2015 (2) TMI 816 - HC - Wealth-tax

Occasion to invoke section 21(4)the Wealth-tax Act - Accelerated interest in the trust properties - whether right to wear the jewellery is not an asset - whether interest of the beneficiaries in the trust property was assessable under section 164 of the Act ? - Held that - The key expression that plays a pivotal role in attracting section 21(4) is indeterminate or unknown beneficiaries. In the instant case, the terms of the trust deed are very clear and unambiguous. Even while conferring a limited privilege of wearing the ornaments in favour of the named women, the trust deed has clearly mentioned that on the death of the two women, the jewellery shall devolve upon their children. It is true that during the life time of the two women, it is difficult to treat any particular individual as the immediate beneficiary, particularly when the right was restricted only to the one of wearing and returning the jewels. However, in law, what becomes necessary is whether there are any beneficiaries at all. It is immaterial whether they are the beneficiaries at present or in future. Once the deed has stipulated that on the death of the two women, their children would become the beneficiaries, the occasion to invoke section 21(4) of the Act does not arise. The inescapable conclusion is that the assessment must be under section 21(1) of the Act. - Decided in favour of the assessees.

Issues Involved:
1. Determination of whether the children of the two ladies acquire interest in the trust properties only after the lifetime of the ladies.
2. Assessment of the interest of beneficiaries in the trust property under section 164 or section 21(4) of the Wealth-tax Act.
3. Classification of the right to wear jewelry as an asset.
4. Determination of whether the shares of the beneficiaries are unknown and indeterminate.
5. Tax implications of capital gains on the sale of jewelry.
6. Assessment of the capital gains income or sale proceeds received by the trustee on behalf of the children of the beneficiaries.

Issue-wise Detailed Analysis:

1. Accelerated Interest in Trust Properties:
The Income-tax Appellate Tribunal (ITAT) held that the children of the two ladies, Sb. Fatima Fouzia and Sb. Amina Marzia, get accelerated interest in the trust properties despite the trust deed clauses indicating that they acquire interest only after the lifetime of the ladies. The High Court upheld this view, noting that the trust deed clearly mentioned that the jewelry would devolve upon the children of the two women upon their death, thus identifying the beneficiaries.

2. Assessment Under Section 164 vs. Section 21(4):
The ITAT reversed the Commissioner of Income-tax (Appeals)' decision, which held that the interest of the beneficiaries in the trust property was assessable under section 164 of the Act. The High Court agreed with the ITAT, emphasizing that the trust deed provided for the devolution of property to the children, making the beneficiaries identifiable. Therefore, the assessment should be made under section 21(1) rather than section 21(4), which applies when beneficiaries are indeterminate or unknown.

3. Right to Wear Jewelry as an Asset:
The ITAT held that the right to wear jewelry is not an asset, contrary to a previous Andhra Pradesh High Court decision in CWT v. The Trustees of H. E. H. Nizam's Sahebzadi Anwar Begum Trust. The High Court supported this view, stating that the limited privilege of wearing the ornaments did not constitute an asset for wealth-tax purposes.

4. Shares of Beneficiaries as Unknown and Indeterminate:
The ITAT determined that the shares of the beneficiaries are not unknown and indeterminate, thus rejecting the application of section 21(4) of the Wealth-tax Act. The High Court concurred, noting that the trust deed explicitly identified the children of the two women as the beneficiaries, making their shares determinable.

5. Tax Implications of Capital Gains:
The ITAT held that the capital gain from the sale of jewelry is a notional or deemed income under section 45 of the Income-tax Act, 1961, and should be treated as part of the corpus. The High Court agreed, emphasizing that the capital gains merged with the corpus and did not constitute separate income for the beneficiaries.

6. Trustee's Receipt of Capital Gains Income:
The ITAT concluded that the trustee did not receive the capital gains income or sale proceeds of the jewelry on behalf of the children of Sb. Fatima Fouzia. The High Court upheld this view, noting that the trust deed did not provide for the immediate distribution of capital gains to the beneficiaries, thus supporting the ITAT's decision.

Conclusion:
The High Court answered all the references against the Revenue and in favor of the assessees, affirming the ITAT's decisions on all issues. The judgment clarified that the assessment should be made under section 21(1) of the Wealth-tax Act, as the beneficiaries were identifiable, and the right to wear jewelry did not constitute an asset for wealth-tax purposes.

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