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TMI Blog1980 (1) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... s justified in law in holding that the business carried on by the assessee was not carried on by him for and on behalf of the K. T. Doctor Family Trust? The facts leading to this reference are as follows : We are concerned with assessment years 1972-73 and 1973-74. The assessee before us is an individual and he derives income from house property, salary, interest, etc. Financial year 1971-72 is the relevant previous year for assessment year 1972-73 and financial year 1972-73 is the previous year for assessment year 1973-74. For the purposes of this judgment so far as assessment year 1972-73 is concerned, the relevant period is October 1, 1971, to March 31, 1972. By a deed of irrevocable trust dated September 30, 1971, Savitaben Tapidas, the mother of the assessee, settled in trust in the first instance Rs. 1,000 for the benefit of four persons named in the trust deed. The assessee and his wife, Mala, were appointed trustees of this trust. The assessee, his wife, Mala, and their two sons, Kedar and Kashmalan, were the only four beneficiaries under this trust. The assessee was to get 40 per cent. share both in the income and in the ultimate distribution of the corpus of the trust a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment proceedings, the assessee was examined on oath and his statement was recorded. He stated before the ITO that, as a trustee, he could not be required to give any know-how, intelligence and mental services to the trust in terms of the trust deed and further that the income was earned because of intelligence and technical know-how and that no trust fund was required for the business which was being carried on by the trust except for and by way of expenses. The ITO came to the conclusion that the assessee had created a device to transfer his own earnings to the trust and thus had transferred 60 per cent. of his professional income to his wife and children through the trust so as to avoid the mischief of s. 64 of the I.T. Act. According to the ITO, even though the trust empowered the trustees to carry on the business of consulting engineers, the directions in the trust deed would be effective only in so far as his business could be carried on with the aid of the trust fund and resources of the trust, not with the personal ability, know-how and technical knowledge of the trustees or of one of the trustees. According to the ITO, the personal ability and know-how and tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of K. Doctor Enrerprise could not be held to be the income of the trust on the facts of the present case. The Tribunal, therefore, decided in favour of the revenue and against the assessee. The Tribunal rejected the view of the ITO that the assessee had created a device to transfer his own earnings to the trust. The Tribunal ultimately confirmed the order passed by the ITO though on a line of reasoning entirely different from the line of the reasoning which had appealed to the ITO and the AAC. Thereafter, at the instance of the assessee, the three questions set out hereinabove have been referred to us for our opinion. At the hearing of the reference before us, Mr. K. C. Patel for the assessee and Mr. Raval for the revenue concentrated on the third question because the other two questions pale into insignificance if question No. 3 is decided in favour of the assessee. It may be pointed out that after the Tribunal first passed its order dismissing the two appeals, a miscellaneous application for review was made by the assessee and what the assessee called inconsistencies were sought to be pointed out to the Tribunal in that miscellaneous application. On that miscellaneous appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributed in the proportion which we have mentioned earlier, namely 40 per cent. to the 19801 ]K. T. DOCTOR v. c. r. T. (Guj.) 507 assessee, 20 per cent. to the assessee's wife and 20 per cent. to Kedar, the son of the assessee, and the remaining 20 per cent. to Kashmalan, the second son of the assessee. The period of distribution of the corpus of the trust was to be 20 years from the execution of the trust deed. The assessee was appointed as chairman and managing trustee and in case of difference of opinion between the trustees the trustees were to act by majority and the assessee was to have a casting vote in case of a tie. Clause V provided as follows: " The trustees may at any time or times at their discretion, invest the trust fund in any of the investments hereby authorised and may from time to time at their discretion sell any or all the stocks, shares and other investments comprising the trust fund, and shall invest the net money produced by any and every such sale, and may, from time to time, at their discretion alter or vary the investments which shall for the time being constitute the said trust fund as they may think fit. " Under sub-cl. (6) of cl. V of the deed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of the powers under this part whether with or without the aid of the trust money. The Tribunal was of the view that for deciding the question as to the existence of an obligation as contemplated in s. 3 of the Indian Trusts Act, the Tribunal was required to find whether the trustees could be sued in court for their default in case they had not for any length of time or ever carried on all or any of tbe businesses or industries so empowered to be carried on as per the instrument of trust. The Tribunal held that the fourth part of cl. V would not mean a trust unless some other provisions