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TMI Blog1977 (12) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ds as follows : " I direct my Trustees to deal with the residue of my property as mentioned below. The residuary property shall be divided between and given to those of my sons who may be alive at the time of my wife's death in equal shares ; but if at that time, any son may have died leaving (behind him) male issue, then his share shall be divided among and given to his sons in equal shares ; but if there be only his daughters alive, then a moiety of his share shall be divided among and given to (his) daughters in equal shares, and the other moiety shall be given to my son who may be alive ; but till that event takes place, (the expenses of) maintaining my family (of) educating the boys and other household expenses shall be defrayed out of the income in respect of the residue of my property ; and if it seems necessary to give special help in connection with the education of any son or in connection with (putting him in) business, the (pecuniary) help shall be given to him out of the principal sum after debiting the same to his account. " We have underlined the relevant portion of the will because the main question which has been debated at the bar is the effect of the underline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the family of Shri Virji Jetha and was herself interested in the income during her lifetime, this estate was also aggregable with the rest of the estate. In appeal before the Appellate Contr. of ED, an alternative contention was raised on behalf of the accountable person that at best, the deceased had only a right to 1/7th share of the income and that the passing of the property should, therefore, be restricted to only 1/7th of the value of the property. The Appellate Controller, however, confirmed the order of the Assistant Controller. When the matter was taken in appeal before the ITA Tribunal, the Tribunal took the view that the deceased, Ramavahu, had no interest in the corpus at all and the only interest which she had in the estate of the testator was the enjoyment of the income therefrom as a member of the family of the testator. The Tribunal found that since the deceased had no interest in the corpus at any time, the benefit that accrued or arose by the cesser of her interest which was confined to her right to enjoy the income from the corpus could not extend beyond that limited interest and, therefore, at the most the proportionate share which the deceased had in the enjo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, no member of the family consisting of deceased, Ramavahu, her two sons and two daughters, which was, according to the learned counsel, a collective class, can claim to be beneficially interested in any defined share or to any definite extent in the property, but all the members of the group, that is, the family which was a collective class together, were constituted the only people who would while Ramavahu was alive, obtain any benefit of the property or have beneficial enjoyment of the property. According to the learned counsel, on the death of Ramavahu, the right of this collective class, that is, the family ceased and the right which then arose in favour of the two sons was a new and a different right and, therefore, on the death of Ramavahu, the entire residuary estate passed under s. 5 as also under s. 7. It is contended that the two sons before the death of Ramavahu had only a contingent interest and not a vested interest, and, therefore, the case must be decided on the footing that neither of the two sons had any vested interest in the property of which they were ultimately to become owners by virtue of cl. 9 of the will. On the other hand, it is contended by Mr. Dastur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions relating to estate duty in England which are to be found in the Finance Act of 1894 and the meaning of the words " passes on death " given by Lord Parker as far back as in 1914 in Attorney-General v. Milne [1914] AC 765 ; 2 EDC 8 (HL) has now been accepted almost as a maxim. In Milne's case, while setting out the meaning of the words " passing on the death " which are used in s. 1 of the English Act, which is a provision analogous to s. 5 of the E.D. Act, Lord Parker observed at page 779 ; 2 EDC 8, 21 : " The expression ' passing on the death ' is not further defined, but is evidently used to denote some actual change in the title or possession of the property as a whole which takes place at the death. " This meaning has further been elaborated and adopted by the courts in England. In Nevill v. IRC [1924] AC 385 ; 2 EDC 219 (HL) Viscount Haldane dealing with the scheme of levy of estate duty, observed at page 389 ; 2 EDC 219, 223, 224 : That scheme is that a new duty, called estate duty, is to be levied on the principal value of the property, settled or not settled, which ' passes ' on death. 