C.I.T., Andhra Pradesh Vs. Trustees of
H.E.H The Nizam's Family Trust [1986] INSC 209 (30 September 1986)
PATHAK, R.S. PATHAK, R.S.
MUKHARJI, SABYASACHI (J)
CITATION: 1987 AIR 107 1986 SCR (3) 973 1986
SCC (4) 352 JT 1986 601 1986 SCALE (2)558
ACT:
Indian Income Tax Act, 1922, s. 147-Nizam's
Family Trust Deed-Income arising from Reserve Fund and Expenses Account-
Whether can be aggregated in one single assessment - Settlor-Whether has a
right to create separate and distinct trusts by a single document.
HEADNOTE:
By a Deed of Trust dated May 10, 1950, the
Nizam of Hyderabad created a Family Trust. A corpus of nine crores in
Government securities was transferred lo the trustees under that Deed, which
was notionally divided into 175 equal units, 5 units to constitute a fund
called the 'Reserve Fund', 31/2 units to constitute the 'Family Trust Expenses
Account' and the remaining 116 1/2 units were allotted to the relatives
mentioned in the Schedule in the manner provided therein. The Trust Deed
provided: (1) that the income or corpus of the Reserve Fund shall be applied
for any special, unusual, unforeseen or emergency expenses for the benefit of
the members of the settlor's family specified in the Schedule; (2) that if
there was a deficit in the Family Trust Expenses Account, a definite proportion
of the income or corpus of the Preserve Fund had to be transferred to the
Family Trust Expenses Account; (3) that the net income of the Family Trust
Expenses Account shall be applied to the charges for the collection of the
income of the Trust Fund and the remuneration of the trustees and of the
members of the Committee of Management and to other costs, charges, expenses
and outgoings relating to the members, (4) that on the death of any of the
settlor's, relatives, a proportionate share of the corpus of the Reserve Fund
must be added to the unit or units of the corpus of the Trust Fund allocated to
such member, and the amounts so amalgama- ted are to be applied in accordance
with the terms of the trust deed; and (5) that the corpus of the Family Trust
Expenses Account has to be ultimately handed over to the Settlor's successor to
the dignity of Nizam and falling him to his eldest male descendant in the
direct male line of succession in accordance with the rule of primogeniture.
974 The income of the two Funds were
separately assessed for the assessment years 1960-61 and 1961-62. Subsequently,
the Income-tax officer, being of opinion that there was only one settlement
under the Trust Deed, reopened the assessments for the assessment years 1960-61
and 1961-62 under clause(a) of s. 147 of the Income Tax Act, 1961 and assessed
the trustees for each of the assessment years on the combined income of the
Reserve Fund and the Family Trust Expenses Account. Following the same line,
separate original assessments for the assessment years 1962-63 to 1965-66 were
also made. On appeal by the asses see, the Appellate Assistant Commissioner
cancelled the assessments for all the years. The Income Tax Appellate Tribunal
and the High Court confirmed the order of the Appellate Assistant Commissioner.
In the appeals by the Revenue to this Court,
on the question whether the incomes arising from the Reserve Fund and the
Expenses Account of the Nizam's Family Trust Deed can be aggregated in a single
assessment for each of the assessment years 1960-61 to 1965-66.
^
HELD: 1. The High Court was right that the
Settlor intended to create separate Trusts in respect of the Reserve Fund and
the Family Trust Expenses Account, and that the respective incomes arising from
the corpus of those Trusts cannot be aggregated in one single assessment but
must be assessed separately. [979A-B]
2. It is open to a Settlor to constitute two
or more distinct trusts by a single document. [978C] In the instant case, there
is no doubt that separate funds were created, even though the division of the
original Trust Fund may have been notional. The objects for which the trustees
held the Reserve Fund and the Family Trust Expenses Account are clearly
demarcated and there is no overlapping or duplication. There is also no
intermingling of the Funds.
The transfer of a portion from one to the
other cannot lead to a confusion in the separate identity of the two Trusts.
[978B-E]
3. Although the corpus of the Trust Fund vested
in the same trustees, the trustees nonetheless held distinct and severable
portions of the corpus of the Trust Fund under those separate trusts. That this
construction of the document accords with the intention of the Settlor is borne
out by the provisions of sub-clause (4) of clause 3 of the Trust Deed, which
specifically provides that on the death of the Settlor the corpus of the Trust
Fund was to be divided or to be created as notionally 975 divided into the 175
equal units mentioned therein for being allocated to the Settlor's relatives
specified in the Schedule. [977G-H; 978A-B]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
1856-61 of 1974 etc.
