Commissioner of Income-Tax, Gujarat Vs.
Jayantilal Amratlal, Ahmadabad [1967] INSC 149 (5 May 1967)
05/05/1967 SIKRI, S.M.
SIKRI, S.M.
SHAH, J.C.
RAMASWAMI, V.
CITATION: 1968 AIR 189 1967 SCR (3) 946
ACT:
Indian Income-tax Act, 1922, s. 16(1)(c), proviso
1--Settlor making charitable trust and registering it under s. 35-Bombay Public
Trusts Act, 1950--S. 16(1)(c) proviso 1 whether can be applied to income of
trust on presumption that settlor may derive benefit contravening the Bombay
Act--Facts justifying applicability of s. 16(1)(c) proviso 1.
HEADNOTE:
J executed a trust deed whereby he created a
charitable trust. The 4iced was registered with the Charity Commissioner under
the Bombay Public Trust Act, 1950. For the year 1958-59 the Income-tax Officer
held that since the settlor had reserved to himself wide powers for own benefit
and had also utilised those powers to his benefit, the case was coveted by s.
16(1)(c) of the Income-tax Act, 1922.
Accordingly the Income-tax Officer taxed the
income of the trust in the hands of the 'settlor. A similar order was passed
for the year 1959-60. In his appeal before the Appellate Assistant Commissioner
the settlor relied on s. 35 of the Bombay Public Trusts Act, 1950 to .show that
he was thereby precluded from utilising the funds for his own benefit but his
plea was not accepted. The Appellate Tribunal, however, relying on the terms
.of the deed itself decided in favour of the settlor and. the High Court in
reference did the same. The revenue appealed.
HELD: (i) There was no doubt' that under the
Trust Deed the settlor had very wide powers and could direct' the Trustees to.
grant loan him. The Trustees could even grant a loan to a firm in which he was
interested. But this would be contrary to the provisions of s. 35 the Bombay
Trust Act.
The said Act to the extent it operates must
override provisions in the Trust Deed. [953E-954A-B] The Legislature in proviso
1 to s. 16(1)(c) is thinking of powers lawfully given and powers lawfully
exercised. Any person can commit breach of trust and assume power over income
or assets but for that reason the income of the trust cannot be treated as the
income of the settlor under the proviso.
Commissioner of Income-tax, West Bengal v.
Sir S.M.
Bose, 21 ].T.R. 135 and Commissioner of
Income-tax, Bombay North v. Mathuradas Mangaldas Parekh, I.T. Ref. No. 4/54,
Judgment by Bombay High Court dated August 26, 1954, referred to.
(ii) The words 're-assume power' give
indication to the correct meaning of s. 16(1)(c) proviso 1. The latter part of
the proviso contemplates that the settlor should be able by virtue of something
contained in the Trust Deed, to take back the power he had over the assets or
income previous to the execution of the Trust Deed. A provision enabling the
settlor to give directions to. trustees to employ the assets or funds of the
trust in a particular manner or for a particular charitable object contemplated
by the trust cannot be said to confer a right to re-assume power within the
first proviso. Otherwise a settlor could never name himself a sole trustee. The
mere fact that the settlor can derive some direct or indirect benefit under a
trust deed would not' bring the deed within the first proviso. [955GH; 966A-B]
947 Chamberlain v. Inland Revenue Commissioner 25 T.C. 317, Tulsidar Kalichand
v. Commissioner of Income-tax, 42 I.T.R.
1, WoIfson v. Commissoners Inland Reventte,
31 T.C. 141, Saunders v. Commissioners Inland Revenue, 37 T.C. 416, referred
to.
Commissioner of Income-tax, Punjab v.S.
Raghbir Singh, 57/.T.R., followed.
On an examination of terms of the Trust Deed
the Court held none of its clauses came within the purview of Proviso 1.
[956C-F]
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 474-477 966.
Appeals by special leave from the judgment
and order dated September 5, 1963 of the Gujarat High Court in Income-tax
Reference No. 19 of 1962.
S.T. Desai, A. N. Kirpal, R.N. Sachthey and
S.P. Nayyar for the appellant (in all the appeals).
