Income Tax Appellate Tribunal - Madras
Cumi Employees' Welfare Trust vs Wealth-Tax Officer on 28 September, 1998
Equivalent citations: [1999]69ITD159(MAD)
ORDER
Shri T.N.C. Rangarajan (Judicial Member)
1. These appeals reiterate the claim that the unspent contribution of Rs. 1.4 lakh given by M/s. Carborandum Universal Ltd. should be excluded from the net wealth of the assessee.
2. The assessee is an irrevocable trust set up by M/s. Carborandum Universal Ltd. for the welfare of its employees. The first contention of the assessee is that it is a public charitable trust and therefore the net wealth of the assessee is exempt under section 5(1)(i) of the Wealth-tax Act. The question whether the employees of a company could be regarded as a section of public so as to treat the trust as a public charitable trust has been the subject of a few decisions. The decisions in the cases of CIT v. Andhra Pradesh Police Welfare Society [1984] 148 ITR 287/16 Taxman 111 (AP) and Saklhi Charitiesv. CIT [1984] 149 ITR 624/19 Taxman 100 (Mad.) are against the assessee. The decision in the case of CIT v. Escorts Employees' Welfare Trust [1989] 175 ITR 105/[1990] 49 Taxman 286 (Delhi) only states that a question of law arises where such a trust is treated as a public charitable trust by the Tribunal. In this background it appear that the assessee cannot succeed on this point.
3. The facts relevant to the second contention of the assessee are as follows : The provisions of Income-tax Act originally allowed in the hands of the company the contribution made to the trust as an expenditure laid out for the purpose of business. The Finance Act, 1984 however introduced sections 40A(9), 40A(10) and 40A(11) with retrospective effect from 1-4-1980. Sub-section (9) provided that the contributions made by the company to the trust for providing a provident fund or gratuity or other benefit to the workmen will not be allowed as a deduction. Sub-section (10) stated that the amounts spent by the trust before 1st March, 1984 will be treated as an expenditure made by the company for the purpose of its income-tax assessment. Sub-section (11) provided that the company may claim repayment of unutilised contribution and when the claim is made the amount shall be repaid. By a resolution dated 23-8-1994 Carborandum Universal has made such a claim for the repayment of the unutilised contribution of Rs. 14 lakhs. The assessee therefore claims that this amount should be deducted in computing the net wealth as on the valuation dates 30-6-1982, 30-6-1983 and 30-6-1984 relevant to the assessment years 1983-84, 1984-85 and 1985-86. The authorities below rejected this claim on the ground that the company had not claimed the repayment of the amount before the valuation dates and therefore there was no outstanding liability which could be deducted as on the valuation dates.
4. In the further appeals before us it was contended on behalf of the assessee that since the section had retrospective effect from 1-4-1980 the assessee must be deemed to have lost title to the funds as soon as the claim was made under sub-section (11) of section 40A. It was urged that full effect should be given to the legal fiction contained in section 40A(9), (10) and (11). On the other hand, it was contended on behalf of the Revenue that in terms of sub-section (11) the amount was payable only when the claim was made by the company and until then there was no liability which could be taken into account as on the valuation dates.
5. On a consideration of the rival submissions we are of the opinion that the assessee must be given the benefit of the retrospective operation of this section. The point for determination is whether the properties to which Carborandum Universal could make a claim under section 40A(11) of the Income-tax Act could not be regarded as belonging to the assessee trust for the purpose of Wealth-tax Act even from 1-4-1980 when that section came into operation retrospectively, or only from the date when the claim was made under that section. Supreme Court has explained in the case of Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888/28 Taxman 641 that the expression 'belonging to' is different from ownership' and the liability to wealth-tax arises because of the belonging of the asset, and not otherwise. Mere possession, or joint possession, unaccompanied by the right to be in possession or ownership of property, would, therefore, not bring the property within the definition of 'net wealth' for it would not then be an asset 'belonging' to the assessee. In that context the Supreme Court noted Salmond's conception of 'ownership' in the following passage :-
"Ownership', according to Salmond, denotes the relation between a person and an object forming the subject-matter of his ownership. It consists of a complex of rights, all of which are rights in rem, being good against all the world and not merely against specific persons. Firstly, Salmond says, the owner will have a right to possess the thing which he owns. He may not necessarily have possession. Secondly, the owner normally has the right to use and enjoy the thing owned; the right to manage it, i.e. the right to decide how it shall be used; and the right to the income from it. Thirdly, the owner has the right to consume, destroy or alienate the thing. Fourthly, ownership has the characteristic of being indeterminate in duration. The position of an owner differs from that of a non-owner in possession in that the latter's interest is subject to be determined at some future time. Fifthly, ownership has a residuary character.' Keeping these principles in view we have to consider how the provisions of section 40A(9), (10) and (11) of the Income-tax Act affected the assets belonging to the assessee.
6. As we have seen above, the section was introduced by the Finance Act, 1984 with retrospective effect from 1-4-1980. The principles applicable to the construction of statutes with respect to retrospective operation have been adumbrated by the Supreme Court in the case of Mithilesh Kumari v. Prem Behari Khare [1989] 177 ITR 97/44 Taxman 45 in the following passage :-
"Retrospective operation is not to be given to a statute so as to impair existing right or obligation, otherwise than as regards matter of procedure unless that effect cannot be avoided without doing violence to the language of the enactment. Before applying a statute retrospectively, the Court has to be satisfied that the statute is in fact retrospective. The presumption against retrospective operation is strong in cases in which the statute, if operated retrospectively, would prejudicially affect vested rights or the illegality of past transactions, or impair contracts, or impose a new duty or attach a new disability in respect of past transactions or consideration already passed. However, a statute is not properly called a retrospective statute because a part of the requisites for its action is drawn from a time antecedent to its passing. The court must look at the general scope and purview of the statute and at the remedy sought to be applied, and consider what was the former state of law and what the legislation contemplated. Every law that takes away or impairs rights vested agreeably to existing laws is retrospective and is generally unjust and may be oppressive. But laws made justly and for the benefit of individuals and the community as a whole may relate to a time antecedent to their commencement. The presumption against retrospectivity may, in such cases, be rebutted by necessary implication from the language employed in the statute. It cannot be said to be an invariable rule that a statute could not be retrospective unless so expressed in the very terms of the section which had to be construed. The question is whether, on a proper construction, the Legislature may be said to have so expressed its intention.
When an Act is declaratory in nature, the presumption against its retrospectivity is not applicable."
7. Let us now consider the legislative history to find out the scope and purview of the statute and the remedies sought to be applied with reference to the former state of the law and what the legislation contemplated. The Finance Minister in his Budget Speech [146 ITR (St.) 65 at 68] stated -
"Another undesirable practice noticed is the tendency of some corporate bodies to make large contributions to the so-called welfare funds. I further understand that utilisation of these funds is discretionary and subject to no discipline. I am, therefore, providing that deductions will be available only in respect of contributions to such funds as are established under statute or an approved provident fund, superannuation fund or gratuity fund. I am making this change with retrospective effect to avoid unnecessary litigation."
The Finance Bill provided by clause 10 the introduction of sub-section (9) only in the following terms :-
"(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up of, or as contribution to, any fund or trust for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36 or, as required by or under any other law for the time being in force."
However, the Fina nee Act introduced three sub-sections as follows :-
"(c) after sub-section (8), the following sub-sections shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1980, namely :-
'(9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution, for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36, or, as required by or under any other law for the time being in force.
(10) Notwithstanding anything contained in sub-section (9) where the Income-tax Officer is satisfied that the fund, trust, company, association of persons, body of individuals, society or other institution referred to in that sub-section has, before the Ist day of March, 1984, bona fide laid out or expended any expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee referred to in sub-section (9) out of the sum referred to in that sub-section, the amount of such expenditure shall, in case no deduction has been allowed to the assessee in respect of such sum and subject to the other provisions of this Act, be deducted in computing the income referred to in section 28 of the assessee of the previous year in which such expenditure is so laid out or expended, as if such expenditure had been laid out or expended by the assessee.
(11) Where the assessee has, before the 1st day of March, 1984, paid any sum to any fund, trust, company, association of persons, body of individuals, society or other institution referred to in sub-section (9), then, notwithstanding anything contained in any other law or in any instrument, he shall be entitled -
(i) to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust, company, association of persons, body of individuals, society or other institution (such amount being hereinafter referred to as the unutilised amount) be repaid to him, and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him;
(ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or other institution out of the sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be transferred, as soon as may be, to him'."
The Memorandum explaining this amendment stated as follows (Circular No. 387, dated 6-7-1984) :-
"Imposition of restrictions on contributions by employers to non-statutory funds -
16.1 Sums contributed by an employer to a recognised provident fund, an approved superannuation fund and an approved gratuity fond are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, association of persons, body of individuals, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or on approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law.
16.3 With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, etc., the amendment has been made retrospectively from 1st April, 1980. However, in order to avoid hardship in cases where such trusts, funds, etc., had, before 1st March, 1984, bona fide incurred expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee out of the sums contributed by him, such expenditure will be allowed as deduction in computing the taxable profits of the assessee in respect of the relevant accounting year in which such expenditure has been so incurred, as if such expenditure had been incurred by the assessee. The effect of the italicised words will be that the deduction under this provision would be subject to the other provisions of the Act, as for instance, section 40A(5), which would operate to the same extent as they would have operated had such expenditure been incurred by the assessee directly. Deduction under this provision will be allowed only if no deduction has been allowed to the assessee in an earlier year in respect of the sum contributed by him to such trust, fund, etc. 16.4 The Finance Act has also provided that notwithstanding anything contained in any other law for the time being in force or in the instrument creating the trust or fund, the assessee may, at his option, claim that the unexpended amount shall be returned by the trustee to the assessee as early as possible. The assessee may also claim that any asset being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company, association of persons, body of individuals, society or any other institution out of the sums paid by the assessee be transferred to the assessee as early as possible.
