Kerala (Full Bench) H.C : The law relating to trustee’s liability for such taxes is so massive and detailed that examination of these matters should proceed from the standard works on the various taxes.

Counsel Appeared

G. Srivarajan, for the Assessee : P.K.R. Menon, for the Revenue

SUKUMARAN,J.:

Trusts have fought pitched battles in the tax fields. The law reports present pictures of many such fights between the assessee and the Revenue. Authoritative text books on trusts or charities now devote substantial space for discussion of taxation problems of the trust. Underhill notes :

“The law relating to trustee’s liability for such taxes is so massive and detailed that examination of these matters should proceed from the standard works on the various taxes.” (See Underhill’s Law of Trusts and Trustees, Thirteenth edn., by David, J. Hayton at p. 358). Yet at page 398, that book itself provides a topic, ‘tax avoidance’, and states : “The question how far the necessary benefit, if financial, may be obtained at the expense of the Revenue—how far, in other words, the Court will approve arrangements solely or principally designed to save tax—is in some respects a difficult one; ” Settlement Trust of Chapman (No. 2) (1959) 2 All ER 48, Drewe (1966) 2 All ER 342, Llyod (1967) 2 All ER 314, Clethero (1959) 3 All ER 789, Cochen (1959) 3 All ER 523, Sainsbury (1967) 1 All ER 878, Lister (1972) 3 All ER 737, Van Gruisen (1964) 1 All ER 843 and Zekelman (1971) 19 KLR (3d) 652 have all been discussed there at some length. Philip H. Pettit in Equity and the Law of Trust deals with trusts and taxation under a separate topic. The discussion starts with the sentence : “With taxation at present level it is obvious that Revenue considerations are in practice commonly of vital importance in matters, particularly perhaps when the creation of trust is under consideration.” ‘The taxation of a trust’ is a separate Chapter in the book “The Modern Law of Trusts by David B. Parkar and Anthony R. Mellows. In India too a specialised publication is available : Tax Planning for Public and Private Trusts by Dr. Paras Diwan and B.K. Diwan.

The last two decades witnessed a spurt in the trust litigation in this Court. Conflicting views on very many facts of trust and their functioning sometimes appear in decided cases. Dharmodayam Co. 1962 KLT 136 (Ker), Shree Shaila Industrial and Spiritual Colony Charities ILR 1972(I) Ker 135, Dharmadeepti 1974 KLT 771, Vanchi Trust 1980 KLT 895 (Ker), Kumaraswamy Reddiar ILR 1982(I) Ker 157, CIT vs. Krishna Warriar (1964) 53 ITR 176 (SC) : TC23R.1031 and Indian Chamber of Commerce vs. CIT 1975 CTR (SC) 271 : (1975) 101 ITR 796 (SC) : TC23R.250 are some of the important decisions on the topic during this period. Some of the complexities of the problem have been referred to in CIT vs. Dharmodayam & Co. 1977 KLT 761 (Ker).

Even in relation to the validity of the trust, there have been quite a few decided cases of this Court in recent years. Kumaraswamy Reddar’s case (supra), T.A.V. Trust (IT Ref. Nos. 48 and 49 of 1980 and 130 and 131 of 1981) and CIT vs. Seematti Trust (1985) 46 CTR (Ker) 356 : (1985) 154 ITR 771 (Ker) are only some such recent cases. The decisions rendered in similar cases, would only be helpful guides and not binding directives. It is obvious that the validity of the trust would essentially be dependent upon facts and materials which have a bearing on the origin and constitution of that trust. The legal validity of one such trust—the Parthas Trust—arises in these references.

4. Parthas Trust was constituted by an indenture dt. 4th Aug., 1981. J. Ramachandru Ammal figured therein as the founder. There were four trustees and 28 beneficiaries. The parties were intimately connected with two trading firms—Parthas Textiles, Kottayam and Parthas Textiles at Attingal. The business of the firms was taken over by the trust under subsequent agreements. The agreement dt. 17th Aug., 1971 concerned immovable properties. Possession of the immovable properties was delivered over to the trust. No sale deed, however, had been executed as regards those properties.