R.J. Kolah, M.L. Bhakta and O.C. Mathur, for
the respondents (in all the appeals).
The Judgment of the Court was delivered by
Sikri, J. These four appeals by special leave are' directed against the
judgment of the Gujarat High Court in Income Tax Reference No. 19 of 1962,
whereby the High Court answered the questions referred to it by the Income-tax
Appellate Tribunal against the Commissioner of Income-tax, who is the appellant
before us. The reference was in respect of assessment years 1955-56 and 1956-57
in the case of Shri Jayantilal Amratlai (Individual) and in respect of
assessments years 1958-59 and 1959-60 in the case of Jayantilal Amratlal
Charitable Trust Ahamedabad. The questions referred are:
(1 ) Whether on the facts and in the
circumstances of the case, the Tribunal was right in holding that the income of
Jayantilal Amratlal Charitable Trust was not assessable in the hands of the
settlor Jayantilal Amratlal under the first proviso to Sec. 16(1)(c) of the
Income-tax Act for the assessment years 1955-56 and 1956-57 ? (2) Whether on
1he facts and in the circumstances of the case, the Tribunal was right in
holding that the income of the Trust should be considered in the assessment of
the trustees and that they were entitled to the benefits of the refunds
attached to the dividends from the Trust properties for 'the assessment years
1958-59 and 1959-60 ? The answer to these quest.ions depends on the true
interpretation of s. 16(1)(c) of the Indian Income-tax Act, 1922, and the
interpretation of the Trust Deed dated June 19, 1947, and 948 to appreciate the
points fully it is necessary to give a few facts which are stated in the
statement of the case.
Jayantilal Amratlal, individual, hereinafter
referred to as the settlor, executed a trust deed whereby he settled 80
ordinary shares of M/s Jayantilal Amratlal Ltd., on trust and created a trust
known as "Jayantilal Amratlal Charitable Trust" to carry out the
following various objects set out in the Trust Deed :
"For the relief of poor, for education,
for medical relief, for advancement of religion, knowledge, commerce, health,
safety or any other objects beneficial to mankind." This Trust Deed was
registered with the Charity Commissioner under the Bombay Public Trust Act,
1950. The Department accepted this trust as a valid charitable trust and gave
the necessary relief to the trustees in respect of the income of the Trust.
till the assessment year 1957-58.
The Income-tax Officer, while dealing with
the assessment of Jayantilal Amratlal Charitable Trust for the year 1958-59,
wrote A letter to the Trust to show cause why the income of the Trust should
not be included in that of the settlor and why the case of the Trust should not
be decided accordingly.
The Managing Trustee submitted his reply. The
Income-tax Officer wrote lengthy order holding that on the facts the case was
covered by the first proviso to S. 16 ( 1 ) (c).
He was impressed both by the wide powers
given to the settlor and the way in which the settlor had been utilising his
powers under the various clauses of the Trust Deed. He held :
"It is not necessary that there should
be diversion of income or assets from char-table purposes to noncharitable
purposes to constitute "retransfer of assets to or reassumption of power
over" the income or assets of the settlor. It is not even necessary for
the purpose of 1st proviso to section 16(1)(c), especially its later part i.e.
"give -the settlor a right to reassume power directly or indirectly over
the income or assets" that income or assets should be used for personal
ends. For diversion of such assets or income from one charitable purpose to
another in accordance with the wishes of the settlor and the utilisation of
income and investment of income or assets not in full conformity with the
desires of the trustees would be enough to drag the Trust property in the ambit
of section 16 (I) (c). In the instant case, the settlor is all in all, he is
the managing trustee and in the event of a conflict of opinion amongst the
trustees the settlor would exercise predominating 949 influence both as
managing trustee as also in his capacity of an arbitrator and his decision
would be binding on all. The most important point which needs consideration is
that all the inherent powers and discretion for the income and corpus of the
Trust property remain with The settlor, in his capacity as settlor and not by
way of his capacity of a trustee." The Income-tax Officer accordingly held
that the income of the Trust would not be computed in the hands of the trustees
but would be computed in the hands of the settlor under s. 16(1) (c). For the
assessment year 1959-60 he passed a similar order on the same date.
