TaxTMI 
TaxTMI 
2002 (3) TMI 201
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....foreign trusts as well as orders of the Settlement Commission. Paper Book No. 11 comprising 14 pages include inter alia statements of income f or the assessment years under appeal enclosed by the assessee along with the returns of income for such years. 4. The relevant facts may be briefly set out at the outset. Late Shri Vikramsinhji, the ex-ruler of erstwhile Princely State of Gondal in Saurashtra, father of the assessee, created the following trusts in USA and UK during the accounting period 1963-64 relevant to the assessment year 1964-65:-- Date of Trust Value of assets transferred Deed (as originally shown) 1 . USA Trusts: Trust No. 1 19-12-1963 Rs. 50196....
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.... Rs. 217812 ----------- &nbs....
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....h, to his elder son, the assessee before us. The Settlement Commission further held that the entire income from the UK trusts was received by the settlor during his lifetime and after the settlor's death, by the assessee and, therefore, on this basis also, the said income is liable to be included in the total income of the settlor and after his death, the assessee before us. 5. On the above basis, the Settlement Commission computed the taxable income of the Settlor under both the sets of trusts for the assessment years 1964-65 to 1970-71 (upto the date of death of the settlor) as also the income of the assessee, his son for the assessment years 1970-71 to 1982-83. The assessee then preferred separate appeals before the Hon'ble Supreme Court against the two orders of the Settlement Commission. The Hon'ble Supreme Court in its judgment Jyotindrasinhji v. S.L Tripathi [1993] 201 ITR 611 has upheld the order of the Settlement Commission. 6. Insofar as the three settlements executed in the US are concerned, the Hon'ble Supreme Court has held that the US trusts are revocable trusts and income from these trusts has been rightly included in the income of the settlor by virtue of sect....
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....i 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 duty and interest. (2) Subject as aforesaid upon trust for all or such one more and more exclusively of the others or other of the beneficiaries at such age or time of respective ages or times if more than one in such shares and with such trusts for their respective benefit and such provisions for their respective advancement and maintenance and education at the discretion of the trustees or of any other person or persons as the person who for the time being is the Maharaja or (if the title is abolished) would have been the Maharaja had the title not been abolished shall at any time during the specified period by any deed or deeds revocable appoint AND in default of and subject to any such appointment upon the trusts and with and subject to the powers and provisions hereinafter declared and contained concerning the same: Provided always that the foregoing power of appointment shall not be capable of being exercised: (a) by anyone other than ....
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....Shri Patel argued that clause 3 could come into operation only if and when the settlor appointed the additional trustees as contemplated by it. According to Shri Patel, the trust had come into existence with the sole trustee (Mr. McGill) and it did not depend upon the appointment of additional trustees by the Maharaja. He further added that clause 3 prevails over clause 4 and UK trusts, like US trusts are also discretionary trusts and not specific trusts as held by the Settlement Commission. According to Shri Patel, no income was received by the settlor or the assessee either in the UK or in India. So long as the trustees decided not to exercise the discretion to distribute the income, no income arose to any of the beneficiaries. 10. Regarding the orders of the Settlement Commission as well as the Hon'ble Supreme Court upholding the income from the UK trusts in the hands of his father as well as in his own case, the ld.counsel argued that the said decisions are not binding for the assessment years under appeal before us. Shri Patel submitted that the crucial distinguishing feature of the present appeals before us is that the assessee has not included the income from the UK trust....
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....s case. Since the facts and circumstances of the case as prevailing for the assessment years 1984-85 to 1989-90 involved in the present appeals before us are substantially similar to the earlier assessment years, we see no reason whatsoever to take a contrary view which is not in conformity with the conclusions of the Hon'ble Supreme Court and Settlement Commission for the earlier assessment years. A distinction on facts sought to be drawn by the learned counsel is patently erroneous as we shall presently see. The facts as they emerge from the order of the Settlement Commission dated 31st March, 1989 in the case of the assessee for assessment years 1970-71 to 1982-83, placed in paper book at pages 238 to 267 are that the assessee declared the income from UK settlements upto the assessment year 1973-74. For some of the years, the statement of account of UK trusts were not available at the time of filing the original return and the assessee, therefore, subsequently filed revised statement of income for such years. While submitting the revised return for assessment year 1970-71, the counsel of the assessee filed a letter dated 20th February, 1974 stating as under:-- "At the time of....