5. The trust had its first assessment under the IT Act, 1961 (hereinafter referred to as ‘the Act’) during the asst. yr. 1972- 73. A fundamental and serious question arose for consideration and decision about the existence of a valid trust. The ITO took the view that there was no duly executed instrument in writing as contemplated under s. 160(1)(iv) of the Act and consequently, the advantageous assessment under s. 161 of the Act would not be available. The AAC took a different view. According to him, there was a valid trust. The Tribunal affirmed that conclusion. The Revenue took up the matter before this Court.

In the meantime assessments were made in respect of later years as well. Against the adverse decisions of those years also, the Revenue took up the issue for a decision by this Court. IT Ref. Nos. 84 to 86 and 125 of 1979, 71 to 77 of 1981 thus came up for hearing before this Court. (We do not consider question No. 1 in IT Ref. No. 20 of 1982 as it was not pressed). A Division Bench of this Court consisting of K. Bhaskaran, Ag. CJ. and M.P. Menon, J. by judgment dt. 12th Oct., 1984, considered the question. The reference was answered in favour of the assessee and against the Department. Three reasons which had been urged for turning down in the claim of the assessee for an assessment under s. 160(1)(iv) were referred to in paragraph 5 of the judgment as : “(i) the founder had no property to be transferred to the trust; (ii) the properties of the minors had been made the subject- matter of the trust without satisfying the condition of s. 7(b) of the Trusts Act; and (iii) the immovable properties have been made the subject-matter of the trust, without a valid transfer.” This Court recapitulated the findings of the AAC, that the trust deed considered as a whole did not indicate the minors as the authors of the trust, that the immovable properties were not the subject-matter of the trust, and that ss. 5 and 6 of the Indian Trusts Act, 1882 had been satisfied. It also adverted to the affirmance of those reasons by the Tribunal.

8. This Court took the view that on 3rd Aug., 1971, a sum of Rs. 1,40,000 was available with the founder of the trust, by the contribution from the two firms and that the sums had become her property before the trust deed came into existence on 4th Aug., 1971. The question whether the property which belonged to the minors had been transferred by the guardians without obtaining the permission of the principal civil Court, and consequently, violating s. 7(b) of the Indian Trusts Act, was also considered by this Court. It was held that the contention about the invalidity of the trust based on an evaluation of s. 7(b) was untenable, inasmuch as, the funds were made available by the majors and contribution was made to the funds of the trust by the minors themselves. The Court, among others referred to the journal entries which showed that ‘the contributions to the corpus of the trust fund so far as the minors were concerned, were made by the majors’. As a matter of fact, on this aspect, even the ITO who turned down the claim of the assessee, found that the submissions made on behalf of the assessee about the transfer of funds as disclosed in the journal entries were correct. The Division Bench quoted the following passage from the order of the ITO : “In the reply it is submitted that the minors have not transferred the property. It is further represented that majors have transferred property to the trust for the minors with the specific direction that the funds are transferred for the corpus of the trust. He also represented that Smt. Ramachandru Ammal has transferred sums in respect of her two minor children R.L. Siva Kumar and K.L. Indumathy. In support of the assessee’s claim he filed copies of the journal entries by which the transfer entries for the corpus of the trust were made. These journal entries filed were verified by me with reference to the books produced and are found correct.”

In reaching the ultimate conclusion, the Division Bench referred to an earlier decision of this Court in CIT vs. V.S. Kumaraswamy Reddiar Trust (1982) 26 CTR (Ker) 443 : (1982) 138 ITR 808 (Ker) wherein the Court had to consider the validity of a trust with somewhat similar features.

