9911796707
TMI Blog1963 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... alled the Thiagarajar Educational Trust was constituted on April 29, 1956, by the assessee along with his brother, Sundaram Chettiar, and his father, Karumuthu Thiagaraja Chettiar. These founders of the trust were themselves to be trustees of the institution. At the inception they transferred the shares held by each of them in Saroja Mills Limited, Singanallur, Coimbatore District. Subsequently, the assessee transferred certain other block of shares held by him in Sundaram and Company Limited, Meenakshi Mills Limited, Manickavasagam (Private) Limited and Rajendra Mills Limited to the trust. We shall refer to the terms of the trust a little later. In the previous years relevant to the assessment years 1957-58 and 1958-59 the trustees aforesaid received dividends of ₹ 1,86,108 and ₹ 1,93,919 respectively from the transferred shares. The net dividends when grossed up amounted to ₹ 2,52,350 and ₹ 2,78,222. A good portion of this dividend income of the trust was advanced as loan to three companies, Rukmani Mills Limited, Meenakshi Mills Limited and East India Corporation Limited, in which companies the trustees in their individual capacity and other members of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of the trust deed, the assessee derives the necessary indirect benefit out of the income of the trust to exclude him from the exemption envisaged in the last proviso to section 16(1)(c). The relevant statutory provision upon which both the department and the assessee rely reads as follows: 16. (1) In computing the total income of an assessee--.... (c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of revocable transfer of assets shall be deemed to be income of the transferor: Provided that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settlor, disponer or transferor a right to reassume power directly or indirectly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or disponer derives no direct or indirect benefit, is not within the main provision of section 16(1)(c). In other words, where there is a transfer of assets irrevocable for a period exceeding six years, the income accruing to the settlee by reason of such transfer should be deemed to be the income of the settlee and should not be included in the income of the settlor. But the important condition is that the settlor should not derive any benefit, direct or indirect. This, in brief, is the substance of the statutory provision. The first proviso to section 16(1)(c) is a commentary on the word revocable found in the main provision. Income from a revocable transfer of assets shall be deemed to be income of the transferor. The true nature of a transfer, whether revocable or not, can be ascertained from the terms of the transfer, express or implied. By the first proviso the statute creates a fiction of revocability, if the transfer deed contains a provision of retransfer of income to the transferor directly or indirectly, or if the settlor reserves or retains a power to reassume directly or indirectly his rights over the income or assets. A potential right or power to enjoy the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y advantage out of the trust funds. It cannot be controverted that the trustees cannot benefit themselves directly from the trust funds. Clauses 2, 3 and 4 of the trust deed state that Karumuthu Thiagaraya Chettiar, Sundaram Chettiar and Manickavasagam Chettiar (the assessee herein) have transferred shares belonging to them in Saroja Mills Limited, Singanallur, for a period of seven years from the date of the indenture. The transfer purports to be both as regards the corpus and the income of the shares. It is in favour of Thiagarajar Educational Trust. There is, therefore, an irrevocable transfer for a minimum period of seven years from the date of the trust. The statutory condition necessary to attract the third proviso, so far as irrevocability is concerned, is satisfied. There does not appear to be any provision in the trust deed wherefrom it can be postulated that there was any hidden purpose in the constitution of the trust so as to enable the trustees to obtain personal advantages under cover of a public trust. The objects of the trust are set out and enumerated in clause 11 of the deed. They are, to establish, run and maintain educational, technical or technological institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law is very jealous of the right and interests of the beneficiary for whose benefit the trust is created and is intolerant with the trustee who swerves from the straight line of his duty. It is an established rule that the trustee shall not gain any personal advantage from the administration of the trust property or exploit his position to derive any pecuniary benefit. For example, a trustee who receives an illegal gratification for investing trust money must account for the amount of bribe received: In re Smith [1896] 1 Ch. 171. This forbidden thing cannot be done directly or indirectly. The reason for the rule is that a person in a fiduciary position is not entitled to put himself in a position where his interest and duty conflict. Thus, a trustee is absolutely prohibited while he remains a trustee from purchasing, leasing or accepting a mortgage of trust property either from himself or his co-trustees, however fair the transaction may be, unless under an express power in the instrument of trust or with the sanction of a competent court. The question is whether a trustee can borrow money for his own personal purposes from the trust. We have no doubt that a trustee who lends mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or trust, the one literal but contrary to law and the other restricted but consistent with law, the courts should prefer the latter construction as it would be improper to assume that the authors of the instrument determined to do something which was neither proper nor legal. We are inclined to take the view that the proper construction of clause 19 of the instrument of trust should be that the trustees have not been authorised to invest moneys of the trust with themselves. Learned counsel for the department cited the decision of the Bombay High Court in Commissioner of Income-tax v. Sir Kikabhai Premchand [1948] 16 I.T.R. 207 in support of the contention that a power reserved by the settlor in the instrument of trust to lend money to himself with or without interest would amount to a derivation of benefit which would take away the exemption created by the third proviso to section 16(1)(c) of the Indian Income-tax Act. In that case a trust deed was executed by Sir Kikabhai Premchand for the purpose of establishing a sanatorium called Lady Lily Kikabhai Premchand Sanatorium at Poona for the benefit of the deserving and needy persons and their families belonging to specified Hindu c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But