TaxTMI 
TaxTMI 
1993 (4) TMI 1
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....matters is the assessability of income from five foreign trusts created by the appellant's father, Sri Vikramsinhji. Sri Vikramsinhji, Ex-ruler of Gondal, executed three deeds of settlement (trust deeds ) in the United States of America on December 19, 1963, and two deeds in the United Kingdom on January 1, 1964. The three settlements executed in the United States are in identical terms. Similarly, the two settlements, executed in the United Kingdom are similar. The two sets of settlements, however, differ from each other in certain particulars, though both the sets are meant for the benefit of the settlor and the members of his family. We may refer to the relevant clauses in the settlements executed in the U. S. in the first instance. Under the U. S. settlements, the National City Bank, New York, is constituted the sole trustee. The trust is created for the benefit of the grantor/ settlor, his wife and children and their spouses (referred to as family members) and their descendants. The trustee is empowered to collect the income from the trust properties and to apply the same among the family members and/or their descendants in such manner as he thinks appropriate. He is als....
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....at such time and in such manner, as he may decide in his absolute discretion. Clause 3 says further that " the trustee may omit eligible members of the class from any or all such payments and applications, and no such payment or application or omission of a person from participation therein shall cause a charge against or otherwise affect the future interest or share of any person hereunder Any determination made by the trustee in good faith in exercising the said discretion is held to be binding and conclusive. It is not necessary to notice the other clauses of these settlements except to say that the object of these trusts is to provide for the education, maintenance and upkeep of the members of the settlor's family and their descendants. The settlor died on August 22, 1969. During his lifetime, the settlor, Vikramsinhji, was filing returns of his income in India including therein the whole of the income arising from the U. S. trusts. The returns were filed by him for the assessment years 1964-65 to 1969-70 (both years inclusive ). Since he died in the middle of the accounting year relevant to the assessment year 1970-71, two returns were filed for the said assessment year, on....
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....tees for the time being appointed in terms of the deeds of settlement. The expression " the beneficiaries " was defined to mean and include (a) the settlor, (b) the children and remoter issue for the time being in existence of the settlor, and (c) any person for the time being in existence who is the wife or widow of the settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the settlor. The clauses which are relevant for our purposes read thus : (We have, for the sake of convenient reference, numbered them as clauses 3 and 4). "3. THE settlor hereby directs that the trustee shall and accordingly, the trustee shall stand possessed of the trust fund and the income thereof upon the trusts following that is to say : (1) UPON trust to raise and pay out of the capital thereof any further estate duty which may still be payable thereon in respect of the death of the settlor's father His Late Highness Shri Bhojrajji Maharaja Saheb of Gondal who died on the thirty-first day of July, one thousand nine hundred and fifty-two and any interest payable on such duty and any costs incurred in connection with the ascertainment or payment of such du....
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....llant took the stand, as mentioned hereinbefore, that the income from these trusts is not includible in his income. He also took the stand that the inclusion of the said income in the returns submitted by his father for the assessment years 1964-65 to 1969-70 and by him in the returns relating to the assessment year 1970-71 was under mistake. This submission too was the subject-matter of the appeals and the revision filed before the Appellate Assistant Commissioner of Income-tax, referred to hereinbefore. When the appellant approached the Settlement Commission with an application for settlement, it related to the income from the U. K. trusts as well. The Settlement Commission heard the arguments in extenso spread over several days and disposed of the matter under two elaborate orders. One order relates to the assessment years 1964-65 to 1970-71 (Vikramsinhji and the other to the assessment years 1970-71 to 1982-83 (the appellant The findings of the Commission which constitute the bases for its orders may briefly be stated as the following : (i) Though the U. S. settlements are in the nature of discretionary trusts, they fall within the mischief of sub-clause (ii) of clause (a....
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.... part of the income or assets. In this case, the relevant clause does not give the transferor such power. The power is given to the trustee to be exercised with the concurrence of the transferor/settlor. Even if, for any reason, the clause is construed as giving such a power to the settlor/transferor, section 63 is not attracted inasmuch as the power is given not to him as such but jointly to him and the trustee. Such a power does not attract the mischief of section 63. (2) The U. S. trusts are discretionary trusts. In such a case, the assessment can be made only upon the trustees and not upon the beneficiaries-recipients. The Revenue has no option in such a situation. It must necessarily tax the trustees and trustees alone. The Revenue cannot take advantage of the mistake of law on the part of the settlor or the appellant. (3) At any rate, with the death of the settlor, the U. S. trusts ceased to be revocable trusts, assuming that they were so during his lifetime. So far as the appellant is concerned, he cannot be taxed on the income received by him from the said trust. Only the trustee can be taxed. (4) So far as the U. K. trusts are concerned, the Settlement Commission ....