We do not find any reason whatever to differ from the factual findings as reached by this Court in relation to the very same assessee and the very same trust deed for the preceding years. Whether the founder had property with her to constitute a trust and whether the transfer of fund had been made by majors as contended by the assessee or on behalf of the minors by their guardians, were questions of fact. This Court on an exhaustive and clear analysis of the materials before it, entered the finding that the author of the trust had the necessary funds for constituting the trust and that the contributions came not from the minors but from the major members of the two firms. As noted earlier, this conclusion was in conformity with the findings of the AAC and the Tribunal. The ultimate conclusion that a valid trust came into being, based on the above findings, does not call for any variation whatever for the subsequent years as well. We have no hesitation in confirming similar findings of the Tribunal for the later years. The first question— “Whether the trust has been created by a duly executed instrument in writing and whether there is any representative assessee within the meaning of s. 160(1)(iv) of the IT Act ?” has, therefore, to be answered in the affirmative, in favour of the assessee and against the Revenue. We do so.

11. This batch of cases happened to be posted before the Full Bench, when a Division Bench (of Kochu Thommen and Radhakrishnan Menon, JJ.) felt that the earlier decision Seematti Trust’s case (supra), on the self-same question, was in conflict with the view expressed in some later cases decided by a different Bench of this Court in CIT vs. Parthas Trust (IT Ref. Nos. 84 to 86 and 125 of 1979 and 71 to 77 of 1981. The Division Bench observed :‘Identical clauses are contained in the deed in question in the present cases.’ With great respect, we feel that this assumption is unjustified. A perusal of the judgments in the two cases would demonstrate the striking differences on factual matters as involved in the two sets of cases. Identical questions had been involved in the decision considered by the Division Bench of this Court in Seematti Trust’s case (supra), doubtless propriety would have demanded a reference to a Full Bench. The Division Bench which decided Seematti Trust’s case (surpa) obviously did not feel it necessary to do so. This can be understood only on the basis that the facts of the decision of this Court in Parthas Trust’s case (supra) did not have any similarity with those in Seematti Trust’s case (supra). As indicated earlier, we do not, in this case, find any reason whatever to take a view different from the one expressed in respect of the self-same trust in the earlier Division Bench decision of this Court.

The second question relates to deduction in the computation of income claimed in relation to the depreciation of the immovable properties which the trust obtained under the agreement dt. 17th Aug., 1971. The possessory right under the agreement coupled with the use thereof it claimed, makes as the assessee eligible to the deduction. The assessee drew inspiration and support from a decision of the Allahabad High Court in Addl. CIT vs. U.P. State Agro Industrial Corpn. Ltd. (1981) 20 CTR (All) 141 : (1981) 127 ITR 97 (All) : TC27R.228. The assessing authorities, however, did not readily grant the claim of the assessee. Ultimately, the claim involved n the appeals of different years, reached the Tribunal, demanding a decision. It so transpired that one set of appeals came before one Bench of the Tribunal and other batch came before another Bench. The two Benches of the Tribunal have, however, talked in two different voices. The Bench which dealt with the appeal [ITA Nos. 157, 156 and 271 (Coch) of 1980] took a view in favour of the assessee. The contrary view was expressed while disposing of the other appeals.

It may straightaway be noticed that the question has now been considered by other High Courts also. The Allahabad and Patna High Courts are the forts sheltering a theoretical thought which would give support and sustenance to the contention put forward by the assessee. All other High Courts have arrayed themselves on the other side. It is not by mere counting of numbers that victory is declared in intellectual fights. Much depends upon the mettle of the reasoning and the deployment of the projected logic. It is useful to start reading that portion of the section of the Act, before any discussion is attempted : “32. Depreciation.—(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall ….. be allowed—” Under the section depreciation is claimable by an owner who uses the asset in question. Both the conditions, ownership and use, have to be satisfied. Each of these terms—ownership and use—would receive much content and colour from the context in which it is used. The background of the statutory scheme would facilitate the search for the correct answer. It would shed light along the path, as to the proper direction and ultimate destination.

The totality of the phrase as occurring in the section will have to be considered lest much vitality and significance should be missed. That was the caution given by Lord Roskill in a recent case— Sought West Water vs. Rumble (1985) 1 All ER 513 at p. 517.

