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TMI Blog1994 (4) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... edding Gifts Trust of HEH the Nizam's two grand daughters " under a trust deed dated 4-9-1951. The beneficiaries of the said trust are the settlor's grand daughters Fatima Fouzia and Ameena Marzia who are the daughters of Prince Mouzam Jah Bahadur, second son of the settlor. The Settlor transferred certain items of his jewellery to the said trust and the same have been described in the first and second schedules of the trust deed. The first schedule comprises of 32 items of ladies jewellery of the oriental type. Likewise, the second schedule of the trust-deed also comprises of 32 items of jewellery. The Settlor appointed four trustees including himself to manage the trust property. The jewellery described in the First and Second Schedules were handed over to the trustees. The trust deed, clause 6, directs the Trustees to keep the said jeweller in safe custody in some reputed bank preferably at Bombay. Accordingly the said jewellery was kept in the lockers of Mercantile Bank, Bombay in the names of the trustees. Under the terms of the trust-deed, Fatima Fouzia and Ameena Marzia were given the right or privilege of wearing the jewellery specified in the First Schedule and the Second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rzia also. She was also given wearing right to wear the said jewellery mentioned in the Second Schedule on the occasion of her marriage and subsequently on special ceremonial occasions and festivities. Thereafter the trustees shall take over charge of the said items of jewellery and keep them in safe custody. Sub-clause (g) and (h) of clause 3 prohibit the alienation of the jewellery specified in the first and second schedules either by sale or otherwise during the life time of Fatima Fouzia and the life time of Ameena Marzia. Clauses 4 and 5 of the trust deed state as to what should happen to the articles of jewellery specified in the first schedule on the death of Fatima Fouzia and the jewellery specified in the second schedule on the death of Ameena Marzia. Clause 4 states that on the death of Fatima Fouzia, the trustees shall hold the articles of jewellery specified in the First Schedule (hereinafter called Fatima Fouzia's jewellery fund) upon trust to divide the same amongst her children and/or remote issues then living per stirpes in the proportion of two shares for every male child and one share for every female child. If the said Fatima Fouzia shall die without leaving any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demands. The settlor did not contemplate this contingency when he created the trust in 1951. He passed away in the year 1967. The arrear wealth-tax demand created a piquant situation to the trustees in the management of the trust property. The jewellery was lying idle as dead wealth in the lockers of a bank at Bombay. Therefore the trustees filed OP No. 210 of 1979 on the file of the Chief Judge, City Civil Court, Hyderabad under section 34 of the Indian Trust Act seeking the Court's opinion regarding the management of the trust property and also as to how best the unforeseen liability should be met. The trustees would appear to have requested the Court for permission to sell one item of jewellery from the First Schedule and one item of jewellery from the Second Schedule for meeting the outstanding tax liability. Fatima Fouzia and Ameena Marzia who were respondents 1 and 2 respectively in OP No. 210 of 1979 opposed the sale of jewellery. The Chief Judge, City Civil Court by his order dated 21-4-1980 permitted the trustees to sell as many items of jewellery as are necessary from the jewellers mentioned in Schedules 1 2 and meet the tax liability and deposit the balance sale procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... casion previously and there is no likelihood of wearing the jewellery in future. At any rate such questions cannot be decided in this petition. It is open for respondents 1 2 to raise such points as they desire with regard to payment of interest only after the sale of the jewellery by separate applications. Whether, In the interest of the beneficiaries interest is to be paid to respondents 1 2 or to be allowed to be accumulated to the corpus is a question to be decided as and when such applications are filed. " The High Court granted permission to the trustees to sell the entire jewellery mentioned in schedules 1 and 2. The said permission was not subject to any condition that the interest accrued on the investment of the said sale proceeds shall be paid to the beneficiaries. 5. In pursuance of the permission granted by the High Court, the trustees sold the articles of jewellery specified in the first schedule relating to Fatima Fouzia Jewellery Fund in the accounting year relevant for the assessment year 1984-85 for Rs. 32,25,421. The said sale resulted in capital gains. Likewise, the articles of jewellery specified in the second schedule relating to Ameena Marzia Jeweller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 33,21,000. It resulted in capital gains. The trustees in their capacity as representative-assessee filed a return of income for the assessment year 1985-86 representing Amina Marzia declaring ' nil ' income. They did not admit capital gains in representative capacity on behalf of Ameena Marzia on the ground that the capital gain arising out of the sale of the jewellery can be assessed in the hands of the children of Ameena Marzia who are ultimate beneficiaries of the corpus. The Income-tax Officer rejected the said contention of the trustees and completed the assessment on the trust applying maximum marginal rate, following the same reasons on which the trustees were assessed in the case of Fatima Fouzia Jewellery Fund earlier. On the appeal preferred by the assessee, the learned Commissioner of Income-tax (A), Hyderabad cancelled the assessment accepting the contention of the trustees that the capital gain was exigible to tax in the hands of the children of Ameena Marzia. Aggrieved by it, the revenue preferred appeal ITA No.856/Hyd/88. 