16.5 The aforesaid provisions take effect retrospectively from 1st April, 1980 and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. [Section 10(c) of the Finance Act]"
8. A study of this legislative background shows that Parliament was aware of the inequity of disallowing the expenditure allowed in respect of an irrevocable trust and provided that even the balance of the amount unspent will be treated as belonging to the company which created the irrevocable trust. In other words, the effect of these three sections is to statutorily revoke the irrevocable trust created by the company. This intention is manifest by the provisions of sub-section (11) which provides that the company can take back not only the amount unutilised but also claim any assets held by the trust and have it transferred to itself. It may be kept in mind that under sub-section (9) the amount bona fide laid out or expended in any expenditure wholly and exclusively for the welfare of the employees is treated as the expenditure of the company and under section 11 the amount which has not been so laid out or expended shall be repaid to the company. Thus the expenditure and the unutilised amount form two sides of the coin and cover the entire assets held in trust under the irrevocable trust. In this situation if we apply the tests of ownership given in Salmond, it will be seen that every one of those tests are satisfied with reference to the company and in the case of the trust the tests fail even w.e.f. 1-4-1980. The conclusion that is irresistible is that the trust ceased to be the owner of the fund from 1-4-1980 and that the irrevocable trust was in effect revoked by statute.
9. It was argued on behalf of the revenue that under sub-section (11) the company is entitled to repayment of the amount only when it makes a claim and, therefore, if no claim is made, the fund continues to remain that of the trust. This argument does not arise on the facts of the present case since a claim had been made by the company and we are only concerned with the question whether the claim relates to the ownership of the fund from 1-4-1980 or only from the date of the claim. Even otherwise, under sections 5 and 6 of the Specific Relief Act, a trust will have no defence for any action to recover the properties. Under the law three distinct actions could be brought for recovery of specific immovable property : suit based on possessory title, suit based on title of ownership and suit by privilege of previous possession. In the present case if the company were to sue the trust, it could be only on title because it had no possessory title or previous possession until the Finance Act was passed in 1984. Similarly, a person who does not have a right to possession of movable property cannot maintain a suit and the right of the company to possession is based only on section 40A(11), which supersedes the right of the trust based on the trust deed. In order to find out whether that pre-existing title or right to possession extended prior to the enactment of the Finance Act, 1984 we have only to see the effect of the section on transactions of the trust prior to that date. For instance, if the trust had alienated the property acquired with the sum paid by the company, the provisions of section 11 do not enable such property to be traced and transferred back. This is because while sub-section (9) treates only expenditure laid out for the benefit of the employees as the expenditure of the company and sub-section (11) allows a claim for repayment of the unutilized contribution, whether held in moneys or in the form of other assets, there is nothing in these sub-sections with reference to other expenditure incurred by the trust for the administration of the trust or even alienation made by the trust. This situation is analogous to creation of benami transaction within the scope of section 82 of the Indian Trusts Act. The direct consequence of such a situation would be to treat the trust as benami for the company from the date on which section 40A(9), (10) and (11) came into force.
10. The situation is further complicated by the promulgation of the Benami Transactions (Prohibition) Act, 1988 (174 ITR St-37). This Act repeals section 82 of the Trusts Act. Supreme Court has now held in the case of Mithilesh Kumari (supra) that this Act is retrospective and must be applied to all transactions prior to the date of coming into force of that Act. The result will be that the trust as ostensible owner will have to be recognised and the provisions of section 40A(9), (10) and (11) to the extent they created benami transactions would have to be abandoned. Since those sections also remain in the statute, the only way of harmoniously reading the two enactments is to consider the effect of section 40A(9), (10) and (11) as converting the trust into an agency. If we regard the effect of section 40A(9), (10) and (11) to be that the trust is revoked w.e.f. 1980 and is treated as an agent of the company from that date onwards, then it will be seen that it fulfils all the conditions required for treating the expenditure incurred by the trust as the expenditure of the company, taking back the property held by the trust by the company whenever it makes a claim and consenting to all other expenditure as an expenditure validly incurred by the trust as an agent. This also provides a legal basis for enforcing the claim to take back the property, which will otherwise be absent. It also recognises the continued existence of the trust until the entire property is taken back by the company as a legally valid institution. To our mind, therefore, only proper resolution of this conflict between the provisions of Income-tax Act and the Benami Transactions (Prohibition) Act is to treat the trust as an agent of the assessee w.e.f. 1-4-1980. Viewed from this perspective the liability to wealth-tax can arise only if the principal, namely the company, is liable to wealth-tax for the assets belonging to the principal and not to the agent from that date.
11. One of the canons of construction with reference to the interpretation of deeds is that where there is a gift of income from a fund, until a contingency happened to the very person who would upon that contingency take the fund, the fund vests from the time when the income is given and does not depend upon the contingency. The situation in the present case is identical. The funds of the trust are by statute given back to the company on the contingency of a claim being made under section 40A(11) while the income of that fund (which is the right to dispose of the income by means of expenditure) is granted to the company w.e.f. 1-4-1980 itself. Under this well understood canon of construction it has to be accepted that the fund itself must be taken to belong to the company from 1-4-1980 when the company was entitled to adopt the expenditure as its own thereby appropriate the income.
12. There is also a question of the liability to wealth-tax. While sub-section (10) deems expenditure incurred by the trust for the welfare of the employees as the expenditure of the company, the other expenditure incurred by the trust are left without consideration in these sections. It is probably because the sections related only to question of allowance of the expenditure as deduction in computing the income of the company. But the wealth-tax liability with reference to the fund could also be regarded as an expenditure indirectly for the welfare of the employees because, if the liability is not met, the fund itself may be wiped off by penal action and the surplus of the fund is to be preserved for the welfare of the employees. Secondly, the provisions of sub-section (11) were brought into the Act on the assumption that the trusts were intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contribution which may even flow back to the employer. Since the section is based on this assumption, we have to give full effect to this intention of Parliament to pierce the veil of the trust and look to the company as the real owner of the fund. We may recall the oft repeated passage in the judgment of Lord Asquith of Bishopstone in East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] A.C. 109 :
"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it ... The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."
13. The intention of the provisions of section 40A(9), (10) and (11) is to disregard the trust and treat the expenditure relating to the trust and fund maintained by the trust as belonging to the company which had made contributions to the trust. We are of the opinion that we must give full effect to this intention and once the claim has been made for repayment, it must be taken to relate back the liability of the trust even from 1-4-1980 when these provisions came into force to acknowledge the right of ownership of the company to the fund. In other words, the asset held by the trust ceased to belong to the trust from 1-4-1980. Even if we view the matter only with reference to the possession of funds from 1-4-1980 until the claim was made for repayment, we cannot ignore the legal liability of the trust to repay the funds which accrued from 1-4-1980 itself and thus cancel out the value of any assets which may be regarded as belonging to the assessee during the period 1-4-1980 to the date of the claim for repayment.
14. When we look at the legislative changes brought about by section 40A(9), (10) and (11) in the light of the principles laid down by the Supreme Court in the case of Mithilesh Kumari (supra), we find that while the Bill was introduced only with reference to the expenditure, it was amplified at the time of passing of the Act to include repayment of the contribution by the trust to the company. The other objective was to defeat the attempt to use the trust as a cloak for the transactions of the company so that it is the company which is regarded as real owner of the fund and the person who is incurring the expenditure for the welfare of the employees. This law was made justly and for the benefit of the community and therefore it related to a time antecedent to the commencement. Moreover, unless the sections were given retrospective operation from 1-4-1980, it would prejudicially affect vested right and the legality of past transactions, Inasmuch as in the context of the Benami Prohibition Act those transactions would become illegal. We are, therefore, satisfied that the intention of Parliament was to convert the trust into an agent from 1-4-1980 itself and this effect, if it may be called retrospective, is inherent in the section as in tone these provisions are declaratory in nature. The tests propounded by the Supreme Court are all satisfied and hence it is not possible to accept the contention of the revenue that the assets must be regarded as belonging to the assessee trust until they are taken back by the company by making a claim.