'Passes' may be taken as meaning ' changes hands '. " Then dealing with s. 1 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Fifth Earl bought the life estate of his said second son, and this interest was conveyed to trustees, their heirs and assigns for the life of the said second son upon discretionary trusts in favour of the said second son, his wife, and his children or remoter issue and, subject to this trust, upon trust to accumulate the surplus of the rents and profits, invest it, and apply the proceeds in discharging debts or incumbrances upon the estates, with a proviso limiting the duration of this trust. The eldest son of the Fifth Earl died in 1908 and the only son of that eldest son died in 1910. In 1915 the Fifth Earl died and was succeeded by his said second son as Sixth Earl and the life estate of the Sixth Earl became an estate in possession. The Sixth Earl died in 1933 and was succeeded by his only son as the Seventh Earl and tenant in tail male in possession of the estates. On these facts the argument on behalf of the appellants as noticed in that case that the "dealing with the Sixth Earl's life interest was equally of such a nature as to prevent the property from passing on his death ", and " that no beneficial interest existed in a person whose only interest was his chance of par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the amounts which they respectively take being in the discretion of the trustees, followed on A's death by a similar discretionary trust during B's life of the income of the property for a group of persons fulfilling different qualifications, I would say that the title to the beneficial interest in the property as a whole changed hands on the death of A and passed on his death under section1: and that notwithstanding that one or more persons fulfilled both sets of qualifications." Thus, though is necessary to compare the persons who were beneficially interested and entitled to beneficial enjoyment of property immediately before the death of the deceased and the persons so beneficially interested after the death, the mere fact that the same persons are entitled to beneficial enjoyment will not in a given case prevent the property from passing under s. 5 of the E.D. Act, if the beneficial interest arises after the death under a different right. In In re Hodson's Settlement : Brooks v. Attorney-General [1939] 1 Ch 343 ; 2 EDC 658, 679 (CA), it was observed that though the beneficiaries may be the same, before as after the death, but the death brings one set of trusts of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of cl. 9 of the will, a bare perusal of which will show that it was made obligatory on the trustees to utilise the income of the residuary property for the purposes of the maintenance of the family, the education of the boys and other household expenses. This is not a case where, assuming for the moment that there are five members in the family, the interest of each of the members of the family was an ascertainable or quantifiable interest. On the terms of cl. 9 it is not possible to hold that each one of the five members of the family for whose maintenance the income was to be spent could require the trustees to spend exactly 1/5th of the total income in respect of each of the members of the family. There was thus no individual interest in the total income in the sense that no individual member of the family could call upon the trustees to apply any definite quantified part of the income of the property for his or her own purpose. Their individual right extended only in so far as each one of the members of the family could require that the trustees applied the entire part the income of the trust properties for the purposes of their maintenance, the education of the sons and the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trustees'. " Apart from the fact that it was held that s. 5(3) of the Finance Act, 1894, which corresponded to s. 23 of the Indian Act, applied, it was held that there was no property which can be said to pass or to be deemed to pass within the words of ss. 1 and 2 of the Finance Act, 1894. Thus it was held in that case that the possibility of receiving fluctuating sums as maintenance could not be interest ceasing under s. 2(1)(b) of the Finance Act, 1894. What is contemplated by s. 2(l)(b) of the English Act was considered in Gartside's case [1968] 70 ITR 663 by the House of Lords and it was observed at page 706 of the report as follows : " The word 'interest', as an ordinary word of the English language, is capable of having many meanings, and it is equally clear that in these provisions its meaning cannot be limited by any technicality of English law ....... But that does not mean that everything which the man in the street might call an interest is covered by the word 'interest' in these sections. A man might say that a son and heir has an interest in his father's property to which he might reasonably expect to succeed. But one can discard that meaning : the son not only ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the trust income is being applied is a person who has an interest in the trust income, in law his right merely extends to requiring the trustees to apply the income for the purpose of maintenance of the family of which he is a member and in his own individual right, he cannot be said to be entitled to a beneficial enjoyment of any particular part of the income of the trust properties. Such a right lacks the quality of definable extent which must exist before it can be taxed under the provisions of the Estate