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TMI Blog1950 (2) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded in the assessment? 3. The amount stated in question (2), with regard to the assessment year 1943-44, is ₹ 12,900. 4. The facts of the case are as follows:- V.M.R. Seshachalam Naidu died leaving behind him a will dated 20th April, 1936, (copy whereof is Exhibit A attached to this statement), by which he appointed his son-in-law C.G. Krishnaswami Naidu, his manager M.R. Krishnaswami Naidu, his daughter Jamuna Bai and his two sons, Badri Narayan alias Badrinath and Sampathkumar (after each of the last three attained majority, i.e., completed 18 years) as executors and trustees of which the firstnamed was to be the executive trustee, and others were to co-operate in the transactions of the business. 5. The testator had timber business in Madras and had agencies at Karachi, Calcutta and branches at Negapatam, Cocanada and Bombay. He had also saw mills at Rangoon. By paragraph 6 of the will, the testator desired that the business should be continued after his death in the manner provided in the will and so long as the business was run at a profit it should not be wound up even after his sons attained majority and assumed management. Paragraphs 7, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the business. Paragraph 18 is rather important, as the testator bequeathed his estate subject to the legacies and dispositions to his sons as tenants-in-common for their respective lives, and the absolute estate was to go to his grandsons, natural or adopted, who are entitled to take per stirpes. 6. The Income-tax Officer assessed the income of the estate in the hands of the executors in the status of association of persons . This has been upheld, on appeal, by the Appellate Assistant Commissioner. Objection to this has been taken before the Tribunal by the appellants and Mr. Rajah Aiyar (Advocate-General), on behalf of the appellants, submitted that the assessments should have been made on the appellants as trustees under Section 41 of the Income-tax Act and not as executors. The point, therefore, to be determined in this case was whether the appellants were executors of the estate of the deceased or whether they were trustees on behalf of the beneficiaries. It was agreed that if they carried on the business in the character of executors then Section 41 would not apply. If, on the other hand, they carried on as trustees, that is, the income was received by them on beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s legal and secondly, whether the sum paid to the mother and the widow should be exempt from tax in the hands of the appellants. The High Court by its order held that the assessment under Section 34 was illegal and, in the circumstances, did not answer the second question. The same argument as advanced for the assessment year 1939-40 was again advanced before us and we have again negatived the contention of the appellants. We think that questions of law do arise from the order of the Tribunal and we refer the following questions to the Honourable High Court:- (1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the executors did not cease to be executors and, therefore, Section 41 of the Income-tax Act had no application? (2) Whether on the facts of the case the Tribunal was right in upholding the decision of the Department that the maintenance paid to the widow and the mother of the testator under the will was not an allowable deduction under the Income-tax Act? K. Rajah Ayyar (Advocate-General) andK. Srinivasan, for the assessee C. S. Rama Rao Sahib, for the Commissioner JUDGMENT SATYANARAYANA RAO, J.- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movable and immovable properties. Under clause (8) there was a provision to purchase immovable properties, after the total capital of the business reached ₹ 10,00,000, i.e., five lakhs for the business in India and five lakhs for the business in Burma. The executors under this clause should set apart immovable properties of the value of ₹ 50,000 every year which they should acquire out of the profits of the business. Under clause (9) the executors were empowered to convert the business in India into a limited concern soon after the capital of the business in India reaches five lakhs of rupees. Clauses (10) and (11) provide for payment of an amount to the mother and also some amounts to his widow for the maintenance of herself and the children. By clause (12) be made provision for certain pecuniary legacies most of which are payable at a future date on the happening or the events mentioned therein. This clause also directs that the mortgage deed executed by the testator's wife's sister's son in his favour should be cancelled and delivered to him. Clause (13) provides for the setting apart of half anna per rupee of the net profits of the business every year a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section are in the nature of persons who merely receive the income but transmit the same to the beneficiaries. In other words, the estate of the beneficiary it is that is charged to income-tax under the section. The other contention raised by the assessees was that the sum of ₹ 12,950 is the assessment year 1942-43 and ₹ 12,900 in the subsequent year were paid by them as maintenance allowance to the widow and the mother of the deceased and that those amounts should be deducted from the income of the estate during the respective assessment years, the contention being that the maintenance allowances were an allocation by the deceased of part of his income which were charged upon the estate and the executors had no right to such income. The amount actually paid daring the period was not is dispute. These two contentions were rejected by the Income-tax Officer and by the Appellate Assistant Commissioner. On further appeal, the Appellate Tribunal confirmed the decision of the Department. Hence this reference. The main contention urged by the learned advocate on behalf of the assessee was that the administration of the estate was completed, the residue was ascertained, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under the will are entitled to certain pecuniary legacies and also a life interest in the residuary. For the executors to become trustees of the residue the funds which they should hold in trust for the residuary legatees must be constituted and must emerge into existence. It is settled law that until the residuary estate is ascertained the residuary legatees acquire no interest in the property and no fund in their favour comes into existence. This has been settled in Lord Sudeley v. Attorney-General [1897] A.C. 11. The position has never been so clearly enunciated as in the speech of Lord Halsbury, L.C., in that case at pages 15 and 16. The following observations at page 15 of the speech are apposite:- It is uncertain until the residuary estate has been ascertained, of what it will consist. It may consist of many