'s order containing four paras. So also the counter comments found in the letter of the authorised representative appearing on behalf of the assessee trust, dated 2-5-1988 were also fully extracted in the Deputy Commissioner (Appeals)'s order and therefore we felt it unnecessary to extract them once again in this order. For the reasons given out in para 7 of his impugned order the Deputy Commissioner (Appeals) held that it was only the trust which owned the properties and the trust was rightly assessed under section 21(4) of the Wealth-tax Act and all the properties covered by the four deeds mentioned above were rightly considered in all the nine assessments as belonging to the appellant-trust. In support of his conclusion the Deputy Commissioner (Appeals) held that the beneficiaries acquired a right to share the trust properties only on the expiry of 25 years from the dates of the deeds. Till then they did not have any kind of right or interest in the trust properties. T....
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....hus he partly allowed the appeals of the assessee for statistical purposes. The Deputy Commissioner (Appeals) disposed of all the appeals relating to the nine assessment years by his common order dated 4-5-1988. Once again having been aggrieved the assessee filed these second appeals. 9. The following grounds were taken in the original grounds :-- " 1. The Deputy CIT(A) erred in observing that one cannot foresee which of the beneficiaries would become indebted or insolvent and hence in the event thereof the share of benefit are indeterminate. Hence, the assessee trust was liable to be assessed under section 21(4) of the W.T Act. 2. The assessee trust cannot be a legal entity in terms of the Trust Act much less an assessee under the provisions of the W.T Act. 3. The Deputy CIT(A) erred in concluding that it would be premature to know who will be the beneficiary or descendants on the expiry of the period of 25 years and hence the shares of beneficiaries are indeterminate. 4. The Deputy CIT(A) is not justified in concluding that the trust per se is assessable under the W.T Act and in any event under section 21(4) of the W.T Act on the ground that the share of benefits a....
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....ifiable, and if not, whether the assessment is to be made against the trustee on the totality of the beneficial interest held by all the beneficiaries under section 21(4) of the W. T Act. Whether any of the deeds are invalid for offending the trust law. Whether there is any error of law in the impugned order passed by the Dy. Commissioner (Appeals) or whether it is a fit one to be confirmed. Whether the maximum marginal rate cannot be applied when the trust is being assessed under section 21(4). The first among the questions which should be taken up for consideration is whether any of the deeds in question is invalid for offending the trust law. We have already extracted the important clauses of all the four deeds executed by Shri M.M. Marican, founder of the trust. In the last of the trust deeds dated 3-3-1971 executed by Shri M.M. Marican it is stated in clause 2(a), which is already extracted above, that in the event of any of the beneficiaries becoming indebted or becoming insolvent no creditors or receiver or official assignee shall have any claim on their share in the properties of the trust nor shall he or she be entitled to receive any income from the estate but any issues ....
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....d their issues, i.e., their sons or daughters shall be entitled to all those benefits. Therefore the intention of the founder was not to give any benefits under the deed to his insolvent son or daughter or beneficiary. Such insolvency or indebtedness on the part of either beneficiary or the sons or daughters of the donor would disentitle them to claim any benefits of the trust. The question is whether such a condition in the trust deed would invalidate the trust. In Nathan and Marshall Cases and Commentary on the Law of Trusts, Seventh Edition, edited by D.J. Hayton, at page 199 the law on this subject is stated as follows :-- " It has long been established that whilst a condition or proviso for forfeiture of an interest on bankruptcy or attempted alienation of the interest is void a limitation of an interest to last until bankruptcy or attempted alienation is valid. The justification for such a distinction is that a limitation merely sets a natural limit to an interest whilst a condition or proviso cuts down an interest before it reaches its natural limit ; if such a condition or proviso is void for being contrary to a course of devolution prescribed by law, in cutting down the....
