PETITIONER: GOSAR FAMILY TRUST, JAMNAGAR ETC. Vs. RESPONDENT: COMMISSIONER OF INCOME TAX, RAJKOT ETC. DATE OF JUDGMENT28/04/1995 BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) SEN, S.C. (J) NANAVATI G.T. (J) CITATION: 1995 AIR 1644 1995 SCC (4) 576 JT 1995 (4) 424 1995 SCALE (3)538 ACT: HEADNOTE: JUDGMENT:
J U D G M E N T
B.P. JEEVAN REDDY.J.
Leave granted in Special Leave Petitions.
A common question arises in this batch of appeals. For
the sake of convenience and with the consent of the counsel
for the parties, we treat the facts in Civil Appeal No.1160
of 1991 (Gosar Family Trust, Jamnagar) as representative of
the facts in all the cases. It is agreed by the learned
counsel for the appellants that the relevant recitals in the
Trust Deeds concerned in all the appeals are identical. The
appeals arise from the judgment and orders of the Gujarat
High Court.
The High Court has answered the following two questions
referred to it, at the instance of the Revenue, under
Section 256(2) of the Income Tax Act in favour of the
Revenue and against the assessee:
“(1) Whether, in law and on facts and having
regard to the provisions of sub-section (1) of section
164 of the Income tax Act, 1961, the assessee is
entitled to the concessional rate of tax?
(2) Whether, in law and on facts and in view of the
provisions of the trust deed, the trust cannot be
subjected to maximum marginal rate of tax?”
By a deed dated October 3, 1981, Sri Hirji Pethraj Shah
created a private trust known as “Gosar Family Trust”. S/Sri
Devchand Shamji Shah, (2) Sri Deepak Devchand Shah, (3) Smt.
Ladhiben Shamji Shah and (4) Smt. Sunanda Rajesh Shah were
named as trustees. The trust was created with a sum of
Rupees five hundred. Clause (7) of the Trust Deed, however,
permitted the trustees to accept from any person desirous of
making contributions to the Trust fund such amounts or
properties and upon such terms and conditions as they may
think fit subject, of course, that the objects of the
contributions are not inconsistent with the objects of the
trust. There are two sets of beneficiaries. The first
category comprises three individuals, viz., (1) Sri Gosar
Devashi Jakharia, (2) Smt. Lakhmaben Gosar Jakharia and (3)
Sri Mukesh Gosar Jakharia. (Nos.2 and 3 are wife and son
respectively of No.1). The second category of beneficiaries
are: (1) Smo.Lakhmaben Gosar Jakharia, (2) family members of
Sri Devchand Shamji Shah and (3) Smt. Kankuben Gulabchand
Shah upto three generations. The recitals in the trust deed
are little unusual and may be noticed (as condensed by us):
(1) The life of the trust is eighteen years. But after the
expiry of two years, the trustees have the discretion to
terminate the trust at any time.
(2) With respect to the income from the trust properties,
the trustees have been given an absolute discretion to
distribute the same among the first category beneficiaries
in such manner and in such proportion and at such times as
they think appropriate. The trustees are vested with
absolute discretion not to distribute the income to any one
and to accumulate it.
(3) At the end of eighteen years or at such time as the
trustees put an end to the trust, the corpus of the trust
and all income accumulated, if any, shall be distributed
among the second category beneficiaries, again in such
proportion and in such manner as the trustees may decide.
(4) The trustees have been expressly empowered to invest the
trust funds in any firm or joint stock companies in which
any one or more of the trustees may be partners, directors
or share-holders, as the case may be.
The trust is undoubtedly a discretionary trust. The
only question in this appeal is whether the income of the
trust taxed in the hands of the trustees is chargeable at
the maximum marginal rate or at the rate applicable to the
association of persons within the meaning of Section 164(1)
of the Income Tax Act. While the Tribunal has held that the
rate applicable is the rate relevant to the association of
persons by virtue of proviso (i) to Section 164(1), the High
Court is of the opinion that proviso (i) is not attracted in
this case and, therefore, the income is chargeable at the
maximum marginal rate. It would be appropriate to read
Section 164(1) insofar as it is relevant at this stage:
“Charge of tax where share of beneficiaries
unknown.