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....ssment years 1974-75 and 1975-76 eventhough the income was shown separately, the assessee appended a note claiming that the income from UK settlements were exempt. From these facts, it is clearly established that the contention of the assessee that income from the UK trusts have been held assessable in the hands of the assessee by the Settlement Commission as well as the Hon'ble Supreme Court mainly on the ground that such income was declared by the assessee himself in his returns is factually incorrect. 14. Now, let us turn to the statements of income filed by the assessee with the returns for the assessment years 1984-85 to 1989-90 which are the subject-matter of the present appeals before us. Such statements of income are available at pages 3 to 12 of the paper book No. III filed by the learned counsel. Statement of income for assessment year 1984-85, appearing at page 3 of the paper book shows that the following note has been enclosed with the return:-- "Notes: (1) The remittance received from the trusts is not included as according to the assessee's opinion the Trust being Discretionary Trust the receipt Trust is not income. (2) The return is subject to our filing pet....
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....3 and 4 of the UK settlements, extracted by us hereinbefore are of crucial relevance for determination of the issue regarding the nature of the UK trusts "The Clause 3 settles the trust income and property upon two successive trusts. The first trust in the Settlement 'B' is to pay the premiums in respect of certain specified insurance policies. The second trust is for such beneficiaries, in such shares, etc., at the discretion of the trustees or of any other person or persons as the Maharaja shall at any time during the specified period appoint. It also mentions that in default of and subject to any such appointment, the trust income and property will be settled upon the trusts thereafter declared. The clause 4 which comes thereafter states that "subject as aforesaid" the trust fund and its income will be held upon the following trusts and then follows an order of succession in which the income of the trust fund and the trust fund itself shall be held upon trust. First of all the income of the trust fund accruing during the life of the settlor shall belong and be paid to the settlor and subject to this the income of the trust fund accruing during the life of the Maharaja's elder....
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....rt of the Maharaja and the trustees in the matter of implementing the provisions of clause (3) of the settlements, reproduced as above eloquently manifests the true intention of the settlor to treat the trust income and trust funds as his own. The settlor Shri Vikramsinhji had two sons, two daughters and several other members in his family who were all beneficiaries of the trust in question. If the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts among them from time to time according to the objects of the trusts. However, the tell-tale facts as indicated above bring out the intention of the settlor to treat the trust property as his own. The settlor and after his death his son, have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of clause 3, one would have expected the state of affairs to have been different. In our considered view, the true intention of ....
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....reclude the Revenue from making a direct assessment upon the beneficiary and/or from determining the tax payable from such persons. The Revenue has thus been given option to tax the income from a discretionary trust either in the hands of the trustees or in the hands of the beneficiaries. The Hon'ble Supreme Court referred to its earlier decision in Nagappa (CR.) v. CIT [1969] 73 ITR 626 and dissented from the Full Bench decision of the Hon'ble Gujarat High Court in CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 wherein a contrary view has been taken. Thus, even if UK settlements are to be treated as discretionary trusts as claimed by the assessee, income from such trusts flowing to the assessee, on the basis of the Hon'ble Supreme Court decision would be liable to be assessed in his hands. In fact, the Hon'ble Supreme Court held that since the income from foreign trusts is assessable in the hands of the assessee by virtue of section 166, the issue whether such trusts arc of the nature of the specific trusts is academic. For the aforesaid reasons, we hold that income from UK trusts has been rightly assessed in the hands of the assessee for the assessment years 1984-85 to 1989-90 un....
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....onary trusts is clause 1(2) which reads as under:-- "Anything hereinabove to the contrary notwithstanding, at any time and from 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 or to the use of such one or more members of a class composed of the grantor, the wife or widow of the grantor, the children of the grantor living from time to time, the spouse of any child of the grantor, then living or deceased (hereinafter referred to as the 'family members'), and the descendants of the family members living from time to time, in such amounts, shares and proportions, either absolutely or in trust, and upon such terms and conditions (including the grant of a further power to appoint) as the trustee and a Maharaja who shall have attained the age of (18 years) shall at any time and from time to time appoint and direct in a written instrument which refers to and specifically exercises this power and which is duly executed by the Maharaja and by the trustee then acting hereunder. The foregoing power to appoint may be released in whole or in part by the Maharaja or by the trustee or by....
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....hree US trust s every year commencing from 31st March, 1970 upto 31st March, 1982 which comprised the period for consideration before the Settlement Commission as per the settlement application. The assessments of such income in the hands of the assessee, as already pointed out above, has been upheld by the Hon'ble Supreme Court. 23. During the course of hearing before us, the Bench specifically called upon the learned counsel to furnish information regarding the disbursement made by the US trustees during the period relevant for assessment year 1987-88 which would be liable to be assessed in the hands of the assessee as his income. The ld. counsel, however, claimed that no distribution has been made by the trustees. When called upon to substantiate the claim, the ld. counsel expressed his helplessness to furnish any such evidence. The assessee has indicated in the income-tax return for assessment year 1987-88 break-up of the income in respect of each of the three US trusts and included such income aggregating to $82,476 (equivalent to Rs. 10,43,321) "subject to Supreme Court decision". Even though the Indian income shown in the return was a loss, the assessee claimed deduction ....