15. The basic fact in this case is that the assessee was established by an irrevocable trust on 20-2-1980 and the title to the initial fund and further contributions as well as the properties both movable and immovable purchased by the trust vested in it. Section 40A(11) enables the company which was the author of the funds and which made the contributions to the trust with which the properties were acquired, to make a claim for repayment of the funds as such or in whatever form it is held. The contention of the Revenue is that this does not amount to a transfer of title by operation of law and until factually a claim is made and the properties are taken back, the title of the trust to the properties remained unaffected. The fallacy in this contention is that it views the provisions of sub-section (11) in isolation and assumes that there is a transfer of title only when the funds are repaid. Since this section affects the general law relating to the transfer of property, it has to be woven in the fabric of the legal system. There can be no claim in law without antecedent title. While there are no words in the section to transfer title w.e.f. 1-4-1980, there are also no words to the effect that the title is to be transferred only when the claim is made. The claim is only for possession as can be seen from the wording of the section and such possession must follow antecedent title. The transfer of title is, therefore, by operation of law and not by the act of parties under the provisions of this sub-section. Such transfer of property by operation of law must be certain and should not be left to speculation. If we consider that even antecedent title vests only a moment before the claim is made and not retrospectively from 1-4-1980 again, we are left with a situation where the title of the trust is subject to extinguishment on the contingency of the claim which can be made at the sweet will of the company at any moment. The result will be that the trust is left with only a precarious title to all the properties held by the Trust. Section 2(e)(v) of the Wealth-tax Act defines an asset to exclude any interest in property where the interest is available to the assessee for a period not exceeding six years from the date the interest vests in the assessee. Even from the point of view of this definition, even though the assessee had vested interest at the inception, it became a contingent interest upon the enactment of sub-section (11) w.e.f. 1-4-1980 and the assessee had no interest exceeding six years even from 1-2-1980 the date of the trust deed, if not from 1-4-1980, because up on the amendment being made by the Finance Act, 1984, the company could make a claim at any moment from 1-4-1984 or any of the relevant valuation dates. The title of the assessee became precarious by operation of law. It has been held by the Supreme Court in the case of CWT v. Smt. R. A. Muthukrishna Ammal [1969] 72 ITR 801 that precarious assets are not liable to wealth-tax. In our considered opinion the properties even if considered to be held by the trust cannot be regarded as assets exigible to tax within the meaning of the Wealth-tax Act.
16. Thus from any point of view, the funds which were liable to be returned in accordance with the provisions of section 40A(9), (10) and (11) w.e.f. 1-4-1980 could not be regarded as forming part of the net wealth of the assessee for the purpose of Wealth-tax Act from that date onwards. We, therefore, direct the W.T.O. to exclude the value of such funds from the net wealth of the assessee and recompute the net wealth.
17. In the result, the appeals are partly allowed.
Shri T. C. A. Ramanujam (Accountant Member)
1. I have carefully gone through the order passed by the learned Judicial Member in respect of these appeals. While I agree with his conclusion in paragraph-2 of his order that the assessee-trust cannot succeed in its claim 5(1)(i) of the Wealth-tax Act in the light of the ruling in Sakthi Charities case (supra), I am not able to agree with the rest of the order passed by him.
2. These are appeals against wealth-tax assessments made on the Cumi Employees' Welfare Trust. The trust filed returns of net wealth for the assessment years now under consideration and claimed deduction of liabilities of over Rs. 14.45 lakhs. The W.T.O. noticed that the liability claimed related to the contribution made by M/s. Carborandum Universal Ltd. to the Trust. He also noticed that comparing the wealth-tax statement with the relevant income-tax statements filed for the purpose of income-tax assessment, the sum of Rs. 14 lakhs did not figure as a liability in the income-tax statement. The clarification given by the Trust was that the Company had called back the amount by virtue of the provisions of section 40A(11) of the Income-tax Act, 1961 and hence it represented a repayable liability. The W.T.O. referred to the provisions introduced by the Finance Act, 1984 in section 40A and observed that the point at issue was when the liability crystallised into a debt repayable by the trust to the company. He has further pointed out that the amount was included in the capital fund of the Trust in the statement filed along with the return of income for the relevant assessment years. It was only after the passing of the Finance Act, 1984 that the Trust revised the statement for the purpose of wealth-tax assessment alone. The Company called back its contribution in August, 1984. The W.T.O. held that the liability came into existence only in August, 1984 and till then there was no such liability. The CIT (Appeals) agreed with this finding. He pointed out that the Company passed the resolution calling back the amount only on 21-3-1984 and till that date the trust was making use of the fund treating the same as its own money. He observed that a liability between two contracting parties cannot be created with retrospective effect. This is a telling comment on the argument advanced in this case about the retrospectivity of section 40A(11). No amount of hair splitting can help any one to get away from this argument advanced by the CIT (Appeals). It is worth reproducing from the order of the CIT (Appeals) before going further in this case :-
"A liability between two contracting parties cannot be created with retrospective effect. No doubt the provisions of section 40A(11) of the Income-tax Act with retrospective effect from 1-4-1980 empowers the company to call back their contributions remaining unspent with the trust. But such a provision by itself does not create a liability. The liability is created only when the company informs the trust that they are calling back their contribution by virtue of section 40A(11). As the liability in this case was created only on 23-8-84 after the valuation dates, relevant for the assessment years 1983-84, 1984-85 and 1985-86, I hold that the Wealth-tax Officer has rightly rejected the claim for deduction of the sum of Rs. 14 lakhs as a liability in the hands of the appellant. The orders under appeal are therefore confirmed."
It is worth-noting that under section 40A(11), where any claim is so made by the company, the unutilised amount shall be repaid as soon as may be.
3. It is necessary to quote the relevant provisions of the Wealth-tax Act, 1957. Section 3 is the charging section, which lays down that there shall be charged for every assessment year a tax in respect of the net wealth on the corresponding valuation date. "Net wealth" is defined in section 2(m) as meaning the amount by which the aggregate value computed in accordance with the provisions of the Wealth-tax Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under the Wealth-tax Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date. The term "asset" has been defined to include "property of every description, movable and immovable". The Bombay High Court pointed out in CWT v. Purshottam N. Amersey [1969] 71 ITR 180 that "every thing of value, which an assessee possesses, is brought into the ambit of the charging section and is assumed to have some value". This was affirmed by the Supreme Court in Purshottam N. Amarsay v. CWT [1973] 88 ITR 417. The Court held that there was no reason or justification to give any restricted meaning to the word "asset". In R. C. Cooper v. Union of India AIR 1970 SC 564 the Supreme Court held that "in its normal connotation 'property' can mean the highest light a man can have to anything, being that right which one has to land or tenements, goods or chattels, which does not depend on another's courtesy". They quoted with approval the Gujarat High Court's ruling in CWT v. Bhogilal Maganlal Shah [1968] 69 ITR 288 that contingent asset constituted an asset within the meaning of section 2(e) of the Wealth-tax Act. Even an interest in expectancy comes within the definition of the term "asset". There is a difference between the legal concepts of vested and contingent interest on one side and spes successionis on the other. While the vested and contingent interest in the property the value of which can be worked out on the basis of actuarial figures might well be subject to wealth-tax, spes successionis is not transferable and will not fall within the definition of the term "property". If the interest was vested or contingent, the same would be taxable and if the interest was spes successionis it will not be taxable under the Wealth-tax Act. Reference may be made to the rulings in CWT v. Ashokkumar Ramanlal [1967] 63 ITR 133 (Guj.), Bhogilal Maganlal Shah's case (supra) and CWT v. Anarkali Sarabhai [1971] 81 ITR 375 (Guj.).
4. The definition of "net wealth" in section 2(m) also refers to debts owed by the assessee on the valuation date. The Madras High Court explained in CWT v. Pierce Leslie & Co. Ltd. [1963] 48 ITR 1005 that a debt has to be distinguished from what can only be described as something which will probably or possibly ripen into a debt. A future contingent liability is not a debt due or owning or owing. It is not only not due, but being contingent, never may become due. An inchoate liability with a fair prospect of maturity into a debt in future and still in its embryo stage, would not answer the description of a debt. Till it is born, it is not a debt. Every kind of liability, immature, formative and in the course of evolution to become a debt, cannot be called a debt in anticipation of the ultimate. The Supreme Court considered the definition of the term "debt" in Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 and observed -
"The principle of the matter is well put in the Annual Practice 1950 at p. 808, thus : 'But the distinction must be borne in mind between the case where there is an existing debt, payment whereof is deferred, and a case where both the debt and its payment rest in the future. In the former case, there is an attachable debt, in the latter case there is not. If, for instance, a sum of money is payable on the happening of a contingency, there is no debt owing or accruing. But the mere fact that the amount is not ascertained does not show that there is no debt. The following passage was quoted by the Supreme Court from the judgment of the Supreme Court of California in the case of People v. Arguello [1869] 37 Calif. 524 which brings out with clarity the essential characteristic of a debt. It also indicates that a debt owing is a debt payable in future. It also distinguishes a debt from a liability for a sum payable upon a contingency. To quote the relevant passage : 'Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds : Solvendum in presenti and Solvendum in futuro. Whether a claim or demand is a debt or not, is in no respect determined by a reference to the time of payment. A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency has happened.' Similarly, the Punjab High Court in Harinder Singh Brar Bans Bahadur v. WTO [1967] 64 ITR 403, quoting the above observation of the Supreme Court in the above case held : "A debt is a present obligation to pay an ascertainable sum of money whether the amount is payable in presenti or futuro, debitum in presenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened."
5. The definition of the term "net wealth" uses the phrase "belonging to the assessee". The meaning of this term "belonging to" was considered by the Supreme Court in CWT v. Bishwanath Chatterjee [1976] 103 ITR 536 and it was observed that "belong" as per dictionary meant "to be the property of rightful possession of". It is the property of a person or that which is in his possession as of right, which is liable to wealth-tax. It is adiomatic in the case of arbitrator's award only a contingent liability is created and only when it is made a rule by the Court and decree is passed that the same becomes a debt due for the purpose of wealth-tax deduction as held in A.P.S. Cold Storage & Ice Factory v. CIT [1979] 119 ITR 709/2 Taxman 459 (All.). A gratuity provision made in the balance-sheet is not deductible for purposes of ascertaining net wealth. It is not a debt owed on the valuation date vide Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470 (SC). It has been clarified in a number of rulings that the concept of debt postulates an existing liability as distinguished from a liability which is contingent - CWT v. Associated Cement Co. Ltd. [1981] 128 ITR 626/[1980] 4 Taxman 556 (Bom.).
