1986 (10) TMI 1 - SC - Income Tax

Whether the Tribunal was justified in law in holding that the income derived by the beneficiaries under the two trust deeds belonged to the beneficiary in individual capacity and not in the capacity as representing the Hindu undivided family - held that income of beneficiary should be taxed as his individual income

Summary

Issues Involved
1. Interpretation of the trust deeds.
2. Determination of the capacity in which the beneficiaries received the income (individual capacity vs. representative capacity as kartas of their respective Hindu undivided families).

Issue-wise Detailed Analysis

1. Interpretation of the Trust Deeds
The Supreme Court addressed the construction of two trust deeds executed by Sir Hukum Chand Seth and Lady Kanchanbai on March 21, 1952. These deeds contained identical terms and conditions, and the primary provisions under consideration were clauses 1, 3, and 4. The trust deeds empowered the trustees to apply the income from the trust properties to various expenses and then divide the remaining income equally among the beneficiaries. Clause 4 stipulated the division and distribution of the trust properties upon the youngest beneficiary attaining the age of 30 years.

2. Determination of the Capacity in which the Beneficiaries Received the Income
The central question was whether the beneficiaries received the income in their individual capacity or as representatives (kartas) of their respective Hindu undivided families (HUFs). The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all assessed the income in the individual status of the beneficiaries. However, the High Court of Madhya Pradesh held that the properties were settled with the beneficiaries in their representative capacity as kartas of their respective HUFs.

The Supreme Court examined the terms and conditions of the trust deeds and concluded that the properties were intended to devolve on the beneficiaries in their individual capacity. The Court noted that the trust deeds provided the trustees with absolute and uncontrolled discretion to apply the income for the maintenance of the widow and male issue of a deceased beneficiary, which would not align with the properties being held as part of an HUF. Additionally, the provision that a widow would receive half the share of a deceased beneficiary, with the other half distributed among the remaining beneficiaries, further indicated an individual capacity rather than a representative one.

The Court also referenced the legal principle established in C. N. Arunachala Mudaliar v. C. A. Muruganatha Mudaliar, which stated that the nature of the interest taken by the donee depends on the terms of the grant. The Supreme Court found that the trust deeds' terms and conditions were inconsistent with the properties passing to the beneficiaries as kartas of their respective HUFs.

The Court rejected the argument that the trust deeds were akin to a family settlement intended to protect the grandsons. It held that the interest of the grandsons was sufficiently protected by the terms of the trust deeds, and it was not necessary to conclude that the properties were intended for the beneficiaries as kartas of their HUFs.

Conclusion
The Supreme Court concluded that the High Court erred in its interpretation of the trust deeds. The properties were intended to devolve on the beneficiaries in their individual capacity. Consequently, the Court answered the question referred to the High Court in the affirmative, in favor of the Revenue and against the assessees. The appeals were allowed with costs.

Judgment
Appeals allowed.