TaxTMI 
TaxTMI 
1978 (8) TMI 4
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....00 in four limited companies for inclusion in his net wealth for the assessment years 1962-63 and 1963-64 ? Referred Case No. 59 of 1976 relates to the assessment of the trustees of H.E.H. the Nizam's Dependants and Khanazads Trust, for the assessment years 1965-66 to 1971-72. Referred case No. 63 of 1978 is in respect of the assessment years 1962-63 and 1963-64 for the wealth of the Nizam Nawab Mir Barkat Ali Khan Bahadur, L/R of Mir Sir Osman Ali Khan Bahadur. The 1st question in Referred Case No. 59 of 1976 and the question referred in Referred Case No. 63 of 1978 relate to the amount of Rs. 23,50,000 and the point involved is whether a valid trust is created by the Nizam in the month of June, 1961, for this amount, and if no such valid trust is created whether this amount has to be included in the wealth of the Nizam. In the statement of the case sent in Referred Case No. 63 of 1978, the Income-tax Appellate Tribunal stated that the statement of case in Referred Case No. 59 of 1976 be treated as the statement in the present reference also. Sri P. Rama Rao, the learned council for the Revenue mainly raised the following points: 1. The applications before the companies t....
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....O rejected this claim which was upheld in appeal. The settlor approached the Central Board of Direct Taxes. Some time in October, 1966, the settlor accepted that there was no valid and proper gift prior to the execution of the trust deed dated August 12, 1957, and, therefore, accepted the correctness of the gift. The late Nizam then wrote a letter to the Central Bank of India stating that the accounts that were maintained by the Financial Adviser on behalf of the members of the family of khanazads and dependants be closed and the balance be transferred to a new account in the name of Khan Bahadur C. B. Taraporevala, who in addition to being the Financial Adviser was also the secretary of the Trust. The settlor had an intention of creating another trust for the benefit of some of the khanazads that were left out at the time of creation of the earlier trust dated August 12, 1957. This trust was to be formed by June 12, 1961. The resolution passed by the trustees on March 14, 1959, also mentions about the intention of late Nizam with regard to creating this trust. Shares of the face value of Rs. 23.5 lakhs were transferred by June, 1961, and that amount formed part and parcel of the t....
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....,000 per year under this trust, but the annual income of the trust was less than a lakh of rupees and in such circumstances if the parol trust (trust created in June, 1961), and the trust created on August 12, 1957 are to be treated as one and the payments on account of the parol trust had to be made to the detriment of the interest of the beneficiaries of the original trust dated August 12, 1957. The ITO, accordingly, held that the corpus of Rs. 23.5 lakhs and the income therefrom should be excluded from the wealth-tax and income-tax assessments of the trust for the assessment year 1965-66, and shall be considered in the personal assessment of the owner, i.e., the Nizam. The ITO followed the said order for the subsequent years 1966-67 to 1971-72. The AAC held that the parol trust is not a valid one and agreed with the findings of the ITO. On the assessee's appeals, the Appellate Tribunal passed one common order on March 31, 1975. It held that the order dated August 23, 1974, passed in Wealth-tax Appeals Nos. 64, 65 and 66 of 1972/73, etc., holding that a valid trust was created by the late Nizam to the extent of Rs. 23,50,000 and this trust formed part of the original trust dated ....
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....solution reads as under: " The Secretary stated that after the creation of this trust on August 12, 1957, H.E.H. wanted to make another trust for the remaining khanazads. In the course of the discussion with the Solicitors, Messrs. Mulla and Mulla, Craigie, Blunt & Caroe, Bombay, it was disclosed " that the entire corpus of this trust comprised of the accumulated balance which had already been given as gifts by His Exalted Highness to the various dependents and khanazads and which has since formed the corpus of the trust. The solicitors were, therefore, of the opinion that the trust executed on August 12, 1957, was null and void, as it was formed with the corpus which was already the property of the khanazads and H.E.H. had no legal right to take back what had previously been given away as gift to the khanazads. Resolved that; in view of the opinion of the solicitors, the trust executed on August 12, 1957, be declared null and void and cancelled forthwith, that the Trust Account with the Central Bank of India Ltd., Hyderabad, be closed immediately and the entire balance in the account and the corpus of the trust be placed at the disposal of the Financial Adviser to H.E.H. the....