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....ears. The order of the Commission is relevant to and is confined only to the assessment years to which it relates. The jurisdiction of this court under article 136 in an appeal against the orders of the Settlement Commission must be conditioned by the above considerations. This court would not be able to go into the merits of the order. The Commission's order cannot be dissected, inasmuch as it is a package deal. Either it stands or falls as a whole. (ii) The interpretation placed by the Commission on both the U. S. and the U. K. trusts is perfectly in order and does not call for any interference by this court. Indeed, under the impugned orders, several benefits have been conferred upon the settlor and the appellant like waiving of penalties, interest and other liabilities attaching to the assessees under the Act. While accepting the same, the appellant cannot be allowed to disown those features of the order which go against him. (iii) The argument of not receiving the income from the U. K. trusts is a mere afterthought and should not be given any credence. During his lifetime, the settlor had declared that he had received income from both the U. K. and the U. S. trusts and h....
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....oner under sub section (1) or sub-section (3)." Section 245E empowers the Commission to reopen the completed proceedings in appropriate cases, while section 245F confers all the powers of an income-tax authority upon the Commission. Section 245H empowers the Commission to grant immunity from penalty and prosecution, with or without conditions, in cases where it is satisfied that the assessee has made a full disclosure of his income and its sources. Under section 245HA, the Commission can send back the matter to the Assessing Officer, where it finds that the applicant is not co-operating with it. Section 245-1 declares that every order of settlement passed under subsection (4) of section 245D shall be conclusive as to the matters stated therein and no matter covered by such, order shall, save as otherwise provided in Chapter XIX-A, be reopened in any proceedings under the Act or under any other law for the time being in force. Section 245L declares that any proceedings under Chapter XIX-A before the Settlement Commission shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code. It is true t....
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....s also the same-whether the order of the Commission is contrary to any of the provisions of the Act and if so, apart from ground of bias, fraud and malice which, of course, constitute a separate and independent category, has it prejudiced the petitioner/appellant. Reference in this behalf may be had to the decision of this court in R. B. Shreeram Durga Prasad and Fatechand Nursing Das v. Settlement Commission (I. T. and W. T.) [1989] 176 ITR 169, which too was an appeal against the orders of the Settlement Commission. Sabyasachi Mukharji I., speaking for the Bench comprising himself and S. R. Pandian J., observed that, in such a case, this court is " concerned with the legality of the procedure followed and not with the validity of the order ". The learned judge added " judicial review is concerned not with the decision but with the decision-making process ". Reliance was placed upon the decision of the House of Lords in Chief Constable of the North Wales Police v. Evans [1982] 1 WLR 1155 (HL). Thus, the appellate power under article 136 was equated with the power of judicial review, where the appeal is directed against the orders of the Settlement Commission. For all the above rea....
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.... or such part thereof is receivable are indeterminate or unknown. . . ..". In Snell's Principles of Equity, 25th Edn. (1965), p. 129, a discretionary trust is defined in the following words : " A discretionary trust is one which gives the beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit.... The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. " That these trusts are discretionary trusts is not in controversy. The main question is whether paragraph 1(2), quoted hereinbefore, makes it a revocable trust within the meaning of section 63. The said clause begins with a non obstante clause, " anything hereinabove to the contrary notwithstanding" thereby giving it an overriding effect over what has been said in the earlier recitals. It then says that " at any time and from time to time, the trustee shall transfer, convey and pay over any portion of the income of the trust fund and any portion or all of the principal held in trust ", to such member of the settlor's family " as the trustee an....
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....her with the trustees and not to the trustee to be exercised together with the settlor. The trustee is anyhow vested with an absolute discretion to distribute the income or the principal of the trust to such member of the family as he thinks appropriate, under the clause preceding and paragraph following paragraph 1(2). If so, there was no point in saying that he can, together with the settlor, be empowered to pay over a part or the whole of the income/principal to " such one or more members of a class composed of the family members living ". It cannot also be forgotten that the trustee in this case is a bank one of the largest in the U. S. A. and not an individual acquainted with the affairs of the settlor's family. Now coming to section 63, it is equally not possible to agree with learned counsel. Section 63 does not say that the power of revocation vesting in the transferor should be absolute or unconditional. As pointed out by Chagla C. J., in Behramji Sorabji Lalkaka v. CIT [1948] 16 ITR 301 (Bom) (at page 307): " the only question that has got to be asked is whether the transfer is capable of being revoked by the assessee or not . . . . it may be that, before the power is exe....