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.... any other properties or moneys that might be obtained by the trust. Therefore even while executing the first of the trust deeds dated 15-7-1970 the founder contemplated that M.M. Marican Trust should not only possess the properties conveyed under that deed but should also possess the other properties which may be conveyed subsequently to the said trust. In the other three deeds, viz., 15-12-1970, 23-2-1971 and 3-3-1971 there was a specific recital in each of them to the effect that the further properties conveyed under them were each intended to form part of the properties of M.M. Marican Trust formed under the deed dated 15-7-1970. Except with regard to the payment of Rs. 50,000 from out of the income derived over the trust properties payable during a long period of 25 years to the named grandson and grand-daughter, in each of the four deeds, all other dispositions were made to the common beneficiaries under all the four trust deeds. For instance except the payment of Rs. 25,000 each to the named grandsons and grand-daughters from out of the income from the trust properties, the other sections which were common were that from out of the remaining 50% of the net income 50% was dir....
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....to whom were after their death to augment the units allocated to their issue who were also relatives specified in the II Schedule. The units allocated to different relatives are kept distinct and separate and even the units of Laila Begum and Jani Begum when they descend to their issue are to be kept distinct and separate. On a consideration of the terms of the trust deed we hold that the deed of trust created several trusts in favour of the relatives specified in the II Schedule and their issue." (Emphasis supplied). It is significant that the Supreme Court did not decide the issue and left the issue purposely open in the last portion of their judgment reported at pages 600 & 601: " The High Court also examined the question whether the trust deed created one single indivisible trust or several distinct and separate trusts and, disagreeing with the view taken by the Tribunal, came to the conclusion that 'the deed of trust created several trusts in favour of the relatives specified in the second schedule and their issues'. But, on the view taken by us that it is sub-section (1) of section 21 and not sub-section (4) of that section which applies in the assessment of the remainder in ....
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.... single Trust, M.M. Marican Trust. Hence we conclude the four deeds established only one Trus t but not different Trusts. In the circumstances we are of the opinion that the deeds dated 15-7-1970, 15-12-1970, 23-2-1971 and 3-3-1971 conveyed properties only to one trust, viz., M.M. Marican Trust and the proposition that it should be held that there are as many trusts as beneficiaries approved by the Andhra Pradesh High Court in Trustees of H.E.H. Nizam's Family (Remainder) Wealth Trust's case cannot be applied to the facts of this case since they are very different from those considered by the Andhra Pradesh High Court. Simply because there are two separate beneficiaries mentioned in each of these deeds were made entitled to an amount of Rs. 25,000 from out of the net income of the trust properties that by itself would not make a single trust into several trusts. Consequently, it follows that with due regard to Annexure-A to D properties the assessments on the assessee should be made for each of the nine assessment years under consideration. We hold that only one common trust was created under the four deeds dated 15-7-1970, 15-12-1970, 23-2-1971 and 3-3-1971. 16. The next questi....
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.... (i) such assets are held under a trust declared by will ; or (ii) such assets are held under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the Wealth-tax Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settlor or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance ; or (iii) such assets are held by the trustees on behalf of a provident fund, super annuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession, wealth-tax shall be charged at the rates specified in Part I of Schedule I." After the amendment made by the Finance (No. 2) Act, 1980, with effect from 1-4-1980 sub-section (1A) to section 21 was inserted and verbal changes were also made both in sub-section (1) and sub-section....
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....rom an individual who is a citizen of India and resident in India for the purposes of this Act, and (a) at the rates specified in Part I of Schedule I ; or (b) at the rate of three per cent, whichever course would be more beneficial to the revenue : Provided that in a case where-- (i) such assets are held under a trust declared by any person by will and such trust is the only trust so declared by him ; or (ia) none of the beneficiaries has net wealth exceeding the amount not chargeable to wealth-tax in the case of an individual who is a citizen of India and resident in India for the purposes of this Act or is a beneficiary under any other trust ; or (ii) such assets are held under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the Assessing Officer is satisfied, having regard to to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settlor or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for....
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....ance with the Muslim law and should execute such instruments as may be required for transfer of the properties in favour of the beneficiaries. From the facts of this case none of the two beneficiaries, who were entitled to Rs. 25,000 from out of the net income of the trust, can demand the trustee as of right on any of the valuation dates relevant to these nine assessment years to pay Rs. 25,000 to each of them inasmuch as, though they were entitled to Rs. 25,000 each, the trustee is at liberty to pay this amount either in lump sum or periodically in a period of 25 years. Thus on any of the valuation dates in question, neither Mohammed Shamsuddin nor Mohammed Mustafa Marican was entitled as of right to claim the amount of Rs. 25,000 or any part of it from the trustee. The position of the other named beneficiaries under each of the three subsequent deeds who were to be paid Rs. 25,000 each from out of the net income of Annexure B to D properties remains the same. So also none of the sons or daughters who are living on the dates of these deeds are entitled to demand 50% from out of the balance income, after deducting Rs. 50,000 from the net income, to them on any of the valuation date....
