Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Rajnikant Gulabdas Sheth Family Trust on 2 January, 1987
Equivalent citations: [1987]20ITD668(AHD)
ORDER
U.T. Shah, Judicial Member
1. The revenue has come up in appeal against the order of the AAC wherein he has held that the assessee-trust was not assessable at the maximum marginal rate.
2. The assessee is a trust and is assessed in the status of an AOP. The assessment year is 1981-82 and the relevant previous year ended on 31-3-1981.
3. One Shri Pranlal Thakordas Shah had created two trusts, viz., Shri Pranlal Thakordas Trust and Rajnikant Gulabdas Family Trust as per will dated 10-3-1977. On 1-5-1979, Shri Pranlal Thakordas Trust was dissolved and its assets were distributed amongst the beneficiaries. During the relevant previous year, the assessee-trust was the only trust which was created under the will.
4. On the aforesaid facts, the assessee claimed before the ITO that it should be taxed at the normal rate as per first proviso to Section 164(1) of the Income-tax Act, 1961 ('the Act'). The ITO, however, assessed the assessee-trust at maximum rate with the following observations :
The assessee has claimed that the income of the trust is chargeable at the normal rate as per first proviso to Section 164(1) as none of the beneficiary is the beneficiary in other trust. The claim of the assessee under proviso to Section 164(1) fails as one of the beneficiaries, namely, Deviayaniben has got taxable income. Regarding the alternative claim of the assessee under second proviso to Section 164(1), the basic condition to be satisfied is that the relevant income is receivable under the trust declared by a 'will' and that trust is the only trust so declared. In this case the settlor had settled two trusts, viz., Pranlal Thakordas Trust and Rajnikant Gulabdas Trust. It is contended that the other trust, i.e., Pranlal Thakordas Trust was dissolved with effect from 1-5-1979 would not make any difference, so far as the creation of two trusts at the earlier stage. Further the trustees had no authority under the Indian Trusts Act, 1882 to dissolve the trust. Considering the above facts, claim of the assessee to tax the income at the normal rate is rejected and tax is charged at the maximum rate.
5. In appeal before the AAC, the assessee once again urged that it should be assessed at normal rate and not at maximum marginal rate as during the relevant accounting year there was only one trust under the will left by late Shri Pranlal Thakordas Shah. In this connection, it was stated that the other trust, viz., Shri Pranlal Thakordas Trust was dissolved by the trustees as under Clause 9(a) of the will, they were authorised to dissolve the trust and determine the shares of the beneficiaries as on the date of dissolution. Therefore, under proviso (ii) to Section 164(1), the ITO ought to have assessed the assessee at the normal rate. Relying on proviso (i) to Section 164(1), it was also submitted that since the beneficiaries of the assessee-trust were not beneficiaries of any other trust during the relevant accounting year, the assessee should have been taxed at the normal rate. In this connection the assessee pointed out to the AAC that proviso (i) to Section 164(1) contains two limbs and the assessee would be entitled to claim that it should be taxed at normal rate if it fulfils the conditions of one of the two limbs. It was, therefore, submitted that the fact that one of the beneficiaries, viz., Smt. Deviyaniben Rajnikant Shah had a taxable income would not debar the assessee to be taxed at normal rate.
6. The AAC in his order under appeal, accepted the first contention of the assessee but rejected the second one in the following manner :
I have considered the arguments of the appellant's counsel. I shall first consider the conditions regarding proviso (i) to Section 164(1). The section provides for charging of tax at the maximum marginal rate in case of a discretionary trust unless it is covered by the proviso to this section. It is true that in proviso (i) there are two limbs. Discretionary trust is not to be charged at maximum rate if the beneficiaries have no taxable income or they are not beneficiaries under any other trust. The proviso to Section 164(1) are introduced with a view to obviate hardship in genuine cases where the circumstances are such that evasion of taxes could not be considered to be the main purpose of creating the trust. Under these circumstances it was necessary to see that the beneficiaries had no taxable income nor they were beneficiaries under any other trust. It would be thus clear that to avail benefit of the proviso (i) it is necessary that both the conditions are fulfilled. Since one of the beneficiaries had a taxable income, the trust could not be entitled to benefit under proviso (i).
