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TMI Blog1965 (11) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... nlal and whatever we say in regard to the terms of that trust deed must apply equally in regard to the terms of the trust deed made by Taramati. By the trust deed, Ramanlal settled a sum of Rs. 60,000 on the trusts set out in clause 3 of the trust deed which runs as follows: "3. The trustees shall hold and stand possessed of the said sum of Rs. 60,000 (rupees sixty thousand) UPON TRUST: (a) to recover the interest, dividends and income of the trust fund and to pay out of the same the charges for collection and all other outgoings, if any ; (b) to apply the balance of such interest, dividends and income hereinafter called 'the net income' or such portion thereof as the trustees in their absolute discretion deem fit for the maintenance, education and advancement and otherwise for the benefit of the settlor's son the said Ashok and of his wife provided such wife is born before the date of these presents and in case of any surplus income to accumulate the same for a period of not more than 18 years PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED THAT the trustees shall not be liable or accountable to any one for any act bona fide done by them or for any payment bona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble age being 25. There is no dispute about this valuation and we will therefore say no more about it. So far as the interest of the assessee in the corpus was concerned, the Wealth-tax Officer was of the view that the interest was a vested interest and he, accordingly, determined the value of the interest on the relevant valuation dates on the basis of its being a vested interest. We are not concerned in this reference with the quantum of the valuation arrived at by the revenue authorities and it is, therefore, not necessary to mention the actual figures of valuation arrived at by them. The assessee being aggrieved by the orders made by the Wealth-tax Officer preferred appeals to the Appellate Assistant Commissioner, there being a separate appeal in respect of each assessment year. The Appellate Assistant Commissioner took the view that the assessee did not have any vested interest in the income of the trust fund and it could not therefore be said that he had an interest in the income which could be valued for the purpose of Wealth-tax. So far as the interest in the corpus was concerned, the Appellate Assistant Commissioner held that the assessee had a vested interest in the corpu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vested interest which was capable of valuation and the Tribunal was, therefore, in error in taking the view that its value was nil. The second ground which he urged in the alternative was that, in any event, even if the interest of the assessee in the corpus was not a vested interest, it was, in any event, a contingent interest and contingent interest being a form of property assignable and transferable, it could be valued by the revenue authorities and the view taken by the Tribunal was, therefore, incorrect. Mr. D. D. Shah, however, contended that having regard to the frame of the question it was not open to the revenue to contend that the assessee had an interest in the corpus and that such interest was a vested interest. He pointed out that the finding of the Tribunal was that the assessee's interest in the corpus was a spes successionis and the question as framed assumed the correctness of this finding and merely brought into issue the point whether the assessee's interest being spes successionis could be valued at nil. He further argued that, even if the finding of the Tribunal were construed to mean that the assessee's interest in the corpus was a spes successionis and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iously comprises two findings : (1) the assessee's interest in the corpus is a spes successionis and, (2) consequently its value is nil and it is, therefore, axiomatic that the challenge to the decision would necessarily carry with it the challenge to both the findings which constitute the decision and not only the final conclusion that the value of the assessee's interest in the corpus is nil but also the premise on which it is based, namely, that the assessee's interest is a spes successionis, would be liable to be challenged under the question as framed. The question is a rolled up one which takes in the challenge to both the findings of the Tribunal and submits both the findings to the court for testing their correctness. This would become still clearer if we consider how the question may be answered if it is to be decided in favour of the revenue. It may be answered in one of two ways : either it may be held that the value of the assessee's interest in the corpus is not nil, though it might be a spes successionis or it may be held that the value of the assessee's interest in the corpus is not nil but it has some value because it is not a spes successionis but is a vested inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e youngest attaining the age of 20 and the argument was that the interest of the children being in the nature of spes successionis was not transferable and the assignment of such interest was therefore invalid. The Privy Council repelled this argument holding that the interest which the children took in the corpus was contingent interest which " was something