From the Judgment and order dated 16.1.1974
of the Andhra Pradesh High Court in Case Referred No 2 of 1977 V.S. Desai, Ms.
A. Subhashini and B.B. Ahuja for the Appellant.
Y.Ratnakar and D.N. Misra for the Respondent.
The Judgment of the Court was delivered by
PATHAK, J. These appeals have been preferred by the Revenue against the common
judgment of the High Court of Andhra Pradesh answering the following questions
in favour of the assessee:
"(1) Whether, on the facts and in the
circumstances of the case, the incomes arising from the Reserve Fund and the
Expenses Account of the Nizam's Family Trust Deed dated s 10.5.1950 can be
aggregated in a single assessment for each of the assessment years 1960-61 to
1965-66? (2) If the answer to the above question is in the affirmative, whether
the assessments made under section 148 of the Act for the assessment years 1960-61
and 1961-62 were legal and valid?" By a Deed of Trust dated May 10, 1950
the Nizam of Hyderabad created a Family Trust. A corpus of nine crores in
Government securities was transferred to the trustees under that Deed. The
corpus was notionally divided into 175 equal units. Five units were to
constitute a fund called the 'Reserve Fund', and 3 1/2 units were to constitute
the 'Family Trust Expenses Account". The remaining 166 1/2 units were
allotted to the relatives mentioned in the Schedule in the manner provided
therein, the number of units allocated to each individual relative being
specified there.
Two clauses of the Trust Deed hold the centre
of the stage in 976 these appeals~. Clause 6 creates a Reserve Fund comprising
five equal units of the corpus of the Trust Fund. The trustees hold the Reserve
Fund upon trust to apply the income or corpus thereof for any special, unusual,
unforeseen or emergency expenses for the benefit of the members of the
Settlor's family specified in the Schedule.
Additionally, if the income of the Family
Trust Expenses Account is insufficiently meet the charges of collection of the
income of the Trust Fund and the remuneration of the trustees and of the
Committee of Management and the other costs, charged, expenses and outgoings
relating to the Trust, the trustees are enjoined to make good such deficit out
of the income or corpus of the Reserve Fund, and for that purpose they may
transfer to the Family Trust Expenses Account such sums as may be required. It
is further provided that on the death of any of the Settlor's relatives
specified in the Schedule the trustees must set apart out of the Reserve Fund a
certain portion calculated in accordance with the directions contained in the
clause and to add such portion to the units of the corpus of the Trust Fund
allocated to the member specified in the Schedule and to amalgamate the same,
and to hold it upon the same trusts as those hereinafter declared and contained
of and concerning the unit or units of the corpus of the Trust Fund allocated
to such relative of the settlor as aforesaid.' Clause 7 directs the trustees to
hold 3 1/2 equal units of the corpus of the Trust Fund allocated to the Family
Trust Expenses Account, and to apply the net income of that Fund to the charges
for the collection of the income of the Trust Fund and the remuneration of the
trustees and of the members of the Committee of Management and to other costs,
charges, expenses and outgoings relating to the Trust. There is a further
provision. After all the other Trusts constituted under the Deed have been
fully administered and carried out and the corpuses of all such units have been
handed over and transferred to the ultimate respective beneficiaries the
trustees are enjoined to transfer and hand over the 3 1/2 units comprising the
Family Trust Expenses Account to the Settlor's successor who may be describe as
the Nizam of by any other title or rank or designation, and failing such
person, to the eldest male descendant in the direct male line of succession of
the Settlor accordmg to the rule of primogeniture.
For the assessment year 1959-60 and the
assessment years prior thereto the incomes accruing to the Reserve Fund and the
Family Trust Expenses Account were aggregated in a single assessment made on
the trustees of the Nizam's Family Trust. But thereafter the asses 977 see's
appeals having been allowed by the Appellate Assistant Commissioner of
Income-tax against the assessments for the years 1955-56 to 1959-60, the
incomes of the two Funds were separately assessed for the assessment years
1960-61 and 1961-62, the assessee being described in the one case as the
trustees of the Nizam's Family Trust Reserve Fund, and in the other as the
trustees of the Nizam's Family Trust Expenses Account. Subsequently, the Income-tax
officer being of opinion that there was only one settlement under the Trust
Deed, reopened the assessments for the assessment years 1960-61 and 1961-62
under clause (a) of s. 147 of the Income Tax Act, 1961 in order to assess the
trustees on the combined income of the Reserve Fund and the Family Trust
Expenses Account. Following the same line, he made separate original
assessments for the assessment years 1962-63 to 1965-66. On appeal by the
assessee, the Appellate Assistant Commissioner relied on an order of the
Appellate Tribunal in the Wealth Tax Appeals pertaining to the same trust
arrangements and cancelled the assessments for all the years. The Revenue
appealed to the Income Tax Appellate Tribunal, but the view taken by the
Appellate Assistant Commissioner was upheld by the Appellate Tribunal and the
appeals were dismissed. Upon that, the Revenue obtained a reference to the High
Court of Andhra Pradesh on the two questions of law set forth earlier for the
assessment years 1960-61 to 1965-66. By its judgment dated January 16, 1974 the
High Court answered both the questions in the negative.
