Commissioner of Income Tax, Madras vs Mrs. Jayalakshmi Duraiswamy

Jagadisan, J.—This is a reference under the Indian Income Tax Act. The assessee is the widow of one Duraiswamy, who died on August

20, 1949. He had no male issues but had three daughters, who were minors at the time of his death. His last will and testament is dated May 4,

1949. The assessee has been appointed as executrix under the will to carry out the directions contained therein. The last assessment of

Duraiswamy as an individual was for the assessment year 1949-50. Thereafter, up to the assessment year 1953-54, the assessments were made

on his widow as executrix of his estate. From the assessment year 1954-55 onwards she has been assessed in her own name in the status of an

individual. In accordance with the directions contained in the will, to which we shall refer later in detail, the widow (the assessee) claimed to have

spends a sum of Rs. 30,875 towards the maintenance of her daughters in the accounting year relevant to the assessment year 1954-55 and sought

to have this amount deducted in the computation of her total income. The Income Tax Officer disallowed the claim in the view that the expenses

incurred by the assessee amounted merely to application of income after its receipt by her. The assessee made a similar claim in a sum of Rs.

32,456 in the assessment year 1955-56 but that again was disallowed by the Income Tax officer. These decisions by the department became final

in regard to the two assessment years 1954-55 and 1955-56.

In the assessment year 1957-58 the assessee again claimed to deduct a sum of Rs. 13,500 as having been incurred by way of maintenance

expenses for her daughters. Her claim was that out of the total maintenance expenses of Rs. 18,000 incurred for the maintenance of herself and the

three daughters, the three fourths share of the daughters, namely Rs. 13,500 was properly deductible from and out of the assessable income in her

hands as the expenses incurred for the daughters were either charged upon the estate or should be treated as performance of an obligation in the

nature of a trust. The Income Tax Officer repelled her claim and she preferred an appeal to the Appellate Assistant commissioner.

The Appellate Assistant Commissioner observed that, as per the provisions of the will, there can be a claim, if at all, only in respect of the

maintenance expenses of one of the daughters, who remained unmarried, the other two daughters having been married even before the accounting

year, and that even such a limited claim cannot be permitted as the assessee was only applying her income from the estate in a particular manner

though under the provisions of the will. The result was that the decision of the Income Tax Officer was confirmed, in so far as this question was

concerned.

The assessee went up on a further appeal to the Income Tax Appellate Tribunal. The conclusion of the Appellate Tribunal is that there should be

an allowance of Rs. 6,000 in the assessable income of the assessee. The order of the Tribunal is far from clear. There is no finding whether the

terms of the will indicate a charge in favour of the maintenance holders or whether they constitute an enforceable trust in respect of the properties in

the hands of the assessee. The following passage extracted from the order of the Tribunal is hardly intelligible :

We are in agreement with the Appellate Assistant Commissioner in his reasonings and conclusions. But we would like to make a few observations.

The sum of Rs. 18,000 said to have been expended is almost an estimate, for no details had been furnished at any stage or even before us of how

the money was spent actually. It is difficult in the circumstances to find out how much was spent on the assessee and how much on the maintenance

and education of the three daughters. In ordinary law an unmarried daughters would have been entitled to maintenance and education and for

marriage expenses. But the will has necessarily introduced some complications.

The Tribunal overlooked that the construction of the will was the essential question whether de hors the will, the unmarried daughters had any

right or not is wholly irrelevant. It is this decision of the tribunal that is now attacked by the Commissioner of Income Tax. At his instance the

Tribunal has referred the following question :

Whether under the terms of the will a charge has been created on the income from properties bequeathed thereunder to the assessee for the

maintenance of daughters ?

The answer to the question must entirely depend on the proper interpretation of the terms of the will of the deceased, Duraiswamy, dated May

4, 1949. We shall now set out the relevant portions of the will :

I appoint my wife, Jayalakshmi Ammal, as executrix to carry out the provisions of the will. In case she predeceases me or dies before my

daughters attain majority, my wife''s brother, T. Govindarajan, shall be executor and trustees to carry out the provisions of the will.....

I give and bequeath to my wife for her life the income from the corpus of my estates. She shall be entitled to the income from the investments and

the dividends from the shares. She shall be entitled to enjoy my immovable properties or the rents thereof, but shall not be entitled to expend out of

capital except for the purposes mentioned hereunder. She shall however be entitled to utilise the income at her absolute discretion subject to the

provisions for maintenance and education of may daughters.

My wife shall maintain my daughters according to the scale of living to which they are accustomed and shall educate them suitably. The expenses of

maintenance and education of my daughters shall be met from and out of the income of my estate. My daughters shall be married at their proper

age and suitably. The expenses of the marriage and of the several functions thereafter till the daughters are settled under their husbands roof may be

met out of the corpus of my estate.

