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TMI Blog1985 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... s justified in holding that the shares of beneficiaries were indeterminate or unknown and, as such, the provisions of section 164 were applicable ? " Brief facts of the case are that pursuant to a notice issued under section 143(2) of the Income-tax Act, 1961 (No. XLIII of 1961) (for short " the Act "), by the Income-tax Officer, A-Ward, Kota, M/s. Moti Trust (hereinafter referred to as " the assessee ") filed a return of its income as Rs. 68,100 for the assessment year 1976-77 and Rs. 41,860 for the assessment year 1977-78. The assessee declared its status as association of persons. A note was put in the return of income that the assessee was determinatory trust; no tax was leviable on the trust; beneficiaries, according to their shares, shall be taxed. The Income-tax Officer completed the assessment of the assessee, i.e., Moti Trust, determining its status as association of persons. In the assessment order it was observed by the Income-tax Officer that the trust had been created by Sardar Mehtab Singh and Smt. Somawanti Sethi by settling a sum of Rs. 10,000. It was further observed by the, Income-tax Officer that the trust property had been specified and the beneficiaries h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idually or severally in his absolute discretion. These facts, according to the Commissioner, showed that it was an out and out discretionary trust and not specific trust, as had been held by the Income-tax Officer. The Commissioner, thus, by order dated October 19, 1979, set aside the order of the Income-tax Officer in respect of the assessment year 1977-78 and by order dated October 23, 1979, set aside the order of the Income-tax Officer in respect of the assessment year 1976-77. The Commissioner directed the Incometax Officer to charge tax on the assessee-trust under section I 64 of the Act and to issue necessary consequential notice of demand and challan and take steps to collect the same as per the provisions of the Income-tax Act, 1961. The assessee, aggrieved against the orders of the Commissioner, filed two appeals before the Income-tax Appellate Tribunal. The learned Tribunal disposed of both the appeals by a common order dated November 24, 1980. The Tribunal agreed with the view taken by the Commissioner and dismissed both the appeals filed by the assessee. The Tribunal took into consideration clauses 1, 2(i) and 3 of the trust deed. After taking into consideration the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative that by clause 3, absolute discretion has been given to the trustee even to vary the sharing ratios of the various beneficiaries. It does not specifically say that the trustee shall not vary the sharing ratios of the beneficiaries while ultimately distributing the corpus. This also gives discretionary powers to the trustee and, therefore, makes the trust a discretionary one. " The alternative argument made by learned counsel for the assessee that so far as the two assessments in appeal were concerned, the trustee had not exercised any such discretion and, therefore, the two assessment years were not affected, was also repelled by the Tribunal. In this regard, it was held by the Tribunal that they had to consider from the various clauses of the trust deed as a whole, whether or not the trust was a discretionary one and not that in a particular year the trustee did not exercise that discretion. The assessee then submitted an application under section 256(1) of the Act for referring the questions of law for the opinion of this court. The Tribunal by order dated August 5, 1981, has thus referred the abovementioned three legal questions for the opinion of this court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsolutely and if he is not alive at the date of distribution, then the said 12 per cent. of the trust fund and the whole of the said accumulations of income shall be distributed equally amongst the persons who would have received the same as heirs of the said Sardar Satjit Singh if he had died intestate and possessed of the said whole of the trust fund but excluding the settlors if they happen to be one of such heirs, so that no part of the trust fund or the income thereof shall revert to the settlors. 3. Notwithstanding anything contained in clause 2 hereof the trustee/trustees shall have absolute discretion to distribute the trust fund including the accumulated income thereon before the expiry of 20 years from the date hereof and in the event of the trustee/trustees so deciding the distribution shall be so effected individually, severally or completely which in the judgment of the trustee/trustees would be in the best interest in carrying out or in furtherance of the objects of the trust. 5. Without affecting the generality of the powers, provisions and authorities vested in the trustee/trustees under these presents the trustee/ trustees shall have in addition thereto and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trustees, either as if the relevant income or part thereof were the total income of an association of persons or at the flat rate of 65%, whichever course would have been beneficial to the Revenue. Section 164 of the Act concerns private discretionary trusts. A " discretionary trust " has been defined to mean " a trust under which the trustees have absolute discretion to apply the income and capital of the trust as they will. " A discretionary trust is one which gives the beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The following passage in Gartside v. Inland Revenue Commissioners [1968] 70 ITR 663 (HL) succinctly brings out the nature of the interest of a beneficiary under a discretionary trust (p. 719): " No doubt in a certain sense a beneficiary under a discretionary trust has an 'interest' : the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by court of equity. Cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the trustee has been empowered to accumulate the whole of the said income or such part thereof as may not be applied for such expenses and invest the same in one or more of the investments. It has also been provided that upon the expiration of the period of 20 years or the period which the trustee may decide hereafter, the trustee shall hand over and transfer or pay definite and determinate percentage of the trust fund as well as the whole of the accumulations of income to each of the beneficiaries. It was thus submitted that the trustee had no right to change the share of any individual beneficiary and their shares have been specifically made known and determinate under the various sub-clauses of clause 2 of the trust deed. There are 14 beneficiaries and in the 14 sub-clauses of clause 2 of the trust deed, shares of each of the individual beneficiaries have been specifically defined and as such it cannot be considered as a discretionary trust as the shares are specified and known. Reliance was placed on Khimji Keshavji Trust Estate v. CIT [1978] 113 ITR 751 (Cal), CIT v. K. Balakrishna Rao [1983] 143 ITR 651 (Mad) and CWT v. Trustees of Nizam's Family [1977] 108 ITR 555 (SC). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such discretionary powers have been vested in the trustee/trustees, the share of the beneficiary remains unknown and indeterminate and the Tribunal has rightly taxed the assessee under section 164 of the Act. Much controversy was raised by learned counsel for both the parties on the interpretation of the language used in clause I of the trust deed for holding as to what amounts should come within the purview of " trust fund " and what amounts remain outside the purview of the trust fund. In our view, any interpretation of clause 1 either way is not going to decide the matter in controversy. The important provisions are those which are contained in the various sub-clauses of clause 2 and for which sub-clause (i) of clause 2 has been extracted by way of illustration and clauses 3 and 5(j). Under sub-clause (i) of clause 2, it has been clearly provided that the trustee shall have powers to accumulate the whole of the net income or such part thereof as may not be applied for expenses and invest the same in one or more of the investments authorised under the trust deed and the resulting income from the investments and all accumulations so made, shall for all purposes be treated as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be done according to the definite percentage of shares mentioned in the trust deed. The argument appears to be convincing in the first impression, but while going deep into the various provisions of the trust deed and the wide powers and discretion given to the trustee/trustees, we are fully convinced, as already discussed above, that even the sharing ratios of the beneficiaries could be varied at the time of ultimate distribution of the trust fund and its accumulation. We do not propose to discuss the cases relied upon by learned counsel for the assessee because every case depends on the language and provisions contained in each individual trust deed. Admittedly, the provisions of the trust deed, under consideration before us, are totally different from the provisions contained in the trust deeds considered in the cases cited by learned counsel for the assessee. It was also argued by learned counsel for the assessee as an alternative argument, that the beneficiaries have already been assessed in their individual capacity and they cannot be assessed as an association of persons. Reliance in this regard was placed on CWT v Kum. Manna G. Sarabhai [1972] 86 ITR 153 (Guj), in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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