6. Conversely an asset to be included must belong to the assessee on the valuation date, i.e., a lottery prize won in a raffle will be includible only when the amount is officially declared as won by the assessee and gazetted accordingly and not earlier - CWT v. Smt. Premilabai Bokre Dewas [1988] 40 Taxman 365 (MP). It was held in CWT v. Meghji Girdharilal [1988] 40 Taxman 438 (MP) that until the asset is confiscated according to law, it would continue to be an asset belonging to the assessee. The issue regarding title to property in possession and enjoyment of the assessee is discussed in CIT v. H. H. Gouri Parvathi Bhai [1988] 173 ITR 355 (Ker.).
7. The argument advanced before us is that section 40A(9), (10) and (11) have retrospective effect and the intention of the legislature in enabling the donor to take back the donation is to have the effect as if there was no donation at all. For this purpose, reliance has also been placed on the observations of the Supreme Court in Mithilesh Kumari's case (supra). The oft quoted observations about the effect of a legal fiction in East End Dwellings Co. Ltd.'s case (supra) is also utilised to reinforce the argument that full retrospectivity should be given to the provisions of section 40A(11) and it should be deemed that the liability existed even on the relevant valuation date in these appeals. I am not persuaded to agree that a legal liability to repay the fund is created w.e.f. 1-4-1980 in this case with the consequential result of the trust being divested retrospectively all the funds given by the company. All these arguments fail to take into account the provisions of section 6 of the General Clauses Act. Under this section, unless a different intention appears, the repeal of an existing law shall not revive anything not in force or existing at the time at which the repeal takes effect or affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder, or affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed. The reason for enacting section 6 of the General Clauses Act is explained by the Supreme Court in State of Punjab v. Mohar Singh AIR 1955 SC 84, in these words :
"Under the law of England, as it stood prior to the Interpretation Act of 1889, the effect of repealing a statute was said to be to obliterate it completely from the records of Parliament as if it had never been passed, except for the purpose of those actions, which were commenced, prosecuted and concluded while it was an existing law : Vide Craies on Statute Law, 5th Edn. page 323. A repeal therefore without any saving clause would destroy any proceeding whether not yet begun or whether pending at the time of the enactment of the Repealing Act and not already prosecuted to a final judgment so as to create a vested right : Vide Crawford on Statutory Constitution, pp. 599-600. To obviate such results, a practice came into existence in England to insert a saving clause in the repealing statute with a view to preserve rights and liabilities already accrued or incurred under the repealed enactment.
Later on, to dispense with the necessity of having to insert a saving clause on each occasion, section 38(2) was inserted in the Interpretation Act of 1889, which provides that a repeal, unless the contrary intention appears, does not affect the previous operation of the repealed enactment or anything duly done or suffered under it and any investigation, legal proceeding or remedy may be instituted, continued or enforced in respect of any right, liability and penalty under the repealed Act as if the Repealing Act had not been passed. Section 6 of the General Clauses Act, as is well-known, is on the same lines as section 38(2) of the Interpretation Act of England."
8. A right that accrued to the assessee-trust over the funds bestowed on it by the company cannot be divested retrospectively by virtue of section 40A(11). I am unable to see any inconsistency in the scheme of section 40A(9), (10) and (11) with the provisions of the Wealth-tax Act. It is necessary to remember that the Supreme Court merely declared the provisions of the Benami Transactions (Prohibition) Act, 1988 as retroactive and not retrospective. The protection given to the beneficial owner has been removed. The beneficial ownership, which was vested, becomes divested and Courts have taken the view that only protection for the beneficial owner is removed and there is no disinvestment. A benami transaction has been defined as any transaction in which property is transferred to one person for a consideration paid or provided by another person. The Act can, therefore, only cover benami purchases and not benami settlements or such types of benami transactions mentioned under section 94 of the Indian Trusts Act. The beneficial owner cannot successfully avoid his income-tax and wealth-tax liability if he continues to enjoy the income and wealth merely because he would have no protection under the law. The benami law and its interpretation by the Court will only go to strengthen the claim of the Revenue that the fund actually belongs only to the assessee-trust. The Benami Transactions (Prohibition) Act came into the statute after section 40A(11) was introduced and it applies to pending proceedings. It is, however, not necessary to go by this law in order to sustain the wealth-tax assessment now in appeal. It is, however, note-worthy that the very passage quoted by the learned Judicial Member in para-6 of his order reiterates the view that retrospective operation is not to be given to a statute so as to impair an existing right or obligation unless that effect cannot be avoided without doing violence to the language of the enactment.
9. Reference may be made to the effect of a legal fiction in interpretation of statutes. It is not always a universal rule that the legal fiction should be taken to its logical course. In CIT v. Vadilal Lallubhai [1972] 86 ITR 2 the Supreme Court pointed out that legal fictions are only for definite purpose and are limited to the purpose for which they are created. They should not be extended beyond their legitimate field. This was reiterated by the Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). In the recent ruling of the Supreme Court in CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711/23 Taxman 8 the effect of the legal fiction is explained at page 718. The Court reiterated with approval its views declared in the Bengal Immunity Case [1957] 2 SCR 203 at 206 that the legal fictions are created only for some definite purpose and this must be limited to that purpose and should not be extended beyond that limited field. Any number of authorities can be quoted in support of the view that in trying to give a harmonious interpretation of the amendment, repealing and other enactments, no violence should be done to existing provisions under the guise of giving full effect to the amended law. Every amendment in the law will have to confine to the provisions of section 6 of the General Clauses Act. Reference may be made in this connection to the ruling of the Supreme Court in CIT v. Godavari Sugar Mills Ltd. AIR 1967 SC 556. This case related to an order under section 23A of the 1922 Act at a time when the Public Companies (Limitation of Dividends) Ordinance, 1948 was in operation. The Supreme Court held that it is the law which prevailed on the date of annual general meeting which has to be taken into account in considering the legal validity of the order under section 23A made by the ITO. The effect of section 13 of the Public Companies (Limitation of Dividends) Act, 1949 is not to obliterate the amendment completely from the statute book because the provisions of section 6(c), (d) and (e) of General Clauses Act would apply since there is no contrary intention appearing in the repealing statute. To me, it appears that section 40A(11) cannot be interpreted to mean that there will be no liability to wealth-tax in respect of the funds lawfully handed over to the trust and enjoyed by the trust. Even after section 40A(11) was brought into the statute book divestment is not automatic. It is not as if by the mere introduction of the provisions of section 40A(9), (10) and (11) the trust ceased to have title to the fund. It is only when the company by an authorised resolution makes a demand that the trust has to make the repayment. Even here the demand cannot apply to the entirety of the trust fund. The demand can be only in respect of the unutilised portion of the trust fund. During the relevant valuation date the amended law was not in force and the trust was in full possession and enjoyment of the fund as its own. Retrospectivity has to be interpreted only as saving the situation in so far as the wealth-tax in respect of such fund is concerned. It is necessary to underline the words "as soon as may be" occurring in section 40A(11). Had the intention been that the fund should be taken as having been retrospectively handed over to the company, there would have been no need for these words "as soon as may be" in the newly inserted sub-clause. The section will have to be re-written by omitting the words "as soon as may be" in order to sustain the argument taken by the counsel for the appellant in this case. The Supreme Court bemoaned in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11 that some of the best brains in the country are being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on one side and the tax gatherer and his, perhaps not so skilful, advisers, on the other side. The provisions of section 40A(9), (10) and (11) were inserted in the statute book as an anti-avoidance measure. It was never meant to confer any benefit on one or other of the parties involved in the avoidance device. A measurement to plug the loophole in the Income-tax Act by denying the benefit of deduction for contribution to dubious welfare trust cannot be interpretated as conferring a benefit to the trust itself in the matter of wealth-tax assessment. To quote the Supreme Court again, it is neither fair nor desirable to expect Parliament to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction. The acceptance of the argument of the appellant in this case will amount to giving such judicial benediction to another tax avoidance scheme not permitted by the amended legislation. It is a salutary principle of interpretation that provisions of two enactments must be construed harmoniously without doing offence to one of the two enactments while applying the other.
10. My conclusions are -
(1) On the relevant valuation dates, namely 30-6-1982, 30-6-1983 and 30-6-1984, the appellant-trust was possessed of the fund handed over to it by the company both as a matter of right in law and as a matter of fact.
(2) Assuming, without admitting, that the provisions of section 40A(11) should be applied in this case, in considering the wealth-tax liability, the position will be that the asset, in this case the sum of Rs. 14.5 lakhs claimed as a liability, is at best a contingent asset and is includible in the net wealth by virtue of the ruling cited in para-3 of this order.
(3) While a contingent asset is per se includible in the net wealth a contingent liability is not deductible since it is not a debt owed until the happening of the contingency. In this case the contingency is the prospect of the company being enabled to call back the amount donated to the trust.
(4) Section 40A(11) is only an enabling measure and does not automatically divest a trust of the funds handed over to it.
(5) The Benami Transactions (Prohibition) Act, 1988 reinforces the stand of the W.T.O. in this case inasmuch as the fund owned by the Trust automatically belong to the trust itself even if it is held that the trust was benami for the company. I am, however, of the view that there is no need to go into this question.