in the instrument of trust persuaded the Tribunal to a different conclusion. In para. 19 of its order, the Tribunal expressed its view that in spite of the power clauses, that is, sub-cls. (6) and (7) of cl. V, if the trustees made use of any small amount out of the trust money, that being not covered by the obligation attached to the ownership of trust money, it might mean unauthorised user and it would not make the business income in question the trust income. Without definitely expressing their opinion in definite words on the point, the Tribunal also saw weight in the department's contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rety charitable and that it came within the exemption enacted in section 4(3)(i): vide In re The Trustees of the Tribune [1939] 7 ITR 415 (PC). That is a question with which we are not concerned in this appeal, and the actual decision of the Privy Council does not bear on the present controversy. What is relevant to our purposes is that before the High Court a contention was raised that the word 'property' must bear the same meaning both in sections 9 and 4(3)(i), that in section 9 it was used in contradistinction to business which was dealt with under section 10, and that, therefore, ' property ' in section 4(3)(i) could not include business. This contention was repelled by the High Court, which held that the meaning of the word 'property' in section 4(3)(i) could not be controlled by the connotation of that word in section 9 : vide In re The Tribune [1935] 3 ITR 246 (Lah)[FB]. Before the Privy Council,however,the question whether business of the Tribune press and newspaper was property was not raised, the Board merely observing that in the letter of reference there was 'no suggestion that the income under assessment is not derived from property held under trust declared in the 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at case also, there was a power to the trustees to carry on business of marketing the product with the use of inventions and patents settled upon the trust and that was to be done with the idea of raising funds for the fulfilment of the aims and objects of the trust. When such activity, according to the Bombay High Court, is done by the trustees, then it is quite clear that the business so done is the business of the trust and hence this business itself is property held under trust. It is thus clear that it is possible for a trust to start its own business and to derive income from the business so that the income can be utilised for the objects of the trust. So long as there is nothing illegal or immoral in the creation of the trust or in the objects of the trust and the business is a normal legal business, and again so long as it cannot be said that the trust is illusory or fraudulent, the trust deed must be allowed to operate in the manner contemplated by the settlor. It is true that there was no obligation on the trustees to carry on any business but if they did decide to carry on a business, such business as they carried on would be the property of the trust. If the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to income-tax as the income of the transferor and shall be included in his total income. Now, it must be noticed that the trust was created not by the assessee, K. T. Doctor, but was created by his mother who paid the amount of Rs. 1,000, in the first instance and Rs. 4,000, subsequently, from her own money. If the trustees by virtue of the power conferred upon them carried on business and thus acquired property in the shape of K. Doctor Enterprise, it cannot be said that the income arising from the business of the trust was income arising to the assessee, K. T. Doctor, in his personal capacity by virtue of a transfer whether revocable or not and whether effected before or after the commencement of the Act and, in any event, the transferor was not the assessee. The Tribunal was, therefore, right in rejecting the contention of the department which appealed to the ITO and the AAC, namely, that the provisions of s. 60 could be invoked in the instant case. It is obvious that the provisions of s. 64 could never have been invoked in this case because no property was transferred and no business was done in partnership by the assessee. In our opinion, the entire error has arisen from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , they are accountable in their capacity as trustees. Thus, lifting of veil or piercing of the veil is an exercise which is not permissible in the field of the law of trusts. The only conclusion was that there was no trust of the business because there was no obligation to carry on the business. That was the only conclusion which the Tribunal arrived at and when one analyses the order of the Tribunal and finds that its approach is wrong, the conclusion is of no consequence. We, therefore, come to the conclusion that since there was a power and authorisation to the trustees to carry on business and in exercise of that power and that authorisation the trustees carried on the business of K. Doctor Enterprise, the income of the business must be held to be the income of the trust. In the light of s. 50 of the Trusts Act, it was not open to the assessee to receive the entire income of K. Doctor Enterprise as his own income. The resolutions passed by the trustees in their capacity as trustees were for starting the business of K. Doctor Enterprise and even if the income of the business was due to personal skill and know-how and intelligence of the trustee, Kumudkant Doctor, it was not op ..... X X X X Extracts X X X X X X X X Extracts X X X X
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