quite different from a mere possibility of a like nature of an heir apparent succeeding to the estate, or the chance of a relation obtaining a legacy....". The Privy Council observed that a contingent interest is "......a well ascertained form of property--it certainly has been transferred in this country for generations--in respect of which it is quite possible to raise money and to dispose of it in any way that the beneficiary chooses." It is, therefore, clear that even if the gift to the assessee be held to be contingent on his surviving up to 31st March, 1987, the interest of the assessee in the corpus cannot be held to be spes successionis and hence, not transferable under section 6(a) of the Transfer of Property Act. The question then arises whether the gift to the assessee is contingent on his being alive on 31st March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hor of the settlement is to be found not in one part of the settlement or in the other but in the entire settlement and that intention can best be gathered by viewing a particular part of the settlement not detached from its context in the settlement but in connection with its whole context. We must, therefore, see whether there is anything in the other parts of the trust deed which shows that the gift of the corpus though apparently contingent was really intended to create a vested interest. Now several provisions contained in the trust deed were relied upon by the learned Advocate-General on behalf of the revenue as indicative of the settlor's intention to create a vested interest. Of these, the main provision on which he relied was that contained in clause 3, sub-clause (b), which imposes an obligation on the trustees to apply the net income or such portion thereof as the trustees in their absolute discretion deem fit for "maintenance, education and advancement and otherwise for the benefit" of the assessee and his wife (provided of course she is born before the date of the trust deed) and in case of any surplus income directs them to accumulate the same for a period of not mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere discretionary power to apply the income for the benefit of the donee, that would not be sufficient to vest the gift. This principle is well-settled in England (vide Halsbury's Laws of England (3rd edition), vol. 39, page 1136, paragraph 1676) and it obviously applied in India since the Exception to section 21 specifically requires a direction to apply the income or so much thereof as may be necessary for the benefit of the donee and that cannot include a case where a mere discretionary power as distinguished from a direction is conferred on the trustees. This was not in dispute between the parties but the point of controversy was as to whether clause 3, sub-clause (b), conferred only a discretionary power on the trustees or contained a direction to them to apply the income for the benefit of the assessee. Now, when we turn to clause 3, sub-clause (b), we find it impossible to take the view that the provision made in that sub-clause confers discretionary power on the trustees to apply the income for the benefit of the assessee. The sub-clause says in terms clear and explicit that the trustees shall hold and stand possessed of the sum of Rs. 60,000 upon trust to apply the net inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and his widow, to divide and transfer one-fifth of the fund to and amongst the children of T equally as and when they should respectively attain the age of twenty-five years, applying from time to time the income of the presumptive share of each child, or so much thereof as the trustees for the time being might think fit, for his and her maintenance and education until such share should become payable as aforesaid. Jessel M. R. held that the children took vested interest at the testator's death and the vesting was not postponed until each respective child attained the age of twenty-five. The provision in the will which we have set out above was interpreted by the learned Master of the Rolls as follows : " There still remains the difficulty that the gift here is not a gift of the whole income absolutely for maintenance : there is a discretionary power to apply the whole income, or so much as the trustees may think proper, and the question is, whether that is a gift of the whole interest within the rule as laid down in Watson v. Hayes and the other cases I have referred to. On that point Harrison v. Grimwood is a distinct authority. There the legacy was given to a class, followed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection required a part of the income to be applied for the benefit of the donee. He argued that, in the present case, a part of the net income was in any event directed to be applied for the benefit of the assessee and, therefore, even if some part of the income was directed to be applied for the benefit of the assessee's wife, it did not make any difference to the applicability of the Exception to section 21. He also urged in the alternative that in any event the application of the income for the benefit of the assessee's wife was application of income for the benefit of the assessee and, consequently, clause 3, sub-clause (b), did not direct or authorise the application of any part of the income for a purpose other than for the benefit of the assessee and the case was, therefore, still within the Exception to section 