Duty Act. The concept of a group interest or a class right has further been considered by the House of Lords in a later part of the judgment in Gartside's case [1968] 70 ITR 663, where at page 709 of the report, it was observed by Lord Reid : " There are in some of the cases indications of a view that, while each of the objects of a discretionary trust has an interest in the trust fund, this interest does not extend to the whole or any part of the interest accruing from the fund. But, on the other hand, all the objects together have a single class or group interest which does extend to the whole interest of the fund.... I think that this idea of a group or class right mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he result, therefore, was that there was clearly a change not only in the persons who beneficially enjoyed the property but even the right in which they came to enjoy the beneficial interest in the property was entirely different and a new one. It is immaterial, in our view, whether the interest of the two sons could be called contigent interest or vested interest though it appears to us that having regard to the provisions in the will that only those sons "who may be alive " were to be given the property in equal shares, it would make the interest of the two sons a contingent interest and not a vested interest. As pointed out by Lord Reid in Gartside's case [1968] 70 ITR 663 (HL) at page 721 of the report, the application of the word " interest " is not confined to a vested or a necessarily contingent interest and, in our view, nothing really turned on whether the two sons had a vested interest or a contingent interest because the test which had to be applied for the purposes of determining whether any property passed on the death of Ramavahu was whether there was a change in the beneficial enjoyment of the property. The mere fact that the two sons of Ramavahu were, as members of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could claim to be beneficially interested in any defined share or to any defined extent in the property ; but the six together constituted the only people who could, while Harry was alive, obtain any benefit from the property or have any beneficial enjoyment of the property. The position after Harry's death was that primarily William was the only person then entitled to an allowance and secondarily, by way of substitution in respect of that allowance, a group consisting of William, his wife, and his brother, Michael, so long as no son was born to William. This group of three persons constituted the only people who immediately after Harry's death could obtain any benefit from the property or have any beneficial enjoyment thereof and it was found that the persons who were beneficially interested immediately after the death of Harry were a new group becoming interested under the new trust and fulfilling a new qualification as a condition of membership, and it was observed that the mere fact that a person who becomes entitled to the beneficial enjoyment of the property on a death, has already before that death been beneficially interested in the property does not prevent the property p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a party to whom the property does not belong as is indicated in s. 34(3) of the E.D. Act, 1953. Having gone carefully through the entire decision of the Supreme Court in Hussainbhai's case [1973] 90 ITR 148, we are not inclined to accept the argument of Mr. Dastur that the observations at page 155 of the report must be read as generally laying down a test applicable in all cases where the revenue wants to invoke the provisions of s. 5 of the E.D. Act. Having regard to the vehemence with which the argument was advanced, it is necessary to refer to the facts in that case. The decision of the Supreme Court was in an appeal from the decision of the Gujarat High Court in CED v. Husenbhai Mohamedbhai Badri [1970] 76 ITR 14. The facts of that case were that one Eusufalli had settled upon trust immovable property and leasehold lands by a trust deed dated 15th July, 1938. Three trustees were appointed under the trust deed, being Eusufalli, the settlor, his wife, Safiabai, and the eldest son, Mohamedbhai. The settlor was entitled to the net income of the trust properties during his lifetime. After the death of Eusufalli, the income was to be divided into three equal shares. One-third of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deceased as Mohamedbhai and the wives and children of Salebhai were already entitled to beneficial enjoyment of income to the extent of one- third each prior to the death of the deceased. It was, therefore, field that only one-third and not the whole of the trust estate was liable to be included in the assessment. Before the Supreme Court, when the matter was taken up in appeal by the revenue, it was contended that the title to the trust properties vested in the trustees till the death of the deceased and that the title that passed on the death of the deceased was the title in respect of the entire trust property and, therefore, the value of the entire trust property should be taken into consideration for the purposes of estate duty. Thus the question before the Supreme Court was whether only one-third interest in