8. In these two appeals 856 and 859/Hyd/88, the revenue assails the action of the CIT(A) in cancelling the assessments. Though the grounds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares in the corpus only after the death of their respective mothers, devolution of their beneficial interest in the trust property got accelerated by the sale of the jewellery under Court orders, that vesting of interest on the ultimate beneficiaries took place on the sale of the jewellery which sale was pre-poned and held even during the life-time of the immediate life-time beneficiaries, that in that view of the matter, the assessment cannot be made under section 164(1) as the shares of the beneficiaries are known and determinate and that the impugned orders of the CIT(A) cancelling the assessments are unassailable. 10. Facts being identical to both the appeals it would be enough if we refer to the facts of the appeal relating to Fatima Fouzia, i.e., ITA No. 859/Hyd/ 88. Let us first consider as to who are the beneficiaries under the trust deed in relation to the jewelleries specified in the first schedule by the date of its sale and also the nature and extent of their beneficial interest and then decide as to in whose hands the capital gains that arose on the sale of the jewellery should be assessed whether under section 161 or under section 164 of the IT Act. 11. HEH the Ni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Trustees shall hold Fatima Fouzia's Jewellery Fund UPON TRUST for the Nizam of Hyderabad who may be surviving at the date of the death of the said Fatima Fouzia in order to enable him to meet the essential expenditure for the management of the Sarf-e-Khas for which he will be responsible as the Head of the Family of the settlor but if the dynasty of the settlor shall come to an end for any reason whatsoever and there shall be no Nizam of Hyderabad existing at the date of the death of the said Fatima Fouzia then the Trustees shall in the event aforesaid hand over and transfer Fatima Fouzia's Jewellery Fund to the eldest male descendant in the direct male line of succession of the Settlor according to the law of primogeniture then living in order to enable him as the Head of the Family of the Settlor to maintain the dignity of the House of Asaf Jah to which the Settlor belongs and the status and position of the various members of his family. " It is clear from clause 4 that such of those children of Fatima Fouzia who would be living by the date of the death of Fatima Fouzia alone would become entitled to the corpus.Clause 4 says that after the death of Fatima Fouzia, the corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tima Fouzia came up for consideration before the Tribunal in the case of Trustees of Wedding Gifts Trust of HEH the Nizam's Two Grand Daughters. The case related to assessment years 1976-77 to 1978-79, i.e., to the period prior to the sale of the jewellery. The Tribunal following the decision dated 5-11-1971 of the High Court rendered in RC 67 of 1969 and distinguishing the decision of the High Court in CWT v. Trustees of HEH the Nizam's Sahebzadi Anwar Begum Trust [1981] 129 ITR 796 (AP) held as follows : " Firstly, we hold that the decision in Nizam's Sahabzade's case supra cannot be applied to the facts of this case. We further hold that the decision rendered by the AP High Court in RC No. 67 of 1969 dated 5-11-1970 is the direct decision on the point. According to said decision, the right to wear jewellery either on the occasion of the marriage or on festive and ceremonial occasions throughout their lives of Fatima Fouzia and Ameena Marzia does not confer any asset on them in the jewelley mentioned in Schedule No. 1 or Schedule No. 2 of the trust deed titled, the Wedding Gifts Trust of the HEH the Nizam's two grand daughters. " Further, the Tribunal held that Fatima Fouzia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the grant of permission to sell the jewellery. In the circumstances, the appellant's contention in this regard are accepted and the assessment to capital gains in the impugned assessment is held to be incorrect. " 16. Clause 4 of the trust deed specifies the line of succession on the death of the beneficiary Fatima Fouzia. It clearly states that it is only on the death of Fatima Fouzia the trustees shall divide, the Fatima Fund amongst her children and/or her remoter issue then living per stirpes in the proportion of two shares for every male child or remoter issue of hers standing in the same degree of relationship and one share to every female child. The Settlor of the Trust did not contemplate the contingency of the sale of jewellery during the life-time of his grand daugher Fatima Fouzia. As a matter