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....ear future for the remaining khanazad and in that trust those boys would be included among the beneficiaries so that they Might not be left out without being provided for. The note was signed by the H.E.H. the Nizam himself. A list of the names of the persons, who served Dulhan Pasha and were provided with Rs. 100 per head, was given. Their names are (1) Rahmat Ali, (2) Khadir Ali, (3) Yousuf Ali, (4) Riasat Ali, (5) Shareef Ali, and (6) Saghi Ali (Nazil Ali) (vide paper Book No. 3, page 265). There is another list of the names of eleven khanazads whose maintenance allowance (alongwith their wives) of Rs. 100 each is to be provided in " the Declaration of the Trust " which is to be completed in the near future. No date was mentioned. There is also another list containing 13 names along with the names of their wives who have to be provided in trust No. 3. On May 27,1961, a note was sent to Taraporevala enquiring about the amount of corpus of trust of 1957 which reads as under: Thus, I wish to know from Taraporevala, how much is the amount of corpus of trust including interest which has so far been invested. And the amount of allowance for each couple, i.e., husband and wife Rs. 3....
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....endants and khanazads was maintained and as per the monthly allowance provided in the lists they were being paid out of the income of the trust fund. The Financial Adviser to the Nizam was entrusted with the corpus for its disposal according to the wishes of the settlor. Now this amount of Rs. 23,50.000 is also transferred to that account. The contention is that no known form of law was adopted to transfer to the account of Nizam's khanazads. We will now examine that aspect. The correspondence that took place between the Central Bank of India and Khan Bahadur C. B. Taraporevala is filed before us which is in Book No. 4, with a memo of clarification filed by the appellant before the Income-tax Appellate Tribunal, Hyderabad, A-Bench. This has been dealt with by the Income-tax Appellate Tribunal in para. 50 of its judgment. The view taken by it is as under: " He has mentioned in the notes written in his own hand which we have referred to earlier, the particulars of the remaining khanazads who were to be provided for in the new trust and the amounts to be paid to each beneficiary. In June, 1961, shares of the face value of (Rs. 23,50,000) 23.5 lakhs, in respect of four limited....
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.... Ltd. also, the position was the same as in the case of the shares of the other two companies and the bank sent safe custody receipt in respect of the share; to Sri Taraporevala on July 13, 1962." After going through the entire correspondence the Appellate Tribunal held: " There cannot be any doubt from this correspondence that the bank was aware in 1961 itself that the shares in question were to be held by it in safe custody and the dividends realised from those shares were thereafter being credited to the 'Account-Nizam's khanazads'." After going through the entire correspondence we are of the opinion that the transfer of the securities of the face value of Rs. 23,50,000 was in the year 1961 itself. In Book No. 4, page No. 17, shows that the equity shares of the company of Kaveri Engineers Limited were issued and that they were received by the Financial Adviser to H.E.H., the Nizam khanazads. When the Appellate Tribunal has gone through the entire correspondence and was satisfied that there was transfer of asset of Rs. 23.5 lakhs in the shape of securities of four companies, it is not necessary for us to go into the matter again. The learned counsel for the asse....
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....sident of the Board of Trustees and shall for such purpose be appointed a trustee thereof in place of and stead of the settlor. The other relevant clause is cl. 24, which provides that it is lawful for the trustees to appoint any person to act as the Secretary of the Trust upon such terms as they may from time to time think fit and also to appoint and employ any person or persons to look after the trust fund and keep the same in good order and condition or otherwise in connection with the administration of the trust at such remuneration and on such terms as the trustees may from time to time think fit. Now, the point for consideration is, whether there were any trustees for the trust created in June, 1961. To examine this point, it is necessary to keep the special facts arising in this case in view. Even though the trust was created and registered by the Nizam on August 12, 1957, it was treated as invalid, vide resolution dated March 14, 1959. The account with the Central Bank of India at Hyderabad, was resolved to be closed and the entire balance in the account and the corpus of that trust placed at the disposal of the Financial Adviser to the Nizam for being credited to the re....
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....the corpus to be added later on for the benefit of the remaining khanazads as a single trust. Therefore, the trustees for the earlier trust would continue to be the trustees for the later trust created in June, 1961. After the Prince Mukaram Jah was recognised by the Government of India as the successor to Nizam, the late Nizam issued letter dated August 25, 1966, to the Central Bank of India, which is as under : " The Central Bank of India Ltd., Hyderabad, A.P. Dear Sirs, Ref : Current Account with your bank. I have to state that my grandson Prince Mukaram Jah has been recognised by the Govt. of India as my successor as the Nizam of Hyderabad. As such, after my lifetime, he will become the owner of the monies standing to the credit of only my personal accounts with your bank No. 670/56, for which separate instructions are being given by me. In addition to the above account, my Financial Adviser has also opened from time to time, under my instructions, the following accounts, on account of the Members of my family, my khanazads and other dependants. The monies standing to the credit of these respective accounts belong to the respective persons for whose benefits they....
