1965 (11) TMI 158 - HC - Income Tax

Summary

Issues Involved:

1. Taxability of the assessee's interest under the trust deeds.
2. Determination of whether the interest in the corpus of the trust is vested or contingent.
3. Applicability of the Exception to Section 21 of the Transfer of Property Act.
4. Valuation of the assessee's interest in the corpus for wealth tax purposes.

Issue-wise Detailed Analysis:

1. Taxability of the Assessee's Interest Under the Trust Deeds:

The reference arises from an assessment to wealth-tax for the years 1958-59 and 1959-60, involving the construction of two trust deeds made by the assessee's parents. The Wealth Tax Officer valued the assessee's interest in both the income and the corpus of the trust, considering the interest vested. The Appellate Assistant Commissioner disagreed, stating the interest in the income was not vested but agreed that the interest in the corpus was vested. The Tribunal, however, ruled that the interest in the corpus was contingent and not vested, leading to a valuation of nil.

2. Determination of Whether the Interest in the Corpus of the Trust is Vested or Contingent:

The Tribunal's decision was challenged, raising the question of whether the interest was a "spes successionis" or a contingent interest. The court noted that a "spes successionis" is a mere possibility, unlike a contingent interest, which is a form of property and assignable. The court emphasized that the interest should be considered vested unless a condition precedent to vesting is clearly expressed. The court examined the trust deed's provisions, particularly Clause 3, Sub-clause (b), which directed the trustees to apply the net income for the benefit of the assessee and his wife, suggesting a vested interest.

3. Applicability of the Exception to Section 21 of the Transfer of Property Act:

The court discussed the Exception to Section 21, which states that if the income from an interest is directed to be applied for the benefit of the donee, the interest is not contingent. The court rejected the assessee's argument that the trustees had discretionary power to apply the income. It held that the trustees were obligated to apply the income for the benefit of the assessee and his wife, thus satisfying the Exception to Section 21. The court also considered the accumulation of surplus income and its transfer to the assessee or his heirs, reinforcing the vested nature of the interest.

4. Valuation of the Assessee's Interest in the Corpus for Wealth Tax Purposes:

The court concluded that the interest in the corpus was vested and not contingent on the assessee being alive on 31st March 1987. The court noted several factors indicating the settler's intention to create a vested interest, including the trust deed's recitals, the provision for the benefit of the assessee and his wife, and the accumulation of income. The court also considered the conferment of a general power of appointment on the assessee, further supporting the vested nature of the interest. Consequently, the interest was capable of valuation for wealth tax purposes.

Conclusion:

The court answered the reference by stating that the interest of the assessee in the corpus is a vested interest and should be valued as such for wealth tax purposes. The assessee was directed to pay the costs of the reference to the Commissioner. The reference was answered accordingly.