(6) The legal fiction of treating the company as the real owner of the fund will have only limited application and the fiction is not applicable to the facts and circumstances of the case.
11. The assessment is confirmed.
ORDER UNDER SECTION 24(11) OF THE WEALTH-TAX ACT READ WITH SECTION 255(4) OF THE INCOME-TAX ACT Since there is a difference of opinion on the following point of difference between the two Members, the appeals are placed before the President, Income-tax Appellate Tribunal for being heard on the following point of difference by one or more of the other Members of the Appellate Tribunal :
"Whether, on the facts and in the circumstances of the case, the retrospective operation of section 40A(11) of the Income-tax Act, 1961 w.e.f. 1-4-1980 affects the liability of the assessee-trust to Wealth-tax ?"
THIRD MEMBER ORDER Shri T. V. Rajagopala Rao (President)
1. While disposing of the appeals in W.T.A. Nos. 324, 325 and 326/Mds./89, for the assessment years 1983-84, 1984-85 and 1985-86, a point of difference arose between the Members of the Tribunal constituting the Bench which is identified and referred as follows :
"Whether, on the facts and in the circumstances of the case, the retrospective operation of section 40A(11) of the Income-tax Act, 1961 w.e.f. 1-4-1980 affects the liability of the assessee-trust to Wealth-tax ?"
2. The President, ITAT, nominated himself as the Third Member and it was communicated to the Madras Office vide Registrar's U.O. No. F. 12-JD (AT)/89(SZ) dated 20-11-1989. Therefore, in view of that order, as President, ITAT, I took up the difference of opinion for consideration and give my orders hereunder.
3. The assessee is M/s. Cumi Employee's Welfare Trust, Madras. Admittedly, M/s. Carborandum Universal Ltd., contributed Rs. 14 lakhs for the welfare of the employees to this Public Charitable Trust. The assessee trust was created by M/s. Carborandum Universal Ltd. for the welfare of its employees by Deed dated 20-2-1980. The provisions of section 40A(11) of the Income-tax Act, was inserted by the Finance Act with retrospective effect from 1-4-1980. The said provisions along with heading of section 40A read as follows :
"40A. Expenses or payments not deductible in certain circumtances ...
(11) Where the assessee has, before the 1st day of March, 1984 paid any sum to any fund, trust, company, association of persons, body of individuals, society or other institution referred to in sub-section (9) then, notwithstanding anything contained in any other law or in any instrument, he shall be entitled -
(i) to claim that so much of the amount paid by him as has not been laid out or expended by such fund, trust, company, association of persons, body of individuals, society or other institution (such amount being hereinafter referred to as the unutilised amount) be repaid to him, and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him;
(ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, company association of persons, body of individuals, society or other institution out of the sum paid by the assessee, be transferred to him, and where any claim is so made, such asset shall be transferred, as soon as may be, to him."
By a resolution dated 23-8-1984, M/s. Carborandum Universal has made a claim for repayment of the unutilised contribution of Rs. 19 lakhs each for assessment years 1983-84 and 1984-85 and Rs. 14 lakhs for the assessment year 1985-86 and on that ground the assessee claimed that these amounts should be deducted in computing its net wealth as on the valuation date falling on 30-6-1982, 30-6-1983 and 30-6-1984 relevant to the assessment years 1983-84, 1984-85 and 1985-86. The authorities below rejected the claim of the assessee. Before the Tribunal it was contended that the section itself was inserted with retrospective effect from 1-4-1980 and therefore, the assessee must be deemed to have lost title to the funds as soon as the claim was made under sub-section (11) of section 40A. It was urged that full effect should be given to the legal fiction contained in sections 40A(9), (10) and (11) (hereinafter called as "the Act"). The bench took up for consideration the question whether the fund representing the unspent amount of contribution made by M/s. Carborandum Universal Ltd. to the assessee trust could not be regarded as belonging to the assessee trust for the purpose of Wealth-tax Act, even from 1-4-1980, when that section came into operation, retrospectively, or the said funds could be regarded as wealth of the assessee only from the date when the claim was made under that section. The learned Judicial Member in his order had taken into consideration the concept of 'ownership' in the Salmond's Jurisprudence. The learned author, Salmond states that 'ownership' denotes the relation between a person and an object forming the subject matter of his ownership. It consists of a complex of rights, all of which are rights in rem, being good against all the world and not merely against specific persons. The ingredients to the concept of ownership consist of the following :
(i) the owner will have a right to possess the thing which he owns; though he may not necessarily have possession;
(ii) the owner has the right to use and enjoy the thing owned; further he has the right to decide how it shall be used; and the right to derive income from it;
(iii) the owner has the right to consume, destroy or alienate the things;
(iv) 'Ownership' has the characteristic of being indeterminate in duration;
(v) the ownership has a residuary character.
Applying the above tests, the learned Judicial Member considered the retrospective effect of section 40A(11) already quoted above. Before arriving at this conclusion the learned Judicial Member had duly kept in mind the principles enunciated by the Hon'ble Supreme Court to determine the retrospectivity of the provisions of the Act enacted by the Legislature as propounded in the case of Mithilesh Kumari (supra). He also took into consideration the budget speech delivered by the then Finance Minister, while introducing the Finance Act, 1984 which was recorded in 146 ITR St. 65. The then Finance Minister, interalia, explained the following to the Parliament before introducing the provisions, inter alia, as sub-section (11) of section 40A. At page 68 the following is found :
"Another undesirable practice noticed is the tendency of some corporate bodies to make large contributions to the so-called welfare funds. I further understood that utilisation of these funds is discretionary and subject to no discipline. I am, therefore, providing that deductions will be available only in respect of contributions to such funds as are established under statute or an approved provident fund, superannuation fund or gratuity fund. I am making this change with retrospective effect to avoid unnecessary litigation."
4. He had also taken into consideration the CBDT Circular No. 387 dated 6-7-1984, which is a Memorandum explaining, inter alia, the insertion of section 40A(11). The extract of the Circular was already quoted in the learned Judicial Member's Order at pages 8, 9 and 10. I feel it is not necessary to once again reproduce the same. However, I may state that I have kept them in mind for due consideration while deciding this issue.
After having thus surveyed the provisions of section 40A(11), the CBDT Circular, as well as the principles enunciated by the Supreme Court regarding the retrospectivity of the legislative provisions, he held that the "Parliament" was aware of the inequity of disallowing the expenditure in respect of an irrevocable trust and provided that even the balance of the amount unspent will be treated as 'belonging' to the donor company. In other words he held that the effect of these three sections is to statutorily revoke the irrevocable trust created by the company. This intention is manifest by the provisions of sub-section (11) which provides that the donor company can take back not only the amount unutilised but also claim any assets held by the trust which were acquired with the contribution made by the donor and have them transferred to itself.
5. At the end of para 11, the learned Judicial Member after discussing the combined effect of the section 40A(11) as well as the promulgation of Benami Transactions (Prohibition) Act, 1988 (174 ITR St. 37) and after duly taking into consideration the effect of the Hon'ble Supreme Court judgment in Mithilesh Kumari's case (supra) where it is held that the said Act was retrospective and must be applied to all transactions prior to the date of coming into force of that Act, held the following :
"The funds of the trust are by statute given back to the company on the contingency of a claim being made under section 40A(11) while the income of that fund (which is the right of dispose of the income by means of expenditure) is granted to the company w.e.f. 1-4-1980 itself. Under this well understood cannon of construction, it has to be accepted that the fund itself must be taken to belong to the company from 1-4-1980 when the company was entitled to adopt the expenditure as its own thereby appropriate the income."
6. In para 12, the learned Judicial Member held that the provisions of section 40A(11) are retrospective in operation and should be applied even from 1-4-1980. While examining the claim of liability from 1-4-1980 of returning the unspent amount which was contributed by M/s. Carborandum Universal Ltd. (which is hereinafter called the donor) to the assessee trust, the learned Judicial Member followed the dictum of Lord Asquith of Bishopstone in East End Dwellings Co. Ltd.'s case (supra), wherein, inter alia, the following is found :
"The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."
7. Having kept in mind the extent of which the imaginary state of affairs can be taken or given effect to the learned Judicial Member stated in para 13 that "the intention of the provisions of section 40A(9), (10) and (11) is to disregard the trust and treat the expenditure relating to the trust and fund maintained by the trust as belonging to the company which had made contributions to the trust". He further stated that "full effect must be given to the intention of the Parliament and once the claim has been made for repayment it must be taken to relate back the liability of the trust even from 1-4-1980 when these provisions came into force to acknowledge the right of ownership of the company to the fund. In other words, the 1 earned Judicial Member held that having regard to the above provisions, it should be held that the assets contributed to the trust ceased to belong to the trust even from 1-4-1980. The learned Judicial Member further stated as follows :
"Even if we view the matter only with reference to the possession of funds from 1-4-1980 until the claim was made for repayment, we cannot ignore the legal liability of the trust to repay the funds which accrued from 1-4-1980 itself and thus cancel out the value of any assets which may be regarded as belonging to the assessee during the period 1-4-1980 to the date of the claim for repayment."
