Income Tax Appellate Tribunal - Madras
Would-Be Wife Of T. Senthil Kumaran vs Income-Tax Officer on 31 December, 1990
Equivalent citations: [1991]37ITD265(MAD)
ORDER
T.N.C. Rangarajan, Judicial Member
1. These appeals relate to the assessment of the beneficial interest arising from a private family trust.
2. The assessee is a trustee representing two beneficiaries under a trust declared on 27-5-1982 by Shri K. Purushotaman. He had set apart a sum of Rs. 10,000 for the benefit of his family members. The trust was to be called 'Anuradha Family Trust' and the trustees were to be Sri S. Thiagarajan, Mrs. Anuradha and Sri Senthil Kumaran (on his attaining the age of majority). Clause 7 of the deed provided that the income of the trust was to be received by all the seven beneficiaries in definite shares mentioned therein as follows :
(i) Mr. Thyagarajan (Son-in-law) 25% share of benefit
(ii) Mrs. Anuradha wife (i) above 20% do
(iii) Senthil Kumaran, minor son of
(i) and (ii) above. 15% do
(iv) Shanmuga Priya, minor daughter
of (i) and (ii) above. 15% share of benefit
(v) Would-be wife of Senthil Kumaran
(iii) above 10% do
(vi) Would be husband of Shanmuga
Priya (iv) above. 10% do
(vi) Trustees of Senthil Charitable Trust 5% do
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100%
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It also provided that the net income was to be divided among the above beneficiaries or credited to the account of each of the beneficiaries at the end of each year of finalisation of accounts or the shares of benefits may be paid to the beneficiaries in such manner as the trustee may decide. Clauses 8 & 9 provided as follows :-
8. In case Senthil Kumaran does not get married or dies before he attains the age of 45 years or for any other reasons such share payable to the would-be wife of Senthil Kumaran could not be paid, then the share of benefit payable to the would-be wife of Senthil Kumaran shall be taken by Senthil Kumaran if he is alive or equally by the surviving beneficiaries herein, if the said Senthil Kumaran dies before getting married.
9. In case Shanmuga Priya does not get married before she attains the age of 40 years or dies before/ she gets married or for any other reason such share payable to the would-be husband of Shanmuga Priya could not be paid, then the share of benefit payable to the would-be husband of Shanmuga Priya Shall be taken by Shanmuga Priya if she is alive or equally to the surviving beneficiaries herein, if Shanmuga Priya dies before getting married.
Clause 10 provided that if any children are born to Anuradha, the share of Sri Thyagarajan and Anuradha will be divided equally along with the children and Clause 11 provided that if any beneficiary died, the surviving beneficiaries will take the share equally. Clause 12 provided that the benefit provided to Shanmuga Priya and her would-be husband would cease from the year in which the marriage takes place and the accumulated benefit was to be paid under Section 13 within six months from the date of benefit payable to such beneficiary ceases as per the terms of the deed. The duration of the trust was a period of 20 years or until it was determined by the trustees.
3. On these facts, in the case of the would-be husband of Shanmuga Priya, while making the assessment for the year 1984-85 corresponding to the previous year ended 31-12-1983, the ITO came to the conclusion that the assessee beneficiary was not identifiable as such as on the date of the trust deed in view of the Explanation 1 (0 to Section 164 and therefore the income of Rs. 68,188 was to be charged to tax at the maximum marginal rate. On appeal, the Appellate Assistant Commissioner held that the income was specifically receivable for one person and clearly identifiable as per the deed and therefore the maximum marginal rate was not applicable.
4. In the case of the would-be wife of Senthil Kumaran also the ITO made an identical order. On appeal the Appellate Assistant Commissioner held that in terms of the trust deed the income was not specifically receivable on behalf of or for the benefit of any particular person and therefore the levy of tax at the maximum marginal rate was correct.
5. The Revenue has appealed in the case of would-be husband of Shanmuga Priya and it was contended that the assessment order should be restored. On the other hand the assessee has filed an appeal in the case of would-be wife of Senthil Kumaran to contend that the assessment must be cancelled.
6. On a consideration of the rival submissions, we are of the opinion that the facts of these cases do net attract the provisions of Section 164 of the Income-tax Act, that section provides that where the income is not specifically receivable on behalf of or for the benefit of any one person or where the individual shares of the beneficiaries are indeterminate or unknown that income shall be charged at the maximum marginal rate. Therefore in order to apply this section there must be a finding that the income is not receivable on behalf of any one person or that the shares are indeterminate or that the shares are unknown. In the present case, none of these findings could be given because the income was receivable on behalf of several persons whose shares were specifically stated in the document and thus determinate and known.
