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TMI Blog1990 (10) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... st and income of investments representing the said sum as well as of any other amounts which may be received by them as provided in the trust deed as also the share of profits in any business which may be carried on by them pursuant to the powers granted to them under the deed. Under clause 2 of the trust deed, it was provided that the trustees may either accumulate the net income or may appropriate or apply the whole or such part of the income as the trustees may, in their absolute discretion, think fit or for maintenance, medical expenses or such necessary expenses or advancement and benefit including the setting up in business of all or any of the beneficiaries, namely, (1) Shri Gosar Devashi Jakharia, (2) Smt. Lakhmaben Gosar Jakharia, and (3) Shri Mukesh Gosar Jakharia, in such shares and proportions and generally in such manner as the trustees, in their absolute discretion, think fit. It was further provided that it shall be lawful for the trustees to exclude any of them while dividing the said net income with or without any reasons and shall accumulate the residue, if any, of the income from the trust by investing the same and the resulting income therefrom, in any of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in the deed, in case of death of any of the beneficiaries of income mentioned in clause 2, the trustees were directed that the income shall be accumulated and they shall have no power or authority to distribute the money for the objects mentioned in clause 2 of the trust deed. From the above material contents of the trust deed, it is clear that the trust created under the deed was not just a simple trust which is generally One which makes no distribution other than of current income and the terms of which require all of its income to be distributed currently and do not provide for charitable or similar contributions, but was of the character of a complex trust which provides for distribution of income or accumulation of income and then distribution of the accumulated income after stipulated period. Under the trust deed, the beneficiaries are divided into two groups or "tiers". The first "tier" is composed of beneficiaries who may be distributed income currently and the second tier is composed of beneficiaries for whom the income is accumulated. The discretion vested in the trustees is very wide in the context of both the groups of beneficiaries and the trustees are given so- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aries. He found that the accumulated income which may be received by them was part of the corpus of the trust and was not income received by them as a part of the previous year's income. He came to the conclusion that, for the purpose of application of the proviso to section 164(1) of the said Act, one has to consider only income beneficiaries and not corpus beneficiaries. The Revenue appealed against the decision of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal, Ahmedabad Bench "C". The Tribunal, concurring with the order of the Appellate Assistant Commissioner, held that the word "beneficiaries" in section 164(1) of the said Act means only income beneficiaries and that the controversy was unnecessarily raised. The Tribunal, rejecting the reference application made by the Revenue, held that there was no referable question of law and refused to draw up a statement of case. However, as directed by this court, this reference was made under section 256(2) of the said Act. Mr. K. M. Raval, learned counsel appearing for the Revenue contended that the assessee-trust does not fall within the proviso to section 164(1) of the said Act because the word "be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contingency contemplated therein did not arise during any of the assessment years in question and, as it did not, the shares of the daughters in the income were not determinate and the Tribunal was right in holding that the first proviso to section 41(1) was applicable. Mr. Raval also referred to the decision of the Andhra Pradesh High Court in CWT v. Trustees of H. E. H. the Nizam's Miscellaneous Trust [1980] 126 ITR 233, in which the High Court held that section 21(4) of the Wealth-tax Act, 1957, was attracted to the amounts which were not specific where the beneficiaries were not known and the actuarial valuation of the totality of the beneficial interest of the remaindermen or reversioners had to be assessed separately under section 21(4). He finally referred to the decision in Commr. of Stamp Duties v. Atwill [1973] 1 All ER 576 (PC) in support of the proposition that although it was often the function of the proviso merely to limit or qualify rather than to add to the substantive provision, a proviso does not necessarily have that restricted effect. Mr. K. C. Patel, learned counsel appearing for the assessee, contended that the case of the Revenue throughout was that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the accounting year in which the income was received and, therefore, on the last day of the relevant accounting year, the employees who were eligible to obtain gratuity under the indenture and their share thereof was determinable. The assessees, as representative assessee, were, therefore, to be assessed not under the provisions of section 164 but under the provisions of section 161 of the Act In the said case, the relevant assessment years were 1963-64 and 1965-66 to 1971-72. In this context, it may be noted that Explanation I was inserted in Section 164 by the Finance (No. 2) Act, 1980, with effect from April 1, 1980, inter alia, providing that, for the purpose of the said section, the individual shares of the 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 trust deed and are ascertainable as such on the date of the deed . It would appear that the case cited by learned counsel has to be read subject to Explanation I introduced in section 164 with effect from the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es had been determinate. With a view to put an effective curb on the proliferation of such trusts and to reduce the scope of tax avoidance through such means, the Finance Act, 1970, replaced section 164 of the said Act by new section under which a representative assessee who received income for the benefit of more than one person whose shares in such income were indeterminate or unknown was chargeable to income tax on such income at a flat rate of 65% or the rate which would be applicable if such income were the total income of an association of persons, whichever course would be more beneficial to the Revenue. In order to obviate hardship in genuine cases where the circumstances were such that tax evasion could not be considered to be the main purpose of creating the trust, certain exceptions were specified where the flat rate of 65% was not to apply and the first exception was that where none of the beneficiaries of the trust had any other income chargeable to income-tax, the income of the trust was to be charged to tax at the progressive rates of tax applicable in the case of an association of persons. The provisions of section 164 as substituted came into effect on April 1, 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant income' and 'beneficiaries', respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Provided that in a case where (i) none of the beneficiaries has any other income chargeable under this Act exceeding the maximum amount not chargeable to tax in the case of an association of persons or is a beneficiary under any other trust ; or ... tax shall be charged on the relevant income or part of relevant income as if it were the total income of an association of persons." The above provision refers to any income in respect of which the persons mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees. For the purpose of the present reference, we will also be concerned with clause (iv) of section 160 which reads as under : "160. (1) For the purposes of this Act, "representative assessee" means-... (iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913)), receives or is entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd are their representative assessees under section 160(1)(iv). It cannot be said that they do not receive the income for the benefit of the second set or "tier" of beneficiaries (described as corpus beneficiaries). The trustees are empowered to accumulate the income for the benefit of the second set of beneficiaries and, therefore, they receive or are entitled to receive the income on behalf of or for the benefit of such second set of beneficiaries also notwithstanding the existence of the first set of beneficiaries to whom they may distribute the income if they so choose to do. The existence of the authority of the trustees to disburse the income they receive under the trust to the first set of beneficiaries does not militate against their entitlement to receive the income on behalf of or for the benefit of the other set for whom they can legitimately accumulate it for eventual distribution. The trustees were entitled to receive the income under this trust on behalf of or for the benefit of the entire class of beneficiaries notwithstanding the fact that they had a discretion to bestow the benefit to one beneficiary or one set of beneficiaries at the cost of the others. The fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivable" by them on behalf of both the sets of beneficiaries depending on their decision to distribute or defer the distribution and to choose the beneficiary. It was even open to the trustees to decide beforehand as to whether and if so how they should distribute the income. For example, they could have taken an advance decision not to distribute to any of the beneficiaries of the first group. Such a decision could have been taken even at the beginning of the previous year. The possibility of the beneficiaries of either group or any of them within the group getting the trust income in their hands solely depended on the discretion of the trustees. It cannot be the intention of the Legislature to leave it to the sweet will of the trustees to subject the income to the maximum marginal rate or not simply, by virtue of their decision, to distribute the income to the first set of beneficiaries or to accumulate it for the eventual benefit of the second set of beneficiaries. Applicability of the maximum marginal rate cannot be made dependent on the discretion of the trustees as to the manner in which the income received by them may be applied amongst the beneficiaries. The phrase "for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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