On the same day he also dealt with the
assessments of Jayantilal Amratlal, individual, for the years 1955-56 and
1956-57. Following his reasoning he included the relevant income of the Trust
in the hands of Jayantilal Amratlal.
Four appeals were taken to the Appellate
Assistant Commissioner who, by his two orders dated November 8, 1960, dismissed
the appeals. Before him the settlor relied on s. 35 of the Bombay Public Trust
Act, 1950, but the Appellate Assistant Commissioner held that this did not
assist the settlor because the Income-tax law did take into consideration
income derived directly or indirectly by illegal means. He felt that the
settlor "could not be precluded from utilising funds of the trust directly
or indirectly to his benefit since he had a right under the settlement to do so
and the Bombay Public Trust Act did not hold any fear for him as the penalties
leviable were not of a deterrent nature, compared to the advantages that he
could gain directly or indirectly by re-assuming control over the investments
or its income".
On appeal, Income-tax Appellate Tribunal,
however, reversed these orders and held that the income from the Trust was not
hit by the first proviso to s. 16(1)(c). The Tribunal ignored the factual
position relied on by the Income-tax Officer and the Appellate Assistant
Commissioner and confined itself only to the Trust Deed. Regarding the
offending clauses 4, 10 and 21 of the Trust Deed, which we will presently refer
to, the Appellate Tribunal held:
"We see nothing in these clauses which
confer on the assessee the right to retransfer to the assessee directly or
indirectly the income or the assets or to reassume power over them. He has
always to exercise these powers within the framework of the Trust. There is no
doubt power in clause (10) to invest in any manner and thereby in the
assessee's own companies, but this is overridden by clause 35 of the Bombay
Trust 9 5 0 Act under which it is registered. If the Charity Commissioner has
chosen not to take action, it may also be that he has considered the matter and
approved the action. It is purely his responsibility. The. fact that the
investment itself has not been made illegal under the Trust Act and that the
assessee can offend the provisions with impunity as the penalty is light are
all matters extraneous to this consideration which has to be confined only to
the provisions in the deed." At the instance of the Commissioner of
Income-tax the Appellate Tribunal stated the case and referred the questions
which we have already reproduced above. The High Court held :
"When a statute talks about a right to
reassume, it must mean a lawful right which can be lawfully exercised. . . . a
right to reassume must be given to the settlor independently of any third party
and dependent upon his own volition. It is true that the Charity Commissioner
may grant leave to the settlor, but he may or may not grant it. A right to
reassume cannot rest dependent upon whether the Charity Commissioner may or may
not grant sanction." Shelat, C.J., observed "Surely, it must be
presumed that the Charity Commissioner would not grant his sanction to an
investment which is bound to result in a conflict of duty and interest on the
part of the settlor who is also a trustee. Therefore, such a right, if it can
be called a right, is not one of any substance and cannot, therefore, be
construed as a right to reassume power over the trust assets or the income
thereof, as contemplated by proviso I to section 16(1)(c)." "A loan,
by the very nature of it, cannot be said to amount to an exercise of dominion
or control over its subject matter. It is repayable and is given on conditions
as to the time of repayment and interest, if any. By taking a loan a settlor
does not exercise over its subject matter power or dominion which, but for the
trust or the settlement, he would have been able to exercise." Section
16(1) (c) reads as follows "16. Exemptions and exclusions in determining
the total income.-.
(1) In Computing the total income of an
assessee.
(a) ......
951 (b)......