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....e Nizam's Trusts. The letter issued by the late Nizam makes it crystal clear that he had not treated the account as his personal account and that it was meant to be operated by Sri Taraporevala for the benefit of the khanazads. To put it in other words, the late Nizam himself constituted as a trustee for the said trust during that period and under the powers conferred by the trust deed dated August 12, 1957, appointed Taraporevala as Secretary of the Trust. The learned counsel for the Revenue on the basis of this letter dated August 25, 1966, contended that for the first time in this letter the Nizam indicated that he has no personal interest in any of these monies and therefore, if any trust is created it takes effect only from August 25, 1966, and not earlier, since up till August 25, 1966, it must be deemed that it was the personal asset of the late Nizam. In this connection, the learned counsel for the Revenue submitted that the Nizam was the owner of the entire corpus and did not make the payments from out of the trust fund to the beneficiaries under the trust of June, 1961. He pointed out that no amounts were paid as on March 31, 1962, to any beneficiary, that as on Mar....
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....essee has referred to Underhill's Law of Trusts and Trustees, 12th edn., at p. 53, wherein the law on this aspect is stated thus: " The would be donor can be bound only in one of two ways. He is bound, at common law, if he has made a gift to the object of his bounty, or to a trustee for that object, or has covenanted under seal either with that object, or with a trustee for that object, to do something for breach of which a common law court will give damages; and in either case equity will enforce the trust against the trustee, and if the trustee refuses to enforce his legal rights against the donor the court will authorise the beneficiary to use his name. A donor is also bound in equity if he has declared himself a trustee for the object; for equity regards a declaration of trust as the equitable equivalent of a common law of gift." It is further stated thus: "On the other hand, if a trust has been once declared and the interest of the settlor in the trust property vested in the trustee (or, in technical language, if the trust is completely constituted) courts of equity will enforce it, whether the party applying for relief gave valuable consideration r not, even although....
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....l with the legal estate in conformity with his intention. " The learned counsel for the assessee also referred to an extract from the Corpus Juris Secundam (Vol. 89, Chapter 45, pp. 788 to 791) which is given in O.P. Aggarwala's The Indian Trusts Act, 1882 (7th edition) (Vide pages 221 and 222) which runs thus: " The rule of certainty in the material terms of a declaration of trust requires that there be certainty as to the objects or beneficiaries of the trust. The beneficiaries must be expressly named or so designated or described as to be capable of identification, or of being ascertained. It is sufficient, however, if the language used clearly points out the beneficiaries if they are designated with reasonable certainty, or if they are made sufficiently certain that the proper court can determine them. Designation of beneficiaries as a class is a sufficiently certain designation provided the class is clearly defined. It is not necessary that the beneficiaries must all be named, or in existence, or known at the time of the creation of the trust. A trust is valid although the beneficiaries are left to be determined by the will of the settlor. Certainty as to all benefici....
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....at if the trust relates to immovable property the transfer or declaration must be by a document registered according to law of registration and if it relates to movable property then no registration is needed. In that view, the Bench observed that the deceased has not divested himself of the property and, therefore, he must be said to have died possessed of those properties. In our view, the observations of the Bench do not support the contention of the Revenue, but on the other hand, supports the contention, of the assessee. In the instant case, we have already noted that during that period the donor was himself the trustee and the account was opened in the name of the account of " Nizam's khanazads " and the settlor had also clearly declared his intention to create the trust in June, 1961, to invest further amounts, and transfer those assets to that account. Even assuming that there are no other trustees during the period from 1961 to 1966, still the settlor was himself the sole trustee and the assets were transferred to the account of Nizam's khanazads. Looking this problem from the other angle also, when the trust created on August 12, 1957, was treated as a valid one and as th....
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....r indicates the class of beneficiaries in the trust deed. We will now deal with this point. Late Nizam sent note containing the names of the remaining khanazads. We have already adverted to the lists signed by the Nizam. One list contains 11 persons and their wives, each to be paid Rs. 100, i.e., in all 22 persons. Another list contains 13 names along with their wives each to be paid Rs. 100, i.e., in all 26 persons. One more list contains 6 names each to be paid Rs. 100. Another list dated May 3, 1961, contains 20 names along with their wives and each to be paid Rs. 100, i.e., in all 40 persons. The total number of persons in all these lists comes to " 94 ". In the face of these lists signed by the Nizam himself, it cannot be said that the beneficiaries were not specified. What is contended by the learned counsel for the Revenue is that in the resolution dated April 15, 1968, in Sch. B, the number of persons given is " 182 " and that was not the number given by the Nizam in various lists. It is already noted that the trust was created in June, 1961, and this was for the benefit of the remaining khanazads. The names which were known to the late Nizam were given in various lists, bu....