of fact the Settlor specifically prohibited the sale of jewellery before the death of Fatima Fouzia as seen from clause 3(g) of the trust deed. His intention was that the jewellery should be used by Fatima Fouzia on ceremonial occasions till her life-time and on her death only it should go to the children of Fatima Fouzia living by that date. Sale of jewellery is only a machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces and get the corpus distributed among the beneficiaries even before the death of Fatma Fouzia. However, such a proposal to dissolve the trust by distribution of the corpus should be approved by the Court u/s 34 of the Trust Act. Till then, clause 4 of the trust deed continues to be in force according to which devolution of interest on the ultimate beneficiaries will take place only on the death of Fatima Fouzia. Though Fatima Fouzia was having 4 children by the date of the sale of the jewellery the interest in favour of those children was only contingent interest by the date of the sale of the jewellery. Further, the children of Fatima Fouzia are only corpus beneficiaries and not income beneficiaries. By the date of sale of the jewellery or by the end of the accounting year their shares in the income arising on the sale proceeds were indeterminate and unknown. By no stretch of imagination it can be said that the trustees received the capital gain income or the sale proceeds of the jewellery for and on behalf of the children of Fatima Fouzia. In that view of the matter no portion of the capital gains can be assessed in the hands of the children of Fatima Fouzia or on the represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the benefit of the beneficiaries was exempt u/s 2(14)(ii) of the I.T.Act. Thereafter at the instance of the Revenue the matter came up before the High Court. The High Court held that the jewellery in question which is intended to be used by the beneficiary on the wedding day and other ceremonial occasions as a mark of status and pride and which requires to be returned to the trustees for safe custody after the ceremonies are over does not come under personal effects u/s 2(14)(ii) of the I.T. Act and that the sale proceeds obtained on the sale of the jewellery still come under capital gains and consequently it is exigible to tax u/s 45 of the I.T. Act. The High Court having come to that conclusion considered the further question whether the trustees should be assessed u/s 161 or u/s 164 of the I.T. Act in respect of that capital gain. The High Court observed that difference between sections 161 and 164 is very clear, that where it is found that the corpus is not received on behalf or for the benefit of the beneficiaries section 164 applies and that where the income is specifically receivable on behalf or for the benefit of the beneficiaries, sec. 161 applies. Ultimately, the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted position that unless there is a decision of the competent court in the matters of doubt the position obtaining in the absence of court's decision has to be considered. Therefore, I am of the firmly of the view that even if any decision is obtained by the trustees at a later date that will have prospective operation but not retrospective operation. It is for this very reason the Trustees have been well advised to file the return on 29th August, 1984 admitting the entire capital gain assessable in the hands of the Trustees directly by admitting total income at Rs. 3,03,240. The subsequent action of the Trustees is therefore without any legal sanction. In the light of the above discussion the income of the Trust is recomputed as under. " Thus, in fact, the Assessing Officer assessed the entire capital gain in the hands of the trust. For the reasons mentioned supra, we hereby set aside the impugned order of the first appellate authority and restore the assessment made by the Assessing Officer against the trust. Accordinigly, ITA No. 859/Hyd/88 filed by the Revenue is allowed. 19. The discussion in ITA No. 859/Hyd/88 holds good for ITA No. 856/ Hyd/88 also. For the reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zia and that it should be considered in the hands of Fatima Fouzia's children in equal shares. The Assessing Officer assessed the entire interest income on the trustees treating them as representative-assessee representing Fatima Fouzia. On the appeals filed by the trustees (representative-assessee) the first appellate authority held that the interest income of Rs. 1,90,063 cannot be assessed in the hands of the representative-assessee (trustees) as representing Fatima Fouzia. Accordingly he deleted it. Hence the Revenue filed appeal ITA No. 858/Hyd/88 contending that the entire interest income should be assessed in the hands of the trustees as representing Fatima Fouzia. 22. We have duly heard both sides on the issue arising out of this appeal. We have to see as to what was the position by the end of the previous year i.e., 31-3-1985. It is seen from the order of the first appellate authority that on 23-3-1985 the Chief Judge, City Civil Court, Hyderabad made an order u/s 34 of the Trust Act to the effect that Fatima Fouzia shall be paid 1/5th share in the interest Account derived from the deposits under National Rural Development Bonds. It is seen from the Revenue's grounds of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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