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TMI Blog1963 (9) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... aritable trust and gave the necessary exemption to the trustees thereof in respect of its income. But while assessing the trust for the assessment year 1958-59, the Income-tax Officer came to the conclusion that section 16(1) (c), proviso I, applied and, therefore, the income of the trust could not be assessed in the hands of the trustees but was assessable in the hands of the settlor, the assessee Jayantilal Amratlal. The Income-tax Officer gave the reasons for so holding, (1) that the assessee had de facto control over the income and corpus of the trust and even the charities and temples to receive the benefit would be chosen by him, and (2) that the infringement of section 35(1) of the Bombay Trust Act, 1950, entailed a small penalty which was hardly deterrent. Finding that the assessment of Jayantilal Amratlal for the assessment years 1955-1956 and 1956-57 was still open, the Income-tax Officer assessed the income of the trust in the hands of the settlor and he passed the assessment orders for the assessment of Jayantilal Amratlal for the assessment of the trust for the assessment years 1958-1959 and 1959-1960 on the same day, i.e., on March 11, 1960. The assessee, Jayantial Am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance was placed upon the decision of this High Court in a case under section 23A of the Act, viz., Jayantilal Amratlal Private Ltd. v. Commissioner of Income-tax, where this High Court held, inter alia, that the promoters of the assessee-company there, i.e., Jayantilal Amratlal and his two brothers, Hariprasad and Ramanlal, were persons acting in union and when they subscribed to a portion of the capital, they could be said to have held the voting power in connection therewith as a block and that there was a community of interest and they could not be regarded as holding those shares as members of the public. As regards the aforesaid 80 ordinary shares, the High Court held that though they were settled upon trust by Jayantilal Amratlal as it was within his power as the settlor to give directions in connection with the voting right to be exercised by the trustees in respect of these shares and, therefore, these 80 shares also could not be regarded as shares held by members of the public. The High Court, therefore, held that the assessee-company was a company in which the public were not substantially interested within the meaning of the Explanation to section 23A. The Tribunal was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d clothes for any temple or temples of the Pushti Marg Sampradaya and in applying the income of the trust property for the aforesaid objects, the trustees may also consider claims of any needy or poor person belonging to the Visa formed community. Clause 5 gives power to the trustees to accept contributions or donations to the trust premises from any person or person and directed the trustees to hold the same upon the same trust and subject to the same powers, provisions and stipulations contained in the trust deed. Clauses 6, 7 and 8 provide for the powers to the trustees to utilise the trust fund for the aforesaid charitable objects or any one of them. Clause 10, which has been relied upon most by the revenue, provides as follows : The trustees may either permit the whole or any part of the trust premises to remain in its present state of investment or shall at any time or times during the lifetime of the settlor at his discretion and may after his death at their discretion call the same or any part thereof and shall during the lifetime of the settlor at his discretion invest the moneys produced by such sale and all other moneys lying invested with them in such of the investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their effect. When read together, there can be no doubt that Jayantilal Amratlal, as the settlor, had absolute discretion during his lifetime to invest under the provisions of clause 10 the assets and the income of the trust fund and the other trustees had no power to overried his wishes. But that by itself would not be a relevant factor as held in Commissioner of Income-tax v. Sir Kikabhai Premchand, at page 211, a case relied upon to some extent by the learned Advocate-General himself. But the contention of the learned Advocate-General did not depend solely upon the deplitude of powers reserved to the settlor in the investments under clauses 10 and 21 but the resultant effect thereof. His submission was that we should consider the absolute discretion given to the settlor under these clauses, including the power to invest the trust funds and the income thereof in such public companies, firms, etc., as he chose and to grant loans to them on such terms and conditions as he might think proper and fit. The power reserved to him as the settlor to give loans to public companies and/or firms, coupled with the absolute voice given to him in the matter of management and administration of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the third proviso did not apply. On an examination of clauses of the deed, they came to the conclusion that the settlor was at liberty to lend part of the income to himself without security and without interest which led one to the conclusion that he derived at least an indirect benefit. They negatived the contention on behalf of the assessee that so long as the settlor did not lend any moneys to himself and did not actually derive any benefit, the third proviso would apply and the income therefore would not be liable to tax in the hands of the settlor. The court held that a