TaxTMI 
TaxTMI 
1950 (2) TMI 8
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....Whether in the circumstances of the case the sum of Rs. 12,950 was rightly included in the assessment?" 3. The amount stated in question (2), with regard to the assessment year 1943-44, is Rs. 12,900. 4. The facts of the case are as follows:- V.M.R. Seshachalam Naidu died leaving behind him a will dated 20th April, 1936, (copy whereof is Exhibit A attached to this statement), by which he appointed his son-in-law C.G. Krishnaswami Naidu, his manager M.R. Krishnaswami Naidu, his daughter Jamuna Bai and his two sons, Badri Narayan alias Badrinath and Sampathkumar (after each of the last three attained majority, i.e., completed 18 years) as executors and trustees of which the firstnamed was to be the executive trustee, and others were to co-operate in the transactions of the business. 5. The testator had timber business in Madras and had agencies at Karachi, Calcutta and branches at Negapatam, Cocanada and Bombay. He had also saw mills at Rangoon. By paragraph 6 of the will, the testator desired that the business should be continued after his death in the manner provided in the will a....
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....in-law should be trained in his business and they should be ultimately taken as partners in the business, and that they should receive certain remuneration while they are working in the business. Paragraph 18 is rather important, as the testator bequeathed his estate subject to the legacies and dispositions to his sons as tenants-in-common for their respective lives, and the absolute estate was to go to his grandsons, natural or adopted, who are entitled to take "per stirpes." 6. The Income-tax Officer assessed the income of the estate in the hands of the executors in the status of "association of persons". This has been upheld, on appeal, by the Appellate Assistant Commissioner. Objection to this has been taken before the Tribunal by the appellants and Mr. Rajah Aiyar (Advocate-General), on behalf of the appellants, submitted that the assessments should have been made on the appellants as trustees under Section 41 of the Income-tax Act and not as executors. The point, therefore, to be determined in this case was whether the appellants were executors of the estate of the deceased or whether they were trustees on behalf of the beneficiaries. It was agreed that if they carried on ....
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....e assessment for the year 1939-40 was made under Section 34. The questions framed were firstly, whether the assessment under Section 34 in the circumstances of the case was legal and secondly, whether the sum paid to the mother and the widow should be exempt from tax in the hands of the appellants. The High Court by its order held that the assessment under Section 34 was illegal and, in the circumstances, did not answer the second question. The same argument as advanced for the assessment year 1939-40 was again advanced before us and we have again negatived the contention of the appellants. We think that questions of law do arise from the order of the Tribunal and we refer the following questions to the Honourable High Court:- "(1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the executors did not cease to be executors and, therefore, Section 41 of the Income-tax Act had no application? (2) Whether on the facts of the case the Tribunal was right in upholding the decision of the Department that the maintenance paid to the widow and the mother of the testator under the will was not an allowable deduction under the Income-tax A....
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....the sons attained the age of majority and assumed the management. Among the properties left by him this business was the most important asset and he had also other movable and immovable properties. Under clause (8) there was a provision to purchase immovable properties, after the total capital of the business reached Rs. 10,00,000, i.e., five lakhs for the business in India and five lakhs for the business in Burma. The executors under this clause should set apart immovable properties of the value of Rs. 50,000 every year which they should acquire out of the profits of the business. Under clause (9) the executors were empowered to convert the business in India into a limited concern soon after the capital of the business in India reaches five lakhs of rupees. Clauses (10) and (11) provide for payment of an amount to the mother and also some amounts to his widow for the maintenance of herself and the children. By clause (12) be made provision for certain pecuniary legacies most of which are payable at a future date on the happening or the events mentioned therein. This clause also directs that the mortgage deed executed by the testator's wife's sister's son in his favour ....
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....a deed or a will, the measure of the liability is the actual interest of the beneficiary concerned. The trustees and other representatives contemplated by the section are in the nature of persons who merely receive the income but transmit the same to the beneficiaries. In other words, the estate of the beneficiary it is that is charged to income-tax under the section. The other contention raised by the assessees was that the sum of Rs. 12,950 is the assessment year 1942-43 and Rs. 12,900 in the subsequent year were paid by them as maintenance allowance to the widow and the mother of the deceased and that those amounts should be deducted from the income of the estate during the respective assessment years, the contention being that the maintenance allowances were an allocation by the deceased of part of his income which were charged upon the estate and the executors had no right to such income. The amount actually paid daring the period was not is dispute. These two contentions were rejected by the Income-tax Officer and by the Appellate Assistant Commissioner. On further appeal, the Appellate Tribunal confirmed the decision of the Department. Hence this reference. The main conte....
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....ary estate a life interest is given to the sons who are to take it as tenants-in-common with a remainder over to the grandsons by the sons. The sons under the will are entitled to certain pecuniary legacies and also a life interest in the residuary. For the executors to become trustees of the residue the funds which they should hold in trust for the residuary legatees must be constituted and must emerge into existence. It is settled law that until the residuary estate is ascertained the residuary legatees acquire no interest in the property and no fund in their favour comes into existence. This has been settled in Lord Sudeley v. Attorney-General [1897] A.C. 11. The position has never been so clearly enunciated as in the speech of Lord Halsbury, L.C., in that case at pages 15 and 16. The following observations at page 15 of the speech are apposite:- "It is uncertain until the residuary estate has been ascertained, of what it will consist. It may consist of many things-it may consist of only a sum of money-and until that has been ascertained the actual right capable of instant assertion does not ....