here, we are dealing with a case where we do not find any provision in the trust deed which would enable the authors of the trust to obtain any benefit directly or indirectly from the trust funds by loaning trust amounts to themselves. As stated already, clause 19 of the trust deed would not permit such an user of the trust fund. The department contends that in fact the trustees have obtained a benefit by utilising the trust funds as advances to various limited companies in which the trustees held large block of shares. We shall now examine the particulars of the share position of the assessee and the other trustees in the borrowing companies, the details of loans advanced from the Thiagarajar Educational Trust and the extent to which the borrowing companies were indebted to the trust in proportion to their other indebtedness. In Rukmani Mills Limited (one of the borrowing companies) the share position as on March 31, 1957, of the assessee, his father and brother was as follows: Karumuthu Thiagaraja Chettiar 187 shares. T. Sundaram Chettiar 1,126 quot; T. Manickavasagam Chettiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Loan from Thiagarajar Educational Trust ₹ 48,101 Nil Percentage of borrowings from trust to total borrowings ... 1.6% Nil (2) Sree Meenakshi Mills Ltd. Total borrowings as on 31-3-1957 and 31-3-1958. 31-3-1957 31-3-1958 Loans from Thiagarajar Educational Trust Rs. Nil. 80,288 Percentage of loan taken from educational trust total borrowings ... Nil 0.43% (3) East India Corporation Limited. Total borrowings as on 31-12-56 and 31-12-57. 31-12-1956 31-12-1957 Borrowings from Thiagarajar Educational Trust ... Rs. Nil 3,19,694. Percentage of borrowings from trust to total borrowings ... Rs. Nil 4.4% An analysis of the above figures would bring out two features prominently. The first is that the share position of the assessee in the borrowing companies was not such as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the meaning of section 46. The learned Law Lord discussed the question and observes as follows at page 40 [1952] A.C. 15: The loans or advances were payments made to Lord St. Levan out of the resources of the company and they were made periodically, and they were received by Lord St. Levan for his own benefit directly or indirectly. Therefore they were 'benefits'. The company, on the other hand, appeals once more to the plain use of ordinary words and denies that a man can fairly be said to receive for his own benefit a sum which he receives by way of loan and has to repay, and further relies on the omission of loan from a definition which refers to payment by way of dividend or interest or by way of remuneration or any other payment. The latter argument may derive some force from the contention of the Crown that a transaction of loan was just what the section was aimed at. But perhaps that contention had only become common form by the time this stage of the case had been reached. My Lords, here again is a question on which I find it impossible to express a confident opinion. It is indeed strange that no reference is made to a transaction of loan, and the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring food for domestic animals. In 1946 the company wanted to extend its business to Eire and formed an associated company at that place. On 16th September, 1947, that Eire company acquired shares in the appellant company which were later forfeited because of non-payment of calls. On the same date the appellant company advanced 35,000 to the Eire company on the security of debentures carrying interest at 5 per cent. per annum. No interest was paid and in November, 1947, and May, 1949, the company waived the interest due for the periods up to 31st October, 1947, and 31st October, 1948, respectively. In the assessment to profits tax made on the company for the chargeable accounting period ending 16th March, 1948, the loan made to its associated company was treated as a distribution to proprietors by virtue of the provision of section 36(1)(c), Finance Act, 1947. The company contended that while the advance on the security of the debentures was an amount applied by way of loan, it was not applied for the benefit of any person, since the money was lent on commercial terms, and that the subsequent waiver of interest could not, respectively, have the effect of altering the original na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies referred to above from the Thiagarajar Educational Trust would constitute a benefit either to the borrowing companies or to the shareholders of those companies. Assuming that it would be permissible to treat the advances as amounting to benefits, can it be said that those benefits were derived by the assessee who was only a shareholder of the companies which borrowed? Learned counsel for the assessee contends that a company is a corporate body distinct and separate from the shareholders, and any benefit to the company would not amount to a benefit to the shareholder. This argument is met by learned counsel for the department by contending that the shareholder's prosperity is linked with the prosperity of the company, and whatever benefit a company might derive would ultimately enure for the shareholder. This is surely problematical. The question now is whether the assessee who is a shareholder obtained a benefit directly or indirectly as a result of the loans for the trust. Benefit may be direct or indirect but it must be benefit. Anything which is abstract, remote or contingent cannot be called a benefit. The characteristic of a benefit is that it is real, and not n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med only for the purpose of taking loans from the trust and then to pass on an indirect benefit to their shareholders for purpose of escapement of tax. Indeed, such a contention has not been urged and it seems to us that on the facts of the present case it would be impossible to do so. In our opinion, all the necessary conditions and ingredients for the operation of the third proviso to section 16(1)(c) are clearly present, and the assessee would not be within the mischief of the main provision. The Tribunal appears to have been obsessed with the view that the assessee had devised a plan to avoid taxation. No subject is compelled to pay tax unless he falls clearly within the scope of the taxing enactment, and, the avoidance of tax, which goes by the name of tax planning in modern times is quite legitimate provided it is done without any subterfuge or fraud. It is open to a taxpayer to keep out of the taxing enactment and so to order his affairs in such a fashion as to achieve that purpose. We may observe that we see nothing improper in it. In the result, the question is answered in favour of the assessee. He will get his costs from the department. Counsel's fee ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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