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Judgment
K. Ramaswamy, J.—H.E.H. the Nizam has created a trust known as "the Nizam''s Second Supplemental Family Trust" by an indenture dated September 11, 1958, settling initially a sum of Rs. 6,18,000 for the benefit of his three grandchildren, viz., (1) Karan Ali Khan, grandson, (2) Sharifa Begum; and (3) Tahniyath Begum, grand-daughters. He directed that half of the interest accrued on the corpus shall be paid to the grandson and the two grand-daughters shall be given 1/4th each. The beneficiaries are thereby entitled to have the income in the above proportion as per the trust deed. However, the assessee trustees have been directed to pay, during their minority for 18 years, half the income derived from the corpus, i.e., the grandson is directed to be paid at Rs. 13,200 per annum and the grand-daughters at Rs. 7,200 each per annum. The balance amount due to them was directed to be accumulated and be paid to them after a period of 18 years from the date of the creation of the trust. The Wealth-tax Officer, in the first instance, for the assessment years 1970-71 and 1971-72 under the Wealth-tax Act, 1957 (27 of 1957) for short, "the Act", assessed, on May 30, 1972, u/s 21(2) of the Act, the tax on the beneficiaries directly. Subsequently, he made assessment on September 25, 1972, under sub-section (1) of section 21 on the trustees representing the beneficiaries. Against this later order, the assessee carried the matter in appeal. The Appellate Assistant Commissioner while upholding the assessment made by the Wealth-tax Officer held that to the extent that property, the beneficial interest of which was already assessed u/s 21(2) is valid and directed that on capitalisation basis, the residue and the corpus should be assessed and the wealth-tax has to be collected on that basis. Aggrieved against that order, the assessee carried the matter in second appeal to the Income Tax Appellate Tribunal which, by its order dated July 15, 1977, held thus :
"By making assessment once again on the trustees u/s 21(2) directly there is a double assessment which is not permissible under law."
Pursuant to directions given by this court u/s 27(3) of the Act, the Tribunal made the reference as follows :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in cancelling the assessments made on the trustees in respect of the corpus of the trust holding that there was double assessment u/s 21(2) of the Wealth-tax Act ?"
Sri Suryanarayana Murthy, the learned standing counsel for the Revenue contends that though u/s 21(2) of the Act, the Wealth-tax Officer is competent to bring the beneficial interest in the net wealth of the beneficiaries directly, it does not preclude the Wealth-tax Officer from exercising the power u/s 21(1) to assess the residual wealth and the corpus which the assessee are representing for the benefit of the beneficiaries. Therefore, the Appellate Assistant Commissioner has rightly held that to the extent the Wealth-tax Officer has already assessed the beneficiaries directly u/s 21(2) of the Act shall be excluded and the residue including the corpus shall be liable to be taxed u/s 21(1) of the Act. The Income Tax Appellate Tribunal erred in law in construing that it is double taxation. In fact it is not so. It is only a rectification of the mistake committed by the Wealth-tax Officer. Therefore, the Tribunal has erred in law in construing that it is double taxation.
Sri Rathnakar, learned counsel for the assessee, has resisted this contention pleading that what is assessable is only the beneficial interest, be it u/s 21(2) directly on the beneficiaries or u/s 21(1) on the trustees representing the interest of the beneficiaries and in no case the corpus is liable to be taxed. The Appellate Assistant Commissioner has erred in assessing the corpus as well as the beneficial interest of the beneficiaries in exercise of the power u/s 21(1) of the Act. In support thereof, he placed strong reliance on The Commissioner of Wealth Tax, Andhra Pradesh, Hyderabad Vs. Trustees of H.E.H. Nizam''s Family Hyderabad, .
In view of the respective contentions, the question that arises for consideration is whether the impugned assessment is valid in law.