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.... then does not come into existence. It is in this light that the observations of Viscount Haldane, L.C., in Attenborough v. Solomon [1913] A.C. 76. at p. 85 have to be understood. In that case it may be observed the residue was ascertained; all the debts and legacies were paid and there was also assent of the executor. It was therefore held that the dispositions by way of trust took effect and that the executors had no interest thereafter to pledge the property which formed part of the residuary estate. No doubt as pointed out by Viscount Haldane, L.C., in that case at page 85: "Executors they remained, but they were executors who had become divested, by their assent to the dispositions of the will, of the property which was theirs virtute officii; and their right in rem, their title of property, had been transformed into a right in personam a right to get the property back by proper proceedings against those in whom the property should be vested if it turned out that they required it for payment of debts for which they had made no provision." To the same effect is also the view of Kekewich, J., in Timmis, In re: Nixon v. Smith [1902] 1 Ch. D. 176, where the learned Judge pointed o....
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....timately belonged only to the office of an executor and not to that of trustee. Kekewich, J., pointed out in a later case in Eaton v. Daines [1894] Eng. Weekly Notes 32 that there was some misapprehension regarding the decision of Kay, J., in In re Moore: McAlpine v. Moore**, as the case before Kay, J., must have been a case where there was no existing trustee of the trust property remaining in the possession of the executor after it has passed from the office of executor to that of trustee which implies that the administration of the estate by the executor was completed by payment of debts, legacies, funeral and testamentary expenses. Of course, Kekewich, J., in that case agreed with Cotton, L.J., that without payment of debts, legacies, funeral and testamentary expenses, the Court had no jurisdiction either under the Act or otherwise to appoint trustee. The executor represents the testator and is his legal representative. He had duties laid down by the will and by the statute which he alone should per- form and could not be taken away out of his hand. These decisions in my opinion do not at all conflict with what was decided by the House of Lords in the cases already examined. On....
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....eted". Section 343 of the Succession Act enjoins that the executor when there is a general legacy to be paid at a future time should invest a sum sufficient to meet it in securities of the kind mentioned in Section 341; and the intermediate interest forms part of the residue of the testator's estate. Under Section 343 where an annuity is given and no fund is charged with its payment or appropriated by the will to answer it, a Government annuity of the specified amount shall be purchased, or, if no such annuity can be obtained, then a sum sufficient to produce the annuity shall be invested for that purpose in securities of the kind mentioned in Section 341. It is after all this that Section 366 of the Act provides that the surplus or residue of the deceased's property, after payment of debts and legacies, shall be paid to the residuary legatee when any has been appointed under the will. It would be seen from this summary of the relevant sections of the Indian Succession Act that the principles embodied in the Act are not at variance with the principles which have been enunciated and applied in England. Before dealing with the facts of the case, it may be useful to advert ....
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.... is admitted by the executors themselves that most of the duties enjoined upon them under the will and under the law have not been carried out. Of the pecuniary legacies, the eldest son alone received some amounts under clauses (a) and (b) of paragraph 12 of the will. The legacies contemplated by clauses (a) to (g) of that paragraph have not become payable and those legacies are to be paid in future. It was the plain duty of the executors to have followed the provisions of Section 342 of the Indian Succession Act and should have provided a fund sufficient to meet the legacies which are payable at a future time. They have not done that. Regarding the maintenance allowances also the situation stands in the same position. Under Section 343 of the Act as the annuities have not been charged and no fund has been appropriated by the will to answer the annuity, the executors should have taken steps to invest a sufficient sum to produce the annuity and invest for that purpose in securities as contemplated by Section 341 of the Act. This also was not done. As regards the cancellation of the deed of mortgage, it may be that they have decided not to enforce it and they have produced the origin....
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....personal obligation to maintain the mother and the wife and it is only that obligation that he had recognised and provided for under the will and therefore it is not income which the executors had received as forming part of the estate. If the testator had been alive he could not have claimed the amount as a deduction notwithstanding that under the Hindu law he is under a personal obligation to maintain his wife and the mother. It is not an allowance which was charged upon the estate by a decree of Court or otherwise and to which the testator himself had no right or title to receive. The income is received by the executors undoubtedly as part of the income of the testator and they applied it for discharging the obligations to pay maintenance to the mother and widow. The decision in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Calcutta***, has no application and the case is clearly governed by the principles in P.C. Mallick v. Commissioner of Income-tax, Bengal*. The claim of the executors was therefore rightly rejected. In the result, the two questions referred to us must be answered in the affirmative and in favour of the Income-tax Commissioner; and the Commissione....
