Gosar
Family Trust, Jamnagar Vs. Commissioner of Income Tax, Rajkot [1995] INSC 245 (28 April 1995)
Jeevan
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Sen, S.C. (J) Nanavati G.T. (J) B.P. Jeevan
Reddy.J.
CITATION:
1995 AIR 1644 1995 SCC (4) 576 JT 1995 (4) 424 1995 SCALE (3)538
ACT:
HEAD NOTE:
Leave
granted in Special Leave Petitions.
A
common question arises in this batch of appeals. For the sake of convenience
and with the consent of the counsel for the parties, we treat the facts in
Civil Appeal No.1160 of 1991 (Gosar Family Trust, Jamnagar) as representative of the facts in
all the cases. It is agreed by the learned counsel for the appellants that the
relevant recitals in the Trust Deeds concerned in all the appeals are
identical. The appeals arise from the judgment and orders of the Gujarat High
Court.
The
High Court has answered the following two questions referred to it, at the
instance of the Revenue, under Section 256(2) of the Income Tax Act in favour
of the Revenue and against the assessee:
"(1)
Whether, in law and on facts and having regard to the provisions of sub-section
(1) of
section 164 of the Income tax Act, 1961, the assessee is entitled to the concessional
rate of tax?
(2)
Whether, in law and on facts and in view of the provisions of the trust deed,
the trust cannot be subjected to maximum marginal rate of tax?"
By a
deed dated October 3,
1981, Sri Hirji Pethraj
Shah created a private trust known as "Gosar Family Trust". S/Sri Devchand
Shamji Shah,
(2)
Sri Deepak Devchand Shah,
(3) Smt.
Ladhiben Shamji Shah and
(4) Smt.
Sunanda Rajesh Shah were named as trustees. The trust was created with a sum of
Rupees five hundred. Clause
(7) of
the Trust Deed, however, permitted the trustees to accept from any person
desirous of making contributions to the Trust fund such amounts or properties
and upon such terms and conditions as they may think fit subject, of course,
that the objects of the contributions are not inconsistent with the objects of
the trust. There are two sets of beneficiaries.
The
first category comprises three individuals, viz.,
(1)
Sri Gosar Devashi Jakharia,
(2) Smt.
Lakhmaben Gosar Jakharia and
(3)
Sri Mukesh Gosar Jakharia. (Nos.2 and 3 are wife and son respectively of No.1).
The
second category of beneficiaries are:
(1) Smo.Lakhmaben
Gosar Jakharia,
(2) family
members of Sri Devchand Shamji Shah and
(3) Smt.
Kankuben Gulabchand Shah upto three generations.
The
recitals in the trust deed are little unusual and may be noticed (as condensed
by us):
(1)
The life of the trust is eighteen years. But after the expiry of two years, the
trustees have the discretion to terminate the trust at any time.
(2)
With respect to the income from the trust properties, the trustees have been
given an absolute discretion to distribute the same among the first category
beneficiaries in such manner and in such proportion and at such times as they
think appropriate. The trustees are vested with absolute discretion not to
distribute the income to any one and to accumulate it.
(3) At
the end of eighteen years or at such time as the trustees put an end to the
trust, the corpus of the trust and all income accumulated, if any, shall be
distributed among the second category beneficiaries, again in such proportion
and in such manner as the trustees may decide.
(4)
The trustees have been expressly empowered to invest the trust funds in any
firm or joint stock companies in which any one or more of the trustees may be
partners, directors or share-holders, as the case may be.
The
trust is undoubtedly a discretionary trust. The only question in this appeal is
whether the income of the trust taxed in the hands of the trustees is
chargeable at the maximum marginal rate or at the rate applicable to the
association of persons within the meaning of Section 164(1) of the Income Tax
Act. While the Tribunal has held that the rate applicable is the rate relevant
to the association of persons by virtue of proviso (i) to Section 164(1), the
High Court is of the opinion that proviso (i) is not attracted in this case
and, therefore, the income is chargeable at the maximum marginal rate. It would
be appropriate to read Section 164(1) insofar as it is relevant at this stage:
"Charge
of tax where share of beneficiaries unknown.
