Income Tax Appellate Tribunal - Madras
Income-Tax Officer vs Smt. J. Kasturi Bai on 23 September, 1987
Equivalent citations: [1988]26ITD126(MAD)
ORDER
T.N.C. Rangarajan, Judicial Member
1. These appeals by the Revenue are directed against the order of the AAC deleting the income of a trust from the total income of the assessee.
2. The admitted facts are as follows. The assessee was a partner in a firm called Veerarajendra Combines. On 5-3-1976 she declared her interest in the firm as a trust property held by her for the benefit of certain beneficiaries named in that document. Some of those beneficiaries were minors. The document provided that the beneficiaries will have beneficial interest not only in the corpus or capital invested in the firm but also in the profits arising therefrom less any loss incurred by the use of those funds in the business carried on by the firm. It further provided that the net profits or losses shall be duly credited or debited to the account of the beneficiaries and the beneficiaries shall be entitled to the net amount as and when they desire payment. Later on 22-3-1980, a deed of rectification was executed by the assessee clarifying that the losses debited to the beneficiaries' account shall be adjusted against the income credited for the earlier years and unadjusted losses shall be adjusted against the share of income for subsequent periods such that if there is any balance of unadjusted losses the same shall be deducted from the capital fund upon dissolution of the trust and in no event the beneficiary will be personally liable for the losses of the trust or to the net debit in excess of the share capital of the corpus attributable to the beneficiary. It was further stated that since the principal deed did not reflect the real intention of the author of the trust it was declared that this rectification clarified the intention from the date of the execution of the principal deed.
3. On these facts, the ITO was of the opinion that the principal deed burdened the minor beneficiaries with the losses of the firm and, therefore, did not constitute a proper gift and consequently the trust deed was invalid. The ITO was also of the view that the rectification could not have a retrospective effect and hence the income arising from the trust up to the date when the rectification deed was executed must necessarily belong to the assessee. On appeal, however, the AAC was of the opinion that the rectification only clarified the real intention of the author of the trust and since the trust did not burden the beneficiary with anything more than the corpus, it was not an onerous gift and must therefore be accepted as a valid creation of a trust. He, therefore, held that the income belonged to the trust and consequently it should be excluded from the total income of the assessee.
4. The Revenue is in appeal to contend that there cannot be a retrospective amendment of the instrument in writing and, therefore, the principal deed should be read without reference to the rectification deed. Secondly, it was argued that in terms of the principal deed the beneficiaries especially the minors were burdened with losses of the firm without limit and hence there was no valid creation of a trust which divested the assessee of the income from the share in the firm. On the other hand, it was contended on behalf of the assessee that the rectification was only clarificatory of the real intention and, therefore, operative along with the terms of the principal deed. It was submitted that even otherwise there was only a gift of an asset subject to the risk of loss which by itself could not invalidate the gift even though it was given to the minors. It was submitted that in the circumstances, the order of the AAC should be confirmed.