things-it may consist of only a sum of money-and until that has been ascertained the actual right capable of instant assertion does not exist; and whether the character is that of executor or of trustee seems to me to be immaterial, because the legatee had no right to go and say 'I will have this or that part of the assets.' If a trustee is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also assent of the executor. It was therefore held that the dispositions by way of trust took effect and that the executors had no interest thereafter to pledge the property which formed part of the residuary estate. No doubt as pointed out by Viscount Haldane, L.C., in that case at page 85: Executors they remained, but they were executors who had become divested, by their assent to the dispositions of the will, of the property which was theirs virtute officii; and their right in rem, their title of property, had been transformed into a right in personam a right to get the property back by proper proceedings against those in whom the property should be vested if it turned out that they required it for payment of debts for which they had made no provision. To the same effect is also the view of Kekewich, J., in Timmis, In re: Nixon v. Smith [1902] 1 Ch. D. 176, where the learned Judge pointed out the ordinary duty of executors to pay the debts, funeral and testamentary expenses, and when that is done he has done all that was necessary and though he still remains executor he has done his duty and is functus officio. In that case there were no legacies in the ordinary sense but if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Kay, J., must have been a case where there was no existing trustee of the trust property remaining in the possession of the executor after it has passed from the office of executor to that of trustee which implies that the administration of the estate by the executor was completed by payment of debts, legacies, funeral and testamentary expenses. Of course, Kekewich, J., in that case agreed with Cotton, L.J., that without payment of debts, legacies, funeral and testamentary expenses, the Court had no jurisdiction either under the Act or otherwise to appoint trustee. The executor represents the testator and is his legal representative. He had duties laid down by the will and by the statute which he alone should per- form and could not be taken away out of his hand. These decisions in my opinion do not at all conflict with what was decided by the House of Lords in the cases already examined. On the other hand, they clearly draw the line of demarcation when the property legally passes from the possession of the executor to that of the trustee. The administration by the executor must be completed and the statutory duties mast be discharged before the estate could pass to the trustee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s estate. Under Section 343 where an annuity is given and no fund is charged with its payment or appropriated by the will to answer it, a Government annuity of the specified amount shall be purchased, or, if no such annuity can be obtained, then a sum sufficient to produce the annuity shall be invested for that purpose in securities of the kind mentioned in Section 341. It is after all this that Section 366 of the Act provides that the surplus or residue of the deceased's property, after payment of debts and legacies, shall be paid to the residuary legatee when any has been appointed under the will. It would be seen from this summary of the relevant sections of the Indian Succession Act that the principles embodied in the Act are not at variance with the principles which have been enunciated and applied in England. Before dealing with the facts of the case, it may be useful to advert to the duties of an executor when one of the assets of the testator's estate consists of a business. The law on the subject is clearly summarised in 14 Halsbury (Hailsham's Edition) at pages 386 and 387, Part V, Section 1; in Williams on Executors, Vol. II, 1930 Edition, page 1171 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by clauses (a) to (g) of that paragraph have not become payable and those legacies are to be paid in future. It was the plain duty of the executors to have followed the provisions of Section 342 of the Indian Succession Act and should have provided a fund sufficient to meet the legacies which are payable at a future time. They have not done that. Regarding the maintenance allowances also the situation stands in the same position. Under Section 343 of the Act as the annuities have not been charged and no fund has been appropriated by the will to answer the annuity, the executors should have taken steps to invest a sufficient sum to produce the annuity and invest for that purpose in securities as contemplated by Section 341 of the Act. This also was not done. As regards the cancellation of the deed of mortgage, it may be that they have decided not to enforce it and they have produced the original deed of mortgage with the word cancelled endorsed over it but not signed by the executors. However that may be, the provision for payment of the future legacies has not been made. The executors have also not carried out the directions contained in clause 13 of the will. No steps have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the amount as a deduction notwithstanding that under the Hindu law he is under a personal obligation to maintain his wife and the mother. It is not an allowance which was charged upon the estate by a decree of Court or otherwise and to which the testator himself had no right or title to receive. The income is received by the executors undoubtedly as part of the income of the testator and they applied it for discharging the obligations to pay maintenance to the mother and widow. The decision in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, Calcutta***, has no application and the case is clearly governed by the principles in P.C. Mallick v. Commissioner of Income-tax, Bengal*. The claim of the executors was therefore rightly rejected. In the result, the two questions referred to us must be answered in the affirmative and in favour of the Income-tax Commissioner; and the Commissioner is entitled to his cost's of this reference which we fix at ₹ 250. VISWANATHA SASTRI, J.