The term ‘owner’ no doubt is an ordinary English word. As observed by Lord Scarman “there are many ordinary English words which possess by their very imprecision the flexibility which is the hallmark of the English language, and which is one of the reasons for the survival of English as a living and worldwide tongue. The decisions dealing with the question have indicated the range of flexibility in some appreciable measure” [vide Rumble’s case (supra) at p. 517]. Owner may signify differently in different contexts. ‘Depreciation’ allowance was a concession granted by the State in the computation of income on very many factors relevant to a wholesome fiscal administration. A booming industrial enterprise is essential for the generation of other economic activities. It is in the ebbtide of economic and industrial adventures, that the State could cast its taxing net wide and deep. It is pointless and profitless from the tax gatherers’ point of view to be a lonely angler. The State needs much more than what would satiate the sportive curiosity of a leisure- seeking holiday man. Entrepreneurial development is, therefore, to be encouraged. Incentives to those who own and use assets of appreciable value is essential to encourage such business ventures. When this is the basic idea, the essential ingredients of a claim for depreciation and for other allowances geared to the use of business assets could be easily identified. These deductions cannot be claimed by someone without any real connection with the assets, someone having only some nominal or casual connection. The claimant must be one with much more than some threads of rights. What is needed is a well woven garment of ownership; not some or a few slender threads somehow gathered. Again, the section would not grant depreciation allowance to a person merely for the reason that he owns it. The user of the asset in the income generating enterprise is equally essential. Are the twin requirements satisfactorily complied with in the present case should be the question to be posed before the deduction under this head is conceded. The full ownership postulated on the part of a claimant has added relevance and significance in that context.

It is unnecessary to traverse areas with which the case in hand is not directly concerned. The short question is whether a person who had obtained a sale deed itself, could be treated as an owner for the purposes of s. 32 of the Act.

It is profitable to bear in mind in that context that tax laws do not stand in isolation from the general law of the country. The laws of the country, the Transfer of Property Act, 1882 and the Indian Registration Act, 1908, would certainly insist on document in writing, and duly registered, for the recognition of a transfer of title of immovable property, of the value of over Rs. 100, a mere agreement of sale will not do duty for a proper sale deed duly executed. The context of s. 32 would not clothe with ownership a mere possessor of some beneficial interest. Sec. 53A of the Transfer of Property Act, which only furnishes an equipment o equity, is not effective enough for the acquisition of title or obtaining of the ownership. When such a vital condition regarding ownership of the asset is not satisfied, the claim for deduction is bound to be rejected. This according to us, is the correct view to be taken in relation to the claim for deduction under the head of depreciation.