5. On a consideration of the rival submissions, we are of the opinion that there are no merits in these appeals. The first question is whether the rectification deed operates to amend the principal deed from the very inception or only from the date of the rectification deed. It is one thing to say that a deed will be amended by stating certain conditions or facts which did not exist at the time when the principal deed was executed. It is well known that the agreement cannot alter the position before it was executed. "It is beyond the powers of the Gods to alter the past." (See British Tax Encyclopaedia, page 1226, para 1466). It is only in statutes that we have the deeming provisions creating fictions relating to facts which did not exist at the time and applying the law retrospectively to a period of time when such provisions were not on the statute book. Such deeming provisions having retrospective effect are a familiar part of the taxing statutes, but such is not the case in the case of agreements between parties. However, it is quite different thing to say that an agreement will be amended by the parties to record either a statement of a fact or certain conditions or intentions which were in the mind of the parties but which had been omitted to be recorded while drawing up the principal deed. This situation is recognised by the provisions of the Specific Relief Act by Section 26 which states that if any instrument in writing does not express the real intention, then, either party may institute a suit to have the instrument rectified and then specifically enforced. In the present case, if the author had not rectified the principal deed it is quite apparent that the beneficiaries could have gone to court Under Section 26 of the Specific Relief Act for having the principal deed rectified so that the real intention namely that the losses shall not exceed the corpus given to the minors be incorporated in the principal deed. When such a plea is taken and the court finds that the principal deed does not reflect the true intention of the parties there is no bar to the relief of rectification retrospectively even if it involves a tax advantage to the parties. See Whiteside v. Whiteside [1949] 2 All E.R. 913 and Re Colebrook's Conveyances [1973] 5 All B.R. 132. In the present case a reading of the principal deed itself indicate(s) that the failure to limit the losses that may arise from the interest in the firm to the capital invested in the firm and declared as a trust, was an inadvertent omission because there is nothing specific in the principal deed to indicate the contrary intention that the beneficiary should also bear losses beyond the capital held in trust. The Supreme Court has observed in the case of J.K. Trust v. CIT [1957] 32 ITR 535 that in law there is no objection to creating a trust over property burdened with obligations, though, if it is onerous by reason of such obligations, the trustee may be entitled to disclaim it. In the present case, since the author herself was the trustee, she could not hold the properties in trust on behalf of the minor beneficiaries if it was onerous and hence it is obvious that the original intention itself was only to declare the interest in the firm which may be subject to the risk of enterprise as held in trust but not to the extent of burdening the beneficiaries with any unlimited losses beyond the corpus. Hence, we are satisfied that the rectification being clarificatory, amended the provisions of the principal deed from the inception and, therefore, the principal deed has to be read along with the rectification deed.
6. The second question that arises is reading the principal deed along with the rectification deed, was there valid trust of the property ? The objection of the Revenue is that the property conveyed being an interest in the firm which is subject to losses the subject-matter itself was a liability and, therefore, an onerous gift to the minors who could repudiate it on becoming majors, was not a validly constituted trust. As we have seen before what was conveyed to the trust was only a share in the firm. In other words, the assessee continued to be a partner in the firm and instead of holding the capital and receiving the income on her own behalf she held the capital and received the income on behalf of the beneficiaries. The partner has changed her character vis-a-vis the beneficiaries although the other partners in the original partnership are not affected by the change that has taken place. All that has happened is that a partner has created a superior title and has diverted the income from the firm as the income of the trust. The question that arises is whether by this transaction there was an onerous gift which could be avoided by the beneficiaries who are minors, on attaining majority. Under Section 127 of the Transfer of Property Act where a gift is burdened by an obligation the donee can take nothing unless he accepts it fully and further a donee not competent to contract and accepting property burdened by any obligation is not bound by its acceptance, unless after becoming competent to contract and being aware of the obligation he retains the property and becomes so bound. Therefore, with regard to the beneficiaries, who are minors, we have to first find whether the property was burdened before we can say whether the minors could avoid the trust before they attained majority so as to say that the trust was invalid during their minority.
7. As we have seen before the author of the trust continued to be a partner and holds her share in the firm in trust for the beneficiaries. As a partner, she is agent of the firm and Under Section 25 of the Partnership Act she is liable jointly with all other partners for all acts of the firm. Thus, her liability is unlimited. But under the terms of the deed as amended, the liability or loss which the beneficiaries have to bear has been limited to the corpus held in trust. Thus, the effect of the document is that minor beneficiaries are not burdened with any liability other than the possibility of losing the corpus. As observed by the Gujarat High Court in CIT v. Keshavlal Prabhudas Shah [1981] 131 ITR 229 "a mere risk or possibility of the firm suffering losses in future will not and cannot convert the share in the firm from an asset to a liability". It follows that the property was not burdened by any obligation and hence, the acceptance of the minor benche aries was not a condition precedent for the validity of the trust. In the constances, we are convinced that the AAC is right in finding that the trust was valid and consequently the income arising to the trust should be excluded from the total income of the assessee. His order is confirmed.
8. In the result, the appeals are dismissed.