TMI Blog1983 (10) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... "Clause 8 : From the interest and other income arising from the trust fund every year, the taxes of every type, income-tax, wealth-tax or any other tax, as also expenses incidental to the maintenance and administration of the trust fund, if any, will be first paid. Out of the remainder the trustees, in their bona fide discretion may give during the period of eighteen years from the date of my death, known as distribution period such sum, as they deem appropriate, either the whole of it or part of it, at such time or times as they think appropriate, to the children of my son, Kiritbhai, namely, Hiren, Kiren, Jagruti and Hina, and also such children as may be alive at the time of distribution of the income, to any one of them, or to more of them, or to all of them as the trustees in their absolute discretion may think fit. If after such distribution any income remains over in any year, it will be added to the trust fund as accretion and that accretion will be treated as part of the trust fund. After the period of eighteen years from the date of my death is over, i.e., at the end of the period of distribution, the abovementioned trust fund shall be distributed by the trustees amongst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to the beneficiaries at one time or from time to time or as many times in the year as they deemed appropriate. Whatever was not distributed by them amongst the beneficiaries was to be added to the trust fund and would become part of it ; (v) that the discretion had to be exercised by the trustees with reference to the children of Shri Kiritbhai, who would be alive, not before the beginning of the previous year, but on the date of distribution of income and if there be more dates than one for distribution of income amongst the beneficiaries, the list of the beneficiaries might be different from date to date depending on the children alive on the given distribution dates. 2.3 Clause 11 of the will gave authority to the trustees to use even the trust fund for the benefit of the beneficiaries, for their bringing up, for their education, their medical and for their marriages, for their life and educational insurance, for setting them up in profession, etc. 2.4 Clause 9 of the will provided for the situation where the trust may become difficult or impossible of operation. In that eventuality, the corpus of the trust was to be disbursed equally amongst the children of Kiritbhai who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust deed or will, as the case may be, and not on the specific regulations made by the trustees for distributing the income amongst the beneficiaries. 4. The assessee carried the matter in appeal to the AAC and reiterated before him the plea raised before the ITO and in support placed reliance on the following decisions : Trustees of Putlibal R.F. Mulla Trust v. CWT. [1967] 66 ITR 653 (Bom.), Suhashini Karuri v. WTO [1962] 46 ITR 953 (Cal.) and CWT v. Trustees of H.E.H. Nizam's Family Remainder Wealth Trust [1977] 108 ITR 455 (SC). 5. The learned AAC accepted the assessee's plea and observed, inter alia, as follows : " . . . it is clear that on the relevant date of assessment, the beneficiaries as well as their shares were known and determinate in the case of the appellant-trust. The fact that a discretion is being given to the trustees in the matter of selection of beneficiaries or their shares would not vitiate the fact that the trust was a specific trust as on the date of the accounting period relevant to the assessment year. He, therefore, directed the ITO to make the assessment of the trust under section 161 rather than under section 164." 6. The revenue is in appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible in law to determine the beneficiaries and their shares by the act of the trustees and that it was not necessary that the trust deed, etc., should determine the beneficiaries and their shares. He also drew our attention to the notes on clauses, explaining the above amendment in the Act, to point out the mischief that was sought to be removed by the aforementioned amendment and submitted that inasmuch as the said amendment was not applicable to the assessment year 1979-80, the act of the trustees was beyond the reach of the amended law. He also contested the reasoning of the learned departmental representative based on section 4 of the Indian Trusts Act and said that the trust was valid and to avoid taxation was not an act opposed to public policy. Every person, according to him could arrange his affairs in such a manner as to minimise tax burden. As to the power of the trustees to make the discretionary trust specific in a given year, it was according to the learned counsel, inherent in the wide powers given to them vide clause 8 of the will extracted above. The trustees could determine the beneficiaries in a given year and also their shares. No extra powers in this regard wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual shares of the beneficiaries in the income so receivable by them are unknown to them ? They can be known to them, if the trust deed makes them explicit. But if the trust deed leaves it to be determined by the trustees (1) as to who are the beneficiaries, and (2) what will be their shares, if at all, then at the point of time when income is received by them, it is not receivable by them for the benefit of any one beneficiary, nor the individual shares of the beneficiaries are known to them. After receiving the income, they themselves have to determine