Section 3 of the Act is the charging secting which adumbrates that subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in Schedule I. When assets are held by court of wards, administrators-general, receivers, managers or any trustees, etc., the computation of net wealth is adumbrated in section 21. Section 21(1), prior to the insertion of "subject to the provisions of sub-section (1A)" (by the Finance (No. 2) Act of 1980 with effect from April 1, 1980) which is not relevant for the purpose of this case, excluding the irrelevant, is as follows : In the case of assets chargeable to tax under this Act, which are held by a court of wards, ..........or any trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise,........the wealth-tax shall be levied upon and recoverable from the........or trustee, as the case may be, in the like manner and to the same extent as it would be leviable upon and recoverable from the person on whose behalf or for whose benefit the assets are held, and the provisions of this Act shall apply accordingly." (The Explanation and sub-section (1A) are not necessary. Hence omitted.) Sub-section (2) postulates that "nothing contained in sub-section (1) shall prevent either the direct assessment of the person on whose behalf or for whose benefit the assets above referred to are held, or the recovery from such person of the tax payable in respect of such assets." (Sub-section (3) is not relevant. Hence not extracted). Sub-section (4) says "Notwithstanding anything contained in the foregoing provisions of this section, where the shares of the persons on whose behalf or for whose benefit any such assets are held are indeterminate or unknown, the wealth-tax shall be levied upon and recovered from the court or wards, .........or other person aforesaid, as the case may be, in the like manner and to the same extent as it would be leviable upon and recoverable from the individual who is a citizen of India and resident in India for the purposes of this Act, and - (a) at the rates specified in Part I of Schedule I; or (b) at the rate of three per cent. Whichever course would be more beneficial to the revenue." (The proviso and the Explanations are not necessary for the purpose of this case. Hence omitted). (Sub-sections (4A) and (5) and the Explanations thereto are also not necessary. Hence omitted).
It is clear from a reading of these provisions that the net wealth of every individual shall be chargeable to wealth-tax for every assessment year on the corresponding valuation date where the assets are held by a trustee on behalf of the beneficiary under an indenture of trust validly created. Section 21 empowers the assessing authority to make two modes assessments, viz., the beneficiary directly under sub-section (2) or the trustee under sub-section (1) respectively. When a beneficiary is sought to be assessed and his interest in the assets is sought to be brought within the net of the net wealth, what is sought to be assessed is the interest he has acquired under the trust. If the assessing authority chooses to exercise its power under sub-section (2) of section 21 and makes direct assessment of the net wealth of the person on whose behalf or for whose benefit the the assets have been held by the trustee, then to the extent so assessed, the corresponding power given to the assessing authority under sub-section (1) of section 21, by necessary implication "in the like manner and to the extent," is taken away, since what is exigible to wealth-tax is the interest in the assets held by the beneficiary. The trustee is only a representative in character for the benefit of the ultimate beneficiary. In a case where the beneficiaries are unknown or the right of the beneficiary is undetermined, then recourse to sub-section (4) of section 21 can be had. In a case where the beneficiaries are known and their interest is specified in the indenture of the deed of trust and their rights also are declared thereunder, then sub-section (4) need not be resorted to. Obviously, in this case, the assessing authority, viz., the Wealth-tax Officer in the first instance, admittedly has taken recourse to sub-section (2) of section 21 and made assessment for the relevant year directly on the beneficiaries on May 30, 1982. Thereafter, he ceased to have any power to take recourse to section 21 in respect of the same beneficial interest held by the beneficiaries to bring it within the net wealth of the beneficiaries under sub-section (1) of section 21. As held earlier, what is sought to be assessed is the beneficial interest but not the corpus. Therefore, when the Wealth-tax Officer exercised the power under sub-section (2) of section 21, then to that extent his power under sub-section (1) of section 21, by necessary implication, is taken out. The Appellate Assistant Commissioner has committed an obvious error in computing the corpus for the purpose of assessment of the wealth-tax of the beneficiary. In The Commissioner of Wealth Tax, Andhra Pradesh, Hyderabad Vs. Trustees of H.E.H. Nizam''s Family Hyderabad, Bhagwati J. (as he then was), speaking for their Lordships of the Supreme Court, while considering the scope of sub-sections (1) and (2) of section 21, held thus (p. 594) :
"The revenue has thus two modes of assessment available for assessing the interest of a beneficiary in the trust properties : it may either assess such interest in the hands of the trustee in a representative capacity under sub-section (1) or assess it directly in the hands of the beneficiary by including it in the net wealth of the beneficiary. What is important to note is that in either case what is taxed is the interest of the beneficiary in the trust properties and not the corpus of the trust properties."
