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TMI Blog1981 (12) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... Trustees shall set apart in every year an amount equal to 5 per cent of the Income of the Trust Fund in that year and shall hold and stand possessed of the same for the benefit of Smt. Laxmi Devi Sadani, wife of Shri C.L. Sadani of 12 and 13, Jackson Lane, Calcutta-1, and shall pay over the same to her. (c) If, at any time during the period referred to in sub-clause (a) above a son is born to the said Smt. Laxmi Devi Sadani, then the Trust contained in sub-clause (c) of this clause shall determine from the date of such birth and notwithstanding anything contained in sub-clause (a) hereof, the Trustees shall hold and stand possessed of the Trust Fund and the balance of the accumulated income upon Trust for the benefit of the said first son of the said Smt. Laxmi Devi Sadani for the unexpired period out of the said 21 years and shall pay the entire Trust Fund and the balance of the accumulated income to him or to his legal guardian on the expiry of the aforesaid period of 21 years. (d) If until the expiry of the period referred to in sub-clause (a) above, the said Smt. Laxmi Devi Sadani does not have a son, or during the period referred to in sub-clause (a) above, she dies withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench is in seisin of the appeal. 3. The learned departmental representative earlier filed an application to admit the following additional ground: "That the AAC should have held that the Trust is void and that it is a resulting trust." He pressed his application for admitting the additional ground during the course of hearing of the appeal. He contended that the ground raised by him goes to the root of the matter and it being a pure question of law should be admitted. The learned counsel appearing for the assessee opposed the admission of the additional ground. Initially the matter was argued on merits also to some extent. But having considered the matter carefully, we are not inclined to admit the additional ground. Firstly, the entire matter proceeded on the basis of a valid trust. There was never any doubt regarding its validity. It was not the case of the ITO. By admitting the additional ground the entire complexion of the matter would change. Secondly, if the additional ground were to be admitted and ultimately finding is given that the trust is invalid, the entire assessment may have to be struck down. In this appeal the only point is about the question as to whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also the beneficiary is known. He contended that as on 31-3-1976 it must be assumed that the contingencies contemplated in the trust deed happened in which case it is very evident as to who are the beneficiaries and their shares. He has also argued that a trust in favour of an unborn person is quite valid and there is nothing in law by which an unborn person cannot be a beneficiary under a trust. 6. At the outset we may mention that though the point to be decided in this appeal appears to be simple as to whether section 164 is attracted to the facts of the case, the arguments cover a wide gamut involving interesting questions. The first question that requires answer is whether an unborn person can be a beneficiary. The learned departmental representative, relying on section 5 of the Transfer of Property Act and section 112 of the Indian Succession Act, argued that the beneficiary should be an existing person. In other words, a person who is non-existent, viz., unborn person, cannot be a beneficiary. He has also referred to us section 9 of the Indian Trust Act pointing out that a beneficiary can be a person capable of holding property, in which case an unborn person cannot be a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blic policy or not the rule against perpetuity is applied. This rule is also enjoined in the Transfer of Property Act. It is only in that limited way that the provisions of the Transfer of Property Act are brought in not because they apply to the trusts but because that rule which is based on public policy is also applied in considering the lawfulness of objects of the trust. Therefore, it is clear that an unborn child can also be a beneficiary subject to the applicability of the rule against perpetuity. There is no other prohibition either in law or otherwise. Therefore, the decisions relied on by the learned departmental representative which deal with gifts and other transfers have no application or relevance. In this view of the matter, it is unnecessary to deal with the decisions cited, viz., CGT v. Maharaja Pateshwari P.D. Singh [1975] 98 ITR 480 (All.), CGT v. G.G.Morarji [1965] 58 ITR 505 (Bom.) and Addl. CIT v. M.K. Doshi [1980] 122 ITR 499 (Guj.). 7. With the above background let us analyse section 164. Obviously that section has application only in respect of assessment of income where there are trusts. It contains two limbs : (1) Where any income or any part thereof is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proviso is satisfied...." We may incidentally mention that while deciding the above matter their Lordships of the Bombay High Court specifically dissented from the judgment of the same Court in the case of Yakub Versey Laljee v. CIT [1946] 14 ITR 548. We are mentioning this aspect to highlight the point that reliance by the departmental representative on Yakub Versey Laljee's case is misplaced. We will also refer to this aspect while considering another facet of the argument of the learned departmental representative. We may, however, add that the view taken by the Bombay High Court in the case of Yakub Versey Laljee has not been taken in any other decision and all other decisions proceeded on the basis that if there is more than one beneficiary the second limb would apply and the two limbs of section 164 are disjunctive. At this stage it is sufficient for us to point out that the second limb of section 164 should be considered. 8. This leads us to the consideration of crucial question as to whether in respect of 95 per cent it can be stated that the beneficiary is known and determinate inasmuch as at the time of execution of the deed there is no son in existence. Before we d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares are indeterminate or unknown. It is not at all relevant whether the beneficiaries may change in subsequent years before the date of distribution, depending upon contingencies which may come to pass in future. So long as it is possible to say on the relevant valuation date that the beneficiaries are known and their shares are determinate, the possibility that the beneficiaries may change by reason of subsequent events such as birth or death would not take the case out of the ambit of sub-section (1) of section 21. It is no answer to the applicability of sub-section (1) of section 21 to say that the beneficiaries are indeterminate and unknown because it cannot be predicted who would be the beneficiaries in respect of the remainder on the death of the owner of the life interest. The position has to be seen in the relevant valuation date as if the proceeding life interest had come to an end on that date and if, on that hypothesis, it is possible to determine who precisely would be the beneficiaries and on what determinate shares, sub-section (1) of section 21 must apply and it would be a matter of no consequence that the number of beneficiaries may vary in the future either by rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Ghosh joins issue here and contends that the question of considering the legal heir of the beneficiary can come only upon the happening of the contingency as mentioned in clause 3(d). According to the provision of the trust deed the income should be accumulated for a period of 21 years or for a lesser period till a son is born, whichever is earlier. Clause 3(c) is very clear on this point. Clause 3(d) mentions that till after the expiry of the period no son is born or Laxmi Devi Sadani dies during that period, the trust shall be determined in which case alone the legal heirs would be entitled to the income. What Mr. Ghosh, therefore, says is that it is only on the happening of contingencies mentioned above the legal heir would come as beneficiary and not otherwise. We, however, find that this argument cannot be accepted in view of what their Lordships of the Supreme Court laid down in Nizam's case. When once we assume that on 31-3-1976 the trust is determined and then find out who are the beneficiaries the problem gets resolved. There is no scope for going into the happening of contingencies or not. The determinateness and the known character of the beneficiaries to be tested o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to a close we would like to point out that there was an amendment to section 164 with an addition of Explanation 1 to sub-section (3) of section 164. By this Explanation it has been brought that the beneficiaries should be determinate and known on the date of the deed creating a trust. When the above amendment has been brought about by the Finance (No. 2) Bill, 1980, the memorandum explaining provisions records as follows: "(iv) Under the existing provisions, the flat rate of 65 per cent is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the court or wakf deed. This provision has been misused in some cases by giving discretion to the trustees to decide the allocation of the income every year and in other ways. In such a situation, the trustees and beneficiaries are able to manipulate the arrangements in such a manner that a discretionary trust is converted into a specific trust whenever it suits them tax-wise. In order to prevent such manipulation, it is proposed to provide that unless the beneficiaries and their shares are e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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