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TMI Blog1978 (9) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... e trust funds for her life. He further found that the trust income could either be given to the assessee or to her mother, Smt. Geeta Mayor. The power contained in cl. 2(b) of the said trust deed empowering the trustees to spend a portion of the corpus of the fund for maintenance, support and education of the assessee also weighed with the ITO, who also noted that the assessee had shown the income from the trust as her own income under s. 166 of the I.T. Act, 1961, but she had not taken into account the capital gains on sale of the shares of Swastik Oil Mills on the ground that the corpus of the trust funds belonged to the trust since she was entitled only to the income of the trust. The ITO, however, was not impressed by the claim made by the assessee that the capital gains should be taxed in the hands of the trust. He, accordingly, after allowing the permissible deduction under s. 80T from the capital gains of Rs. 12,443 on the sale of the said shares, taxed Rs. 2,605 in the hands of the assessee with the result that the matter was taken in appeal at the instance of the assessee before the AAC who also was not impressed by the contention advanced on behalf of the assessee, and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal at the instance of the assessee the Tribunal deleted this income from the assessment year following its earlier decision in I.T.A. Nos. 1602 and 1603 (Ahd) of 71-72 dated November 26, 1973, in the case of Smt. Kamalini Khatau v. ITO. It is in this background that the Commissioner has sought the reference which has been granted by the Tribunal by its order of July 23, 1974. So far as the question referred to us at the instance of the Commissioner is concerned, we are of the opinion that the question is concluded in view of the decision of the majority view of a Full Bench of this court in CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652. The question, at the instance of the Commissioner should, therefore, be answered in the affirmative, in favour of the assessee and against the revenue. It was the question at the instance of the assessee which has been strongly debated before us. A short but neat question of law arises, whether s. 164 of the I.T. Act, 1961, is attracted in the present case. If it is attracted in the present case, as contended by the assessee, we must agree with the learned advocate for the assessee before us that the Tribunal was clearly in error of law in up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould result in a benefit to the revenue." Section 164 would, therefore, be attracted in two contingencies, as has been clarified by a Division Bench of the Bombay High Court in B.P. Mahalaxmiwala v. CIT [1954] 26 ITR 177. Section 164 is in pari materia with the two provisos to s. 41(1) of the 1922 Act. Chief justice, Chagla, as he then was, speaking for the Division Bench, construed the main s. 41(1) and the two provisos thereto in the following terms (p. 180) : " ... the main section 41(1) makes the income of a beneficiary taxable in the hands of the trustee to the same amount and in the like manner as the beneficiary himself would have been taxed. But the first proviso imposes a heavier liability upon the income received from a trust under the circumstances mentioned in that proviso, and the circumstances are that if the income is not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, then the tax shall be levied and recoverable at the maximum rate. Therefore, the proviso clearly contemplates two cases. One case is where the trust is in favour of one beneficiary a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which it cannot be predicated that a particular beneficiary is beneficially entitled to it either wholly or in any determinate and known share so as to attract the applicability of the last part of section 161 (1), would have to be taxed in the hands of the trustees as if it were the total income of an association of persons." In view of this settled legal position, so far as this court is concerned, it cannot be said, much less urged successfully, as has been sought to be done by the learned Government pleader for the revenue, that s. 164 would be attracted only in cases where beneficiaries are more than one. That would not be a correct reading of the section, because that interpretation does not give full effect to the words employed by the Legislature as the first set of contingency in s. 164. To emphasise, the first set of contingencies in which s. 164 would be attracted is when income or any part thereof is not specifically receivable on behalf of or for the benefit of any one person. The submission of the learned Government pleader that s. 164 is attracted only in those cases where beneficiaries are more than one does not give full effect to the words " where any income . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed of trust. Clause 2 provided as under: " 2. (a) During the lifetime of the said Pallavi, the trustees shall hold the trust funds upon trust and utilise the net income thereof for the maintenance, support and education of the said Pallavi and in particular to defray her living and personal expenses including travelling and medical expenses in such proportion and in such manner and at such time or times as the trustees may think fit provided however that during the minority of the said Pallavi the trustees shall be at liberty either to utilise the net income of the trust funds for the said purposes and in the said manner, or to pay the net income of the trust funds to the said Geeta Mayor, mother of the said Pallavi, as the guardian of the said Pallavi for the said purposes and in the said manner and the receipt of the said Geeta Mayor as the guardian of the said Pallavi for the net income shall be a valid and effectual discharge to the trustees and they shall not be liable to see the application thereof. (b) Notwithstanding anything hereinabove contained, the trustees shall have power to have recourse to and utilise any portion or portions of the corpus of the trust funds for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the hands of the assessee, as has been sought to be done by the ITO, and ultimately upheld by the Tribunal. Can it be said that the capital gains is an income specifically receivable by the trustees on behalf of or for the benefit of the present assessee ? On behalf of the assessee, our attention was invited to the fact that the assessee was actually entitled to the net income of the trust funds under cl. 2(a) of the trust deed and the trustees had a discretion to have recourse to and utilise any portion of the corpus of the trust fund for the maintenance, support and education of the assessee, or on the occasion of serious illness or emergency when the trustees may exercise their discretion as they may think fit and their decision under cl. 2(b) has been described as conclusive and not open to challenge. It was, therefore, urged on behalf of the assessee that the gains which have been made on the sale of shares in question are capital accretions and, therefore, by no stretch of imagination without violence to the language, it can be said that it is an income specifically receivable on behalf of this particular beneficiary. On the other hand, on behalf of the revenue, this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the benefit of the sole beneficiary, namely, the present assessee. This is in our opinion, too broad a submission which we are not inclined to uphold. It is no doubt true that the trustees have power to apply a portion of the corpus on specified occasions mentioned in cl. 2(b), but that Dower is one which is to be exercised by the trustees whenever they think fit in their absolute discretion. It cannot be said that as a matter of right the present assessee can enjoin the trustees to utilise that portion in a particular manner. If that is the construction of the relevant cl. 2, and we do not feel doubt in our mind, it cannot be urged successfully that the capital accretion which had arisen as a result of the sale of ordinary shares of Swastik Oil Mills Ltd., Bombay, would be an income received by the trustees specifically on behalf of or for the benefit of the assessee. A similar question arose before the Bombay High Court in CIT v. J. B. Wadia [1963] 48 ITR 135, where, for the assessment year 1955-56, the question was, whether a sum of Rs. 3,122-8-0 received by the trustees from B.E.S.T. Co. Ltd., being a part of Rs. 35,000 representing a distribution out of the accumulated pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which will be payable by them to the assessee." The Division Bench, therefore, held that the amount of Rs. 3,122-8-0 could not be regarded as income of the assessee. On the second question as to the capital accretion of Rs. 907 on sale of shares by the trustees, this is what the Division Bench said (pp. 142, 143): " It has, however, taken the view that although the said profit could be taxable profit in the hands of the trustees, it could not be taxable in the hands of the present assessee because under the terms of the will, the said profit has not been received by the trustees on behalf of the assessee. As we have seen, under the terms of the will, the trustees were directed to make investments in certain specified investments and they were given power to vary and transpose the said investments from time to time. The income from the said investments was to go to the assessee for his life. Under the powers with which the trustees were invested under the will, if they varied the investments, the proceeds obtained on the sale of the investments, they had to reinvest in other securities. The accretion arising on sale thus had to be treated as an accretion of the corpus to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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