1987 (2) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Whether the value of the corpus of the trust or any part thereof under the Supplemental Family Trust dated February 28, 1952, passed on the death of the settlor under section 5 of the Estate Duty Act and is exigible to levy of estate duty.

Issue-Wise Detailed Analysis:

1. Interpretation of the Trust Deed:
The primary issue revolved around the interpretation of the trust deed executed by the late Nizam VII Nawab Sir Mir Osman Ali Khan on February 28, 1952. The deed settled shares for the benefit of his grandson and two grand-daughters, with specific provisions for the management and distribution of the trust fund. The Assistant Controller of Estate Duty held that the beneficiaries did not acquire any right to enjoy the income from the corpus during the settlor's lifetime and thus, the property passed to them on the settlor's death, making it liable for estate duty under section 5 of the Estate Duty Act.

2. Beneficiaries' Interest:
The Tribunal, relying on a previous judgment (CWT v. Trustees of H.E.H. Nizam's Suppl. Family Trust [1968] 68 ITR 508 (AP)), held that the beneficiaries had a vested interest in the corpus of the trust. The only change after the settlor's death was that the beneficiaries could then ask the trustees to pay the income to them, which they could not do during the settlor's lifetime. The Tribunal also noted that the beneficiaries were subjected to income-tax and wealth-tax in respect of their beneficial interest.

3. Revenue's Contention:
The Revenue contended that the beneficiaries had no vested interest until the settlor's death since the settlor was empowered to make changes to the trust. Therefore, the interest of the beneficiaries was contingent, not vested.

4. Assessee's Argument:
The assessee argued that the beneficiaries had a vested interest during the settlor's lifetime as the corpus was acquiring interest for their benefit. The right to enjoy the income was postponed, and after the settlor's death, their right was enlarged to receive the income from the corpus. There was no change in the beneficiaries before or after the settlor's death.

5. Court's Analysis:
The court examined the relevant clauses of the trust deed and concluded that the trustees were not empowered to revoke the trust. The discretion given to the trustees was solely for the benefit of improving the trust properties. The interest of the beneficiaries was assured by the recitals in the trust deed. The only change after the settlor's death was that the beneficiaries got the right to receive the income, which was earlier accumulated. The trust deed did not contemplate any change in the beneficiaries after the settlor's death.

6. Legal Precedents:
The court referred to various legal precedents, including CED v. Hussainbhai Mohamedbhai Badri [1973] 90 ITR 148 (SC) and Mahendra Rambhai Patel v. CED [1967] 63 ITR 645 (SC), which supported the view that the beneficial interest of the beneficiaries did not change with the death of the settlor. The court also noted that the Revenue had treated the beneficiaries as independent owners for wealth-tax and income-tax purposes during the settlor's lifetime.

7. Conclusion:
The court concluded that there was no passing of property within the meaning of section 5 of the Estate Duty Act on the settlor's death. The beneficiaries had a vested interest in the corpus of the trust, and the death of the settlor did not affect their rights. Therefore, the value of the corpus of the trust was not exigible to levy of estate duty.

8. Final Judgment:
The court answered the reference in favor of the assessee and against the Revenue, holding that the value of the corpus of the trust did not pass on the death of the settlor under section 5 of the Estate Duty Act and was not liable for estate duty. There was no order as to costs.

This comprehensive analysis preserves the legal terminology and significant phrases from the original text while providing a thorough and detailed summary of the judgment.