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....gh it is the hand of the trustees that receives the income and though for purpose of income-tax the trustees are assessed under Section 41(1) of the Income-tax Act. The trustees may receive the income of a settled estate and distribute it among the beneficiaries, but income-tax is levied not on the aggregate income of the estate in the hands of the trustees and at the rate appropriate to such total income, but on the income of each of the beneficiaries at the appropriate rate of tax, Section 41(2) permits the direct assessment of each of the beneficiaries according to his share of the income of the trust estate. Where, however, the estate is administered by executors, the income received by them pending the conclusion of their administration is not, in law, the income of the legatees or beneficiaries. Where trustees are appointed under a will, whether the trustees be the executors them. selves or strangers, the right and interest of the beneficiary in the income of the trust fund differs radically from the interest of the legatee in the income received by the executors during the period of their administration. During such period the income of the estate is the income of the execut....
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.... assent is meant not that the executor concurs in the dispositions in the will but that he assents to the disposition taking effect upon the specific property if the bequest is specific, upon the gum of money if it is pecuniary or upon the residue brought out by the executor at the end of the administration, if it is a residuary bequest. There is the same necessity for the executor's assent to a bequest of the residue as to a bequest of a specific or pecuniary legacy, So soon as be assents to the dispositions of the will--and the assent may be express or implied from his conduct--they become fully operative and the title of the legatees becomes absolute. If there ace trusts declared or created by the will in respect of the subject-matter of the bequest the trusts take effect on such assent, the estate vested in the executor as such is divested and vests in the trustees of the will. The fact that the executors are themselves the trustees does not make any difference. Nor does the fact that the bequest is of the residue affect the point, once the residue has been ascertained in due course of administration. See Attenborough v. Solomon*. We are concerned in this case with the r....
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....espect of certain dividends was claimable on behalf of the charity on the ground that eventually the stocks and shares as well as the dividends would come to be held in trust for the charity. The House of Lords negatived the claim holding that, during the relevant period, the dividends were not the income of the charity but of the executors, and that the executors and not the charity, were the recipients of the income, the administration of the estate of the executors not having been completed. When the case was before the Court of Appeal, Younger, L.J., (afterwards Lord Blanesborough) stated the law in these terms: "Until the residue is ascertained, and until its existence as net residue has been acknowledged by the executor, either by payment to the residuary legatee, or if the residue be settled, by the appropriation of a fund to meet the settled residue, the residuary legatee has no interest in any specific part of that which subsequently becomes residue as a specific fund but his right is, until that moment of time arrives, to have the estate administered in due course." The House of Lords affirmed the decision of the Court of Appeal on the ground above stated. The ratio decid....
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....residuary estate has been ascertained, the bequest of the residue has been assented to and the residuary estate therefore became vested in trustees, be they the executors themselves or strangers? In other words, can it be said that the residuary estate had taken concrete shape and could and should have been handed over by the executors to the persons beneficially entitled but for the fact that the estate is settled in trust and vested in the executors as trustees? Having considered the materials placed before us, I am of opinion that the administration of the estate by the executors in the present case is far from complete, the executorial functions and duties have not been discharged, the residuary estate has not been ascertained and has not come into existence, the trust fond has not been constituted, the executors have not yet become divested of the property and the residue has not vested in them as trustees. It is common ground that some of the pecuniary legacies bequeathed under the will have not yet been paid. The suggestion that the time for payment of those legacies has not arrived is not supported by the answers given by one of the executors to the questions propounded ....
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....e business is now being carried on by the executors who are empowered and directed to do so by the teems of the will. The question of the admission of a sonin-law of the testator as a partner in the business and of the formation of a limited company, both of which were directed by the testator, are stated to be still under the consideration of the executors. I have said enough to show that the administration of the estate by the executors was not complete during the relevant period, that their executorial duties had not been discharged and the residue of the estate has not been ascertained so as to constitute it a trust fund. The executors have not been divested of the estate, and the residue, not having been ascertained, cannot be considered to have vested in them qua trustees. The question is one of substance and the way in which the estate has been dealt with by the executors by means of entries in their accounts is not conclusive. It is not merely a question of entries in the accounts purporting to be kept by the executors. I am making this observation, because an account has been shown to us--it was not shown to the Income-tax Officer or to the Appellate Assistant Commissio....
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....ority that even if the assessees are deemed to be trustees, they could be assessed as an association of individuals carrying on business, on the entire profits of the business under Section 10 of the Income-tax Act, as laid down in Saldhana's caseand the Hotz Trust case. The answer to the first question referred to us is therefore in the affirmative and against the assessees. The second question is comparatively easy of answer. It is admitted that the sum of Rs. 1,050 a month directed to be paid to the widow of the testator has not been paid to the widow but has been merely credited to her in the accounts and debited to the estate. The sum of Rs. 25 per month payable to the mother of the testator is stated to have been partly paid in cash and partly credited to her in the accounts. But it is admitted that the sums credited to her include the income of her own individual property, and it is not possible to say whether the drawings are attributable to the payments directed to be made to her under the will of the testator or to her own private income. Even if all the sums had been paid by executors to the widow and the mother of the testator during the course of their admini....