1970 (4) TMI 58 - HC - Income Tax

Computation of capital gains realised in son s life-time when trust-deed provides that income is to be payable to son for life and after son s life-time the corpus is to be divided among the children

Issues Involved:
1. Taxation rate applicable to capital gains under section 17(6) versus maximum rate under section 41 of the Indian Income-tax Act, 1922.
2. Determination of beneficiaries' shares as determinate and known or indeterminate and unknown.
3. Applicability of section 41 to the trustees in respect of capital gains.

Detailed Analysis:

1. Taxation Rate Applicable to Capital Gains:
The primary issue was whether the capital gain of Rs. 41,085 should be taxed at the rate provided under section 17(6) of the Indian Income-tax Act, 1922, as contended by the assessee, or at the maximum rate as contended by the department. The trustees argued that section 17(6) provided special and self-contained provisions for determining the rates at which capital gains are to be taxed, making section 41 irrelevant in this context. The revenue, however, argued that section 41 was compulsorily applicable in every case where the assessees were trustees, and thus the capital gains should be taxed at the maximum rate.

2. Determination of Beneficiaries' Shares:
The court had to determine whether the shares of the beneficiaries under the trust deeds were determinate and known or indeterminate and unknown. The trustees contended that the capital gains were receivable by them for the benefit of persons whose shares were determinate and known, relying on the decisions in Trustees of Putlibai R. F. Mulla Trust v. Commissioner of Wealth-tax and Commissioner of Income-tax v. Mrs. Hansabai Tribhuwandas Trust. The revenue argued that the beneficiaries' interests were contingent and thus indeterminate and unknown, making the proviso to section 41 applicable.

3. Applicability of Section 41 to Trustees:
The court examined whether section 41, which deals with the tax liabilities of trustees, was applicable to the trustees in respect of capital gains. The trustees argued that the provisions of section 41 were not applicable for the computation of tax on capital gains, and only section 17(6) was relevant. The revenue, however, relied on the decision in Commissioner of Income-tax v. Balwantrai Jethalal Vaidya, which suggested that it was mandatory to proceed in accordance with section 41 when assessing trustees.

Court's Findings:

On Taxation Rate:
The court concluded that the capital gains tax could not be levied and/or computed at the maximum rate mentioned in the proviso to section 41. It found that the provisions in section 17(6) were special and self-contained for determining the rates at which capital gains are to be taxed.

On Determination of Beneficiaries' Shares:
The court held that the beneficiaries' shares were determinate and known. It noted that at the relevant date, the beneficiaries could be ascertained, and their shares in the capital gains earned and the corpus were ascertainable. The fact that these beneficiaries held contingent interests was deemed irrelevant. The court relied on the ratio of the decision in Commissioner of Wealth-tax v. Mrs. Hansabai Tribhuwandas Trust, which stated that the question of whether the shares of the beneficiaries are indeterminate or unknown must be judged based on the facts existing at the relevant date.

On Applicability of Section 41:
The court found it unnecessary to discuss the trustees' submission that section 41 was irrelevant for the computation of tax on capital gains. However, it noted that the decision in Commissioner of Income-tax v. Balwantrai Jethalal Vaidya mandated that trustees be assessed in accordance with section 41. The court also distinguished the case from Commissioner of Income-tax v. Lady Ratanbai Mathuradas, where the trustees had absolute discretion not to disburse the income, making the beneficiaries' shares indeterminate and unknown.

Conclusion:
The court answered the question in favor of the assessee, stating that the capital gain mentioned in the question could not be taxed at the maximum rate as contended by the department. The Commissioner was ordered to pay the costs.

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