(c) all income arising to any person by
virtue of a settlement or disposition whether revocable or not, and whether
effected before or after the commencement of the Indian Income-tax (Amendment)
Act, 1939 (VII of 1939), from assets remaining the property of the settlor or
disponer, shall be deemed to be income of the settlor or disponer, and all
income arising to any person by virtue of a revocable transfer of assets shall
be deemed to be income of the transferor :
Provided that for the purposes of this clause
a settlement, disposition or transfer shall be deemed to be revocable if it
contains any provision for the retransfer directly or indirectly of the income
or assets to the settlor, disponer or transferor, or in any way gives the
settlor, disponer or transferor a right to reassume power directly or
indirectly over the income or assets;
Provided further that the expression
"settlement or disposition" shall for the purposes of this clause
include any disposition, trust, covenant, agreement, or arrangement, and the
expression "settlor or dispone r" in relation to a settlement or
disposition shall include any person by whom the settlement or disposition was
made :
Provided further that this clause shall not
apply to any income arising to any person by virtue of a settlement or
disposition which is not revocable for a period exceeding six years or during
the life-time of the person and from which income the settlor or disponer
derives no direct or indirect benefit but that the settlor shall be liable to
be assessed on the said income as and when the power to revoke arises to
him." The learned counsel for the appellant, Mr. S. T. Desai, has
submitted three propositions before us (1) The operation of the first proviso
to s. 16(1) (c) depends only on the settlement and its terms and not on any
provision of the Bombay Public Trusts Act, which may or may not be observed;
(2) The absolute powers reserved over the
income and corpus of the trust property remain vested in the settlor in his
capacity as the settlor and not as trustee, and further they fall within the
purview of the first pro. viso to s. 16(l.) (c); and (3) It is a relevant
consideration that, as found by the authorities, the settlor has been deriving
direct and indirect benefits from the trust properties. He relies on clauses 4,
6, 8, 10, 11 and 21 of the Trust Deed to show that the Trust Deed gives the
settlor right to re-assume power directly 9 Sup. CI/67-17 952 or indirectly over
the income or assets of the Trust within the first proviso to s. 16(1)(c).
Let us now examine the Trust Deed. This
indenture was made between Jayantilal Amratlal, hereinafter called the settlor,
and Jayantilal Amratlal, Padmavati wife of the said Jayantilal Amratlal,
Ramanlal Amratlal, Hariprasad Amratlal, Kasturlal Chandulal Parikh and
Bhagubhai Chandulal, hereinafter called the Trustees. Clause, 1 vests the
shares and the other trust properties and income in the trustees.
Clause 2 gives the name of the trust Clause 3
obliges the trustees to get and collect income ,of the trust properties and pay
expenses, etc. Clause 4 creates the trust for the relief of poor, and for
education, medical relief, etc. It further provides : "The Trustees shall
at the direction of the Settlor during, his lifetime and after his death at
their discretion set aside any portion of the income of the Trust Premises to
provide cash, food and clothes for any temple or temples of the Pushti Marg
Sampradaya. In applying. the income of the Trust Premises for all or any of the
objects hereinbefore specified the Trustees may consider the claims of any
needy or poor person belonging to the Visa Porwad Community." Clause 5
enables the settlor to give direction to the trustees to accept contributions or
donations to the Trust from other persons.
Clause 6 provides as follows : "The
Setflor may at any time or times by writing direct that any specific funds or
investments or property forming part of the Trust Premises and/or the income
thereof shall be utilised and applied exclusively for any one more of the
aforesaid ,charitable objects and the Settlor may by writing at any time or
times vary or revoke any such directions previously given by him and Trustees
shall be bound to carry into effect all such directions given by the
Settlor." Clause 7 enables the Trustees to utilise the whole or any
portion of the Trust Premises for all or any of the charitable object-,,, if
the Settlor so directs. Clause 8 may be set out in full :
"8. The Trustees shall from time to time
at the direction of the settlor during his life time and after his death may at
any time at their discretion deliver or hand over the income of the Trust
Premises or any part of such income to any institution, association or society to
be applied for all or any of the purposes of these presents without being bound
to see to the application thereof or being liable for the loss or
misapplication thereof." Clause 9 enables the Trustees to invest the
residue, etc., and to accumulate the same and apply towards the objects of the
