Gujarat H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in concluding that Shri Harshadrai was, under the trust, the sole beneficiary during his lifetime ?

Counsel Appeared

K.C. Patel, for the Assessee : B.R. Shah with R.P. Bhatt of R.P. Bhatt & Co., for the Revenue

M.P. THAKKAR, J. :

A number of questions have arisen in the course of the assessment in the case of Keshavlal Punjaram and others assessed in the capacity of legal heirs of Partivkumar Harshedkumar as an Association of Persons (hereinafter referred to as AOP), in Income-tax Ref. No. 66/77. The main question invoked in this reference has also been raised in Wealth-tax Ref. No. 18 of 1976, where also Keshavlal Punjaram & others as legal heirs of Partivkumar Harshadkumar are the assessees. Since an identical question is involved in these allied matters it will be convenient to dispose of both these matters by this common judgment. We will first deal with the question which is common IT Ref. No. 66/77 and WT Ref. No. 18/76 (being question No. 1 out of the four questions in ITR No. 66/77 and the only question in WTR No. 18/76, though it is worded slightly differently). The said question reads as under :

ITR No. 66/77 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in concluding that Shri Harshadrai was, under the trust, the sole beneficiary during his lifetime ?”

WTR No. 18/76

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that as on 30th Oct., 1970, Shri Harshadrai was the sole beneficiary under the trust, A-1, as, modified by deeds A-2 and A-3 ?”

2. One Keshavlal Punjaram executed an indenture of settlement on 18th April, 1928. After executing the aforesaid indenture of settlement, the settler made modifications in respect of certain vital matters by a subsequent document executed by him pursuant to the power reserved under the original deed of settlement of 1928 (Annex. A). The first modification was made by document dt. 29th July, 1940 (Annex. B). The second and final modification was made as per document dt. 16th Sept., 1948, (Annex. C). We are concerned with the modification made in so far as the rights of Harshadrai Keshavlal (who will be hereinafter referred to as “H”) and his legal heirs have been affected by this modification. By original document at Annex. A, executed in 1928, it was provided by cl. (2) that the trust funds shall be held for the benefit of H and that the income of the fund should be paid to him “for and during his life and down to his death. In so far as the heirs of H were concerned, a provision was made by cl. (3) and the trustees were directed to hold the trust funds in trust for the rightful heirs of the said H. By Annex. B, which was the first document of modification, executed in 1940, i.e., some 12 years after the execution of the original document, the provision made for payment of income of the trust to H was deleted and it was instead provided that income of the trust funds should be accumulated during the lifetime of the settlor. It was further provided that after the lifetime of the settlor the net income was to be paid to H for and during his life and down to his death. By the second modification, as per the last document executed in 1948—as per annex. C—the settlor directed that the trust funds shall be held in trust for the said H “for the life and for his heirs, executors, administrators and assigns absolutely”. The relevant portion may be reproduced for the sake of preciseness : “… hold the trust funds comprised in the said recited deed of trust in trust for the said Harshadrai (son of the settlor) for the life and for his heirs, executors, administrators and assigns absolutely.” [Emphasis, italicized in print, supplied]

3. In the context of the alterations made from time to time, a question arose whether H was the sole beneficiary pursuant to the last document executed in 1948 in so far as the income of the trust during the lifetime of H was concerned. The Tribunal has taken the view that on a true interpretation of the relevant clause read in the light of the history of the previous two documents, it is abundantly clear that the settlor had directed that the trust should be held for the benefit of H during his lifetime and, therefore, he was the sole beneficiary during his lifetime. The view taken was that it was only upon the death of H that the question of interest of his heirs, etc., would arise and that they would only thereupon get the trust fund absolutely. The controversy centres round the question as to whether the income of the trust during the lifetime of H could be considered to be the income of H, he being the sole beneficiary or whether it could be considered as the income of H along with his wife and children. In our opinion, the interpretation placed by the Tribunal is the only interpretation which can be placed on the relevant clause. No other interpretation is possible. The history of the settlement from time to time shows that throughout, the intention of the settler has been to confer a life interest (and nothing beyond life interest) on H. At one point of time the original direction to pay the income of the trust fund to H was modified and it was directed that the income should be accumulated during the lifetime of the settlor and should be paid to H only after the lifetime of the settlor and the only benefit conferred upon H was to receive the income of the trust fund during his lifetime (lifetime of H). At no point of time an absolute interest has been conferred upon H. So far as the legal heirs of H are concerned, the intention of the settlor has been to make a provision for holding the trust fund for their benefit. In the original trust deed no provision was made to make the heirs of H absolute owners upon the death of H. In the first deed of modification also no such provision was made. It, however, appears that in 1948, when the final modification was made, the settlor had an intention to create an absolute interest in favour of the heirs of H after the lifetime of H. And that is why the aforesaid provision appears to have been made. Thereby the life interest has been conferred upon H and the absolute interest in the trust fund has been conferred upon his heirs after the lifetime of H. The relevant clause has not been very happily worded but the intention of the settlor is abundantly clear. In the first place, at no point of time absolute interest has been conferred upon H. The interest which has been conferred upon H is the interest to receive the income of the trust fund during his lifetime and no more. Till the last modification made in 1948, no provision was made for creating an absolute interest in favour of the legal heirs of H. It is for the first time that in the last document a provision for the life interest of H and an absolute interest of the heirs of H has been introduced. The very concept of life interest is inconsistent with absolute interest in the trust funds during lifetime of H. In so far as the heirs are concerned, absolute interest has been created as contradistinguished from the life interest created in favour of H, and there is no room for doubt that an absolute interest has been created only in favour of the heirs of H which would of necessity come into existence on the termination of the life of H. There can be no question of the heirs of H during his lifetime. This is another reason why the provision cannot be interpreted in any other manner. In our opinion, there is no room for doubt that the view taken by the Tribunal is the correct view. Under the circumstances, the said question is answered in the affirmative and against the assessee both in I.T.Ref. No. 66/77 as well as in WT Ref. No. 18/1976.

