Commissioner of Income Tax vs Nelson Trust

C.N. Ramachandran Nair, J.—In these connected cases, the question raised is whether the sole beneficiary of the trust can revoke the trust before the duration of the trust. The respondent trust was created in the year 1981 when the sole beneficiary Mr. Nelson was a minor aged 14 years. The trust was to be operative until the beneficiary became 21 years of age and thereafter the trust property was to be transferred to the beneficiary. However, on becoming major on November 13, 1984, the sole beneficiary revoked the trust and took over the assets and business of the trust and started carrying on business as the proprietor, with effect from April 1, 1985. Relying on clause 2 of the trust deed, the Assessing Officer held that the trust is continuing business and consequently the respondent was assessed as a trust, Even though the beneficiary was also assessed in his individual capacity on the same income, the respondent assessee filed appeal which was allowed by the Commissioner of Income Tax (Appeals) and the Tribunal on second appeal, confirmed it. It is against the order of the Tribunal, that the Department has filed these appeals for the assessment years 1986-87 and 1987-88.

We have heard Shri P. K. R. Menon, learned senior counsel appearing for the Revenue and Shri P. Balakrishnan and Shri K. B. Pradeep appearing for the respondent.

While clause 15 of the trust deed says that the deed of trust shall be irrevocable, clause 2 provides for duration of the trust as follows:

On the completion of 21 years of age of the said Nelson the trustees shall hand over the trust property which shall include the fund and investments representing the same for the time being to the end and intent that the said Nelson shall be the sole and absolute owner of the said trust fund and investments representing the same for the time being provided, however, that if the said Nelson shall die before the date of distribution, the trustees shall pay the trust fund and investments representing the same for the time being to the brother K. P. Edison. If the said Nelson shall die without leaving his brother K. P. Edison, then the trustees shall divide the trust fund and the investments representing the same for the time being between the legal heirs (but excluding the settlor) under the law who may be alive at the time of distribution.

Relying on the above provision, Shri P. K. R. Menon, learned senior counsel appearing for the Revenue contended that the beneficiary cannot revoke the trust and continue business in his individual capacity, as the trust was to continue until the beneficiary attains the age of 21 years. Learned senior counsel has relied on the decision of the Bombay High Court reported in Ramabai Govind Vs. Raghunath Vasudeo, wherein the Bombay High Court held as follows (page 112):

The legal ownership which vests in the trustee is for the purposes of the trust and the administration of the provisions of the trust. Because, the beneficiary, until the trusts are carried out is not entitled to deal with the property, the trustee is the person who is empowered to deal with the same, but he can only deal with it in accordance with the provisions of the deed of trust.

In response to this, learned Counsel for the respondent relied on the decision of the Calcutta High Court in Raja Baldeodas Birla Santatikosh Vs. Commissioner of Income Tax, and contended that the trust is revocable with the consent of the beneficiary and a Department like the Income Tax Department has no say in it.

We are unable to accept the contention of the Revenue based on the decision cited which is not on revocation of the trust. In this regard, we have to refer to Clause 78 of the Indian Trusts Act which provides for revocation of trust, which is as follows:

Revocation of trust.-A trust created by will may be revoked at the pleasure of the testator.

A trust otherwise created can be revoked only:

(a) where all the beneficiaries are competent to contract by their consent ;

(b) where the trust has been declared by a non-testamentary instrument or by word of mouth-in exercise of a power of revocation expressly reserved to the author of the trust ; or

(c) where the trust is for the payment of the debts of the author of the trust, and has not been communicated to the creditors-at the pleasure of the author of the trust.

From the above clause, it is clear that the beneficiaries of the trust can revoke the trust by their consent, if they are competent to contract. In this case, there is only one beneficiary for the trust. Even though the trust was to continue to operate till the beneficiary became the age of 21 years, Section 78 of the Indian Trusts Act authorises the beneficiary to revoke the trust if he so desires, on his becoming major. The ingredients for entitling revocation of the trust are consent of all the beneficiaries and their competence to contract. In this case, the only disability for the beneficiary to contract at the time of formation of the trust was that he had not attained the age of majority. As and when he attained the age of majority, he is free to revoke the trust notwithstanding the contrary provisions contained in clause 2 of the trust deed which says that the trust will be operative till the sole beneficiary attains the age of 21 years. In the decision of the Calcutta High Court this principle is recognised. Since the sole beneficiary opted to revoke the trust in exercise of his authority u/s 78 of the Trusts Act, the Department cannot insist and hold that the trust will continue in force till the duration as stated in clause 2 of the trust deed. We are therefore in agreement with the findings of the Tribunal that the trust did not survive beyond April 1, 1985, and thereafter no assessment on trust is permissible.

In this view of the matter, we dismiss the appeals.