8. In para 15, while appreciating the basic fact that the assessee trust was created under the Deed dated 20-2-1980 as an irrevocable trust, he held that the title to the initial fund and further contributions as well as the properties, both movable and immovable purchased by the trust vested in the donor. In fact it belongs to the company (donor) by which the contributions were made under the provisions of section 40A(11) of the Act. He stated that the contention of the revenue is that the fund belongs to the assessee trust only, till the claim is made by the company, is untenable. According to him, this argument amounts to reading the provisions of section 40A(11) in isolation and also depends upon the assumption that there is a transfer of title only when the funds are repaid. The learned Judicial Member opined that the transfer of title is affected, therefore, by operation of law and not by the act of parties under the provisions of section 40A(11). He held that such transfer of property by operation of law must be certain and should not be left to speculation. The fiction under section 40A(11) when construed, properly creates, certain liability but not a contingent liability. Under the said provision the unspent amount from 1-4-1980 belongs to the donor and no longer belongs to the assessee-trust. In order to butress the validity of his conclusion he had examined section 2(e)(v) of the Wealth-tax Act, which defines an asset to exclude any interest in property where the interest is available to the assessee for a period not exceeding six years from the date of interest vests in the assessee. Assuming the liability of the assessee trust is to return the money as and when demanded and the liability did not arise from 1-4-1980 only is to be accepted, even in such a case since the deed itself was executed on 1-2-1980 and since under the provisions of section 40A(11) the amount can be rightfully claimed by the donor any moment from 1-4-1984, it can be seen that the funds themselves were not held for more than six years to treat it as an asset of the assessee trust, within the meaning of section 2(e)(v) of the Wealth-tax Act and the learned Judicial Member had followed the Supreme Court decision in Smt. R. A. Muthukrishna Ammal's case (supra), wherein it was held that precarious assets are not liable to Wealth-tax. Ultimately, he came to the conclusion that the amount of Rs. 14 lakhs cannot be considered to be part of the 'net wealth' of the assessee trust for the purpose of Wealth-tax from 1-4-1980 onwards from which date section 40A(11) came into operation and, therefore, he directed the W.T.O. to exclude the funds of Rs. 14.45 lakhs from the net wealth of the assessee trust.
9. The learned Accountant Member struck a note of dissent for this conclusion reached by the learned Judicial Member. He held that the W.T.O. noticed that the contribution made by the donor to the assessee-trust was Rs. 14.45 lakh. He also held that the W.T.O. compared the statement of wealth-tax filed by the assessee trust with the statement of income filed along with the income-tax return for these years and he found that the sum of Rs. 14 lakh was not claimed as a liability in the income-tax statement filed along with the return. When a clarification was sought from the assessee trust, it was stated that by virtue of provisions of section 40A(11), the sum of Rs. 14 lakhs represented a repayable liability. The W.T.O. found that the amount was included in the capital fund of the trust in the statement filed along with the return of income for these assessment years and it was only after passing the Finance Act, 1984 that the assessee-trust revised the statement for the purpose of wealth-tax assessments only. He further found that the donor called back its contribution from the assessee trust only in August 1984. The W.T.O. held that the liability to return back the amount of Rs. 14 lakh to the donor came into existence only in August 1984 and till then there was no such liability. The CIT (Appeals) agreed with this point. In appeal, the learned CIT (Appeals) found that the company passed a resolution calling back the amount of contribution only on 21-3-1984 and till that date the trust was making use of the fund treating the same as its own money. The CIT (Appeals) found that the liability between the two contracting parties cannot be created with retrospective effect. The learned Accountant Member states that this is a telling comment on the argument advanced in this case about the retrospectivity of section 40A(11). He reproduced a portion of the CIT (Appeals)'s order also and according to his reading of section 40A(11), the unutilised amount shall be repaid as soon as may be. The learned Accountant Member took note of section 3, 2(m) Wealth-tax Act as well as section 2(e) Wealth-tax Act which is the definition of the word "asset" under the Wealth-tax Act. He had also noted the Gujarat High Court decision in Bhogilal Maganlal Shah's case (Supra) wherein it is stated that the contingent asset constituted an asset within the meaning of section 2(e) of the Wealth-tax Act and even an interest in expectancy comes within the definition of the term "asset". He pointed out the distinction between vested and contingent interest on one side and succession is on the other. He has relied upon the decision of the Madras High Court in Peirce Leslie & Co. Ltd-'s case (supra) and held that a debt has to be distinguished from what can only be described as something which will probably or possibly ripen into a debt. According to the learned Accountant Member, it is an authority for the proportion that a future contingent liability is not a debt due or owning or owing. It is not only not due, but being contingent, never may become due. An inchoate liability with a fair prospect of maturity into a debt in future and still in its embryo stage, would not answer the description of a 'debt'. Till it is born, it is not a debt. Every kind of liability, immature, formative and in the course of evolution to become a debt, cannot be called a debt in anticipation of the ultimate. He had cited the decision of Kesoram Industries & Cotton Mills Ltd.'s case (supra) to have a thorough understanding of the word 'debt'. The learned Accountant Member gave importance to the distinction drawn between the various kinds of debts discussed by the Hon'ble Supreme Court in the said case, as can be seen from the portion quoted below :
"The principle of the matter is well put in the Annual Practice 1950 at p. 808, thus: 'But the distinction must be borne in mind between the case where there is an existing debt, payment whereof is deferred, and a case where both the debt and its payment rest in the future. In the former case, there is an attachable debt, in the latter case, there is not. If, for instance, a sum of money is payable on the happening of a contingency, there is no debt owing or accruing. But the mere fact that the amount is not ascertained does not show that there is no debt. The following passage was quoted by the Supreme Court from the judgment of the Supreme Court of California in the case of People v. Arguello (1869) 37 Calif. 524 which brings out with clarity the essential characteristic of a debt. It also indicates that a debt owing is a debt payable in future. It also distinguishes a debt from a liability for a sum payable upon a contingency. To quote the relevant passage : 'Standing along, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds : Solvendum in presenti and Solvendum in futuro. Whether a claim or demand is a debt or not, is in no respect determined by a reference to the time of payment. A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable upon a contingency, however, is not a debt, or does not become a debt, until the contingency had happened'. Similarly, the Punjab High Court in Harindra Singh Brar Bans Bhadur v. WTO [1967] 64 ITR 403, quoting the above observation of the Supreme Court in the above case held : "A debt is a present obligation to pay an ascertainable sum of money whether the amount is payable in presenti or futuro, debitum in presenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened."
10. After observing several case laws, to highlight the fact that a contingent liability is not owed, he held that an asset to be included in the wealth must belong to the assessee on the valuation date. He also recorded the arguments advanced on behalf of the assessee, viz., Section 40A(9), (10) and (11) have retrospective effect and the intention of the legislature in enabling the donor to take back the donation is to have the effect as if there was no donation at all. The further argument developed on behalf of the assessee is that the legal liability to repay the unspent donation remaining with the trust should be refunded to the donor with effect from 1-4-1980 itself and therefore, the liability to return the funds even from 1-4-1980. The learned Accountant Member held that this argument is not acceptable. This argument can be rejected in view of the provisions of section 6 of the General Clauses Act, according to the learned A.M. Under section 6 of the General Clauses Act, unless a different intention appears, the repeal of an existing law shall not revive anything not in force or existing at the time at which the repeal takes effect or affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder, or affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed. The purpose of enacting section 6 of the General Clauses Act, which was examined by the Hon'ble Supreme Court in Mohar Singh's case (supra) was quoted in the order of the learned A.M. and ultimately he held the following findings :
11. Bearing in mind the judgments which had discussed in paragraphs 5, 6 and 7, he held that the right that accrued to the assessee trust over the funds bestowed on it by the company cannot be divested retrospectively by virtue of section 40A(11). He further held that the beneficial owner cannot successfully avoid his income-tax and wealth-tax if he continues to enjoy the income and wealth, merely because he would have no protection under the law. The benami law and its interpretation by the Court will only go to strengthen the claim of the revenue that the fund actually belongs to the assessee-trust. The Benami Transactions (Prohibition) Act came into the statute after section 40A(11) was introduced and it applies to pending proceedings. It is, however, not necessary to go by this law in order to sustain the wealth-tax assessment now in appeal.
12. In para 9, the learned A.M. stated that it is not always correct that the legal fiction should be taken to its logical end while interpreting the statute in which a provision with retrospective effect was inserted and he had cited the decisions in Vadilal Lallubhai's case (supra), Cambay Electric Supply Industrial Co. Ltd's case (supra) and Mother India Refrigeration Industries (P.) Ltd's case (supra) for the proposition that the legal fiction should be extended only in order to achieve the purpose for which it is created and should not be extended any further. He stated that any number of authorities can be quoted in support of the view that in trying to give a harmonious interpretation of the amendment, repealing and other enactments, no violence should be done to the existing provisions under the guise of giving full effect to the amended law. Every amendment in the law will have to conform to the provisions of section 6 of the General Clauses Act. He relied upon the decision of the Supreme Court in Godavari Sugar Mills Ltd.'s case (supra) for the proposition that it is the law which prevailed on the date of annual general meeting which has to be taken into account in considering the legal validity of the order under section 23A made by the ITO. Again he had given the following findings :
"To me, it appears that section 40A(11) cannot be interpreted to mean that there will be no liability to wealth-tax in respect of the funds lawfully handed over to the trust and enjoyed by the trust. Even after section 40A(11) was brought into the statute book divestment is not automatic. It is not as if by the mere introduction of the provisions of section 40A(9), (10) and (11) the trust ceased to have title to the fund. It is only when the company by an authorised resolution makes a demand that the trust has to make the repayment. Even here the demand cannot apply to the entirety of the trust fund. The demand can be only in respect of the unutilised portion of the trust fund. During the relevant valuation date the amended law was not in force and the trust was in full possession and enjoyment of the fund as its own. Retrospectivity has to be interpreted only as saving the situation in so far as the wealth-tax in respect of such fund is concerned. It is necessary to underline the words "as soon as may be" occurring in section 40A(11). Had the intention been that the fund should be taken as having been retrospectively handed over to the company, there would have been no need for these words "as soon as may be" in the newly inserted sub-clause. The section will have to be re-written by omitting the words "as soon as may be" in order to sustain the argument taken by the counsel for the appellant in this case."