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.... trustees and they have also been enumerated in the Schedule. The learned counsel for the Revenue in support of his contention that when there is uncertainty of the beneficiaries there could be no valid trust, placed strong reliance on a decision of the Supreme Court in Allahabad Bank Ltd. v. CIT [1953] 24 ITR 519. The Supreme Court was considering the case of a banking company carrying on business at Calcutta, Allahabad, etc. On March 15, 1946, the appellant executed deed by which it purported to create a trust for the payment of pensions to the members of its staff. The deed recited that a sum of Rs. 2 lakhs had already been made over to the trustees and that there would be added to it such further contributions as the bank might make from time to time, though it would not be bound to make such contributions. In the course of the accounting year 1946-47, the bank made a further payment of Rs. 2 lakhs to this fund. In its assessment for the assessment year 1947-48, the appellant claimed deduction of that sum of Rs. 2 lakhs under s. 10(2)(xv) on the ground that it was an item of expenditure laid out or expended wholly and exclusively for the purposes of its business. The ITO, th....
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....behalf to grant no pension at all to any officer of the staff who made an application to them for a pension and also to withdraw, modify or determine any pension payable to such officer if in their opinion the conduct of the recipient or the circumstances of the case should justify them in so doing. The whole scheme of the deed invested the bank or its officers duly authorised in that behalf with the sole discretion of granting or of withdrawing, modifying or determining the pension and it was not at all obligatory on them at any time to grant any pension or to continue the same for any period whatever. The beneficiaries, therefore, could not be said to have been indicated with reasonable certainty. What is more it could also be validly urged that there being no obligation imposed up" the trustees no trust in fact was created, even though the moneys had been transferred to the trustees." (underlining is ours). It was also contended before the Supreme Court that the power conferred upon the bank or its officers duly authorised in that behalf was power in the nature of a trust, that there was a general intention in favour of a class and a particular intention in favour of individu....
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....n would not avail the appellant because there was no clear indication in the deed of trust that the bank intended the power to be regarded in the nature of a trust, inasmuch as there was no obligation imposed on the bank or its officers duly authorised in that behalf to grant any pension at all to any applicant. In fact, even the pension, if granted, could be withdrawn, modified or determined by the bank or its officers duly authorised in that behalf as therein mentioned. Under the circumstances, their Lordships held, it could not be said that there was a power in the nature of a trust which could be exercised by the court if the donee of the power for some reason or other did not exercise the same. It was also considered, whether any beneficiary claiming to be entitled to a pension under the terms of the deed could approach the court for the enforcement of any provision purporting to have been made for his benefit. Even though, it was held, the beneficiary may be qualified under cl. 8 to apply for the grant of a pension he could not certainly enforce that provision because there was no obligation imposed at all on the bank or its officers duly authorised in that behalf to grant an....
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....aised by the learned counsel for the Revenue, Sri P. Rama Rao, we had to deal with the trust created on August 12,1957. At one stage, as it was treated to be null and void, a separate account was opened in the name of Khan Bahadur C.B. Taraporevala, Financial Adviser to H.E.H. the Nizam, Hyderabad. This account was opened in the year 1959, in pursuance of the resolution dated March 14, 1959. The securities of the face value of Rs. 23.5 lakhs was deposited in this account when the trust was formed in June, 1961. The manner in which the shares of the value of Rs. 23.5 lakhs was deposited in the account of Nizam's khanazads has already been discussed in the earlier part of this judgment. The entire amount became a part and parcel of the account of Nizam's khanazads. The intention of H.E.H. the Nizam that he wanted to treat the trust formed in 1961, as part of the trust formed in 1957, is clear from the note dated May 27, 1961, asking Taraporevala as to how much was the amount of corpus, what was the interest or return earned by it, etc. This note clearly indicates that after knowing the details the Nizam wanted to increase the corpus, if necessary. It can also be inferred that if the ....