164.
(1) Subject to the provisions of sub-sections (2) and (3), where any income in
respect of which the persons mentioned in clauses (iii) and (iv) of sub-
section (1) of section 160 are liable as representative assessees or any part
thereof is not specifically receivable on behalf or for the benefit of any one
person or where the individual shares of the persons on whose behalf or for
whose benefit such income or such part thereof is receivable are indeterminate
or unknown (such income, such part of the income and such persons being
hereafter in this section referred to as "relevant income",
"part of relevant income" and "beneficiaries",
respectively), tax shall be charged on the relevant income or part of relevant
income at the maximum marginal rate:
Provided
that in a case where-- (i) none of the beneficiaries has any other income
chargeable under this Act exceeding the maximum amount not chargeable to tax in
the case of an association of persons or is a beneficiary under any other
trust.........
(Clauses
(2), (3) and (4) omitted as unnecessary.) tax shall be charged on the relevant
income or part of relevant incomes as if it were the total income of an
association of persons:
(Rest
of the section omitted as unnecessary.) The sub-section contemplates charging
of tax at maximum marginal rate in two situations, viz., (a) where any income,
in respect of which the trustees (omitting unnecessary categories of persons)
are liable to be assessed as representative assessees, is not specifically
receivable on behalf or for the benefit of any one person and (b) where the
individual shares of the persons on whose behalf or for whose benefit such
income or such part thereof is receivable are indeterminate or unknown. The
first proviso, however, says inter alia that where none of the beneficiaries
has any other income chargeable under this Act exceeding the maximum amount not
chargeable to tax in the case of an association of persons or is a beneficiary
under any other trust, tax shall be charged on the relevant income as if it
were the total income of an association of persons. In this case, none of the
first category beneficiaries has taxable income under the Act within the
meaning of proviso (1), while the second category beneficiaries do have such
income. This means that if the second category beneficiaries are also treated
as beneficiaries for the purpose of proviso (i), the trust income is liable to
be charged at the maximum marginal rate. If, on the other hand, only the first
category beneficiaries are treated as beneficiaries (and not the second category
beneficiaries) within the meaning of proviso (i), then the trust income is
liable to be charged in the hands of the trustees at the rate applicable to the
association of persons. For this reason, the assessees' contention has been
that only the first category beneficiaries are beneficiaries within the meaning
of proviso (i) while the Revenue contends to the contrary. The reasoning of the
High Court on which it has held against the assessee is to be found in the
following three paragraph:
"There
is no dispute about the fact that the income was not specifically receivable on
behalf of or for the benefit of any one person and that the individual shares
of beneficiaries were indeterminate or unknown.
Therefore,
the provisions of section 164(1) are attracted to the type of arrangement made
under this trust. The argument that only the first set of beneficiaries who may
receive the income are the class envisaged by sub-section (1) of section 164
and not the type of beneficiaries who may, ultimately, get the accumulated
income on distribution is not warranted by the wording of the provision which
includes the entire class of beneficiaries on whose behalf or for whose benefit
the income is receivable by the trustee.
The
trustees receive or are entitled to receive the income (under the deed) on
behalf of or for the benefit of both the sets of beneficiaries and are their
representative assessees under section 160 (1) (iv). It cannot be said that
they do not receive the income for the benefit of the second set or "tier"
of beneficiaries (described as corpus beneficiaries). The trustees are
empowered to accumulate the income for the benefit of the second set of
beneficiaries and, therefore, they receive or are entitled to receive the
income on behalf of or for the benefit of such second set of beneficiaries also
notwithstanding the existence of the first set of beneficiaries to whom they
may distribute the income if they so choose to do. The existence of the
authority of the trustees to disburse the income they receive under the trust
to the first set of beneficiaries does not militate against their entitlement
to receive the income on behalf of or for the benefit of the other set for whom
they can legitimately accumulate it for eventual distribution.