164. (1) Subject to the provisions of sub-sections (2)
and (3), where any income in respect of which the
persons mentioned in clauses (iii) and (iv) of sub-
section (1) of section 160 are liable as representative
assessees or any part thereof is not specifically
receivable on behalf or for the benefit of any one
person or where the individual shares of the persons on
whose behalf or for whose benefit such income or such
part thereof is receivable are indeterminate or unknown
(such income, such part of the income and such persons
being hereafter in this section referred to as
“relevant income”, “part of relevant income” and
“beneficiaries”, respectively), tax shall be charged on
the relevant income or part of relevant income at the
maximum marginal rate:
Provided that in a case where–
(i) none of the beneficiaries has any other income
chargeable under this Act exceeding the maximum amount
not chargeable to tax in the case of an association of
persons or is a beneficiary under any other
trust………
(Clauses (2), (3) and (4) omitted as unnecessary.)
tax shall be charged on the relevant income or part of
relevant incomes as if it were the total income of an
association of persons:
(Rest of the section omitted as unnecessary.)
The sub-section contemplates charging of tax at maximum
marginal rate in two situations, viz., (a) where any income,
in respect of which the trustees (omitting unnecessary
categories of persons) are liable to be assessed as
representative assessees, is not specifically receivable on
behalf or for the benefit of any one person and (b) where
the individual shares of the persons on whose behalf or for
whose benefit such income or such part thereof is receivable
are indeterminate or unknown. The first proviso, however,
says inter alia that where none of the beneficiaries has any
other income chargeable under this Act exceeding the maximum
amount not chargeable to tax in the case of an association
of persons or is a beneficiary under any other trust, tax
shall be charged on the relevant income as if it were the
total income of an association of persons. In this case,
none of the first category beneficiaries has taxable income
under the Act within the meaning of proviso (1), while the
second category beneficiaries do have such income. This
means that if the second category beneficiaries are also
treated as beneficiaries for the purpose of proviso (i), the
trust income is liable to be charged at the maximum marginal
rate. If, on the other hand, only the first category
beneficiaries are treated as beneficiaries (and not the
second category beneficiaries) within the meaning of proviso
(i), then the trust income is liable to be charged in the
hands of the trustees at the rate applicable to the
association of persons. For this reason, the assessees’
contention has been that only the first category
beneficiaries are beneficiaries within the meaning of
proviso (i) while the Revenue contends to the contrary. The
reasoning of the High Court on which it has held against the
assessee is to be found in the following three paragraph:
“There is no dispute about the fact that the income was
not specifically receivable on behalf of or for the
benefit of any one person and that the individual
shares of beneficiaries were indeterminate or unknown.
Therefore, the provisions of section 164(1) are
attracted to the type of arrangement made under this
trust. The argument that only the first set of
beneficiaries who may receive the income are the class
envisaged by sub-section (1) of section 164 and not the
type of beneficiaries who may, ultimately, get the
accumulated income on distribution is not warranted by
the wording of the provision which includes the entire
class of beneficiaries on whose behalf or for whose
benefit the income is receivable by the trustee.
The trustees receive or are entitled to receive
the income (under the deed) on behalf of or for the
benefit of both the sets of beneficiaries and are their
representative assessees under section 160 (1) (iv). It
cannot be said that they do not receive the income for
the benefit of the second set or “tier” of
beneficiaries (described as corpus beneficiaries). The
trustees are empowered to accumulate the income for the
benefit of the second set of beneficiaries and,
therefore, they receive or are entitled to receive the
income on behalf of or for the benefit of such second
set of beneficiaries also notwithstanding the existence
of the first set of beneficiaries to whom they may
distribute the income if they so choose to do. The
existence of the authority of the trustees to disburse
the income they receive under the trust to the first
set of beneficiaries does not militate against their
entitlement to receive the income on behalf of or for
the benefit of the other set for whom they can
legitimately accumulate it for eventual distribution.
