Rai Saheb Seth Ghisalal Modi Family Trust vs Commissioner of Income Tax

R.K. Vijayvargiya, J.—As directed by this Court by order, dated 16-10-1980, passed in Misc. Civil Case Nos. 62 and 63 of 1977, the Tribunal, Indore Bench, has referred the following questions of law for the opinion of this Court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the trust was not invalid?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income tax Officer had not exercised the option to include the income from the trust in the hands of the beneficiaries?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that if shares of the beneficiaries were not specified in the trust deed, they would be held as indeterminate and the provisions of section 164(1) of the Act were attracted?

The facts giving rise to this reference briefly stated are as follows: Rai Saheb Seth Ghisalal Modi Family Trust, Indore, of which the asses-sees are the trustees was originally created by a trust deed, dated 28-5-1969, by Smt. Krishnabai wife of Ghisalal and Shri Ramkaran son of Shri Ghisalal Modi. The trust was created for the benefit of the four sons of Shri Girdharilal and grandsons of Shri Ramkaran, who were all minors at the relevant time. The trust was to continue till the youngest beneficiary attained the age of majority. Thereafter the property of the trust was directed to be equally distributed among the beneficiaries. The trustees were required to preserve the income and corpus of the trust and they were authorised to spend only so much out of the income of the trust as was necessary for meeting the essential requirements of the beneficiaries and for their overall advancement only. The shares of the beneficiaries in the income of the trust were not specified in the trust deed.

The ITO assessed the assessee-trust u/s 164(1) of the income tax Act, 1961 (''the Act''), holding that the shares of the beneficiaries of the trust were indeterminate. The appeals preferred by the assessee to the AAC and the Tribunal were unsuccessful. The Tribunal negatived the contentions of the assessee that the trust was invalid, that the shares of the beneficiaries were determinate, and that the ITO by assessing the income of the trust in the hands of the beneficiaries was precluded from assessing the assessee-trust. On the last-mentioned contention, the Tribunal held that in fact the ITO did not exercise his option as contended by the assessee. The assessee submitted an application for referring questions of law arising out of the order of the Tribunal. This application was rejected by the Tribunal. The assessee then submitted an application to this Court for a direction to the Tribunal to refer questions of law arising out of the order of the Tribunal. This application was allowed by this Court and, as directed by this Court, the Tribunal has referred the aforesaid questions of law for the opinion of this Court.

As regards Question No. 1, it was contended by the learned counsel for the assessee that the trust was invalid because the property settled by one of its authors, viz., Shri Ramkaran was ancestral property in the hands of Ramkaran qua his son Girdharilal and as such he had no power to create a trust with respect to his share in the property. This contention has no force. The admitted facts, as recorded by the Tribunal, are that the property which Ramkaran got on the death of his father Ghisalal and which has been settled on trust was the individual property of Ghisalal received by him on partition. Ramkaran succeeded to this individual property of Ghisalal u/s 8 of the Hindu Succession Act, 1956. Thus, if the property inherited by Ramkaran was the individual property of his father Ghisalal, it is difficult to appreciate how it became ancestral property in his hands. Ramkaran had full disposing power over the property inherited by him from Ghisalal and the trust created by him in respect of the said property does not suffer from any infirmity. Thus, on the facts and in the circumstances of the case, the Tribunal was fully justified in holding that the trust was not invalid. Question No. 1 is, accordingly, answered in the affirmative and against the assessee.

As regards Question No. 2, the Tribunal held that the assessment of the beneficiary Arunkumar for the assessment year 1971-72 was made by the ITO u/s 143(1) of the Act and the assessments in the cases of the beneficiaries Rajkumar, Nandkishore and Surendrakumar were made in which their income from the trust was included in their returns. For the assessment year 1972-73, the assessment of the beneficiary Nandkishore was made u/s 143(1). The Tribunal held that the ITO did not exercise his option by assessing the beneficiaries individually on the ground that the ITO specifically stated that they were subject to rectification on completion of the assessment in the case of the trust.

The learned counsel for the assessee relying upon the decisions in (1966) 60 ITR 95 (SC) and GIRDHARI LAL LAXMAN PRASAD Vs. COMMISSIONER OF Income Tax, U. P., , contended that the Tribunal was not justified in holding that the ITO did not exercise his option merely because in the assessment order he stated that the orders were subject to rectification. The contention of the learned counsel for the assessee is well founded.