Trust. Clause 10 inter alia empowers the Settlor to give directions regardinthe
investment of moneys "as are authorised by law for investment of trust
premises or in ordinary or preference shares of joint stock companies, whether
partly or fully paid, or in debentures or in giving loans to any public company
or firm of good standing and reputation or in the purchase or mortgage of any
movable or immovable property with power to the Trustees with the like direction
to vary or transpose the said investments into or for others of the same or of
a like nature." Clause II inter -alia enables the Settlor to direct the
Trustees to vary the investments. Out of the other clauses we need only mention
clause 21 which reads as follows :
"All questions arising in the management
and administration of the trusts or powers hereof and all differences of
opinion amongst the Trustees shall be disposed of in accordance with the
opinion of the Settlor during his lifetime and on and after the death of the
settlor in accordance with the opinion of the majority of the Trustees in the
case of their being equally divided the trustee senior most in age shall have a
casting vote." The learned counsel for the appellant says that these clauses
read fairly would enable the Settlor to direct the Trustees to give a loan to
him and he could give directions to the Trustees in 'such a way as to re-assume
control over the assets. He says that as a matter of fact the Income-tax
Officer did find that the Settlor has been utilising these powers for his own
benefit. There is no doubt that under the Trust Deed the Settlor has very wide
powers and the Settlor could direct the Trustees to grant loan to him. The
Trustees could even grant loan to a firm in which be was interested. But this
would be contrary to the provisions of the Bombay Public Trust Act. Section 35
(I) of the Bombay Public Trust Act provides :
"35(1) : Investment of Public Trust
Money Where the trust property consists of money and cannot be applied
immediately or at an early date for the purposes of the public trusts the
trustee shall be bound (notwithstanding any direction contained in the
Instrument of the Trust) to deposit the money in any scheduled bank as defined
in the Reserve Bank of India Act, 1934, in the Postal Savings Bank or in a
Cooperative Bank approved by the State Government for the purpose or to invest
it in Public security;
Provided......
Provided further that the Charity
Commissioner may by general or special order permit the Trustee of any public
trust or classes of such trusts to invest the money in any other manner."
9 54 Mr. S. T. Desai submits that we cannot take into consideration the
provisions of the Bombay Public Trust Act.
We are unable to accept this submission. The
Bombay Public Trust Act must, to the extent it operates, override any
provisions in the Trust Deed. As Shelat, J., observed, "when proviso 1
talks about a right to reassume power, prima facie, that must mean that there,
is such power lawfully given under the deed of trust." It seems to us that
the Legislature, in proviso I to s. 16(1)(c) is thinking of powers lawfully
given and powers lawfully exercised. Any person can commit breach of trust and
assume power over the income or assets but for that reason the income of the
trust cannot be treated as the Income of the settlor under the proviso.
The Calcutta High Court in Commissioner of
Income-tax, West Bengal v. Sir S. M. Bose(1) observed "The first proviso
to Section 16(1)(c) only contemplates cases where the settlor can lawfully
reassume power over the income or the assets. Unless that was so, the proviso
would cover every trust where a settlor has made himself trustee because a
trustee acting dishonestly could always assume control over the income."
We agree with these observations. Similarly, in an unreported judgment
(Commissioner of Income-tax, Bombay North v. Mathuradas Mangaldas Parekh ( 2 )
the Bombay High Court repelled a similar argument by observing :
"The first answer to this contention is
that them trustees would be committing a breach of the law if they were to
advance moneys to themselves. There is a clear prohibition under Section 54 of
the Trusts Act." If we do not ignore the provisions of the Bombay Public
Trust Act and the general principles applicable to public trusts, the question
arises whether on a true interpretation of the first proviso to S. 16 ( 1 ) (c)
the powers reserved to the settlor under the Trust Deed come within its mischief.
The learned counsel says that the words of the proviso are very wide. I He
points out the reasons why Parliament has inserted this proviso. He draws our attention
to -the -following observations of Lord Macmillan in Chamberlain v. Inland
Revenue Commissioners(1), quoted in.--Tulsidas Kilachand v. Commissioner of
Income-tax(1) (1) 21 I.T.R. 135 at p. 141.
(2) I.T. Ref. No. 4 of 1954, judgment dated
August 26, 1954, reported in "unreported Income-tax Judgments of the
Bombay High Court, Book One, Published by Western India Regional Council of the
Institute of Chartered Accountants of India, Bombay" p. 314 at p. 316.