The trustees were entitled to receive the income under
this trust on behalf of or for the benefit of the
entire class of beneficiaries notwithstanding the fact
that they had a discretion to bestow the benefit to one
beneficiary or one set of beneficiaries at the cost of
the others. The fact that the income so received is
disbursed to some and not to others or is disbursed now
or accumulated for future disbursement should make no
difference and will not change the nature of the
arrangement made under the trust, namely, that the
trustees receive or are entitled to receive the income
for the benefit of or on behalf of the entire class of
beneficiaries name in the trust.
The fact that the trustees are not obliged to
disburse the income or accumulate it for the benefit of
the first set or the second set of beneficiaries or any
of them would itself indicate that the income is
receivable by the trustees for the whole class of
beneficiaries irrespective of the ultimate manner in
which the income is distributed.”
The High Court further pointed out that for the purpose
of Section 164, it is not necessary that the beneficiaries
do actually receive the income. It is sufficient, it held,
that the income is receivable by the trustees for the
benefit of the persons named in the trust. The High Court
observed, “the real question is whether the persons named in
the trust have an interest, whether vested or contingent, in
the income that is receivable on their behalf” and answered
the question by saying that both the categories of
beneficiaries mentioned in the trust deed have an interest
in the trust and the income of the trust is received by the
trustees on their behalf.
Sri Eradi, learned counsel for the assessees contended
that the second category of beneficiaries cannot be called
“beneficiaries” with respect to the income of trust for the
reason that they are not entitled to any portion of income;
they are entitled only to the corpus. Only the first
category beneficiaries are entitled to the income of the
trust, it is submitted. When Section 164 speaks of income
and it being taxed at a particular rate, it is having in
mind the particular year in which the income is received by
the trustees and is being taxed in their hands. Counsel
further submitted that even if the trustees decide not to
distribute the income and accumulate it, it forms part of
the corpus which is distributed among the second category
beneficiaries at the end of eighteen years or earlier
whenever the trust is put an end to by the trustees in their
discretion. Strong reliance is placed upon the decision of
the Bombay High Court in Commissioner of Income Tax v.
B.A.Sanghrajka Trust (181 I.T.R.484) where construing
similar terms of a trust deed, the Bombay High Court held
that the second category beneficiaries cannot be treated as
beneficiaries within the meaning of provision (1). It is
brought to our notice that the said decision has been
followed later by the same High Court in Commissioner of
Income Tax v. Mrs.Pushpaben Family Trust (207 I.T.R. 5877.
We must say that the trust deed in question is rather a
curious one. It is effective only for a limited period which
can be as short as two years. If, in case, the trustees do
not choose to put an end to the trust, even then the maximum
life of the trust is eighteen years only. One beneficiary is
common to both the first and second categories, viz.,
Smt.Lakhmaben Gosar Jakharia. The trustees are not obliged
to disburse or distribute the income among the first
category beneficiaries in the year they receive it. They
need not pay & single pie to any of the beneficiaries in the
first category at any time during the currency of the trust;
they are entitled to accumulate the whole income which will
then pass to the second category beneficiaries as and when
the trust comes to an end. In other words, the first
category beneficiaries have no right to receive the income.
So have the second category beneficiaries no right to
receive any income though they may ultimately get the whole
or part of the income along with the corpus on the expiry of
the period of trust. The trustees are expressly entitled to
deposit the monies of the trust fund in any firm or joint
stock company in which any one or more of them is/are
partners/directors/share-holders, which means that the
trustees could as well have decided not to distribute a
single pie and invest all the income and corpus fund for the
full period of eighteen years in their own firms and
concerns. No less surprising is the provision that the trust
started with a mere Rupees five hundred and the trustees
have been given absolute discretion not only in the matter
of distribution of income but also in the matter of very
continuance of the trust. At any time after the expiry of
two years they can put an end to it if they so choose.