The scope of s. 54 of the Transfer of Property Act, and ss. 17 and 47 of the Indian Registration Act has been discussed in the context of ordinary civil suits. Some of those important decisions of the Supreme Court are : Radha Kishan Laxminarayan Toshniwal vs. Sridhar Ramchandra Alshi AIR 1960 SC 1368, Ram Saran Lal vs. Smt. Domini Kuer AIR 1961 SC 1747 and Hiralal Agarwal vs. Rampedarath Singh AIR 1969 SC 244. Sec. 47 permits a document, when registered to operate from a date which may be anterior to the date of registration but that has nothing do to with the completion of sale when the instrument is one of sale. That appears to be one of the emerging principles. Even in other contexts, similar approach had been indicated by the High Court [See CIT vs. Bhurangya Coal Co. (1958) 34 ITR 802 (SC) : TC20R.1007, CIT vs. Ganga Properties Ltd. (1970) 77 ITR 637 (Cal), CIT vs. Hindustan Cold Storage & Refrigeration (P) Ltd. 1976 CTR (Del) 78 : (1976) 103 ITR 455 (Del) : TC27R.219, Amarchand J. Agarwal vs. Union of India & Ors. (1982) 26 CTR (Bom) 286 : (1983) 142 ITR 402 (Bom) : TC3R.488, Amarchand Jainarain Agarwal vs. Union of India & Ors. (1982) 31 CTR (Bom) 122 : (1983) 142 ITR 410 (Bom) : TC3R.486 and Dr. Raja Sir M.A. Muthiah Chettiar vs. CIT (1984) 38 CTR (Mad) 76 : (1984) 148 ITR 532 (Mad)]. Even in the context of a claim for depreciation under s. 10(2)(vi) of the Indian IT Act, 1922 (which corresponds to the present s. 34 of the 1961 Act) the Delhi and Bombay High Courts have taken the view that in the absence of a registered sale deed, a claim for depreciation has to fail by reason of non- satisfaction of one of the preconditions. These decisions have been surveyed exhaustively in a very recent decision of Madras High Court in CIT vs. Tamil Nadu Agro Industries Corpn. Ltd. (1984) 41 CTR (Mad) 223 : (1987) 163 ITR 61 (Mad) : TC27R.236 by Ramanujam and Ratnam, JJ. With great respect, we are in agreement with the analysis, approach and conclusion as indicated in that decision. We agree with that High Court that the contrary views taken by the Allahabad and Patna High Courts in U.P. State Agro Industrial Corpn. Ltd.’s case (supra) and Addl. CIT vs. Sahay Properties & Investment Co. (P) Ltd. (1983) 34 CTR (Pat) 382 : (1983) 144 ITR 357 (Pat) do not lay down the correct law. Our entire agreement with the lucid reasoning of the Madras High Court in Tamil Nadu Agro Industries Corpn. Ltd.’s case (supra) justifies the reproduction of the following extract from that judgment : “……The use of the expression ‘owned by the assessee and used for the purpose of business or profession’ emphasises that it is not mere user irrespective of ownership that is contemplated by s. 32 as a necessary condition for claiming the allowance of depreciation. Such ownership must necessarily mean legal title to the asset in the assessee and the user thereof by the assessee while being such owner in the course of the business of the assessee. Otherwise, as pointed out earlier, any person inclusive of a person who is not, in any manner, entitled to be in possession of the property, can get into possession and then claim that he is in possession of the property in his own right to the exclusion of others and, therefore, he should be deemed to be the ‘owner’ for all purposes, inclusive of s. 32 of the Act. We are unable to subscribe to such an interpretation of s. 32 of the Act. We are unable to subscribe to such an interpretation of s. 32 of the Act, as in our view, that would strike at the root of and negate the very notion of and the basis for the allowance of deprecation claimed by an assessee in respect of the assets used by him in his business. This also accords with the scheme of the Act in providing for the allowance of depreciation. Under the provisions of the Act, income is subject to tax without any reference to the exhaustion or diminution or even the destruction of the value of capital which includes building, machinery, etc. If the income is so subjected to tax without reference to the exhaustion or erosion of the value of the capital , it would no doubt work a great hardship to assessees engaged in business using the building, machinery, plant or furniture, etc. It is only with a view to provide relief to the assessees in such cases, the grant of allowance in respect of depreciation had been thought of and provision therefore had also been made in s. 32 of the Act. It is difficult to envisage the availability of the benefit of such an allowance to a person who has merely made an advance for the purpose of acquiring a capital asset as a building, machinery, plant etc., but had not actually acquired legal title to it. In other words, in cases where the assessee had not secured legal title to the building, plant or machinery, it is difficult to extend the benefit of the granting of the allowance of depreciation to those assessees, as that would amount to recognition of mere possession of the assets without anything more, as the fulfilment of one of the requirements under s. 32 of the Act to be eligible for the grant of an allowance by way of depreciation…….”

We may add a few words more as regards the Allahabad High Court decision in U.P. State Agro Industrial Corporation Ltd.’s case (supra). The Allahabad High Court felt that the decision of the Supreme Court in R.B. Jodha Mal Kuthiala vs. CIT (1971) 82 ITR 570 (SC) which, according to it, had been omitted to be noticed by the Delhi High Court in Hindustan Cold Storage and Refrigeration (P) Ltd.’s case (supra) made all the difference After anxiously considering the decision of the Supreme Court, this decision does not contain any principle or logic which would induce us to take a different view of the construction of s. 32. The Supreme Court case essentially dealt with the effect and impact of the Pakistan Evacuee’s Property Vesting Act. The assessee in that case had owned assets in Lahore in the form of hotel. And for the purpose of establishing the hotel the assessee had taken huge loans from the banks. Interest payable for the loans taken was claimed as deduction. It was in this context the question arose about the assessability of income from the hotel property in Pakistan. The Supreme Court found that in the light of the provisions of the Pakistan Ordinance, the assessee did not have any ownership over the hotel. The observations of the Supreme Court made in that decision have to be understood in that context. The Supreme Court was concerned with a case about the taxability of income from a property. The income generating activity and the interconnection between the assessee and the asset involved in the activity had to be adjudged in that context. This emphasis is seen from the observation contained at page 595 : “…. It must be remembered that s. 9 brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of s. 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right.”