the trust properties, in the income of which the deceased Safiabai had one-third interest, which had to be treated as having passed or whether the entire trust estate consisting of the trust properties should be treated as having passed under s. 5(1). It was in that context that after referring to the test laid down in Scott's case [1937] AC 174 ; 2 EDC 579 (HL) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wife died after the Finance Act, 1894, had come into operation. On the death of the wife it was held that the estate duty was only payable on the one-ninth share of the excess of the trust fund over the specified sum and on the benefit which accrued to the children by the cesser of the annuity, since that was the only property passing on the death of the wife. The Supreme Court in Hussainbhai's case [1973] 90 ITR 148 no doubt observed that the rule laid down in Townsend's case [1901] 2 KB 331 ; 1 EDC 336 (KB) is equally applicable to the facts before the Supreme Court. The rule to which the reference was being made was the rule set out in the next sentence of the judgment at page 154 where it is observed : " In our opinion what is relevant in determining the scope the expression 'property passing on the death of the deceased' is the change in the beneficial interest and not title." With this test there cannot be any quarrel and the only question is whether the observations made at page 155 must be read as superseding the test which is laid down at page 154 of the report. The Supreme Court having earlier clearly observed that the test laid down in Townsend's case [1901] 2 KB 331 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iciaries completed the age of 25 years, the trustees were to transfer out of 160 shares his portion of the shares and the accumulation or any other investment in lieu thereof to him absolutely. A clause in the trust deed provided that if any of the beneficiaries should die before completing the age of 25 years the shares settled on him (but not the accumulated surplus income) were to devolve on certain persons. The beneficiaries had no right to mortgage or create any incumbrance or sell it until each of them completed the age of 25 years. One of the minor beneficiaries died a minor and unmarried and the principal value of his interest in the settled property was brought to estate duty in the hands of his brother and the question was whether his interest was rightly included in the estate for the purpose of estate duty. The deceased minor's name was Manubhai. It was held in that case by the Supreme Court : " On Manubhai's death, there was under the deed of trust a change in the person who was beneficially interested in the shares. " Therefore, here again the Supreme Court was dealing with a case where the deceased had a beneficial interest and the question was whether the benefici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the revenue that the trust created under cl. 9 of the will was a discretionary trust and having regard to the decisions in Scott's case [1937] AC 174 ; 2 EDC 579 (HL) and Burrell's case [1937] AC 286 ; 2 EDC 590 (HL), the discretionary trust came to an end with the death of Ramavahu and, therefore, also the estate must be held to have passed under s. 5. Now, we are reluctant to hold having regard to the nature of the provision made in cl. 9 that the trust created by cl. 9 of the will was a discretionary trust as in Scott's case [1937] AC 174 ; 2 EDC 579 (HL) or in Burrell's case [1937] AC 286 ; 2 EDC 590 (HL). A discretionary trust is one which gives a 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. (See Snell's Principles of Equity, 26th edition, page 148). In a discretionary trust the discretion lies entirely with the trustees to utilise the trust properties or the income thereof for the benefit of all the beneficiaries or one or more of them. In the instant case, there is no such discretion given to the trustees at all. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L) (see remarks of Lord Parker at page 1018 and of Lord Wrenbury at pages 1020-1021) ; Re Vestey's Settlement [1950] 2 All ER 891, 902 (CA). " The observations made by the learned author no doubt refer to the interest of an object of a discretionary trust, but it appears to us that the effect of the decision in Gartside's case [1968] 70 ITR 663 (HL) has not been considered by the author in those observations. In Gartside's case [1968] 70 ITR 663 (HL), Lord Reid has positively pointed out the extent of the right of a discretionary trust and the House of Lords has in terms held that such a right cannot be termed as a beneficial interest. It will be difficult for us to give the word " interest " in s. 34(3) a meaning different from the one which we have given while determining the rights of the member of the group or the family in whom the right of beneficial enjoyment has vested by the terms of the will. If the only right which Ramavahu had was in her capacity as a member of the group and all that she could do individually was to see that the trustees applied the trust funds for the purposes of the trust, the extent of that right was immeasurable, its value could not be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X
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