After the lifetime of my wife my daughters shall take my estate absolutely in equal shares with powers of gift, alienation and all rights

whatsoever..........

The question for considerations whether the amount of maintenance and education expenses incurred by the assessee in pursuance of the

directions under the will should be treated as her income which she applied in a particular manner or whether it belonged to the maintenance

holders and the assessee merely collected and paid it. If it was her income the payment is only a disposal and there is no escape from its taxation in

her hands. But if it was not her income the fact that it passed through her to the ultimate destination cannot make her liable to tax. Put in this form

the position is apparently simple and clear. But the determination of the question whether an amount received by an individual and paid over to, or

expended for, another is the income of the person in receipt or of the person who obtains the benefit, presents, sometimes, great toughness. This

question very often arises where the assessee is under an obligation to pay maintenance or other allowance to persons who stand in a close degree

of relationship to him having a legal right to claim the maintenance or allowances. It may at once be stated that any amount of obligation, legal and

ascertained, which the assessee may be bound to fulfil, while it may have the effect of draining his income cannot make it any the less his income.

But if the obligation is of such a character as to deprive the assessee, the obligation, of any beneficial interest in the income received even at the

inception it would be a parody to call it his income. Instances of this description are cases where there is a charge on the property or on the income

from the property for payment of maintenance or allowances, or where a trust is created for specific purposes like maintenance, education,

marriage, etc. The charge overrides the income to such an extent that it originates as the income of the charge holder. The trustee receiving trust

income is governed by a special provisions under the Income Tax Act. section 41, but the department cannot claim to have it assessed as the

individual personal income of the trustee. The question that is usually posed to determine whether the amount disbursed by the assessee is his

income or not is : ""Whether it is an application of income or diversion of income""; or ""Whether it is disposal or divestment"". In our opinion the true

test in each case would be:

Whose income is it, that of the assessee or that of some other persona having claim against the assessee.

There are several decisions on the subject involving the question whether a particular expenses is merely an application of income by the

assessee or a diversion of the income. It may not be profitable to refer to these cases as the questions is really one of fact. We may, however,

point out that the Supreme Court has exhaustively considered the matter in the decisions in Commissioner of Income Tax v. Sitaldas Tirathdas That

was a case in which the assessee became liable to pay maintenance allowance and marriage expenses for his daughters under a compromise

decree of court. No charge was created on any of his properties. He claimed that in computing his total income for purposes of Income Tax, the

amounts paid by him as maintenance to his wife and children under the decree of court should be deducted. It was held by the Supreme Court that

the assessee was not entitled to any such deduction. At page 374, Hidayatullah J. summed up the positions thus :

In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no

doubt, there are in every case, but it is the nature of the obligations which is the decisive fact. There is a differences between an amount which by

the nature of the obligation to apply out of his income and an amount which by the nature of the obligations cannot be said to be a part of the

income of the assessee. Where by the obligations income is diverted before it reaches the assessee, it is deductible; but where the income is

required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the

first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of ones

own income, which has been received and is since applied.

In our opinion the terms of the will are of sufficient amplitude to create a trust in favour of the daughters of the deceased for the maintenance,

education and marriage expenses. The maintenance and education expenses would be available to the daughters only so long as they remain

unmarried. After marriage such a claim would become extinguished. It is unmistakably clear that the testator imposed an obligation by way of trust

on his widow who was to be the executrix and in her absence on the person who might function in such capacity. In fact, the expression ""trustee

itself has been used by the testator. The benefit which the assessee get under the will is very limited. No doubt she is entitled to utilise the income at

her absolute discretion but the testator takes care to say that it is subject to the provisions for the maintenance and education of his daughters. The

daughters are to take the property absolutely in equal shares after the lifetime of the assessee. It cannot be said that the assessee is an absolute

legatee of the income from the properties left by her husband, and that the testator merely expressed a pious wish or hope that she would maintain

and educate her daughters and get them married suitably.

A trust is an obligation annexed to the ownership of property. It is very difficult to define a trust; and we may in this connection refer to the

following observation in Hanbury on Modern Equity, page 118 :

Few feats are more frustrating than definition. This is true of trusts as of the other things.

The borderline between a gift with a motive and a trust in the form of a gifts is thin but not imperceptible. In cases where a gift or bequest is

made to a person, ""for the maintenance of himself and his family"", or ""towards the support and maintenance of himself and his children, no trust is

inferred in the view that the settlor or the testator has not imposed a trust but has only made a gift to enable the settle or the legatee to do certain

things. Lewin in his book on Trusts, 15th edition, page 85, refers to the following instances as creating a trust :

Instances of the creation of a trust are, where property is given that she may dispose thereof for the benefit of herself and our children, or at her

sole and entire disposal for the maintenance of herself and her children, or for her own use and benefit, and for the maintenance and education of

my dear children or at the disposal of the legatee for herself and her children, or over flush or to A for the education and advancing in life of her

children, or to the testators wife for her use and benefit and for the maintenance and education of his children or to A and the said tenement I leave

to the disposal of her with a view that the said tenement may be disposed of as she may think proper for the maintenance and education of my two

daughters.....