In Murlidhar Jhawar & Puma Ginning &'' Pressing Factory''s case (supra), the ITO assessed the three persons who were parties to a joint venture as individuals and included their share of income from the joint venture in their individual assessments. Thereafter, the ITO. assessed the three parties to the joint venture as an unregistered firm. On these facts, the Tribunal held that the ITO had the option to assess the individual parties to the joint venture and he having exercised that option, it was not open to him thereafter to reassess the same income collectively in the hands of the three parties to the joint venture in the status of an unregistered firm. The Supreme Court upheld the order of the Tribunal. The Supreme Court also negatived the contention that the assessments in the first instance were provisional and, therefore, it could not be said that the ITO had exercised his option. The Supreme Court held as follows:

...Again the order of the income tax Officer clearly indicates that he was cognizant of the fact that the income of the joint venture was taxable collectively, but he thought that he could in law in the first instance make an ''assessment provisionally'' of the three parties separately and then rectify the assessments later. In so holding the income tax Officer may have committed an error of law, but he does not appear to have laboured under an ignorance of facts...." (p. 99)

In the present case also, the ITO while assessing the beneficiaries very well knew that they had a share in the trust and that as the shares of the beneficiaries were but specified, the trust was liable to be assessed u/s 164(1). In spite of this the ITO assessed the beneficiaries individually by including their shares of income in the trust. The assessments were not provisional, properly so-called. From the mere fact that the ITO stated in the assessment orders that they were subject to rectification, it cannot be held that he did not exercise his option.

In Girdhari Lal Laxman Prasad''s case (supra), the ITO completed the assessment of two of the partners of the assessee-firm which consisted of three partners taking their share in accordance with their returns subject to the same being rectified later when the correct share was determined in the assessment of the assessee-firm. Subsequently, the ITO made an assessment on the firm as an unregistered firm. On these facts, a Division Bench of the Allahabad High Court held that the ITO had elected to tax the profits in the hands of the individual partners although it was specifically stated in the order as stated above that the assessment was subject to rectification later, when the correct share was determined in the assessment of the assessee-firm.

We are, therefore, of the opinion that on the facts and in the circumstances of the case, the Tribunal was not justified in holding that the ITO had not exercised the option to include the income from the trust in the hands of the beneficiaries. Question No. 2 is, therefore, answered in the negative and in favour of the assessee.

As regards Question No. 3, the learned counsel for the assessee contended that as the shares of the beneficiaries in the trust property were equal and it was to be divided equally on completion of the trust, it cannot be held that their shares in the income of the trust were indeterminate. This contention has no force. In order to attract the provisions of section 164(1), the shares of the beneficiaries in the corpus of the trust is not relevant. What has to be seen is whether their shares in the income of the trust are determinate. As held by the Tribunal, by the trust deed the trustees were required to preserve the income and corpus of the trust and they were authorised to spend only so much out of the income of the trust as was necessary for meeting the essential requirements of the beneficiaries and for their overall advancement only. On a bare reading of the trust deed, it is clear that the shares of the beneficiaries in the income of the trust are not determinate and the trustees were authorised to spend only so much income of the trust as was necessary for meeting essential requirements of the beneficiaries, which from the nature of things were bound to be unequal, and for their overall advancement. The trustees were not required to spend equally on the beneficiaries but according to their needs. In the circumstances, the Tribunal did not commit any error in holding that the shares of the beneficiaries in the trust were not specified and were indeterminate and in holding that the provisions of section 164(1) were attracted.

The decisions in Commissioner of Wealth-tax Vs. Trustees of the Estate of V.R. Chetty and Brothers, Shrivallabhdas Modani Vs. Commissioner of Income Tax, , Commissioner of Income Tax, West Bengal Vs. Bhim Chandra Ghosh, ), SRI SRI JYOTISHWARI KALIMATA AND OTHERS Vs. COMMISSIONER OF INCOME TAX, BIHAR and ORISSA., COMMISSIONER OF Income Tax, WEST BENGAL Vs. PULIN BEHARI DEY., and COMMISSIONER OF Income Tax, WEST BENGAL Vs. SM. ASHALATA DEVI., relied upon by the learned counsel for the assessee in support of his contention are distinguishable on facts and it is not necessary to discuss them in detail. Our answer to Question No. 3 is, therefore, in the affirmative and against the assessee. The reference is answered accordingly. In the circumstances, the parties shall bear their own costs of this reference.