1994 (12) TMI 121 - AT - Wealth-tax

Capital Gains High Court Interest Income Net Wealth Representative Assessee Sale Proceeds Wealth Tax Act

Issues Involved
1. Applicability of Section 21(1) of the Wealth-tax Act, 1957.
2. Determination of beneficiaries and their interests.
3. Applicability of Section 21(4) of the Wealth-tax Act.
4. Valuation and assessment of various funds within the trust.
5. Taxability of life interest and remainder interest.

Detailed Analysis

1. Applicability of Section 21(1) of the Wealth-tax Act, 1957
The primary issue in these appeals concerns the applicability of Section 21(1) of the Wealth-tax Act, 1957, to the assessments made on the trustees of the Wedding Gifts Trust of H.E.H. the Nizam's two grand-daughters. The assessments were made by invoking Section 21(1), bringing to tax the entire value of the assets held by the trust. The Tribunal's decision in the case of Trustees of Wedding Gifts Trust of HEH the Nizam's Two Grand Daughters v. WTO [1989] 30 ITD 490 (Hyd.) was followed by the CWT (Appeals), who held that Section 21(1) is not applicable but directed assessment under Section 21(4) for the first two years under consideration. For the subsequent years, the assessments made under Section 21(1) were canceled without further directions.

2. Determination of Beneficiaries and Their Interests
The trust was created by the Nizam of Hyderabad for the benefit of his grand-daughters, Sb. Fatima Fouzia and Sb. Amina Marzia, with various funds set up under the trust deed. The Tribunal found that the grand-daughters had only a life interest in the assets of the trust, and this right was not an asset within the meaning of Section 2(e) of the Wealth-tax Act. The ultimate beneficiaries were the children of Sb. Fatima Fouzia and Sb. Amina Marzia, and their shares were determinate and known on the relevant valuation dates.

3. Applicability of Section 21(4) of the Wealth-tax Act
The CWT (Appeals) directed assessment under Section 21(4) for the first two years, assuming that the remainder beneficiaries were not determinate. However, the Tribunal clarified that the statement that "none of the beneficiaries, their particulars, their interest in the Trust, were ascertained or mentioned in the assessments" was not a finding that the beneficiaries were indeterminate. The trust deed provided for every contingency, and the shares of each beneficiary were ascertainable and known at a particular point of time.

4. Valuation and Assessment of Various Funds within the Trust
The Tribunal held that the life interest of the grand-daughters in wearing the jewellery was not an asset and could not be assessed under Section 21(1). However, the sale of jewellery transformed their interest into an income-yielding interest, making it an asset. The capitalized value of this income was includible in the net wealth under the Wealth-tax Act. Similarly, the Pocket-money Fund and Housing Fund were to be assessed based on the life interest of the beneficiaries.

5. Taxability of Life Interest and Remainder Interest
The Tribunal concluded that the life interest of the grand-daughters in the jewellery, Pocket-money Fund, and Housing Fund should be valued and assessed under Section 21(1). The remainder interest of the ultimate beneficiaries, being directly assessed under Section 21(2), should not be included in the assessment under Section 21(1). The value of the life interest should be excluded from the value of the corpus directly assessed in the hands of the remainder-men beneficiaries.

Conclusion
The Tribunal upheld the assessment of the life interest of the grand-daughters in the Jewellery Fund, Pocket-money Fund, and Housing Fund under Section 21(1) of the Wealth-tax Act. The assessments for the remainder beneficiaries under Section 21(2) were also upheld, with the value of the life interest excluded from their assessments. The appeals were treated as partly allowed for statistical purposes.

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