Report No. 70

Chapter 28

Contingent Interests

Section 21 to 27

28.1. Introductory.-

In contrast with vested interests, which are disposed of in two sections only, the subject of contingent interests and allied subjects occupy seven sections. Most of these sections contain rules for determining in what cases an interest is to be regarded as contingent. They are mostly-but not exclusively-based upon the intention imputed by the law to the transferor.

28.2. Rationale.-

These rules for the construction of contingent interests, contained in sections 21 to 27, are mostly based on the underlying rationale that the law favours the vesting of estates and also that the law favours the early vesting of estates.

28.3. Section 2-Analysis.-

Under section 21, where, on a transfer of property, an interest therein is created in favour of a person to take effect only on the happening of a specified uncertain event or if a specified uncertain event shall not happen, such person thereby acquires a contingent interest in the property. This is the first proposition enacted in the section and the contingent interest described in the section is to be contrasted with the vested interest dealt with in section 19. The essence of a contingent interest is a contingency which may or may not happen-this is indicated by the word "uncertain" which occurs in section 21.

The second proposition enacted in section 21 is to the effect that such (contingent) interest becomes a vested interest when the specified uncertain event happens or when the specified uncertain event becomes impossible, as the case may be.

28.4. Exception.-

However, on the principle that the law always favours the vesting of estates, the section makes an exception concerned with interests contingent on age. Where, under a transfer of property, a person becomes entitled to an interest therein upon attaining a particular age and the transferor also gives to him absolutely the income to arise from such interest before he reaches that age or directs the income or so much thereof as may be necessary to be applied for his benefit, then under the Exception to section 19, such interest is not contingent. The Exception is based on an English decision1 where Page Wood V.C. held that where the principal is given at a distant epoch and the income is given in the meantime, the court, leaning in favour of vesting, has said that the whole thing is given.

1. Pearson v. Dolmont, Law Reports 3 Equity 321, discussed in Cosavi v. Rivett Carnac, ILR 13 Born 463.

28.5. Rule in England.-

In England, the rule is well established by several decisions, of which we may mention only two,1-2 that a gift apparently contingent must be held to be vested in interest where it is accompanied by a gift of the intermediate income or a direction for application of the intermediate income for the benefit of the donee. The principle on which the rule rests is that, ordinarily, a person is not entitled to the income of property unless the property itself is vested in him, so that the giving of the income is presumptive proof of the intention to give a vested estate.

This being the rationale of the rule, it is apparent that in order to attract the applicability of the rule, the whole of the intermediate income should be made available to the donee in whose favor the interest in the corpus is created. Where there is a gift of the whole intermediate income to the donee or there is a discretion to apply the whole of the intermediate income for the benefit of the donee, there is no difficulty and the rule could clearly apply. But what would be the position where there is a direction that the whole of the intermediate income or a considerable portion thereof or so much thereof as the trustees for the time being might think fit, should be applied for the benefit of the donee. This question naturally arises. We shall revert to it later.3

1. (1801) 6 Vos 239.

2. (1839) 5 My and Cr 125.

3. Para. 28.10, infra.

28.6. Reality of contingent interest.-

Reverting to the first proposition, we may state that the fact that the interest does not vest and the transfer is not yet complete merely means that there is a possibility in favour of vesting as well as against vesting, but this does not mean that a contingent gift has no existence in law. While the fact that a particular contingency is less probable than another contingency may increase the degree of uncertainty, it is to be remembered that a contingent "interest" is as much an interest as a vested interest, inasmuch as it is not the same thing as a mere possibility of succession.

A gift to several sons with the proviso that if any one dies leaving no male issue, his share should go over to other sons and not to the widow or daughter of the deceased son, was held to be valid under Hindu law, and on the happening of the contingency the sons were entitled to the additional benefits.1 This and similar decisions show the practical utility of a contingent interest.

It may be noted that in this case, the potential donees were all in existence at the date of the gift, so that no question of infringement of the rule against perpetuity was involved, nor was the question of violation of the traditional rule of Hindu Law prohibiting gift to an unborn person involved. The case was decided before the Act, but is a good illustration of the reality of a contingent interest.

1. Soorginani v. Dinabandhoo, 9 MIA 123.

28.7. Utility of contingent interest.-

It was pointed out by the Privy Council in Fernande1 that a conveyance of contingent remainder (after the enabling statute under English law)2 would effectually pass all the interest which the grantor possessed and (when the contingency happened) automatically transfers the property to the grantee when the remainder vested in possession. Under the Roman rule, a vested interest in remainder can be alienated. The Roman law saw no objection in principle to the transfer of things not yet come into existence.

Further, there is no indication that the alienation of a contingent interest is necessarily prohibited by the policy of Roman law.

1. Fernande v. Gunatillake, AIR 1921 PC 138 (144) (Roman law also examined).

2. The reference seems to be to the statute of 1877.

28.8. Divesting.-

Section 19 looks at a contingency from its creative aspect-as vesting an interest. There may be contingencies on the happening or non-happening of which a clearly vested interest may be divested. This is really a condition subsequently dealt with in section 31. The condition subsequent may be dependent on an event independent of the will of the beneficiary. Illustrations to section 31 are confined to the latter category, but not so the text of section 31.

As regards the event to which the condition is related, the condition must be valid as is expressly provided in section 32 and also by the opening words of section 31. Similar are the provisions in sections 25 to 30, under which a condition may be super-added, whereby an interest possessed and (when the contingency happened) given to A may be divested from A and vested in B.

28.9. On the whole, it would be correct to say that when the question is whether interest granted under a transfer or will is vested or contingent, the interest is held to be vested unless a condition precedent to the vesting is expressed with reasonable clearance.1

1. Wealth Tax Commissioner v. Ashok Kumar, AIR 1957 Guj 161.

28.10. Direction as to income.-

Reference has been made above1 to certain problems arising out of the Exception to section 19. Difficult questions sometimes arise where the income is not, by a mandatory provision in the will or deed, directed to be applied for the benefit of the person in whom the corpus is also to vest, and the direction is in the form of a discretion to apply the income of the trust fund or so much thereof as the trustees may think necessary for the benefit of the beneficiary even in such a case. It has been held by the Gujarat High Court2 that the case would fall within the purview of the exception; provided no portion of the income is directed to be applied for a purpose other than the benefit of the beneficiary.

Although the matter was decided for the purpose of income-tax legislation, it goes without saying that the decision would be operative even where a question of tax is not involved, since it is based on a construction of sections 19 and 21. Relevant case law is considered at length in the judgement. We are, with respect, in agreement with this view, which promotes the beneficial object of the section. No, amendment of the section is, of course, required on this point.

1. Para. 28.5, supra.

2. Wealth Tax Commissioner v. Ashok Kumar, AIR 1967 Guj 161.