7. The Revenue relied on Explanation 1 (i) to this section which is as follows:
(i) any income in respect of which the persons mentioned in Clause (iii) and Clause (iv) of Sub-section (1) of Section 160 are liable as representative assessee or any part thereof shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed;
It was submitted by the revenue that since the would-be wife or the would-be husband could not be produced before their marriage they should be treated as not identifiable within the meaning of this Explanation and consequently the income should be deemed as being not specifically receivable on their behalf. Reliance was placed on the decisions in the case of CIT v. Smt. Kamalini Khatau [1978] 112 ITR562(Guj.)(FB), VE.A. Vairavan Chettiar v. CIT [1973] 92 ITR 474 (Mad.), and Nirmala Bala Sarkar v. CIT [1969] 74 ITR268 (Cal.) to contend that where the beneficiaries were fluctuating under the terms of the deed they should be taken as unknown or indeterminate.
8. We are unable to accept either of these arguments. Firstly the memorandum explaining the provisions of Finance (No. 2) Act, 1980 which introduced the Explanation states as follows :
4. Under the provisions as they existed prior to the amendments made by the Finance Act, the flat rate of 65 per cent was not applicable where the beneficiaries and their shares are known in the previous year although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the court or wakf deed. This provision was misused in some cases by giving discretion to the trustees to decide the allocation of income every year and in several other ways.
In such a situation, the trustees and beneficiaries were able to manipulate the arrangements in such a manner that a discretionary trust was converted into a specific trust whenever it suited them tax-wise. In order to prevent such manipulation, the Finance Act has inserted Explanation 1 in Section 164 to provide as under :
a. any income in respect of which the court of wards, the administrator-general, the official trustee, receiver, manager, trustee or mutawalli appointed under a wakf deed was liable as a representative assessee or any part thereof shall be regarded as g not being specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed as the case may be, and is identifiable as such on the date of such order, instrument or deed. (For this purpose, it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the court or the instrument of trust or wakf deed on the date of such order, instrument or deed;) b. the individual shares of the persons on whose behalf or for whose benefit such income or part thereof is receivable will be regarded as indeterminate or unknown unless the individual shares of such persons are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be and are ascertainable as such on the date of such order, instrument or deed. As a result of the insertion of the above Explanation, trust under which a discretion is given to the trustee to decide the allocation of the income every year or a right is given to the beneficiary to exercise the option to receive the income or not each year will all be regarded as discretionary trusts and assessed accordingly.
(Emphasis supplied) This shows that the purpose of the Explanation was only to prevent conversion of a discretionary trust into a specific trust. The present case is not a discretionary trust at all, but only a specific trust because no discretion has to be given to the trustees either to choose the beneficiary or to vary their interest. The cases relied on by the Revenue relate to the discretionary trusts and are not applicable to the present case. Secondly, it has been held by the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 that it would be a matter of no consequence that the number of beneficiaries may vary in the future either by reason of some beneficiaries ceasing to exist or some new beneficiaries coming into being and as long as it is possible to determine who precisely would be the beneficiaries on what determined shares, it cannot be said the beneficiaries are indeterminate or unknown. Thirdly the identification of the beneficiary does not mean that the beneficiary must be available. In the case of CIT v. P. Bhandari [1984] 147 ITR 500 the Madras High Court held that a trust created for the future of a prospective wife of a person was valid. In that case the trust deed provided that the income was to be held for the benefit of the prospective wife of Dileep Kumar and in case he died unmarried the income must go to wife of Pradeep Kumar and if he also died unmarried, it was to go to a charity. The Court observed at page 505 :
But as long as the trust deed gives the description of the person who is to be benefited, the beneficiary cannot be said to be uncertain merely because the actual beneficiary cannot be known until the marriage of Dileep Kumar or Pradeep Kumar takes place. It is also said that since there is a possibility of both of them not marrying, the beneficiary should be taken to be uncertain. It is well established that a trust may be created in favour of an unborn person provided it satisfies the conditions laid down in Section 13 of the Transfer of Property Act, even though the coming into existence of such a beneficiary is uncertain. It is no doubt true that trust deed provides that in the event of death of his sons without marrying, the property will go to charitable purposes. But what are the charitable objects to be performed by the trustees have not been clearly and specifically set out. But we are of the view that once a trust is created for charitable purposes, even if the details of the charitable purpose are not mentioned, the trust will have to be taken as valid.
In the present case also the deed provides for every eventuality and there is no uncertainty about the vesting of the income. Since the beneficiary is identifiable as the would-be wife or the husband and is not required to be un-named as mentioned in the memorandum explaining the provision, we are satisfied that the shares cannot be treated as indeterminate or unknown within the Explanation l(j'). Consequently the tax at the maximum marginal rate cannot be imposed in respect of these two assessees. The ITO is therefore directed to levy the tax at the normal rates.
9. In the result, Appeal No. 2391/86 is allowed and appeal No. 2312/87 is dismissed.