Then, the learned A.M. had quoted from McDowell & Co. Ltd.'s case (supra) discussed it and then catalogued his ultimate conclusion at para 9 of his order as follows :
"The provisions of section 40A(9), (10) and (11) were inserted in the statute book as an anti-avoidance measure. it was never meant to confer any benefit on one or other of the parties involved in the avoidance device. A measurement to plug the loophole in the Income-tax Act by denying the benefit of deduction for contribution to dubious welfare trust cannot be interpretated as conferring a benefit to the trust itself in the matter of wealth-tax assessment."
13. In the arguments addressed Shri R. Vijayaraghavan, learned counsel for the assessee, fully relied upon the orders of the learned Judicial Member. He submitted that the retrospective effect brought about by the legislature while inserting, inter alia, section 40A(11), should be taken into account and nuances of such retrospectivity should be fully given effect to without minding whether while giving full effect to the retrospective operation, the provisions of Wealth-tax Act are likely to be contravened. He submitted that the sum of Rs. 19 or 14 lakhs which is the subject matter of these appeals, admittedly represents an unspent amount by the trust on each of the relevant valuation dates. Even though the donor claimed the amount back in 1984, the right to claim back the unspent amount accrued to it from the date from which the provisions of section 40A(11) came into retrospective operation, viz, 1-4-1980. Therefore, even though on 1-4-1980 the amount is lying with the assessee-trust, it can no longer be said that the said amount belonged to the assessee-trust and by virtue of the provisions of section 40A(11) the unspent amount of Rs. 14 lakh or Rs. 19 lakh, as the case may be, should always be taken to be due to the donor from the assessee trust. Therefore, it is obvious that from 1-4-1980, the donor has the right to claim even though in fact the claim to return back the amount was made in 1984. The legal effect of the retrospective operation of section 40A(1 1) actually revokes the trust or makes the trust revocable to the extent of Rs. 19 lakh or Rs. 14 lakh, as the case may be. Section 4(5) of the Wealth-tax act, is significant to be borne in mind at this juncture and it is as follows :
"4. Net wealth to include certain assets ....
(5) The value of any assets transferred under an irrevocable transfer shall be liable to be included in computing the net wealth of the transferor as and when the power to revoke arises to him."
14. The Trust Deed was executed on 20-2-1980 and it is described as an irrevocable trust, a photo-copy of which is already on record. Under the provisions of section 40A(11), which is already extracted verbatim in this order, the word 'assessee' signifies the donor company or the company which contributed the funds to the irrevocable trust. It is clearly stated in the said sub-section that any sum is paid before 1st day of March, 1984, inter alia, to any trust, referred to in sub-section (9), then, notwithstanding anything contained in any other law or any instrument, he shall be entitled to claim so much of the amount paid by him as has not been laid out or expended by such fund (such amount being hereinafter referred to as the unutilised amount) be repaid to him. Therefore, the meaning of the sub- section is very clear and by virtue of the provision, the Parliament conferred a right to the donor who had contributed, the funds to the irrevocable trust before 1-3-1984, a right to demand repayment of the unutilised portion out of the said amount. The remaining words occurring in sub-section (11)(i) "and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him". The above words forming part of sub-section 40A(11)(i) casts an obligation on the donee-trust (assessee-trust) to whom the contribution is made to repay the unutilised amount out of the total amount contributed to them to the donor. This was already considered by the Madras Tribunal in a SMC Bench in the case of ITO v. Tube Investments of India Ltd. [1990] 32 ITD 172. In that case, the assessment year involved is 1982-83. The assessee trust was set up by the settlor company for the welfare of its employees. It is an irrevocable trust. After the introduction of section 40A(9), (10) and (11) with retrospective effect from 1-4-1980, the assessee company in that case had claimed refund not only the unutilised portion of the trust contribution but also the accrued interest as well as dividends, if any. The question was whether the claim of the assessee-company in that case is allowable under the law. Upholding the claim of the assessee-company the following is held by the Madras Bench of the Tribunal as per the head note obtaining at page 173 of the decision :
"The accrued interest for the accounting year in question or the dividend income earned during that year which were both assessed in the hands of the assessee trust for the assessment year 1982-83 came under the unutilised amount for which also the company had got every right to recover from the assessee-trust. The amount invested in fixed deposits in bank from out of contributions made and accrued interest thereon could not partake the character of expenditure in the hands of the assessee-trust. The invested funds in fixed deposits, from the facts and circumstances of the case, should be held forming part of the unutilised amount within the meaning of section 40A(11)(1). This unutilised amount because of retrospective operation should be deemed to be returnable even by 1-4-1980. To put in other words, from 1-4-1980 the whole of the unutilised amount belonged to the company and no longer belonged to the assessee-trust. When the amount of deposit belonged to the company especially in the accounting year relevant to the assessment year 1982-83, the interest income accrued therefrom or the dividend income derived should also belong to the company though it was claimed later from it.
Section 61 was relevant. To the extent of recovering the unutilised amount, the trust deed should be considered as revocable transfer. Therefore, all incomes which accrued or arose by virtue of revocation of the trust should be chargeable to income-tax as the income of the transferor. In this case, the company was the transferor. Admittedly, the interest and the dividend income were accrued on the unutilised amount. That too, during a period when unutilised amount should have been transferred to the company, and in those circumstances, section 61 clearly applied to the facts of this case, and the interest and dividend income should be chargeable to income-tax as income of the company but not as income of the assessee-trust. Hence, the orders of the AAC was upheld."
Thus, the deduction claimed by the assessee trust for each of these assessment years ought to have been allowed by the revenue authorities and thus the learned J.M. was justified on the facts and in law to allow the claim of the assessee trust in this case.
15. On the other hand, Shri T Suriyanarayanan, learned departmental representative, contended that while applying the provisions of section 4(5) of the Wealth-tax Act, the crucial question which calls for interpretation is "when the power to revoke the trust accrued to the transferor". According to the learned D.R. section 40A(11) was not intended to revoke the trust at all, it only obliges the trust to retransfer the property, if any, acquired by the fund or with the aid of the fund. According to the correct interpretation of section 40A(11) despite its retrospective operation with effect from 1-4-1980, if the money ultimately repayable by the trust or the property transferable by the trust to the donor-company, were not claimed but remained as claimable then the amounts returnable or the property transferable still remain as the assets of the trust and the assessee-trust only is liable to pay wealth-tax on the value of such assets. The learned. D.R. drew my attention to the Central Board of Direct Taxes Circular No. 387 dated 6-7-1984 under the following captioned subject :
"The Finance Act, 1984 - Explanatory notes on the provisions relating to direct taxes."
The CBDT circular is found extracted in 152 ITR St. 1. He drew my attention to paragraphs 16.1 to 16.5 of the said Circular found printed at pages 10 and 11 of the 152 ITR. The learned D.R. argued that a debt should be allowed in the hands of the trust only after the claim is made, which is possible only after 1-4-1984. He stated that the learned J.M. in para 10 of his order had followed the Supreme Court decision in Mithilesh Kumari's case (supra). He brought to my notice that this decision was subsequently partly overruled by the Supreme Court itself in the case of R. Rajagopal Reddy v. Padmini Chandrasekharan [1995] 213 ITR 340/79 Taxman 92 (SC) at 342. The learned D.R. also argued that the liability created between the two contracting parties cannot be made retrospectively operative and for this proposition he strongly relied upon the decision of the Supreme Court in the case of Kesoram Industries & Cotton Mills Ltd (supra). He submitted that the claim to return back the money by the donor was made in pursuance of the resolution passed by the Company on 23-8-1984. Therefore, according to the learned D.R. on and from 23-8-1984 or thereafter the unspent amount is returnable but not before the date. There was a possibility to treat this unspent amount of Rs. 19 lakh or Rs. 14 lakh as the case may be to be a debt due by the assessee trust only on and from 23-8-1984 and not earlier to that date.
16. In reply the learned counsel for the assessee contended that the argument of the learned D.R. virtually nullifies the retrospective operation of the provisions of section 40A(11), which came into operation from 1-4-1980. A plain reading of section 40A(11) will disclose that the unspent amount from out of the contributions made by the company to the assessee trust turns itself to be a debt owed by the assessee even from 1-4-1980. The later part of section 40A(11)(i) would only specifies the mode of repayment or re-transfer. In order to claim the amount as a deduction, it is enough to disclose the debt due and is not further necessary to disclose the actual payment of the debt. Incurring a debt is one and repayment of that debt is quite different. Simply because the payment of the debt is postponed to a later date, it cannot be said that the debt itself arose on the date of repayment. By virtue of non obstanate clause found in section 40A(11), even the irrevocability of the trust under which the assessee trust was created, no longer remains sacrosanct but becomes revocable at least as regards the liability to return back the unutilised amount of Rs. 14 lakh or Rs. 19 lakh, as the case may be, is concerned. When once the trust itself is revocable any sum repayable under such revocable trust should be considered to be the money of the transferor (in this case the donor) and no longer remains the money belonging to the transferee (in this case the assessee-trust).