And hence these appeals.
For the subsequent assessment years 1967-68
to 1970-71 the High Court adopted the same view in regard to the first
question. The second question did not arise for those assessment years. Special
Leave Petition Nos. 4171 to 4174 of 1978 have been filed against the judgment
of the High Court in those cases. We grant special leave, and the consequent
appeals are also being disposed of by this judgment.
The primary question in these appeals is
whether the incomes arising from the Reserve Fund and the Family Trust Expenses
Account of the Nizam's Family Trust can be assessed separately or must be
aggregated in a single assessment.
It seems to us clear that by the Deed of
Trust dated May 10, 1950 the Nizam created a number of separate and distinct
Trusts. They were created for specific and distinct purposes, and although the
corpus of the Trust Fund vested in the same trustees, the trustees nonetheless
held distinct and severable portions of the corpus of the Trust Fund 978 under
those separate trusts. That this construction of the document accords with the
intention of the Settlor is borne out by the provisions of sub-clause (4) of
clause 3 of the Trust Deed, which specifically provides that on the death of
the Settlor the corpus of the Trust Fund was to be divided or to be treated as
notionally divided into the 175 equal units mentioned therein for being
allocated to the Settlor's relatives specified in the Schedule, 166 1/2 units
being apportioned between the relatives in the proportion set out, five equal
units to constitute the Reserve Fund and the last 3 1/2 equal units to
constitute the Family Trust Expenses Account. There is no doubt that separate
funds were thus created, even though the division of the original Trust Fund
may have been notional. There is also no denying that it is open to a Settlor
to constitute two or more distinct trusts by a single document. See
Commissioner of Income-tax, Bombay v. Manilal Dhanji, [1962] 44 I.T.R. 876,
886. The entire position becomes absolutely clear if regard is had to clause 10
of the Trust Deed which permits the trustees to have separate Trust Deeds made
and executed in respect of the different funds carved out of the 175 equal
units of the corpus of the Trust Fund.
It is also apparent that the objects for
which the trustees held the Reserve Fund and the Family Trust Expenses Account
are clearly demarcated and there is no overlapping or duplication. There is
also no intermingling of the Funds.
It is true that if there is a deficit in the
Family Trust Expenses Account, a definite portion of the income or corpus of
the Reserve Fund has to be transferred to the Family Trust Expenses Account.
But the two Funds, remain distinct from each other at all times, The transfer
of a portion from one to the other cannot lead to a confusion in the separate
identity of the two Trusts.
A further indication evidencing the creation
of two distinct Trusts is the completely different manner of disposal of the
corpus of the two Funds. As regards the Reserve Fund we have seen that on the
death of any of the Settlor's relatives a proportionate share of the corpus of
the Reserve Fund must be added to the unit or units of the corpus of the Trust
Fund allocated to such members, and the amounts so amalgamated are to be
applied in accordance with the terms of the Trust Deed mentioned earlier. In
the case of the Family Trust Expenses Account, the corpus of that Fund has to be
ultimately handed over to the Settlor's successor to the dignity of Nizam and
failing him to his eldest male descendant in the direct male line of succession
in accordance with the rule of primogeniture.
We agree with the High Court that the Settlor
intended to create 979 separate Trusts in respect of the Reserve Fund and the
Family Trust Expenses Account, and that the respective incomes arising from the
corpus of those Trusts cannot be aggregated in one single assessment but must
be assessed separately. The first question in these Appeals is therefore
answered in the negative, in favour of the assessee and against the Revenue.
Inasmuch as the answer to the first question
is in the negative, the second question does not arise and we need not consider
that question in these Appeals.
The Appeals are dismissed with costs.
M.L.A. Appeals dismissed.
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