The distinction between a motivated gift and an actual trust is that in the former transaction the only intention is to make a gift, though it is

coupled with hope and expectation that the done might utilise it for some stated purpose while in the latter the author of the transaction intends to

create a trust by creating an obligation on the part of the trustees to fulfil the directions contained in the instrument. ""The test whether in fact a trust

is created seems to turn upon the questions whether the testator has merely made an expression of his wishes and belief as distinguished from an

imperative direction amounting to an obligation."" (Godfroi on Trusts, 5th edition, page 102).

Whether the words of a will making a bequest to A upon condition that some benefit may be conferred on B, constitute a mere charge in

favour of B or effectuate a trust is entirely a question of interpretation. One simple rule is to ascertain from the language of the instrument whether

A, the devise or legatee obtains a full beneficial interest in the legacy. If such be the case the condition of benefit to B can be given effect to by

recognising a charge in favour of B. If, however, the interpretation of the will leads to the conclusion that the testator intended that A should hold

the property for the benefit of himself and B, a trust and not a charge is necessarily created. Underhill in his law of trusts, 10th edition, page 41,

states that : ""Where there was bequest of income to A, that he may use it for the benefit of himself and the maintenance and education of his

children, a trust was intended to be imposed upon A, to maintain and educate his children, a trust was intended to be imposed upon A, to maintain

and educate his children.

We may now refer to a recent decision of the Supreme court in commissioner of Income Tax v. Manilal Dhanji The facts of that case were as

follows : The assessees father had created a trust in respect of some shares and a cash sum of Rs. 30,000 for the benefit of his four sons including

the assessee. The trustees were the Central Bank Executor and Trustees co., the assessee himself and his wife and brother. The said trustees were

to hold the trust funds upon trust to pay the net interest and income thereof to the assessee ""for the maintenance of himself and his wife and for the

maintenance, education and benefit of all his children till his death."" In the relevant account year, the assessee obtained an income of Rs. 14,170

from the trust funds. The view of the taxing authorities and the Income Tax Appellate Tribunal was that under the aforesaid provision of the trust

deed the assessee was the sole beneficiary and that the amount was received by him for his own benefit and he was not accountable to anyone in

respect of the amount and therefore the amount should be assessed as part of his total income. The Tribunal stated a case u/s 66(1) of the Act to

the High Court of Bombay. The High Court answered the question in favour of the assessee. On a certificate granted by the High court the

supreme court heard an appeal from the decision of the Bombay high court. The Supreme court affirming the decisions of the Bombay High Court

held that the expression. ""For the maintenance of himself and his wife and for the maintenance, education and benefit of all his children till his death

was not indicative of a mere desire or hope but to impose a binding and obligatory trust. The true position of the assessee was held to be that of a

trustee and not the sole beneficiary under the trust deed. The relevant clause of the trust deed construed by the Supreme court reads as follows :

The trustees shall hold and stand possessed of the trust fund mentioned in the second schedule hereto and the accumulations thereof referred to in

clause 3 hereof upon trust to pay the net interest and income thereof to the settlers son, Manilal, for maintenance of himself, his wife and for the

maintenance, education and benefit of all his children till his death.

Referring to this clause, Hidayatuallah J. observed thus at page 885

The question before us is whether under this clause the income received by the assessee is impressed with a trust in favour of himself, his wife and

children to whom he is accountable as a trustees for the amount received. In other words, the question is whether the trust deed of December 1,

1941, created two trusts the one requiring the trustees to pay the income from the trust funds to the assessee and second requiring the assessee to

spend the income for the maintenance of himself and his wife and for the maintenance, education and benefit of his children.

The relevant clause in the will with which we are concerned providing for maintenance, education and marriage expenses of the three daughters

of the testator bears very close resemblance to the clause under the trust deed considered by the Supreme Court and in our opinion the assessee in

the present cases stands exactly in the position of Manilal in the Supreme court case.

The assessee should be held to be a trustee as the terms of the will, in our opinion, constitute a valid trust for the purposes mentioned therein. It

follows, therefore, that no part of the trust money can be included in her total income assessable to tax. It may be that the department might have

recourse to section 41(1) of the Act but upon that question we express no opinion.

The question that has been referred to us, namely, whether the terms of the will operate to create a charge, is not the question which really

arises in the case. We have therefore recast the question in the following form : ""Whether, on the facts and circumstances of the case, the decisions

of the Tribunal directing the exclusion of Rs. 6,000 from the total assessable income of the assessee is correct or not ?"" We answer this question in

the affirmative and in favour of the assessee. The Commissioner will pay the costs of the assessee. counsels fee Rs. 250.

Questions recast and answered in the affirmative.