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TMI Blog1986 (2) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... 21-3-1983). The assessment order does not enlighten us on the question whether the ITO had applied his mind to certain provisions of law applicable for the first time. 3. The Commissioner called for the records and found that the action of the ITO is prima facie erroneous insofar as it is prejudicial to revenue, thus, warranting action under section 263. Accordingly, he issued notice under section 263 dated 5-1-1983. The substance of this, notice is that the ITO failed to consider the impact of Explanation 1 to section 164 of the Act inserted by the Finance (No. 2) Act, 1980 with effect from 1-4-1980. The other contents of the Commissioner's notice refer to certain factual and legal aspects which need not be referred here as they are dealt with separately below. 4. The assessee gave his reply, the contents of which are summarised by the Commissioner in paragraphs 7-10 of his order. The Commissioner rejected the main and alternative arguments and directed the ITO to treat the assessee as discretionary trust and, hence, liable to be assessed at maximum rates. It was pointed out to us that for the assessment year 1981-82, the assessee's contention was accepted by the IAC under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st part shall be held, received and paid to the wife of Mr. Chandrakant Mirje provided she is living with him during his lifetime and so long as she is not remarried after his death. In case, wife of Mr. Chandrakant Mirje is also not surviving or is not living with him, then the trustees shall hold, receive the 1st part and pay the same to Mr. Chandrakant Mirje. In case of death Mr. Chandrakant Mirje, trustees shall distribute th e first part equally amongest the legal heirs of Mr. Chandrakant Mirje other than the settlor. 2. The 2nd part shall be held, received and distributed amongst the beneficiaries of the 2nd group as under : Equally amongst Nitin Mirje and such of the daughters of Suryakant Mirje, namely, Anjali Mirje, Rohini Mirje who are unmarried, or survivor of them. In case, none of Nitin, Rohini, Anjali are entitled to the income either on account of death or marriage in case of daughters, namely, Rohini and Anjali Mirje 2nd part shall be held, received and paid to the wife of Suryakant Mirje provided she is living with him during his lifetime and so long as she is not remarried after his death. In case, wife of Suryakant Mirje is also not surviving or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with him during the lifetime and so long as she is not reimbursed after his death. In case, wife of Vasant Mirje is also not surviving or is not living with him then the trustees shall hold, receive the 5th part and pay the same to Vasant Mirje. In case of death of Vasant Mirje trustees shall distribute the 5th part equally amongst the legal heirs of Mr. Vasant Mirje other than the settlor. 6. 6th part shall be held, received and distributed amongst the beneficiaries of the 6th group as under : Equally amongst Parag Mirje and such of the daughters of Ashok Mirje namely, Nutan Mirje, Nayan Mirje, Kshitija Mirje who are unmarried or survior of them. In case, none of Parag, Nutan, Nayan and Kshitija Mirje are entitled to the income either on account of death or marriage in case of daughters Nutan, Nayan and Kshitija 6th part shall be held, received and paid to the wife of Ashok Mirje provided she is living with him during his lifetime and son long she is not remarried after his death. In case of wife of Ashok Mirje is also not surviving or is not living with him then the trustees shall hold, receive the 6th part and pay the same to Ashok Mirje. In case of death of Ashok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup) or to give the entire income or only a part thereof to any one to the entire exclusion of all others and this power shall also include to power to give income to any one of the beneficiaries for the income who is not given any shares under clause (b) above. Such resolution can be made for a specified number of accounting years also and once passed, the resolution shall be irrevocable for the concerned number of year or years; (ii) So long as the trustees have not exercised the discretion given to them under sub-clause (i) above in respect of the entire income of the trust fund or any part thereof, the trustees shall have absolute discretion by passing a resolution 3 months prior to the beginning of any accounting year, to accumulate the said entire income of the trust fund or said part thereof as the case may be in respect of which the trustees have not exercised powers under clause (i) and to add the said entire income or the said part to the corpus to the entire exclusion of all the beneficiaries to the income of the trust fund. Such resolution can be made for one or more accounting years. Once passed, the resolution shall be irrevocable for the concerned number of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mum rate. It is this decision of the Commissioner which has given rise to this appeal. 7. Shri Dastur took us through the relevant clauses of the trust deed. According to him the alleged offending clause enabling the trustees to alter the shares or to accumulate the profits does not have the effect of rendering a specific trust into a discretionary one. Firstly, the power can be exercised only prospectively. The previous year is samvat year. Unless the trustees pass a resolution altering the shares or directing accumulation at least 3 months before the commencement of accounting period, the original specific shares stand. Secondly, trustees have not passed any resolution at any time. Thirdly, one has to examine the specification of shares in reality in the accounting period and not in imagining all possibilities and probabilities. The main clause specifying beneficiaries is precise and mails provision for possibilities regarding death, marriage, renuciation, etc., by the beneficiaries. If such possibilities do not make the trust discretionary there is no reason why mere existence of clause enabling the trustees to alter the position regarding shares should render the trust discre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons on whose behalf or for whose benefit such income ... is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income ... is receivable, are expressly stated in ... the instrument of trust ... and are ascertainable as such on the date of such ... instrument ..." Before coming to his arguments Shri Dastur took us through the memorandum explaining the provision. The relevant portion is as under : "Under the existing provisions, the flat rate of 65 per cent is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specifies in the relevant instrument of trust ... This provision has been misused in some cases by giving discretion to the trustees to decide the allocation of income every year and in other ways. In such a situation, the trustees and beneficiaries are able to manipulate the arrangements in such a manner that a discretionary trust is converted into a specific trust whenever it suits them tax-wise. In order to prevent such manipulation, it is proposed to provide that unless the beneficiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imb of Explanation 1(ii) of section 164 regarding ascertainment of shares from the instrument. 