4. We are now concerned with the three questions referred to us for our opinion, being questions Nos. 2, 3 and 4 in IT Ref. No. 66/77. So far as question No. 2 is concerned, it reads as under : “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in concluding that the ITO’s order directly assessing the beneficiary, Shri Harshadrai, for the asst. yr. 1971-72, did not tantamount to the Department having exercised on option in favour of direct assessments of the beneficiaries concerned for the asst. yrs. 1971-72 and 1972-73 ?”

5. This controversy has arisen by reason of the fact that the assessment of the trust as an assessee as also the assessment of H in his individual capacity were made on the same day. H included in his return. 1/4th share on the footing that he was not the sole beneficiary of the trust but one of beneficiaries along with his wife, son and daughter. The ITO assessed the trust on the footing that H was the sole beneficiary. Since, however, H had included in his return 1/4th share, as if he was not the sole beneficiary but had only an 1/4th share in the income of the trust, the ITO, as a protective measure, made an assessment on this footing as well. Thereupon it was argued on behalf of the assessee that the ITO had exercised the option to make a direct assessment in respect of H and, therefore, under the circumstances, the ITO was not justified in assessing the trust under s. 161 of the Act. The Tribunal rightly took the view that the ITO had assessed the trust as an AOP and the protective assessment made in respect of the individual assessment of H did not tantamount to an exercise of the option under s. 166 of the Act. The order of the ITO makes it abundantly clear that he was making the assessment in respect of 1/4th income, included by the assessee only as a protective measure because the assessee himself had included the said income in his return. At the same time he made it clear that the trust was being assessed as an AOP and the question of including this income in the assessment of H did not arise except by way of protective measure. It is, therefore, futile to contend that the ITO had exercised the option under s. 166 of the Act. The view taken by the Tribunal is unexceptionable. The question is, therefore, answered in the affirmative and against the assessee.

6. So far as the third question is concerned, it reads as under : “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law, (i) in holding that the finding in the civil suit was not binding on the income-tax authorities or on the Tribunal; and (ii) in arriving at a contrary finding so far as the period of Shri Harshadrai’s lifetime was concerned ?”

7. It appears that there was a civil suit between H, his wife, his son, his daughter and co-trustees. It is not necessary to examine the question whether it was a collusive suit or a suit which was required to be instituted on account of any genuine dispute between the parties. The learned civil judge (S.D.), Ahmedabad, before whom the matter came up for hearing came to the conclusion that H was not the sole beneficiary but he was a beneficiary along with others in view of the last document executed by the settlor in 1948 (Annexure. C). In the background of these facts it was contended on behalf of the assessee that the finding recorded by the Civil Court in the course of the aforesaid suit was conclusive and the ITO had no jurisdiction to form his own opinion in regard to this question. The Tribunal has rightly taken the view that the decision rendered by the Civil Court in the aforesaid circumstances cannot preclude the statutory jurisdiction of the ITO to form his own opinion. Similar question arose in CIT vs. Thobhandas Jivanlal Gajjar (1977) 109 ITR 296 (Guj) : TC42R.174, wherein the same view has been taken. In view of this decision it is not necessary for us to discuss this question afresh. Accordingly, we answer this question in the affirmative and against the assessee.

8. So far as question No. 4 is concerned, it is not necessary to answer this question. In view of our answer to question No. 1 this question does not survive. We, accordingly, answer the reference in the following manner : IT Ref. No. 66/77 :

Question No. 1 : In the affirmative and against the assessee.

Question No. 2 : In the affirmative and against the assessee.

Question No. 3 : In the affirmative and against the assessee.

Question No. 4 : Not necessary to answer as this question does not survive in view of the answer to question No. 1. WTR No. 18/1976 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that as on 30th Oct., 1970, Shri Harshadrai was the sole beneficiary under the trust, A-1, as modified by deeds, A-2 and A-3 ?”

In the affirmative and against the assessee. There will be no order as to costs.

[Citation : 141 ITR 466]