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....nterests are not known or determinate on each of the valuation dates in question. The named beneficiaries and other beneficiaries who were having claims from out of the income of the trust properties, though had a vested right, none of them had a present right to demand payment from the Trustee on any valuation date relevant to any of these years. Under the circumstances, we are of the opinion that since the beneficiaries are indeterminate or unknown, inasmuch as the founder did not die before any of the valuation dates in question and the question of his heirs would arise only after his death and not before that, the correct provision under which assessment is to be made is section 21(4) and not section 21(1). 17. What were the circumstances under which the two sub-sections of section 21, i.e., sub-section (1) or sub-section (4) of section 21 have to be applied to a particular set of circumstances is clearly discussed by the Hon'ble Supreme Court in Trustee, of H.E.H. Nizam's Family (Remainder) Wealth Trust's case. At page 598 it is stated as follows : " This immediately takes us to the question as to which of the two sub-sections (1) or (4) of section 21 applied for the pur....
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....s. Giving an illustration as to under what circumstances section 21(4) WT Act would come into play the Hon'ble Supreme Court had stated as follows at page 596: "We have given in preceding paragraph illustration of a case falling within section 21, sub-section (1), but the illustration can be slightly modified by taking a case where property is held on trust for giving income for life to A and on his death, to such of the children of A as the trustee might think fit. Section 21, sub-section (4) would be clearly attracted in such a case so far as the reversionary interest is concerned, because, on the relevant valuation date, the remaindermen and their shares would be indeterminate and unknown." So it is clear that on a given valuation date where the shares of all the beneficiaries were not determinate or known section 21(4) would apply. Now in this case it is not at all possible to determine who were the ultimate persons (heirs) who would be entitled to succeed the founder and who would be entitled to claim their share in the corpus of the trust. This would be possible only after the death of the founder and the persons who may ultimately turn out to be his heirs cannot be ascert....
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....dual under sub-section (4) of section 21. The difference between the value of the corpus of the trust property and the aggregate of the actuarial valuation of the life interest of A and the remainderman's interest would not be assessable in the hands of the trustee because, as pointed out above, the trustee can be taxed only in respect of the beneficial interests and there being no other beneficiary apart from A and such of the children of A as the trustee might think fit, the balance of the value of the corpus cannot be brought to tax in the hands of the trustee under sub-section (1) or (4) of section 21." Their Lordships further made very clear that corpus of the trust funds cannot be assessed in the hands of the trustee either under sub-section (1) or sub-section (4) of section 21 because the trustee is only a representative assessee and he is representing all the beneficiaries under the trust. In the case on hand some of the beneficiaries were entitled to specified amounts from out of the income of the trust property. So their right on each of the valuation dates relevant to the nine assessment years in question remained as the present right to receive the sum of Rs. 25,000 ove....
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....nd re-examined for all the nine assessment years under consideration and he also directed the WTO to make a reference to the valuation cell of the department under section 16A(1) of the Wealth-tax Act. We directed that, the valuation cell should bear in mind while valuing the properties the fact that the trustee was representing only the totality of the beneficial interests of all the beneficiaries which falls short of the total value of the corpus for the assessment years 1973-74 to 1979-80 but he should also remember that because of the insertion of sub-section (1A) into section 21 he should value the total value of the corpus in-the hands of the trustee for the assessment years 1980-81 and 1981-82. The Dy. Commissioner (Appeals) also directed that wherever the provisions of rule 1BB of the Wealth-tax Rules are found applicable to any of the properties of the assessee the valuation must be made according to that rule. Against this direction the department did not come up in appeal. Therefore we confirm the said direction of the Dy. Commissioner (Appeals). Reliance was placed on Pradeep D. Kothari Trust's case. The ratio laid down in the said case disposed of by Madras 'A' Bench i....