13. Coming to the case law relied upon by the Commissioner, Shri Dastur pointed out that CIT v. Lady Ratanbai Mathuradas [1968] 67 ITR 504 (Bom.) at p. 512, dealt with a case where the discretion was total. In this case, the facts were that the trustees held the property in trust for A and B during their lifetime and thereafter for their children in such proportion as the trustees think fit. A and B by renouncing their interest, underwent a civil death qua the trust leaving the trustees with the remaining obligation which was discretonary. It was held that the actual division by the trustees amongest the beneficiaries in a particular proportion did not render the trust any the less discretionary. The context is, thus, materially different. 14. Padmavati Jaykrishna Trust v. CWT [1966] 61 ITR 66 (Guj.) relied upon by the Commissioner actually helps the assessee's case as their Lordships have clearly held that the situation is to be seen on the relevant date for each year of taxation. In the case under appeal, there was no doubt about the situation in the accounting period, there being n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make after that date. Reliance was also placed on a Special Bench decision that the disallowance of expenditure under section 44C of the Act which came into effect from 1-6-1976 refers to expenditure incurred after 1-6-1976-American Express International Banking Corpn. v. IAC [1985] SOT 263 (Bom.) (SB). 18. In reply Shri Sathe again took us through the relevant part of the trust deed. The provision of Chapter IV if analysed properly would show that specification of defiant shares is subject to an overriding discretionary power. Consequently, the shares of beneficiary initially indeterminate, became specific, not because of the clause specifying shares, but because of forbearance and indulgence shown by the trustees. It cannot, therefore, be said that the shares are ascertainable from the trust deed. What is required under the Explanation is that the shares should be ascertainable once for all on the date of execution of the trust deed. The volition of beneficiaries would doubtless affect the shares but what the Legislature had in mind was the volition of the trustees. Thus, the non-exercise of discretion by the trustees is another way of exercise of discretion so as to result in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the position is quite clear. When the Legislature refers to ascertainment as on the date of execution of the instrument, there is no scope of reading the latter document into the original during the period, when there was no such document. Indeed, the so-called document of clarification (page 97 of paper book) states that 'experience have shown that there is no need to continue with such powers.' Experience does not come within a split second from the date of execution and, therefore, the deletion could not have been retospectively made from the date of original execution. When exactly did the so-called experience mature into a decision to delete to offending clause ? The Commissioner is, therefore, justified in rejecting the contention. 21. Regarding the second alternate contention, referring to Kanga and Palkhivbala's law and Practice of Income-tax, p. 83, Shri Sathe pointed out that the Finance Bill always states 'unless the context otherwise requires'. In this case the context shows clearly the applicability for the assessment year 1980-81 as mentioned in paragraph 30.4 of the CBDT Circular No. 281, dated 22-9-1980. Even the memorandum explaining the provisions of the Bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed to have come into force on the 1st day of April, 1980. The impugned clause is section 27 of the finance (No. 2) Act. Many other clauses have other operative dates, e.g., section 17 of the Finance (No. 2) Act is effective from 1-4-1972. Sections 18-23 and 26 of the Finance (No. 2) Act are effective from 1-4-1981 (assessment year 1981-82). Section 24 dealing with validity of return comes into effect from 1-9-1980 indicating that it applies to return filed on or after 1-9-1980. Thus, where a clause is procedural or penal it may come into effect in respect of returns filed after the date. Similarly, where a clause delays with expenditure and comes into effect from a date other than the first day of the financial year it would be operative from that date. But where a substantive provision comes into effect from the first day of April, it would apply to the assessment year commencing on the first day of April as discussed by Kanga and Palkhivala's in Law and Practice of Income-tax, Seventh edn., Vol. 1, p. 83 as below : Though the subject of the charge is the income of the previous year, the law to be applied is that in force in the assessment year, unless otherwise stated for im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a loose sense as mentioned in case law in judicial dictionaries. The ascertainment which again should be from the instrument itself is not possible unless one embarkes on an enquiry whether the trustees have in fact invoked their discretionary pokers vested in them in the trust deed. This fact cannot be 'ascertained' from the instrument and, therefore, the assessee is hit by the second limb of Explanation 1(ii). The omission of reference to the previous year (which features prominently Explanation 1(i) from Explanation 1(ii) indicates that for getting out of the clutches of the provision, specification of shares from all times to come is contemplated. Shares may vary depending on the vicissitudes through which beneficiaries go (death, marriage, renunciation, etc.) but if such contingencies are mentioned in the deed the shares would still remain specific and ascertainable. But the very existence of a clause giving overriding pores to trustees to vary the share without giving any reasons, except their absolute discretion is fatal. 27. Coming to the case law, we agree that not much can be drawn from them as they do not deal directly with the legal provisions under consideration. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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