The
trustees were entitled to receive the income under this trust on behalf of or
for the benefit of the entire class of beneficiaries notwithstanding the fact
that they had a discretion to bestow the benefit to one beneficiary or one set
of beneficiaries at the cost of the others. The fact that the income so
received is disbursed to some and not to others or is disbursed now or
accumulated for future disbursement should make no difference and will not
change the nature of the arrangement made under the trust, namely, that the
trustees receive or are entitled to receive the income for the benefit of or on
behalf of the entire class of beneficiaries name in the trust.
The
fact that the trustees are not obliged to disburse the income or accumulate it
for the benefit of the first set or the second set of beneficiaries or any of
them would itself indicate that the income is receivable by the trustees for
the whole class of beneficiaries irrespective of the ultimate manner in which
the income is distributed." The High Court further pointed out that for
the purpose of Section 164, it is not necessary that the beneficiaries do
actually receive the income. It is sufficient, it held, that the income is
receivable by the trustees for the benefit of the persons named in the trust.
The High Court observed, "the real question is whether the persons named
in the trust have an interest, whether vested or contingent, in the income that
is receivable on their behalf" and answered the question by saying that
both the categories of beneficiaries mentioned in the trust deed have an
interest in the trust and the income of the trust is received by the trustees
on their behalf.
Sri Eradi,
learned counsel for the assessees contended that the second category of
beneficiaries cannot be called "beneficiaries" with respect to the
income of trust for the reason that they are not entitled to any portion of
income;
they
are entitled only to the corpus. Only the first category beneficiaries are
entitled to the income of the trust, it is submitted. When Section 164 speaks
of income and it being taxed at a particular rate, it is having in mind the
particular year in which the income is received by the trustees and is being
taxed in their hands. Counsel further submitted that even if the trustees
decide not to distribute the income and accumulate it, it forms part of the
corpus which is distributed among the second category beneficiaries at the end
of eighteen years or earlier whenever the trust is put an end to by the
trustees in their discretion. Strong reliance is placed upon the decision of
the Bombay High Court in Commissioner of Income Tax v. B.A.Sanghrajka Trust
(181 I.T.R.484) where construing similar terms of a trust deed, the Bombay High
Court held that the second category beneficiaries cannot be treated as
beneficiaries within the meaning of provision (1). It is brought to our notice
that the said decision has been followed later by the same High Court in
Commissioner of Income Tax v. Mrs.Pushpaben Family Trust (207 I.T.R. 5877.
We
must say that the trust deed in question is rather a curious one. It is
effective only for a limited period which can be as short as two years. If, in
case, the trustees do not choose to put an end to the trust, even then the
maximum life of the trust is eighteen years only. One beneficiary is common to
both the first and second categories, viz., Smt.Lakhmaben Gosar Jakharia. The
trustees are not obliged to disburse or distribute the income among the first
category beneficiaries in the year they receive it. They need not pay & single
pie to any of the beneficiaries in the first category at any time during the
currency of the trust; they are entitled to accumulate the whole income which
will then pass to the second category beneficiaries as and when the trust comes
to an end. In other words, the first category beneficiaries have no right to
receive the income.
So
have the second category beneficiaries no right to receive any income though
they may ultimately get the whole or part of the income along with the corpus
on the expiry of the period of trust. The trustees are expressly entitled to
deposit the monies of the trust fund in any firm or joint stock company in
which any one or more of them is/are partners/directors/share-holders, which
means that the trustees could as well have decided not to distribute a single
pie and invest all the income and corpus fund for the full period of eighteen
years in their own firms and concerns. No less surprising is the provision that
the trust started with a mere Rupees five hundred and the trustees have been
given absolute discretion not only in the matter of distribution of income but
also in the matter of very continuance of the trust. At any time after the
expiry of two years they can put an end to it if they so choose.