According to proviso (ii), the income is to be taxed at the normal progressive rate if it is a sole-discretionary trust declared under the will. In this case settlor had declared two trusts as per his will dated 10-3-1977. The trust came into existence after death of the settlor on 17-3-1977. On 1-5-1979, Pranlal Thakordas Trust was dissolved and the assets were distributed amongst the beneficiaries. The second proviso was modified by the Finance (No. 2) Act, 1980. It restricts the benefit of concessional rate of tax only to a trust which is the only discretionary trust created under the will. In this case two trusts were declared under the will much before this amendment came into force. Since the appellant expired long before and he had made provision for two trusts, the benefit under proviso (ii) could not be denied for all the time to come. Since one trust had been dissolved by the trustees who were so empowered under Clause 9(a) of the will and only one trust declared under the will was in existence in the account year, I hold that this trust was entitled to be assessed at the normal progressive rate applicable in the case of association of persons. It was entitled to the benefit of proviso (ii) to Section 164(1). The ITO was not justified in assessing total income of this trust at the maximum rate. He is, therefore, directed to modify the assessment as indicated above.
7. Being aggrieved by the order of the AAC, the revenue has come up in appeal before the Tribunal. The learned representative for the department strongly relied on the order of the ITO and submitted that the AAC was not justified in holding that by virtue of the provisions of proviso (ii) to Section 164(1) the assessee was not liable to tax at the maximum marginal rate as during the relevant accounting year there was only one trust under the will left by late Pranlal Thakordas Shah. According to the learned representative for the department, once two discretionary trusts are created under the will, there is no question of adopting normal rate of taxation merely because one of such trusts was not in existence in the relevant accounting year, He, therefore, urged that the order of the AAC should be reversed.
8. The learned Counsel for the assessee, on the other hand, strongly relied on the order of the AAC and submitted that the AAC was fully justified in accepting the assessee's submissions regarding the applicability of the provisions of proviso (ii) to Section 164(1). In this connection, he highlighted the fact that the other trust, namely, Shri Pranlal Thakordas Trust was dissolved on 1-5-1979, i.e., much before the introduction of Finance (No. 2) Bill, 1980 on 18-6-1980, in the Parliament. Therefore, no motive could be attached so as to apply maximum marginal rate in the assessee's case. In. this connection, he invited our attention to the relevant notes on clauses to the said Finance Bill which read as under :
Clause 27 seeks to amend Section 164 of the Income-tax Act relating to the taxation of discretionary trusts.
Sub-clause (a)(i) seeks to amend Sub-section (1) of Section 164. Under the existing provisions, the income received by the trustees of a discretionary trust is chargeable to income-tax at the flat rate of 65 per cent or the rate which would be applicable if such income were the total income of an association of persons, whichever course would be more beneficial to the revenue. Under the proposed amendment, the income received by the trustees of a discretionary trust would be chargeable at the rate of income-tax, including surcharge, applicable to the highest slab of income of an association of persons, as specified in the Finance Act of the relevant assessment year.
Sub-clause (a)(ii) seeks to amend the proviso to Sub-section (1) of Section 164. The first amendment seeks to provide that the provisions of Sub-section (1) will not apply to a discretionary trust in which none of the beneficiaries has any other income chargeable to income-tax and none of them is a beneficiary, in any other trust. For this purpose, none of the beneficiaries should have income assessable under the Income-tax Act exceeding the exemption limit for the relevant assessment year.
The second amendment seeks to amend Clause (ii) of the proviso to Section 164(1). Under the existing provisions, where a discretionary trust is declared under a will, the income of the discretionary trust is charged to tax at the rates applicable to an association of persons and not at the flat rate of 65 per cent. Under the proposed amendment, the benefit of concessional tax treatment will be withdrawn if the person declaring such trust has declared any other trust by will.
9. He also invited our attention to the relevant portion of the memorandum explaining the provisions of the said Finance Bill, which read as under :
Experience has, however, shown that the provisions of Section 164 have not been fully effective in curbing the use of private trusts for avoiding the proper tax liability. It is accordingly proposed to make the following amendments in Section 164 with a view to curbing tax avoidance through the medium of such trusts :
(i) It is proposed to provide that a discretionary trust will be liable to tax at the maximum marginal rate of income-tax. As a result, the entire income of a discretionary trust will be liable to tax at the maximum marginal rate of income-tax (including surcharge) applicable, under the Finance Act of the relevant year, to the highest slab of income in the case of an association of persons.
(ii) As already stated, the existing provision relating to the levy of the flat rate of 65 per cent does not apply in a case where none of the beneficiaries of the trust has any other income chargeable to income-tax. This special dispensation has been misused by the creation of a large number of discretionary trusts, the beneficiaries of which do not have any other income chargeable to income-tax. With a view to ensuring that the provision is not misused in this manner, it is proposed to provide that the discretionary trust would be liable to tax at the maximum marginal rate unless none of the beneficiaries has any other income chargeable to tax under the Act nor is he a beneficiary under any other private trust. It is also being clarified that, in this context, income chargeable to tax would mean total income above the exemption limit for the relevant year.