At page 595, it was further illustrated thus :
"......take a case where property of the value of Rs. 10 lakhs is held in trust under which the income of the property is given to A for life and on his death, the property is to be divided equally between B and C. The beneficiaries in this case are clearly A, B and C, A having life interest in the trust property and B and C having equal shares in the remainder. The revenue has option to assess the beneficial interests of A, B and C in the trust property in the hands of the trustee or to make direct assessment on each of the three beneficiaries. If the trustee is assessed under sub-section (1) of section 21, three separate assessments would have to be made on him, one in respect of the actuarial valuation of the life interest of A, which may be, to take an ad hoc figure, say, Rs. 5 lakhs, and the other two in respect of the actuarial valuations of the remaindermen''s interests of B and C, which may be, to take again an ad hoc figure, say, Rs. 2 lakhs each. But as pointed out above, the revenue may, instead of assessing the trustee, proceed to make direct assessment on each of the three beneficiaries A, B and C and in that case, Rs. 5 lakhs, Rs. 2 lakhs and Rs. 2 lakhs would be included in the net wealth of A, B and C, respectively. The result would be that though the value of the corpus of the trust property is Rs. 10 lakhs, the assessments, whether made on the trustee or on each of the three beneficiaries, would be only in respect of Rs. 5 lakhs, Rs. 2 lakhs and Rs. 2 lakhs and the balance of Rs. 1 lakh would not be subject to taxation. In fact, in most cases, if not all, the aggregate of the values of the life interest and the remaindermen''s interest would be less than the value of the total corpus of the trust property, since the value of the remaindermen''s interest would be the present value of his right to receive the corpus of the trust property at an uncertain future date and this would almost invariably be less that the value of the corpus of the trust property after deducting the value of the proceeding life interest. The balance of the value of the corpus of the trust property would not, in the result, be subjected to assessment to wealth-tax. But that is the logical and inevitable effect of the scheme of section 21. Once it is established that a trustee of a trust can be assessed only in accordance with the provisions of section 21 and under these provisions, it is only the beneficial interests which are taxed in the handsof the trustee, it must follow as a necessary corollary that no part of the value of the corus in excess of the aggregate value of the beneficial interest can be brought to tax in the assessment of the trustee. To do so would be contrary to the scheme and provisions of section 21. It would be clearly erroneous to assess the trustee to wealth-tax on the excess of the value of the corpus over the actuarial valuations of the life interest and the reversionary interest of the beneficiaries."
The same ratio applies on all fours to the facts in this case as well. In the trust, the beneficial interest is only what is vested in the grandchildren of H.E.H. the Nizam, viz., the interest accrued from the corpus, and it was directed to be paid in the proportion as adumbrated in the beginning, that is, the only interest the beneficiaries would get under the trust and of which the trustees are obligated to make payment over to the beneficiaries. The Wealth-tax Officer, having exercised the power under sub-section (2) of section 21 and assessed the beneficial interest held by the beneficiaries in the trust property, as held earlier, is devoid of power to take recourse to sub-section (1) of section 21. The Appellate Assistant Commissioner further committed an error in computing the corpus also as the wealth of the beneficiaries in the hands of the trustees in a representative capacity. Thus considered, it must be held that the impugned assessments are clearly illegal. The Tribunal held that it may amount to double taxation, and if we consider from the above perspective, the conclusion cannot be said to be illegal. Accordingly we hold that the view taken by the Tribunal is perfectly legal. Accordingly we answer the reference in favour of the assessee and against the Revenue. In the circumstances, we direct each party to bear its own costs.