by the exercise of the discretion vested in them as to who the beneficiary will be and what their individual shares will be. This action of the trustees will be posterior in point of time to the receipt of income and as such it will not be correct to say that the income in question was receivable by them for any one beneficiary or their individual shares were determinate or known. The basic difference, thus, between a trust, which is 'ministerial' or specific, and the one which is discretionary, is that whereas in the former, the knowledge of the beneficiaries and of their individual shares is available with the trustees by v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discretion has to be exercised and not earlier. A decision in advance even before the previous year has begun and the income has started accruing, to distribute the income in a given manner amongst the children of Kiritbhai, alive on the date of the resolution, prior to the commencement of the previous year, does not amount to distribution. It may be a decision to distribute the income, but not the distribution itself. The income itself accrued to the trust towards the end of the previous year Samvat year 2034, when 50 per cent share of profit from Scientific Chemicals amounting to Rs. 57,799 and interest amounting to Rs. 7,689 was ascertained and communicated to the assessee-trust. Similar is the position regarding interest of Rs. 2,265 received from Scientific Soap Works. It was credited to the trust's account by the said firm at the end of Samvat year 2034. The aforesaid income aggregating to Rs. 67,753 was distributed amongst the named beneficiaries as on the last day of Samvat year 2034, and not 9-11-1977, when the previous year had not yet begun and the income had not started even accruing. Clause 8 of the will enjoins on the trustees to choose the beneficiary/beneficiaries o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make their choice. Any award of percentage of the future income of the trust by the resolution dated 9-11-1977 to such an ineligible person would have no legal effect. One, who is not eligible for the award of the income on the appointed day, can be given nothing, even if the trustees might have resolved so, for the trustees can do nothing in excess of the authority given to them by the testatrix. The submission of the learned counsel that, in case of death, the designated share of the deceased will go to his/her legal heirs does not appear to us tenable. If, as per clause 8 of the will, nothing could have been given to him, he not being part of eligible class, any previous resolution of the trustees cannot give him/her anything. The resolution of 9-11-1977, therefore, appears to us nothing but an advance declaration of the intention of the trustees to act in the indicated manner, if the list of beneficiaries continued to remain unchanged on the date of distribution of income. The decision of 9-11-1977 has, therefore, to be related to the date of distribution of income. It assumes meaning only on that day provided the named beneficiaries continued and no one else was born in the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust. During the period of distribution the income of the trust properties was to be accumulated or applied for the education or maintenance of any one or more of the four children at the trustees' absolute discretion. At the end of the distribution period, the corpus was to be divided in certain shares. The trustees credited the net income of the trust to the accounts of the four children in accordance with the shares to which they would be entitled to the corpus at the end of the distribution period. On these facts, the question for determination was "whether the shares of the four children are indeterminate and unknown for the purposes of application of the first proviso to section 41 ?" [analogous to section 164(1)] of the present Act. While considering the above question, their Lordships pointed out, inter alia, as follows : ". . . it has to be noticed that the words of the proviso to section 41 are 'where any such income, profits or gains or any part thereof are 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'. The word 'receivable' indicates that we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the family in future was immaterial. The facts of the present case have no similarity with the facts of the above case. In our case, as we have seen above, the trust deed did not specify the beneficiaries, it specified a class out of which the trustees were to choose the beneficiary/beneficiaries. The deed also did not specify the shares of the beneficiaries. Even they had to be determined by the trustees, who were, thus required to exercise two fold discretions : first to determine the trustees and then to determine the shares. The facts of Padmavati Jaykrishna Trust's case bear absolutely no affinity to the facts of the present case. Similar is the position of all other cases relied on by the assessee's counsel. In all of them, the beneficiaries were determinate and also their shares. There was possibility in all of them that there may be variation in the list of the beneficiaries in future. Such a possibility was held to be immaterial. 13. Reference to the notes on clauses to the Finance (No. 2) Bill, 1980, and the clause (ii) to Explanation 1 to section 164(1), also does not advance the assessee's case further. We are not laying down in the present case any general proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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