1981 (12) TMI 51 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 164 of the Income-tax Act, 1961.
2. Admissibility of additional ground regarding the trust's validity.
3. Determination of beneficiaries and their shares.
4. Legal status of an unborn person as a beneficiary.
5. Interpretation of relevant legal provisions and precedents.

Detailed Analysis:

1. Applicability of Section 164 of the Income-tax Act, 1961:
The primary issue is whether the higher rate of tax under Section 164 of the Income-tax Act, 1961, applies to the assessee-trust. The Income Tax Officer (ITO) held that Section 164 would apply because 95% of the income is not specifically receivable on behalf of or for the benefit of any one person. However, the Appellate Assistant Commissioner (AAC) held that Section 164 would not apply since the trust provisions are clear, specified, non-discretionary, and irrevocable.

2. Admissibility of Additional Ground Regarding the Trust's Validity:
The departmental representative sought to admit an additional ground claiming that the trust is void and should be considered a resulting trust. The Tribunal declined to admit this additional ground, stating that the entire matter proceeded on the basis of a valid trust, and admitting this ground would change the entire complexion of the matter and potentially worsen the revenue's position.

3. Determination of Beneficiaries and Their Shares:
The Tribunal examined whether the beneficiaries of the trust are known and determinate. The revenue argued that 95% of the income is not receivable by a specified person, while the assessee contended that both the 5% and 95% shares are determinate and known. The Tribunal referred to the Supreme Court's decision in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust, which established that the position of beneficiaries should be determined as if the trust had come to an end on the relevant date.

4. Legal Status of an Unborn Person as a Beneficiary:
The Tribunal considered whether an unborn person can be a beneficiary under the trust. The departmental representative argued that a beneficiary should be an existing person, citing sections of the Transfer of Property Act and the Indian Succession Act. However, the Tribunal held that an unborn child can be a beneficiary under the Indian Trusts Act, 1882, subject to the rule against perpetuity. The Tribunal cited the Allahabad High Court's decision in Addl. CIT v. Ram Krishna Gupta, which supports the validity of a trust in favor of an unborn beneficiary.

5. Interpretation of Relevant Legal Provisions and Precedents:
The Tribunal analyzed Section 164, noting that it applies to trusts where the income or part thereof is not receivable on behalf of or for the benefit of any one person, or where the beneficiaries' shares are indeterminate or unknown. The Tribunal concluded that the second limb of Section 164 applies, as there are more than one beneficiary. The Tribunal further clarified that the position of beneficiaries should be assessed as if the trust had come to an end on the relevant date, following the Supreme Court's dictum in the Nizam's case. On 31-3-1976, the beneficiaries were known and their shares were determinate, thus Section 164 did not apply.

Conclusion:
The Tribunal dismissed the revenue's appeal, concluding that the assessee-trust is not liable to be taxed at the maximum rate under Section 164. The decision emphasized that the beneficiaries were known and determinate as of the relevant date, and the trust provisions were clear and irrevocable. The Tribunal also highlighted that the legislative amendment to Section 164, introduced later, was intended to prevent manipulation and did not apply to the assessment year in question.