The summing up of the Supreme Court in relation to the statutory scheme of the Ordinance was : “……The evacuee could not exercise any rights in that property except with the consent of the Custodian. He merely had some beneficial interest in that property. No doubt that resident interest in a sense is ownership. The property having vested in the Custodian, who had all the powers of the owner, he was the legal owner of the property. In the eye of the law, the Custodian was the owner of that property…..”

19. Sec. 34 of the 1961 Act as also its predecessor section, s. 10(2)(vi) of the 1922 Act had a close model in the English enactments. The Customs and Inland Revenue Act, 1918 is the legislative ancestor [as pithily put by Rebert Goff, L.J. in Stokes vs. Costain Property Investment Ltd. (1984) 1 All ER 849]. Sec. 12 of that enactment allowed as deduction ‘the diminished value by reason of wear and tear during the year of any machinery or plant used for the purpose of the concern, and belonging to the person or company by whom the concern is carried on’. The words ‘diminished value by reason of wear and tear’ became abridged in later time as ‘depreciation’. No doubt, the section employed not the word ownership’ but the words ‘belonging to’. Mecnaghten, J. regarded ‘belonging’ as meaning ‘ownership in that context [See Union Cold Storage Co. Ltd. vs. Simpson (Inspector of Taxes) (1938) 4 All ER 673 at p. 675]. The implication of the term ‘belonging’ had been examined by the English Courts on earlier occasions also. Additional incentives had been offered to the industry by the later enactments. Some of these important enactments upto 1971 have been catalogued in Stokes’ case (supra), the Customs and Inland Revenue Act, 1918, the IT Act, 1945, the IT Act, 1952, the Finance Act, 1957, the Capital Allowances Act,

1968 and the Finance Act, 1971. The purpose of these statutory provisions was undoubtedly to encourage investment (Robert Goff, L.J. says so in his speech). Lord Justice Fox observed : “The purpose of the statutory provisions is evidently to encourage investment in machinery and plant.” Secs. 41 and 44 of the Finance Act, 1971 dealt with allowances, the first year allowance and written down allowance subject to the condition that the machinery or plant belonged to the assessee. The Court of Appeal had occasion to consider the scope and amplitude of the term ‘belonging to’ in that context. Commenting on the expression ‘belonging to’ in the Customs and Inland Revenue Act, Fox, LJ. observed : “The requirement of ‘belonging’ first appears in the legislation on this subject in s. 12 of the 1878 Act. In that section it is difficult to suppose that the word ‘belonging’ can have been intended to mean anything other than absolute ownership.” and later : “I agree that ‘belong’ and ‘belonging’ are not terms of art. They are ordinary English words. It seems to me that in ordinary usage, they would not be satisfied by limited interests. For example, I do not think one would say that a chattel ‘belongs to X’ if he merely had the right to use it for five years. Nor do I think it is an apt use of language to say that landlord’s fixtures

‘belong’ to the leaseholder.” The ultimate conclusion was that the lessee who had beneficial interest arising under the lease for even such a long period of 99 years, could not claim to be the person to whom the machinery and plant belonged.

20. It is comforting to note that the aforesaid decision of the Court of Appeal considerably contributes strength and support to our conclusion as reached above. We might further note, as did the Court of Appeal in the above decision, that mighty minds like those of Macnaghten, J., and Du Parcq, LJ., had similar trends of thought [see Union Cold Storage Co. Ltd.’s case (supra)].

21. In the light of our discussion, we have not hesitation to negative, on the facts and circumstances disclosed, the claim of the assessee for depreciation. We answer the cases in the manner indicated above.

[Citation : 169 ITR 334]