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.... assessee also contended that if the corpus of Rs. 23.5 lakhs is not treated as a part of the original corpus under the trust dated August 12, 1957, it will not be a benefit even for the revenue. The learned counsel referred to the income-tax assessment order which was relied on for wealth-tax assessments and quoted in the judgment of the Appellate Tribunal. It runs thus: "As on to day, the original alleged corpus of Rs 23.5 lakhs dwindled to a mere half, because heavy payments were made to the beneficiaries. The income of the corpus was not sufficient to meet the scheduled payments. HEH would never have intended to create a trust of this type wherein in a few more years there would be no corpus as such and nothing would devolve on his heir, the present Nizam, when, in contradistinction, in the first trust of 1957, the corpus of 85 lakhs had remained in tact and also improved by accretion to a crore and twenty lakhs, after meeting the stipulated payments to all the beneficiaries in the last twelve years." This also points out that the late Nizam never wanted to create trust with insufficient corpus so that during the course of time the very corpus itself may get exhausted to ....
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....pressed their view that the trust was null and void but did not disclaim their office as Trustees, nor did they resign or renounce their office as Trustees, nor did they resign or renounce their office as such. Their right, therefore, to function as Trustees and discharge their duties and exercise all their powers and functions under the trust deed, has remained in full force and effect." By this resolution again Taraporevala was appointed as secretary of the trust. This clinches the issue that the trustees constituted for the trust in 1957 continued for the later trust created in 1961 also, as the assets were put in the same account. We have already dealt with this point at length. The learned counsel for the Revenue urged that there is no specific mention of Rs. 23.5 lakhs in the resolution. When the amounts are deposited in the very same account of Nizam's khanazads and not treated as separate accounts, there could be no separate reference to that amount at all. On the other hand, it shows that no distinction was made between the two amounts. That apart if the contention of the learned counsel for the assessee that the trust formed in June, 1961, was a part of the trust creat....
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....neficiaries were being paid the allowances out of the trust fund and that sufficient time has elapsed from the creation of the trust. Daring all these years no claims were set up by the heirs of the Nizam that no trust was created for the remaining khanazads. Even if for any reason the trust as created in June, 1961, is treated as invalid, still it becomes valid by the doctrine of user. In this connection, the learned counsel relied on Moorthanna v. Chinna Ankaiah [1975] ALT 1. That was a decision rendered by us. One of us, Sambasiva Rao J., (as he then was) speaking for the Bench held thus: " The conclusion is, therefore, irresistible that the trustees constituted as per the provisions of the will were in legal possession of the two houses from 1931, when Kotamma died, right up to 1968 and that possession was on behalf of the trust. They were in possession for nearly 37 or 38 years on behalf of the trust and in their capacity as trustees to the exclusion of the heirs of Kotamma and everybody else, that is to say, the heirs of Kotamma cannot now claim the properties and the trustees have acquired a possessory title, against any other possible claimant and, to the properties. Thi....
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....der does not contain anything about this amount. It is to be noted that it was only after the death of the Nizam that the returns were filed by his successor Barkat Ali Khan. This suggests that the trust was carved out only in 1967 and not earlier to that. The learned counsel for the assessee, on the other hand, submitted that Mir Barkat Ali Khan as the legal representative of the late Nizam filed the gift-tax return declaring the gift of Rs. 23.5 lakhs. The GTO on this passed an order thus : " Without prejudice to the stand taken in the assessments of the khanazads Trust and as a purely protective measure in the interest of the Revenue, whose collection would be in a jeopardy in the event the present Nizam's stand of a valid third trust for the khanazads is vindicated in appeal, I proceed to complete the assessment by accepting the face value of the shares declared in the return as the market value. The assessment is completed under s. 15(1) of the G.T. Act." After giving the basic exemption the taxable gift was arrived at Rs. 23,40,000. The learned counsel for the assessee, on the other hand, also submitted that this point was not taken before the lower Tribunals and this a....
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....ier trust created on August 12, 1957. In other words, the amount of Rs. 23.5 lakhs would cease to be the asset of the Nizam and, therefore, not available for inclusion in his net wealth for the assessment years 1961-62 and 1962-63. In this connection, the learned counsel for the assessee referred to CIT v. Motilal Ramswaroop [1970] 76 ITR 43 (Raj) in support of the proposition that when once the wealth goes out of the hands of the assessee, that wealth including the interest accrued thereon, would not be available for assessment of either wealth-tax or income-tax in the hands of the assessee. In that case, the karta of the HUF, the assessee, gifted an amount of Rs. 4 lakhs to seven divided members of the family. The ITO did not accept the gifts on the ground, that the karta of the assessee-family was, not competent to make the gifts of a substantially large amount and he assessed the total income of the assessee including therein the interest on the said sum of Rs. 4 lakhs. The Tribunal directed that the interest be deleted from the assessment on the ground that under the law gifts made by the karta of an undivided Hindu family were not void. On a reference to the High Court under ....