proper construction of the trust deed did not and could not and could not depend upon what the settlor actually did or what he refrained from doing. It could only depend upon the court coming to the conclusion that, as the trust deed stood, the settlor was entitled to certain benefits whether they were direct or indirect in nature and that there could be no doubt, looking at the clause as to investments, that the settlor was entitled to a benefit under the provisions of the trust deed and thereby derived an indirect benefit in the income of the trust and, therefore, the third proviso did not apply and the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, the case fell within the first proviso to section 16(1) (c) of the Act. The learned judges rejected this contention as being unsound on the ground that the trustees would be committing a breach of law if they advanced moneys to themselves which was prohibited by section 54 of the Trust Act. They also held that interest would be derived by the trustees and not by the settlor and, therefore, the income derived by the trustees could not be assessed in the hands of the assessee, Hindu undivided family. It will be thus seen that one of the reasons for refusing to apply proviso 1 to section 16(1) (c) in the decision was that if the trustees were to give a loan to themselves section 54 of the Trust Act would be a bar and such a loan would be in breach of law by the trustees and, therefore, the power conferred upon them was not a valid power which could be considered while determining whether proviso 1 applied or not. The learned Advocate-General tried to distinguish this case upon the grounds, (1) that the case was concerned with the private trust and therefore section 54 of the Trust Act applied, and (2) that the power to give loan included the power to give loan to the trustees and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the settlor a right to reassume power directly or indirectly over the income or the assets of the trust premises. 9. The question, therefore, is whether clauses 10 and 21 of the present deed of trust relied upon by the learned Advocate-General, have the effect of giving a right to the settlor to reassume power directly or indirectly over the income or assets of the trust fund which he had before he made the trust deed. When proviso 1 talks about a right to reassume power, prima facie, that must mean that there is such a power lawfully given under the deed of trust. It obviously cannot be a right, against the mischief of which the legislature was constrained to make a provisions and which a settlor cannot lawfully exercise without either committing a breach of trust or a breach of some law. In the case of Mathuradas Mangaldas, the High Court of Bombay considered it an effective answer to the contention on behalf of the revenue that, though the deed of trust there contained power to the trustees to give loans to themselves, section 54 of the Trust Act would render such an act a breach of the law and, therefore, such a provision cannot be regarded as a right to reassume power. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be any better than a trustee under a private trust and we should, therefore, think that if a trustee of a charitable trust were to give a loan to himself, that would clearly be a case of a conflict of duty and interest and would amount to a breach of trust on his part. In the present case, we are on somewhat safer grounds. The Bombay Public Trust Act (XXIX of 1950) came into force on August 14, 1950, and section 35 thereof, as it stood prior to its amendment in 1954, provided that where the trust property consisted of money and could not be applied immediately or at any early date to the purpose of the public trust, the trustee shall be bound, subject to any direction contained in the instrument of trust, to invest the money in public securities. The second proviso to that section laid down that the Charity Commissioner may, by general or special order, permit the trustee of any public trust or classes of such trusts to invest the money in any other manner. As section 35 stood before its amendment in 1954, a trustee of a public trust could invest the trust fund in securities other than public securities if the deed of trust permitted him to do so. But by Bombay Act LIX of 1954 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax, where proviso 1 to section 16(1) (c) was relied upon by the Commissioner. The learned judges there held, on a reading of clause 5 of the deed of trust, that under that clause all the powers reserved thereunder for payment of the income of certain sale proceeds were in favor of one Kamalabai, the wife of the settlor, and not the settlor. It was true that under the provisions of that clause, the said Kamalabhai was given the right to apply to the trustees for payment for a change of air for the settlor, or if there was protracted illness of the settlor, but the High Court held that it was still a right given to Kamalabhai and not to the settlor and the amount under clause 5 was to be paid to Kamalabai and therefore, it was the volition of Kamalabai alone which could bring into operation, first the application, and, secondly, if it was acceded to, the payment to her. Mr. Justice Kania, as he then was, therefore, of the view that the provisions of clause 5 under these circumstances did not amount to either a retransfer of the assets or the income or a reassumption of power directly or indirectly in the settlor. In the case before us, the power under clause 10, even when read ..... X X X X Extracts X X X X X X X X Extracts X X X X
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