The
ingenuity of the assessee and the naivete of the department in espousing and
accepting such a trust is remarkable. Be that as it may, we have to answer the
question, whether the second category beneficiaries are not
"beneficiaries" within the meaning of proviso (i) to Section 164(1)
on the above facts? We are of the considered opinion that the second category
beneficiaries are also beneficiaries as rightly pointed out by the High Court.
If the income is not distributed among the first category beneficiaries, the
whole income - or such part of it as may not have been distributed among the
first category - goes to the second category. There is no reason why it cannot
be said that the income is received by the trustees on behalf of both the
categories of beneficiaries. Indeed, there is no distinction between the two
categories so far as the income of the trust is concerned. The members of the
first category too have no right to demand or receive income. They may or may
not receive any income. It may well happen that they may not get a single pie
either in the year concerned or during the entire period of the trust. If so,
how it is being said that income is being received on their behalf. The second
category beneficiaries too have no right to the income but yet they may get whole
of it or such part of it as may not have been distributed or paid to first
category. Thus, neither category has a right but only an expectation to receive
income. In this sense, members of the second category are as much beneficiaries
as the members of the first category. The trustees are entitled to choose not
to pay a pie out of the income to any one and invest the whole of it in their
own concerns. They were also under no obligation to disburse or distribute the
income received in an year in that year or in the following year. For the
purpose of Section 164(i) what is relevant is that the income is receivable on
behalf of the beneficiaries. It is not necessary that the income is received by
the beneficiaries. It is, therefore, difficult to say in the light of the
recitals of the trust deed that the income is receivable only on behalf of the
first category but not on behalf of the second category beneficiaries. Indeed,
Section 164(1) or the proviso (i) thereto does not make any distinction between
beneficiaries and beneficiaries - nor is the said expression defined in the
Act. It would, therefore, be reasonable to construe and understand the
expression "beneficiaries" in its ordinary and normal sense, which
means that both categories are beneficiaries. Situation could probably have
been different if there had been an obligation upon the trustees to distribute
the income received in an year in that very year or in the following year(s) in
which event it could probably be said that the trust income is receivable by
the trustees on behalf of or for the benefit of the first category
beneficiaries only. In this case, there is no such obligation and the income
not distributed ultimately goes to the second category. It is immaterial
whether that income becomes a part of corpus or not. What is material is that
it goes to the second category. It cannot, therefore, be said that income is
received only on behalf of the first category and not the second category
beneficiaries. Either category could have received the income wholly to the
exclusion of the other or both could have received it partly in the manner
explained above. We are, therefore, unable to agree with the contentions urged
by the learned counsel for the assessees.
The
charging of maximum marginal rate was not contrary to law.
Now,
coming to the decision of the Bombay High Court in Sanghrajka Trust, the High
Court has construed the trust deed concerned therein to mean that the
daughter-in-law (comparable to second category in our case) had no right or
interest in the income of the trust for any year but it did not attach
sufficient importance to the other recital in the trust deed that the trustees
were entitled in their discretion not to disburse any income to the grand
daughters (comparable to first category in our case) of the settlor in which
case the entire income would have gone to the daughter-in-law at the expiry of
the trust. The daughter-in- law may not have had a right to the income of the
trust, but so did the grand daughters too did have no right. The said decision,
therefore, cannot advance the case of the appellants herein.
We
must say that the policy of law as disclosed from Section 164(1) is to
discourage discretionary trusts by charging the income of such trusts in the
hands of trustees at the maximum marginal rate except in certain specified
situations. The trust deed concerned herein is a discretionary trust of an
extremely unusual type. Since it is stated that the Tribunal has found the
trust deed to be a genuine one, we do not wish to say anything more on this
score.
For
the above reasons, the appeals fail and are dismissed with costs.
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