(3) 25 T.C. 317. 329. (4) 42 I.T.R. 1, 4.
955 .lm15 "This legislation.... (is)
designed to overtake and circumvent a growing tendency on the part of taxpayers
to endeavour to avoid or reduce tax liability. by means of settlements. Stated
quite generally, the method consisted in the disposal by the taxpayer of part
of his property in such a way that the income should no longer be receivable by
him, while at the same time he retained certain powers over, or interests in,
the property or its income. The Legislature's counter was to declare that the
income of which the taxpayer had thus sought to disembarrass himself should,
notwithstanding, be treated as still his income and taxed in his hands
accordingly." This Court held in that case, that these observations
applied also to the section under consideration, and the Indian provision is
enacted with the, same intent and for the same purpose. But even so, Lord
Simonds observed while construing a similar provision in Wolfson v.
Commissioners of Inland Revenue(1) :
"It was urged that the construction that
I favour leaves an easy loophole through which the evasive taxpayer may find
escape. That may be so; but I will repeat what has been said before. It is not
the function of a court of law to give to words a strained and unnatural
meaning because only thus will a taxing section apply to a transaction which,
had the Legislature thought, of it, would have been covered by appropriate
words." Viscount Simonds observed again in Saunders v. Commissioners of
Inland Revenue(1) in construing a similar provision occurring in the English
Act :
"I am assuredly not going to depart from
the fair meaning of words in a taxing Section in order that tax may be
exacted." What then is the fair meaning of s. 16(1)(c) proviso.1 ? It
seems to us that the words "reassume power' give indication to the correct
meaning of the proviso. The latter part of the proviso contemplated that the
settlor should beable by virtue of something contained in the Trust Deed, to
take back the power he had over the assets or income previous to the execution
of the Trust Deed. A provision enabling the settlor to give directions -to
trustees to employ the assets or funds of the trust in a particular manner or
for a particular charitable object contemplated by the trust cannot be said to
confer a right to reassume power within the first proviso. Otherwise a settlor
could never name himself a sole trustee. It seems to us that the latter part of
the proviso contemplates a provision which would enable the settlor (1) 31 T.
C. 141, 169.
(2) 37 T.C. 416,431, 956 to take the income
or assets outside the provisions of the Trust Deed. Mr. Desai says that if a
settlor can derive some direct or indirect benefit under a trust deed the trust
would fall within first proviso. But the first proviso does not use these words.
The words "direct or indirect benefit" occur only in the third
proviso. This Court held in Commissioner of Income-tax, Punjab v. S. Raghbir
Singh(1) that although the settlor in that case obtained a benefit from the
trust-payment of his debts-the first proviso was not attracted.
Coming to the various clauses of the Trust
Deed there is no doubt that the settlor has retained power to see that his
wishes are carried out while he is alive. But he can only direct the carrying
out of his wishes within the terms of the Trust Deed. What he can direct under
clause 4 is the application of income to a particular charitable purpose.
Similarly under clause 6 he can nominate the
charitable object and the fund or investment which should be utilised for that
object. This is in no sense a power to reassume control. Clause 8 enables the
settlor to delegate the carrying out of a particular charitable object. For
instance, he could direct some contributions to be made to a hospital or a
school without obliging the trustees to see that the hospital or the school
does not misapply the funds.
Clauses 10 and It which enable the settlor to
give directions regarding the investment must be read subject to the provisions
of the Bombay Public Trust Act and the general principles of law relating to
trusts. We have already said that he could not legally direct a loan to be made
to himself. Further it is difficult to subscribe to the,, proposition that a
loan to a company in which the settlor is interested would give power to the settlor
over the assets within the meaning of the first proviso. Clause 21 only shows
the wide powers which the settlor has reserved to himself. None of these
clauses comes within the purview of Proviso 1.
In the result we agree with the conclusions
of the High Court. The appeals accordingly fail and are dismissed with costs.
One hearing fee.
G.C. Appleas dismissed.
(1) 57 I.T.R. 408.
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