21. Now, in order to arrive at a true interpretation of the Exception to section 21, it is necessary to notice briefly the position in England in regard to this question. We may at once point out that, so for as the law of transfer and succession is concerned, the rules evolved by English courts are very often based on technical rules peculiar to the development of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le income and since there was no gift of the unapplied portion of the income for the benefit of any person other than the donee, the learned Lord held that the legacy was vested. In the second case also, as pointed out above, Jessel M.R. took the same view and observed : "The gift must be read as a direction to apply the whole income for maintenance, with a discretionary power reposed in the trustees to apply less than the whole income for the purpose if they thought fit. A gift of the intermediate income to be applied for the benefit of the parties contingently entitled would, according to Hanson v. Graham, vest the fund, and he should regard the fund as not the less vested if to that direction a discretion was appended not to apply the whole income in that manner, provided there was no gift over of the unapplied portion." It will be seen from the last part of the observation that the learned Master of the Rolls emphasised that even where the direction gives a discretion to the trustees to apply the whole of the income or such part thereof as they think fit for the benefit of the donee, there should be no gift over of the unapplied portion of the income and the unapplied portion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upports the contention of the learned Advocate-General, for both the learned judges who decided this case held that the rule laid down in the English decisions does not apply because the Exception to section 21 in terms refers not only to the whole income but to a part of the income as well and it is therefore sufficient if there is a direction in the will to spend a part of the income for the benefit of the legatee ; such a direction would bring the case within the Exception to section 21. This decision was taken in appeal to the Privy Council and was reversed but the decision of the Privy Council did not touch this point and, therefore, the decision of the Bombay High Court on this point would stand and we would be bound to follow it whatever might be our own view in regard to the question. But we find that there is a decision of the Supreme Court in Rajes Kanta Roy v. Smt. Shanti Debi where it is laid down in clear and unambiguous terms that it is undoubtedly the rule that where the enjoyment of the property is postponed but the present income whereof is to be applied for the benefit of the donee, the gift is vested and not contingent but this rule operates normally in those cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the heirs of the assessee as property belonging to the assessee, if the assessee dies intestate or according to the terms of the will, if he dies after having made a will. The whole of the intermediate income is thus given to or for the benefit of the assessee. It is, therefore, clear that the Exception to section 21 applied and the gift made to the assessee in clause 3, sub-clause (c), though apparently contingent, must be held to be vested. There are also certain other circumstances which clearly indicate the intention of the settlor that the assessee should receive a vested interest in the corpus and that the period of distribution alone should be postponed to 31st March, 1987. The trust deed recites that the trust is being made for the benefit of the assessee. Then there is the gift of the corpus to the assessee in clause 3, sub-clause (c), under which the corpus is to be handed over to the assessee on the 31st March, 1987, if he is then alive and in the meantime the whole of the intermediate income is given to or for the benefit of the assessee. If the assessee dies before 31st March, 1987, leaving a child or children, the corpus is to go to such child or children and if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d belong to the owner of the corpus and though on the death of the assessee prior to the 31st March, 1987, his interest in the corpus would be divested, a similar conclusion would not follow in regard to the accumulation of the income since, unlike sub-clause (c), sub-clauses (d) and (e) of clause 3 do not refer to the accumulation of the income and the gift over contained in these sub-clauses does not comprise such accumulation of income. These circumstances, in our opinion, clearly indicate that the assessee was intended to have a vested interest in the corpus despite the words of contingency used in clause 3, sub-clause (c). That leaves only one last point raised by the learned Advocate-General on behalf of the revenue. He contended that, in addition to these circumstances which we discussed above, there was one other circumstance which also pointed in the direction of vesting and that circumstance was to be found in the provision of gift over made in clause 3, sub-clauses (d) and (e). He relied on the rule which is well-established in English Law and which is commonly referred to as the rule in Phipps v. Ackers, that where there is a gift " to A 'if' or 'when' he shall attain ..... X X X X Extracts X X X X X X X X Extracts X X X X
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