The ingenuity of the assessee and the naivete of the
department in espousing and accepting such a trust is
remarkable. Be that as it may, we have to answer the
question, whether the second category beneficiaries are not
“beneficiaries” within the meaning of proviso (i) to Section
164(1) on the above facts? We are of the considered opinion
that the second category beneficiaries are also
beneficiaries as rightly pointed out by the High Court. If
the income is not distributed among the first category
beneficiaries, the whole income – or such part of it as may
not have been distributed among the first category – goes to
the second category. There is no reason why it cannot be
said that the income is received by the trustees on behalf
of both the categories of beneficiaries. Indeed, there is no
distinction between the two categories so far as the income
of the trust is concerned. The members of the first category
too have no right to demand or receive income. They may or
may not receive any income. It may well happen that they may
not get a single pie either in the year concerned or during
the entire period of the trust. If so, how it is being said
that income is being received on their behalf. The second
category beneficiaries too have no right to the income but
yet they may get whole of it or such part of it as may not
have been distributed or paid to first category. Thus,
neither category has a right but only an expectation to
receive income. In this sense, members of the second
category are as much beneficiaries as the members of the
first category. The trustees are entitled to choose not to
pay a pie out of the income to any one and invest the whole
of it in their own concerns. They were also under no
obligation to disburse or distribute the income received in
an year in that year or in the following year. For the
purpose of Section 164(i) what is relevant is that the
income is receivable on behalf of the beneficiaries. It is
not necessary that the income is received by the
beneficiaries. It is, therefore, difficult to say in the
light of the recitals of the trust deed that the income is
receivable only on behalf of the first category but not on
behalf of the second category beneficiaries. Indeed, Section
164(1) or the proviso (i) thereto does not make any
distinction between beneficiaries and beneficiaries – nor is
the said expression defined in the Act. It would, therefore,
be reasonable to construe and understand the expression
“beneficiaries” in its ordinary and normal sense, which
means that both categories are beneficiaries. Situation
could probably have been different if there had been an
obligation upon the trustees to distribute the income
received in an year in that very year or in the following
year(s) in which event it could probably be said that the
trust income is receivable by the trustees on behalf of or
for the benefit of the first category beneficiaries only. In
this case, there is no such obligation and the income not
distributed ultimately goes to the second category. It is
immaterial whether that income becomes a part of corpus or
not. What is material is that it goes to the second
category. It cannot, therefore, be said that income is
received only on behalf of the first category and not the
second category beneficiaries. Either category could have
received the income wholly to the exclusion of the other or
both could have received it partly in the manner explained
above. We are, therefore, unable to agree with the
contentions urged by the learned counsel for the assessees.
The charging of maximum marginal rate was not contrary to
law.
Now, coming to the decision of the Bombay High Court in
Sanghrajka Trust, the High Court has construed the trust
deed concerned therein to mean that the daughter-in-law
(comparable to second category in our case) had no right or
interest in the income of the trust for any year but it did
not attach sufficient importance to the other recital in the
trust deed that the trustees were entitled in their
discretion not to disburse any income to the grand daughters
(comparable to first category in our case) of the settlor in
which case the entire income would have gone to the
daughter-in-law at the expiry of the trust. The daughter-in-
law may not have had a right to the income of the trust, but
so did the grand daughters too did have no right. The said
decision, therefore, cannot advance the case of the
appellants herein.
We must say that the policy of law as disclosed from
Section 164(1) is to discourage discretionary trusts by
charging the income of such trusts in the hands of trustees
at the maximum marginal rate except in certain specified
situations. The trust deed concerned herein is a
discretionary trust of an extremely unusual type. Since it
is stated that the Tribunal has found the trust deed to be a
genuine one, we do not wish to say anything more on this
score.
For the above reasons, the appeals fail and are
dismissed with costs.