- The facts that have led to this reference and the questions referred to us have been stated in the judgment just delivered. Numerous English decisions were cited before us by the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed not on the aggregate income of the estate in the hands of the trustees and at the rate appropriate to such total income, but on the income of each of the beneficiaries at the appropriate rate of tax, Section 41(2) permits the direct assessment of each of the beneficiaries according to his share of the income of the trust estate. Where, however, the estate is administered by executors, the income received by them pending the conclusion of their administration is not, in law, the income of the legatees or beneficiaries. Where trustees are appointed under a will, whether the trustees be the executors them. selves or strangers, the right and interest of the beneficiary in the income of the trust fund differs radically from the interest of the legatee in the income received by the executors during the period of their administration. During such period the income of the estate is the income of the executors and not of the beneficiaries or legatees, though the executors are bound to apply the income in a due course of administration. The executors do not, during the period of their administration, become trustees of any part of the estate for the legatees, unless they have assented to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the administration, if it is a residuary bequest. There is the same necessity for the executor's assent to a bequest of the residue as to a bequest of a specific or pecuniary legacy, So soon as be assents to the dispositions of the will--and the assent may be express or implied from his conduct--they become fully operative and the title of the legatees becomes absolute. If there ace trusts declared or created by the will in respect of the subject-matter of the bequest the trusts take effect on such assent, the estate vested in the executor as such is divested and vests in the trustees of the will. The fact that the executors are themselves the trustees does not make any difference. Nor does the fact that the bequest is of the residue affect the point, once the residue has been ascertained in due course of administration. See Attenborough v. Solomon*. We are concerned in this case with the rights of residuary legatees under a will which constitutes the executors, trustees of the residuary estate. The contention on behalf of the assessees is that the executors have become trustees and that the true relationship between the executors and the residuary legatees is now one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not the income of the charity but of the executors, and that the executors and not the charity, were the recipients of the income, the administration of the estate of the executors not having been completed. When the case was before the Court of Appeal, Younger, L.J., (afterwards Lord Blanesborough) stated the law in these terms: Until the residue is ascertained, and until its existence as net residue has been acknowledged by the executor, either by payment to the residuary legatee, or if the residue be settled, by the appropriation of a fund to meet the settled residue, the residuary legatee has no interest in any specific part of that which subsequently becomes residue as a specific fund but his right is, until that moment of time arrives, to have the estate administered in due course. The House of Lords affirmed the decision of the Court of Appeal on the ground above stated. The ratio decidendi was that during the relevant period executors held the dividends not for the charity but for the general purposes of the testator's estate, and that since the executorial duties had not been fully discharged and the residue had not been ascertained, the executors had not conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and should have been handed over by the executors to the persons beneficially entitled but for the fact that the estate is settled in trust and vested in the executors as trustees? Having considered the materials placed before us, I am of opinion that the administration of the estate by the executors in the present case is far from complete, the executorial functions and duties have not been discharged, the residuary estate has not been ascertained and has not come into existence, the trust fond has not been constituted, the executors have not yet become divested of the property and the residue has not vested in them as trustees. It is common ground that some of the pecuniary legacies bequeathed under the will have not yet been paid. The suggestion that the time for payment of those legacies has not arrived is not supported by the answers given by one of the executors to the questions propounded by the revenue authority. Even if the suggestion were correct, it was the duty of the executors under Section 342 of the Succession Act to have invested a sum sufficient to meet the legacy when due and payable. This hag not been done yet. There is also a provision in the will for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the testator, are stated to be still under the consideration of the executors. I have said enough to show that the administration of the estate by the executors was not complete during the relevant period, that their executorial duties had not been discharged and the residue of the estate has not been ascertained so as to constitute it a trust fund. The executors have not been divested of the estate, and the residue, not having been ascertained, cannot be considered to have vested in them qua trustees. The question is one of substance and the way in which the estate has been dealt with by the executors by means of entries in their accounts is not conclusive. It is not merely a question of entries in the accounts purporting to be kept by the executors. I am making this observation, because an account has been shown to us--it was not shown to the Income-tax Officer or to the Appellate Assistant Commissioner, and it is a matter of dispute whether it was shown to the Appellate Tribunal wherein certain figures are entered as representing the assets of the timber business carried on by the testator and continued by the executors. It is claimed that the assets of the timber busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The answer to the first question referred to us is therefore in the affirmative and against the assessees. The second question is comparatively easy of answer. It is admitted that the sum of ₹ 1,050 a month directed to be paid to the widow of the testator has not been paid to the widow but has been merely credited to her in the accounts and debited to the estate. The sum of ₹ 25 per month payable to the mother of the testator is stated to have been partly paid in cash and partly credited to her in the accounts. But it is admitted that the sums credited to her include the income of her own individual property, and it is not possible to say whether the drawings are attributable to the payments directed to be made to her under the will of the testator or to her own private income. Even if all the sums had been paid by executors to the widow and the mother of the testator during the course of their administration it would not make any difference in the answer to the question propounded. I have already reached the conclusion that the executors received the income of the estate of the testator qua executors and not as trustees during the relevant period. In this view, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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