(iii) At present, where a discretionary trust is created under a will, the income of the discretionary trust is charged to tax at the rates applicable to an association of persons and not at the flat rate of 65 per cent. This provision was originally made with a view to relieving hardship in a case where a person genuinely creates one discretionary trust by will for the benefit of his near relations. However, it has been observed that this provision has been misused to a large extent by persons creating a number of discretionary trusts by will. It is accordingly proposed to withdraw the benefit of concessional tax treatment in the cases where a person has created more than one discretionary trusts by will.
10. He, therefore, urged that keeping the aforesaid background in proper perspective, the AAC was fully justified in accepting the assessee's submission that during the relevant time, there was only one discretionary trust created by the will.
11. In support of his aforesaid submissions, he also relied on certain observations made by the Hon'ble Supreme Court in the following cases :
1. CIT v. J.H. Gotla [1985] 156 ITR 323 :
Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning. (p. 339)
2. Saroj Aggarwal v. CIT [1985] 156 ITR 497 :
. . . Facts should be viewed in natural perspective, having regard to the compulsion of the circumstances of a case. Whether it is possible to draw two inferences from the facts and where there is no evidence of any dishonest or improper motive on the part of the assessee, it would be just and equitable to draw such inference in such a manner that would lead to equity and justice. Too hypertechnical or legalistic approach should be avoided in looking at a provision which must be equitably interpreted and justly administered. It is true that there must be succession by inheritance. But it is possible in a particular case without any express provision either in the deed or in writing to infer from the conduct of the parties that there was succession, and if such a view is possible in spite of the absence of an express provision, in our opinion, such an inference could be and should be drawn. Courts should, whenever possible, unless prevented by the express language of any section or compelling circumstances of any particular case, make a benevolent and justice-oriented inference. Facts must be viewed in the social milieu of a country, (p. 508)
3. Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 :
The principle that fiscal statutes should be strictly construed does not rule out the application of the principles of reasonable construction to give effect to the purpose or intention of any particular provision as apparent from the scheme of the Act, with the assistance of such external aids as are permissible under the law." (p. 603)
12. According to the learned counsel for the assessee, even under proviso (i) to Section 164(1), the assessee would be entitled to claim that it should be assessed at normal rate. In this connection, he submitted that under the said proviso a discretionary trust has to be taxed at normal rate if none of its beneficiaries has any other income chargeable under the Act or none of its beneficiaries is a beneficiary under any other trust. The learned Counsel for the assessee was fair enough to state that one of the beneficiaries of the assessee-trust, Smt. Deviyaniben Rajnikant Shah, had a taxable income. However, he hastened to state that since the said beneficiary was not a beneficiary under any other trust, the assessee would be entitled to claim that its income should be taxed at normal rate. He, therefore, urged that the AAC was not justified in holding otherwise.
13. We have carefully considered the rival submissions of the parties. At this juncture, it would be necessary to reproduce below the relevant portion of Section 164 :
(1) Subject to the provisions of Sub-sections (2) and (3), where any income in respect of which the persons mentioned in Clauses (iii) and (iv) of Sub-section (1) of Section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as 'relevant income', 'part of relevant income' and 'beneficiaries', respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate :
Provided that in a case where--
(i) none of the beneficiaries has any other income chargeable under this Act exceeding the maximum amount not chargeable to tax in the case of an association of persons or is a beneficiary under any other trust ; or (7) the relevant income or part of relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him ; or
(iii) and (iv) ** ** ** tax shall be charged on the relevant income or part of relevant income as if it were the total income of an association of persons.
14. On the plain reading of the aforesaid provisions of the Act, we are of the view that the AAC was fully justified in holding that by virtue of proviso (ii) to Section 164(1) the assessee would be required to be taxed at normal rate." It is no doubt true that initially under the will two discretionary trusts were created by late Pranlal Thakordas Shah. However, much prior to the introduction of Finance (No. 2) Bill, on 18-6-1980, Shri Pranlal Thakordas Trust was dissolved on 1-5-1979 with the result that during the relevant accounting year, there was only one discretionary trust created under the will. Keeping in mind the aforesaid observations of the Hon'ble Supreme Court, we are of the view that the provisions of proviso (ii) to Section 164(1) have to be construed reasonably and not in the manner, the ITO has construed. Since there was only one discretionary trust created under the will, we are of the view that the AAC was fully justified in holding that maximum marginal rate was not applicable to the assessee.
15. As regards the assessee's submission in respect of the provisions of proviso (i) to Section 164(1), it is not necessary for us to express any opinion as the assessee has not preferred any appeal/cross objection against the order of the AAC.
16. In the result, the appeal is dismissed.