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....other decisions cited before us in any detail. The decision of this court in CIT v. Ratilal Nathalal [1954] 25 ITR 426, emphasises that the power of revocation must be given to the settlor as settlor and not in any other capacity. In the deeds before us, the power is indisputably conferred upon the settlor in the very same capacity and not in any different capacity. The other decision of this court in CIT v. Jayantilal Amratlal [1968] 67 ITR 1 is distinguishable for the reason that the power of the settlor therein was merely to choose among the several objects of the trust and, therefore, it was held that it does not attract section 63. On the other hand, Tarunendra Nath Tagore v. CIT [1958] 33 ITR 492 (Cal) was a case where the trust deed empowered the settlor to cause re-transfer of the trust assets in certain specified contingencies. The question was whether such a provision makes the transfer a revocable one within the meaning of the first proviso to section 16(1)(c) of the 1922 Act. It was held that it does, notwithstanding the fact that the power had to be exercised only in certain specified contingencies. The decision of the Madras High Court in K. Subramania Pillai v. Ag....
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....rovided that, in such cases " tax shall be charged (i) as if the relevant income or part of relevant income were the total income of the association of persons, or (ii) at 65 per cent., whichever course would be more beneficial to the Revenue ". For the purpose of this case, it is not necessary to notice the provisos appended to sub-section (1) or the subsequent amendments to the sub-section At the same time, section 166 expressly declares that " nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income ". The language of this section is clear. The opening words " nothing in the foregoing sections in this Chapter " which means Chapter XV, wherein sections 159 to 165 among other sections occur give it an overriding effect over the preceding provisions in the Chapter. The section states in unmistakable terms that nothing contained in the preceding provisions in the Chapter shall preclude the Revenue from making a direct assessment upon the beneficiary and/or from recovering the ....
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....y in appropriate cases assess the representative assessee in respect of that income and limited to that extent, and tax may be levied and recovered from him to the same extent as may be leviable and recoverable from the person represented by him. The contention raised by counsel for Nagappa that, since the trustees were assessable in respect of the income of the beneficiaries under section 161(1), that income could not by virtue of sub-section (2) of section 161 be assessed in the hands of the beneficiary is contrary to the plain terms of section 166. Sub-section (2) of section 161 does not purport to deny the Income-tax Officer the option to assess the income in the hands of the person represented by the representative assessee : it merely enacts that when a representative assessee is assessed to tax in exercise of the option of the Revenue, he shall be assessed under Chapter XV and shall not in respect of that income be assessed under any other provision of the Act. We will presently state the reasons why the rule was so enacted by Parliament. But on the plain words used by Parliament the plea raised by counsel that the representative assessee alone may be assessed as regards ....
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....the taxing authorities may, but are not bound, to treat such persons as assessees and recover tax. The taxing authorities may always proceed against the owner of the income and assess the tax against him. The definition in the connotation of 'person' undoubtedly include a receiver, trustee, common manager, administrator or executor, and by such inclusion, it is open to the taxing authorities to assess tax against any such persons ; but, on that account, the income in the hands of the owner is not exempt from liability to assessment of tax. " The principle of this decision does support our view, notwithstanding certain variance between the provision concerned in the said decision and those concerned herein. Sri Ashok Desai, however, placed strong reliance upon a Full Bench decision of the Gujarat High Court in CIT v. Kamalini Khatau [1978] 112 ITR 652, where the majority (Divan C. J. and B. K. Mehta I., with P. D. Desai J., dissenting) appears to take a contrary view. Before we deal with the decision, it would be interesting to note that counsel for the appellant, Sri N. A. Palkhivala, who appeared for the appellant before the Settlement Commission had himself repudiated this ....
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....to existence with the appointment of the sole trustee, Mr. McGill, and that the coming into existence of the trust did not depend upon the appointment of additional trustees. The Commission was wrong in holding that until and unless the additional trustees are appointed, the trust in clause 3 does not come into existence. Properly construed, says Sri Desai, clause 3 creates a discretionary trust. Inasmuch as the sub-clause does not prescribe any time limit within which the trustees must decide to distribute the income among the beneficiaries says counsel, clause 4 has not and had never come into operation. In this case, the trustees never did decide not to exercise their discretion under clause 3. If so, no income ever arose or accrued to the settlor or the appellant under clause 4. If the trustees fail to exercise their discretion under clause 3, the only remedy for the beneficiaries is to approach the court to compel the trustees to exercise their discretion one way or the other, but they cannot say that the trust income has accrued to them. Clause 4 comes into operation, says counsel, only where the trustees decide not to distribute the income among the specified beneficiaries; ....