2015 (2) TMI 22 - HC - Wealth-tax

Wealth tax assessment - Wedding Gifts Trust - Levy of tax u/s 21 of the Wealth Tax Act - Whether the assessment has to be made under sub-section (1) or sub-section (4) thereof - Held that - The terms of the Trust Deed are very clear and unambiguous. Even while conferring a limited privilege of wearing the ornaments in favour of the named women, the Trust Deed has clearly mentioned that on the death of the two women, the jewellery shall devolve upon their children - It is true that during the life time of the two women, it is difficult to treat any particular individual as the immediate beneficiary, particularly when the right was restricted only to the one of wearing and returning the jewels. However, in law, what becomes necessary is whether there are any beneficiaries at all. It is immaterial whether they are the beneficiaries at present or in future. Once the Deed has stipulated that on the death of the two women, their children would become the beneficiaries, the occasion to invoke Section 21 (4) of the Act does not arise. The inescapable conclusion is that the assessment must be under Section 21 (1) of the Act. The expression where the shares of the beneficiaries are indeterminate or unknown carried with it, by necessary implication, a situation where the beneficiaries themselves are indeterminate or unknown. Such, for example, would be the case in the modified illustration given above. There, the beneficiaries are such of the children of A as the trustee might think fit and the beneficiaries themselves would, therefore, be indeterminate and unknown and yet sub-section (4) of Section 21 would apply in their case. To take any other view would be to deny full meaning and effect to the words where the shares of the beneficiaries are indeterminate or unknown and to create a lacuna where, even though the beneficial interest in the remainder is disposed of under the trust deed, such beneficial interest would escape assessment. The correct interpretation of sub-section (4) of Section 21 must, therefore, be that even where the beneficiaries of the remainder are indeterminate or unknown, the trustee can be assessed to wealth-tax in respect of the totality of the beneficial interest in the remainder, treating the beneficiaries fictionally as an individual. - view taken by the Commissioner and the Tribunal is correct - Decided in favour of assessee.

Summary

Issues Involved:
1. Accelerated interest of beneficiaries in trust properties.
2. Assessment of interest under Section 164 of the Income Tax Act.
3. Right to wear jewelry as an asset.
4. Application of Section 21(4) of the Wealth Tax Act.
5. Determination of shares of beneficiaries.
6. Taxation of capital gains and corpus formation.

Detailed Analysis:

1. Accelerated Interest of Beneficiaries in Trust Properties:
The primary issue was whether the children of the two ladies, namely Sb.Fatima Fouzia and Sb.Amina Marzia, acquired accelerated interest in the trust properties despite the Trust Deed stating that they would acquire interest only after the lifetime of the ladies. The court held that the terms of the Trust Deed were clear and unambiguous, stipulating that on the death of the two women, their children would become beneficiaries. Thus, the assessment must be under Section 21(1) of the Wealth Tax Act, as the beneficiaries were determinable.

2. Assessment of Interest under Section 164 of the Income Tax Act:
The court examined whether the interest of the beneficiaries in the Trust property was assessable under Section 164 of the Act. The Tribunal had reversed the decision of the CIT (Appeals), holding that the shares of the beneficiaries were unknown and indeterminate, thus necessitating assessment under Section 164(1). The court upheld this view, emphasizing that the Trust Deed clearly identified the beneficiaries, negating the need for Section 21(4) application.

3. Right to Wear Jewelry as an Asset:
The court addressed whether the right to wear jewelry constituted an asset, referencing the decision in Sb.Anwar Begum Trust, which held that interest in Jewelry Fund was assessable under Section 21(1) of the Wealth Tax Act. The court concurred that the limited privilege of wearing the jewelry did not equate to ownership, reinforcing that the assessment should not invoke Section 21(4).

4. Application of Section 21(4) of the Wealth Tax Act:
The Wealth Tax Officer had sought to levy tax under Section 21(4), which applies when the shares of beneficiaries are indeterminate or unknown. The court clarified that the Trust Deed explicitly identified the children of the two women as future beneficiaries, thus invalidating the application of Section 21(4). The assessment should be made under Section 21(1), as the beneficiaries were determinable.

5. Determination of Shares of Beneficiaries:
The court examined whether the shares of the beneficiaries were unknown and indeterminate. It concluded that the Trust Deed provided clear instructions that the jewelry would devolve upon the children of the two women upon their death. This clarity negated the need for Section 21(4) application, confirming that the beneficiaries were determinable.

6. Taxation of Capital Gains and Corpus Formation:
The court addressed whether the capital gains were notional or deemed income under Section 45 of the Income Tax Act and if they merged with the corpus. The Tribunal had held that capital gains formed part of the corpus and that the trustee did not receive the capital gains income on behalf of the children. The court upheld this view, emphasizing that the capital gains merged with the corpus, and the shares of the beneficiaries were indeterminate, thus necessitating assessment under Section 164(1).

Conclusion:
The court concluded that the view taken by the Commissioner and the Tribunal was correct. The references were answered against the Revenue and in favor of the Assessees, affirming that the assessment must be under Section 21(1) of the Wealth Tax Act, as the beneficiaries were determinable. The court derived support from the Supreme Court judgment in COMMISSIONER OF WEALTH TAX A.P., Vs. TRUSTEES OF H.E.H. NIZAMS FAMILY (REMAINDER WEALTH) TRUST, reinforcing that the beneficiaries were clearly identified and Section 21(4) did not apply.