17. The next question would be when the irrevocable transfer becomes a revocable transfer. The answer is simple. This is brought about by virtue of the retrospective operation of the provisions of section 40A(11), and therefore, the trust deed dated 20-2-1980 referred to above under which the assessee trust was created, no longer remains irrevocable trust on and from 1-4-1980 and the amount which is returnable viz., Rs. 14 lakh or Rs. 19 lakh as the case may be under the provisions of section 4(5) of the Wealth-tax Act becomes the amount returnable under the terms of revocable trust from 1-4-1980. In which case, they should be held to be belonging to the donor company. Correspondingly, the unutilised amount which is the same repayable to the donor with effect from 1-4-1980 becomes a liability or a 'debt' due from the assessee trust to the donor company while computing the net wealth of the assessee trust under section 2(m) of the Wealth-tax Act, the unutilised amount which is recoverable from the assessee trust from 1-4-1980 is deductible from the total value of the asset held by the assessee trust on the valuation dates subsequent to 1-4-1980.
18. After having considered the arguments on both the sides advanced before me, I find it easy to accept the arguments advanced on behalf of the assessee and consequently I hold that the learned J.M.'s ultimate conclusion that the unutilised amount in the hands of the assessee-trust from out of the contributions made by the donor becomes debt in the hands of the assessee-trust from 1-4-1980 itself under the provisions of section 40A(11), which are specifically held to be retrospective from 1-4-1980 is correct. The only point of difference as set out in the referred question is whether the retrospective operation to section 40A(11) with effect from 1-4-1980 affects the liability of the assessee-trust to wealth-tax. In my opinion, it does affect the wealth-tax liability of the assessee trust in the following manner. I have already extracted the sub-section (11) of section 40A in the above paras. Sub-section (11) clearly states about the right as well as liability. Firstly, I make it very clear that the word in the said sub-section "assessee" contextually means only the donor-company which had contributed the funds to the assessee-trust. When so under-stood, the sub-section reads that if the assessee (donor) has before 1st March, 1984 paid any sum to any trust, then notwithstanding anything contained in law or any instrument, he shall be entitled to claim the unutilised amount on each of the three valuation dates relevant to the three assessment years under consideration. Sub-section (11) contained an non obstante clause-"notwithstanding anything contained in any other law or in any instrument". Therefore, this abrogates any recital in the instrument. The Trust Deed dated 20-2-1980, is an instrument and no doubt in the recitals it is described as an irrevocable trust. Even though it is irrevocable, by virtue of the operation of the non obstante clause used in sub-section (11) it should be held to have become revocable from 1-4-1980 by virtue of retrospective operation of this sub-section. It means that whatever might have been written in the revocable trust deed, the donor company is entitled to recover the unutilised amount. Therefore, it is clear that at least as far as realisation of the unutilised amount is concerned, the trust deed becomes revocable trust and does not remain irrevocable.
19. The second limb of sub-section (11)(i) viz., "any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him". Here again in my view the pronoun "him" again denotes to only the donor-company and these words cast an obligation on the assessee trust (the donee trust) to repay the unutilised amount to the donor company. It is true that the obligation to repay arises only when the claim is made and the repayment shall be made by the donee-trust "as soon as may be". Therefore, it is clear that the later part of the sub-section quoted above speaks about the liability to repay the unutilised amount and also deals with the time of such repayment. Now the question turns out whether an amount repayable under the revocable trust can be considered to be an asset belonging to the donee trust (assessee trust) from the date when the liability to repay arose viz., 1-4-1980. In this connection, the provisions of section 4(5) of the Wealth-tax Act is very relevant to be considered. As correctly argued section 4 is provided under the head "Net wealth to include certain assets" which states: "The value of any assets transferred under an irrevocable transfer shall be liable to be included in computing the net wealth of the transferor as and when the power to revoke arises to him". This provision would clearly show that from the date when the power to revoke arose to the donor the unutilised amount, which is repayable to it, should be considered to be part of its assets liable to wealth-tax under section 4(5) of the Wealth-tax Act. If unutilised amount should be regarded as part of the taxable assets held by the donor-company, correspondingly, it should form part of the debt due from the assessee-trust, since it is common knowledge that a single 'asset' cannot constitute wealth both in the hands of the donor as well as in the hands of the donee especially in the face of clear working of section 40A(11) in that regard. I have already examined this position in Tube Investments of India Ltd.'s case (supra) from which I have already quoted. Therefore, when the unutilised amount and the accretions thereon in the share, interest and dividends therefrom can be regarded only as an asset held by the donor-company and when the liability to repay the unutilised amount was cast on the assessee-trust (donee-trust), it is clear that the unutilised amount would become a liability or a debt payable by the donee-trust (or assessee-trust) to the donor-company. Therefore, when the unutilised amount of Rs. 19 lakh or Rs. 14 lakh as the case may be, can be considered only as an asset in the donor-company's hands from 1-4-1980. The said retrospective effect of the provisions of section 40A(11) will certainly affect the Wealth-tax liability of the assessee-trust (donee-trust) inasmuch as, the unutilised amount which otherwise would have been part of its assets from 1-4-1980, would become its liability since the said amount is liable to be returned to the donor-company. In view of this finding, the conclusions listed out by the learned A.M., in my humble opinion, are not correctly reached by applying the correct law or by appreciating the true or plain meaning of the provisions of section 40(11) of the Income-tax Act. The first conclusion that on the relevant dates, viz., 30-6-1982, 30-6-1983 and 30-6-1984, the assessee-trust was possessed of the funds as a matter of right in law and as a matter of fact cannot be accepted as correct. It may be holding possession of the funds but with an obligation attached to repay the same to the donor-company. When the Parliament states that this unutilised amount can be claimed as a matter of right by the donor-company, it is not very clear how it can be considered to be a contingent asset includible in the net wealth of the donee-trust. Further, it is not also comprehensible as to how the unutilised amount out of the contributed funds to the doneetrust can be termed as contingent liability which arose to the assessee after 1-4-1980. Another conclusion of the learned A.M. that section 40A(11) is only an enabling measure and does not automatically divest a trust of the funds handed over to it, is simply unacceptable and represents erroneous view of law or the meaning of section 40A(11). No discussion was there in the order of the learned A.M. in support of this conclusion. The difference as well as the discussion relation to Benami Transactions (Prohibition) Act, 1988, both by the learned Members, in my opinion, is not directly relevant for disposal of the case and the sixth conclusion of the learned A.M. that the legal fiction created under section 40A(11) has only a limited application and the fiction is not applicable to the facts and circumstances of the case is again, in my view, erroneous and does not stand on the anvil of correct legal scrutiny. Therefore, I agree with the conclusion reached by the learned Judicial Member and allow the amount of Rs. 19 lakh or Rs. 14 lakh, as the case may be, as the liability in the hands of the donee-trust for all the three assessment years under consideration.
20. The matter now is directed to go back to the Division Bench and the Division Bench should pass an order according to the majority verdict.
N. D. Raghavan (Judicial Member)
1. These are appeals of the assessee challenging the common order dated 6-2-1989 of the CIT (Appeals) as erroneous.
2. Facts of the case are briefly these : The common ground in all these three appeals of the assessee for the respective assessment years is that the Assessing Officer ought to have deducted a sum of Rs. 14 lakhs as on the valuation date as liability towards the settlor company in respect of the amount remaining unspent out of the contribution to the trust. In other words, these appeals reiterate the claim that the unspent contribution of Rs. 14 lakh given by Carborandum Universal Ltd. should be excluded from the net wealth of the assessee M/s. Cumi Employees Welfare Trust. The Appellate Commissioner held that the Assessing Officer was correct in rejecting the claim for deduction of the sum of Rs. 14 lakh as liability in the hands of the assessee. Aggrieved, the assessee went on second appeal before the Tribunal. After hearing the parties, while the learned Judicial Member proposed his order holding that the funds which were liable to be returned in accordance with the provisions of section 40A(9) to (11) w.e.f. 1-4-1980 could not be regarded as forming part of net wealth of the assessee for the purposes of Wealth-tax Act from that date onwards and consequently directed the Assessing Officer to exclude the value of such funds from the net wealth of the assessee and to recompute the net wealth accordingly, the learned Accountant Member dissented from his order by confirming the order of assessment resulting in dismissal of the assessee's appeal fully. Thus the following question was referred to the Hon'ble President for constitution of a Third Member to resolve the dispute on the point below :
"whether, on the facts and in the circumstances of the case, the retrospective operation of section 40A(11) of the Income-tax Act, 1961 w.e.f. 1-4-1980 affects the liability of the assessee-trust to Wealth- tax ?"
3. The learned Third Member, speaking through the Hon'ble President, agreed with the conclusion arrived at by the learned Judicial Member and allowed the amount of Rs. 19 lakh or Rs. 14 lakh, as the case may be, as liability in the hands of the donee-trust for all the three assessment years in question for the various reasons detailed by him in his elaborate order dated 13-7-1998. Thus, the learned Accountant Member's dissenting order was not agreed to by the learned Third Member.
4. Thus these appeals were directed by the learned Third Member to go back to the Division Bench to decide the point according to the opinion of the majority of the Members of the Tribunal who have heard the case including those who first heard it.
5. Consequently in accordance with the majority opinion, the appeals of the assessee are allowed accordingly.