Madras High Court
Ranga Rao Lottery Agencies vs Cit on 9 February, 2005
Equivalent citations: (2006)201CTR(MAD)431, [2006]155TAXMAN422(MAD)
Author: N.V. Balasubramanian
Bench: N.V. Balasubramanian
JUDGMENT N.V. Balasubramanian, J.
In all these cases, the Tribunal, at the instance of the assessee, has stated a case and referred the following common questions of law for consideration by this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant trust is a discretionary trust and hence maximum marginal rate of tax has to be applied ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that rectification deed effected by the authority would not relate back and could not cure the alleged defect in the trust deed ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in refusing to follow the general principle of law viz., when the shares are not specified in the deed, the beneficiaries take the shares in equal proportion ?
4. Whether the Tribunal is further right in law in distinguishing the decisions relied in support of the above proposition ?"
2. The assessment years involved are 1983-84, 1984-85 and 1985-86 (Tax Case Nos. 5, 6 and 7 of 2001) and 1986-87 and 1987-88 (Tax Case Nos. 41 and 79 of 1999). There is not much dispute of the facts and the assessee is a trust and the trust was created for the benefit of the beneficiaries whose names are given in the deed of trust. In the original deed of trust dated 10-3-1982, the names of the beneficiaries are given but there is no specification of their shares either in the income or the corpus of the trust. A deed of rectification came to be executed by a deed dated 6-6-1988, wherein the lacuna, i.e., omission to mention the share of each beneficiary in the income and corpus of the trust was sought to be rectified specifying their share in the income as well as their share in the corpus. The deed of rectification, as already stated, came to be executed on 6-6-1988 stating that the settlor never intended the trust to be a discretionary trust and has always intended that the share of each beneficiary is specific both as regards the corpus and the income of the trust. We are concerned with the assessment years prior to the date of execution of deed of rectification dated 6-6-1988. The question that arises is whether the trust is a discretionary trust or a specific trust. The assessing officer held that the trust deed is silent in regard to the sharing of income by the beneficiaries and held that it is a discretionary trust. The Deputy Commissioner (Appeals) on appeal preferred by the assessee allowed the appeal of the assessee holding that the shares of the beneficiaries are determinate and the trust is not a discretionary trust. The revenue carried the matter in appeal before the Tribunal. The Tribunal considered the matter and found that the shares of the beneficiaries are not expressly stated in the deed of settlement and were also not ascertainable on the date of execution of the deed of settlement. The Tribunal, therefore, held that the assessee-trust was a discretionary trust. As far as the rectification deed is concerned, the Tribunal held that the rectification deed came into force subsequent to the assessment years in question and did not relate back to the assessment years. The Tribunal, therefore, held that the trust is a discretionary trust and attracts maximum marginal rate of tax and allowed the appeals preferred by the revenue. The assessee challenged the orders of the Tribunal for various assessment years in question. The Tribunal, as stated earlier, has stated a case and referred the questions of law set out earlier.
3. The only question that arises in the above tax case reference is whether the view of the Tribunal is correct or not. To appreciate the point, it is necessary to refer to the Expln. 1(ii) of section 164 of the Income Tax Act, 1961, and the Explanation reads as under :
"the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, 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."
A close reading of the 'Explanation shows that the trust would be regarded as a discretionary trust unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable by the trust are expressly stated in the deed of trust and their shares are ascertainable on the date of the instrument.
4. We carefully perused the deed of settlement dated 11-3-1982. In the deed of settlement, except mentioning the names of the beneficiaries, the shares of the beneficiaries are not expressly stated and further, it is not possible to ascertain the share of each beneficiary from the reading of the deed of settlement. We, therefore, hold that the Tribunal was correct in holding that the trust is a discretionary trust as under Expln. l(ii) of section 164 of the Act, the shares of the beneficiaries in the income and the corpus are not stated expressly in the deed and it wag also not ascertainable on the date of the deed of settlement. Learned counsel for the assessee referred to the deed of rectification dated 6-6-1988. The deed of rectification came to be executed on 6-6-1988 and the deed also came into force only subsequent to the assessment years in question. We are not going into the validity of the deed of trust since the deed of rectification came into force subsequent to the assessment years in question and further, it is impermissible for the assessee to rely upon the deed of trust to contend that the earlier deed of settlement should be read along with the deed of rectification and it would operate from the deed of settlement dated 10-3-1982. We hold that the Tribunal was correct in holding that the assessee-trust is a discretionary trust and the deed of rectification does not relate back to the deed of settlement and does nor cure the alleged defect in the original deed of settlement. We hold that the view of the Tribunal is in conformity with the Expln. 1(ii) of section 164 of the Act and no exception can be taken to the view taken by the Tribunal holding that the assessee trust is a discretionary trust.
5. Mr. P.P.S. Janarthana Raja, learned counsel for the assessee contended that since the beneficiaries have been assessed to tax, it is not open to the revenue to make assessi-nerit on the trust. He referred to the submissions made before the Tribunal. The Tribunal, in para 15 of its order, has recorded that it was contended by the learned counsel for the assessee that the respective shares of the beneficiaries of the income of the trust had been brought to tax in their hands and consequently the assessing officer was not justified in bringing to charge the trust income, at the maximurn marginal rate in the hands of the trust, However, we find that the Tribunal has not considered the question in proper perspective. Though the Tribunal has referred to the decision of the Supreme Court in CIT v. Smt. Kamalini Khatau (1994) 209 ITR 101 (SC), it did not have the benefit of the subsequent decision of the Supreme Court in Moti Trust v. CIT (1999) 236 ITR 37 (SC). The Tribunal has proceeded on the basis that the income was not actually received by the beneficiaries and it is open to the revenue to make a direct assessment on the trust. We find the Tribunal did not have the benefit of the decision of the Supreme Court in Moti Trust v. CIT (supra) and hence we are of the view that the question has to be considered by the Tribunal once again. Accordingly, without expressing any opinion on the point raised by the learned counsel for the assessee that since the revenue has already exercised the option to tax the beneficiaries, it is not open to the assessing officer to assess the income of the trust in the hands of the trustee, we answer the questions of law referred to us in the affirmative, against the assessee and in favour of the revenue, but with a direction to the Tribunal to consider the question afresh whether it is permissible for the revenue to assess the income of the trust in the hands of the trustee and whether the revenue has actually exercised the option while making assessment on the beneficiaries, in the light of the decisions of the Supreme Court in CIT v. Smt. Kamalini Khatau (supra) and Moti Trust v. CIT (supra.). The Tribunal is directed to consider that question alone. With the above direction, all the questions referred to us are answered against the assessee and in favour of the revenue and the revenue is also entitled to costs of Rs. 1,000 one set.