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TMI Blog1965 (11) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... equally in regard to the terms of the trust deed made by Taramati. By the trust deed, Ramanlal settled a sum of ₹ 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 ₹ 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 outgoing 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 settler 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 bona fide act done by them or for any payment bona fide made by them in pursuance of the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 corpus and merely his possession or en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had under the trust deed was neither a spes successions no a contingent interest in the corpus but it was a vested interest which was capable off 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 f 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 an the vie 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 being spes successions 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 successions and also a contingent interest that would not make any difference, for that being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion that the value of the assessee's interest in corpus is nil but also the premise on which it is based namely that the assessee's interest is a spes successions would be liable to be challenged under the question as framed. The question is rolled up one which takes in the challenge to both the finding 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 but it has some value because it is not a spes successions but is a vested interest or at any rate of contingent interest. The finding of the Tribunal that the assessee's interest in the corpus is a spes successions being based on the view that the assessee's interest is not a vested interest but in contingent on the assessee being alive on 31 March 1987,. And that the finding of the Tribunal is therefore incorrect. What is the nature and quality of the interest of the assessee in the corpus must therefore directly arise f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 bee held to be contingent on his surviving upto 31st March 1987, the interest of the assessee in the corpus cannot be held to be spes successions and hence not transferable under S. 6(a) of the transfer of Property Act. (5) The question then arises whether the gift to the assessee is contingent on his being alive on 31st March 1987 as held by the tribunal or is it vested in interest in the assessee possession or enjoyment alone being postponed. What is the nature and quality of the interest of the assessee in the corpus; is it a vested interest or a contingent interest? The decision of this question depends on the true interpretation of the provisions of the trust deed. Now in cases of this kind where the question is as to whether an interest granted under a settlement or a will is vested or contingent. It is a well est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest (6) Now several provision contained in the trust deed were relied upon by the learned Advocate General on behalf of the revenue as indicative of the settler 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 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 more than 18 years. The argument of the learned Advocate General was that this provision brought case within Exception to Section 21 of the transfer of Property Act which provides as follows: Where under a transfer of property, a person becomes entitled to an interest therein upon attaining a particular age, and the transfer also given to him absolutely the income to arise from such interest before he reaches that age, or directs the income or so much thereof as may be necessary to be applied for his benefit, Such interest is not contingent . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 clauses 3, Sub-clauses (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 ₹ 60,000/- upon trust to apply the net income or such portion thereof as the trustees in their absolute discretion deem fit for the benefit of the assessee and his wife. There is thus an obligation on the trustees to apply the net income in the manner set out in the sub-clause and the discretion that is given to the trustees is with regard to the quantum of the amount which they may apply for such purpose. The Trustee may apply the net income of the benefit of the assessee and his wife or they may apply a lesser amount if they in their absolute discretion deem fit. But they cannot say that they w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive 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 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 a laid down in Waston v Hayes (1839) 5 Mys. Cri, 125 and the other cases, I have referred to. On that point Harrison v. Grinwood (1849) 12 Beav 192 is a distinct authority. There the legacy was given to a class, followed by a direction, during the minority of the members of the class, to apply the interest, or a competent portion thereof for maintenance; and the Court held the legacy was vested. Lord Langdale does not appear to have considered the indication of intention derived from the direction to pay the whole income as affected by the words enabling the trustees to apply less than the whole income; and that appears to me to be rational view. Being opposed to the frittering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and consequently clause 3 sub-clause (b) did not direct or authorise the application of any part of the income for purpose other than 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 far 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 the English law of property and inheritance and they should not therefore be allowed to control the plain and grammatical meaning of the provisions of the Transfer of Property Act or the Indian Succession Act which is the statutory law applicable in India but we cannot overlook the fact that many of the rules codified in the Transfer of Property Act and the Indian Succession Act are based upon the rules of English law and the rules of English law where they are not based on any technicality but are based on general principles can be referred to profitably for the purpose of understanding the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es contingently entitled would, according to (1801) 6 Ves. 239, vest the fund and he should regard the fund as not the less vested if to that direction a direction 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 should not be given for purpose which is not for the benefit of the donee. Where the whole of the income is not made available for the benefit of the donee and a part of the income is directed to be applied for a purpose other than the benefit of the donee, the whole of the income cannot be said to have been intended for the benefit of the donee and the inference that the donee was intended to have the corpus in any event cannot be raised. (9) Now, when we turn to the Exception to Section 21 of the Transfer of Property Act and the corresponding Exception to Section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 [1957]1SCR77 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 thereof is to be applied for the benefit of the donee. Having regard to this decision of the Supreme Court, we are not bound by the view taken by the Division Bench of the Bombay High Court and we must hold that in order to attract the applicability of the Exception to Section 21, the direction must require application of the whole of the intermediate income for the benefit of the donee and though the trustees may be given a discretion to apply less than the whole intermediate income, no part of the unapplied portion of the intermediate income should be directed to be applied for a purpose other than the benefit of the donee. We may point out as a matter of interest that this identical view was taken by that eminent lawyer Sir Jamshedji Kanga, when sitting as an Additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 such child or children and if the assessee dies before 31st March 1987 without leaving any child, the corpus is to be disposed of in accordance with the terms of any appointment which may be made by the assessee in exercise of the general power of appointment conferred upon him under C. 3 sub-clause (e) and falling such appointment, the corpus is given to the heirs of the assessee. The conferment of a general power of appointment on the assessee is a very important factor showing that the assessee was intended to have a vested interest. It is further difficult to conceive that the settler should have conferred a general power of appointment on a donee who was merely entitled to a contingent interest in the corpus. The fact that on the death of the assessee without exercising the power of appointment, the corpus wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, 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 (1842) 9 Cl F. 563 where there is a gift to A `if', x or `when' he shall attain a given age with a gift over in the event of his dying under that age, the attainment of the given age is held to be a condition subsequent and not precedent and A takes as immediate vested estate, subject to be divested upon his death under the specified age . This rule according to him was a rule of construction and there was, therefore, no reason why it should not be imported in the construction of settlements or wills in India and in order to establish that it was a rule of construction, he relied on the decision of the Chancery Court in Re Heath: Public Trustee v. Heath (1936) 1 Ch 259. Mr. D.D. Shah, on behalf of the assessee however urged that this rule though admittedly a rule of construction should not be imported in India since it established in England with a vie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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