Andhra HC (Pre-Telangana)
Commissioner Of Wealth-Tax vs A.V. Reddy Trust And Ors. (For Margaret ... on 8 December, 1987
Equivalent citations: [1989]180ITR263(AP)
JUDGMENT Y.V. Anjaneyulu, J.
1. All the four references under section 27(1) of Wealth-tax Act, 1957, are at the instance of the Commissioner of Wealth-tax. An identical question of law is referred to this court in all the four references. The facts in all the four cases are also identical. It will, therefore, be convenient to dispose of all the four references together by a common judgment.
2. One Sri A. V. Reddy of Kadiam in East Godavari District (hereinafter referred to as "the settlor") created four trusts for the benefit of his three grandchildren and a daughter. One trust was created for the benefit of his grandson, Dexter Anand Sear (eldest son of his daughter, Margaret). The relevant trust deed was executed on March 14, 1972, and is the subject-matter of consideration in R.C. No. 37 of 1983. The name of the trust is misdescribed by the tax authorities as well as the Tribunal. It is referred to as "Sri A. V. Reddy Trust for Mrs. Margaret Anne Reddy", whereas the trust deed would indicate that the trust was created in favour of Dexter Anand Sear, the settlor's daughter's son. Another trust was created on October 3, 1970, for the benefit of the settlor's grandson, Harish Reddy, and the trust was known as "Sri. A. V. Reddy Trust for B. V. Harish Reddy". The trust is the subject-matter of consideration in R.C. No. 38 of 1983. A third trust was created on October 2, 1970 for the benefit of the settlor's grandson, B. V. Satish Reddy. This trust is described as "Sri A. V. Reddy Trust for B. V. Satish Reddy" and is the subject-matter of consideration in R.C. No. 39 of 1983. A fourth trust was created on July 6, 1971, for the benefit of the settlor's second daughter, Mrs. Lalitha Anderson. This trust is described as "Sri A. V. Reddy Trust for Mrs. Lalitha Anderson", and is the subject-matter of consideration in R.C. No. 40 of 1983.
3. In R.C. No. 37 of 1983, which relates to the wealth-tax assessment years 1975-76 to 1978-79, the following question is referred by the Tribunal for the consideration of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only the value of the interest of the beneficiary in the trust could be included in the net wealth and not the value of the 'corpus' of the trust itself ?"
4. In R.C. No. 38 of 1983, which related to the wealth-tax assessment years 1976-77 and 1978-79, the question referred for consideration is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only the value of the interest of the beneficiary in the trust could be included in the net wealth and not the value of the 'corpus' of the trust itself ?"
5. In R.C. No. 39 of 1983, which relates to the wealth-tax assessment years 1976-77 and 1977-78, the question for consideration is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only the value of the interest of the beneficiary in the trust could be included in the net wealth and not the value of the 'corpus' of the trust itself ?"
6. Finally, in R.C. No. 40 of 1983, which relates to the wealth-tax assessment years 1976-77, 1977-78 and 1978-79, the question referred for consideration is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only the value of the interest of the beneficiary in the trust could be included in the net wealth and not the value of the corpus of the trust itself ?"
7. The trusts created by the settlor followed a uniform pattern. We shall first consider the relevant provisions in the three trust deed relating to the three grandchildren (R. Cs. Nos. 37, 38 and 39 of 1983). The settlor settled in trust a sum of Rs. 1,116 at the time of creating the trusts with a provision to augment the trust fund from time to time by further contributions. It does appear that between the date of creation of the trusts and the relevant assessment years, further amounts were added by the settlor. The settlor appointed himself as the sole trustees during his lifetime. The settlor shall nominate a board of three trustees to administer the trusts after his lifetime. The trust funds were directed to be invested in the family business on a preferential basis and thereafter in any other joint-stock companies. The other modes of investment of the trust funds were also referred to in the trust deeds. We have three crucial clauses in each trust deed which determined the character of the trusts. We will extract those clauses from R.C. No. 37 of 1983 as they are identical in the remaining trusts.
"18. The trustee for the time being may, at his discretion, apply the whole or any portion of the income of the trust fund for the maintenance, education or advancement in life of the beneficiary and shall accumulate all the residue by the investing the same in the aforesaid manner.
20. On the beneficiary completing the age of 25 years, the trustees shall transfer and make over to the beneficiary all the trust funds and on so transferring, this trust deed shall stand cancelled and be of no effect.
21. If the object for which the trust has been created fails and cannot be fulfilled, the trustee for the time being shall be at liberty to apply to trust property to the benefit of the other sons, daughters of my last daughter, Mr. Margaret Anne Reddy Sear, in the proportion of one share for a son and half-share for a daughter."
8. In the trust created for the benefit of the settlor's daughter, Mrs. Lalitha Anderson (R.C. No. 40 of 1983), the provisions are identical except clause 20 of the trust deed under which the settlor directed that on the beneficiary completing the age of 45 years, the trustees shall transfer and make over to the beneficiary all the trust funds. It will thus be seen that whereas the period of accumulation of income in the beneficiary attained the age of 25 years, such period is described as 45 years in the trust created for the benefit of the settlor's daughter.
9. Proceedings for the levy of wealth-tax were taken by the Wealth-tax Officer against the trustee in each one of the cases. Wealth-tax assessments were, accordingly, made by the officer under section 16(3) of the Wealth-tax Act. It is necessary to emphasise that the assessments were made on the trust as designated in each trust deed. The illustrate, the name of the assessee in R. C. No. 38 of 1983 was shown as "A. V. Reddy Trust for B. V. Harish Reddy". In the assessment order, the status was shown as trust. In each of the cases and for each of the assessment years under reference, the officer assessed the value of the trust found held by the trustee. Learned counsel for the assessee clarified during the course of the arguments that the beneficiaries of these four trusts did not posses by individual wealth. It was claimed that the Wealth-tax Officer purported to make an assessment on the trustees in respect of the beneficial interest. The assessments made by the officer were challenged before the Appellate Assistant Commissioner of Wealth-tax. The grounds urged related to the valuation of shares. At the time of hearing, however, an additional ground was filed before the Appellate Assistant Commissioner that the assessment made by the Wealth-tax Officer was erroneous as the entire trust fund was subjected to assessment whereas only the beneficial interest of the concerned beneficiary in each trust should have been subjected to tax. Without discussing the legal position, the Appellate Assistant Commissioner of Wealth-tax accepted the additional ground and directed the Wealth-tax Officer to determine the interest of the beneficiary in the trust properties and assess the same accordingly either directly in the hands of the beneficiary or in the hands of the trust.
10. The Revenue filed appeals before the Income-tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner of Wealth-tax. The Revenue, inter alia, urged before the Tribunal that the Appellate Assistant Commissioner was in error in directing the assessment of the beneficial interest of the beneficiary. The Revenue claimed that the assessments made by the Officer on the entire value of the trust fund in the hands of the trustee were in accordance with law and that the Appellate Assistant Commissioner of Wealth-tax ought not to have entertained the plea that only the beneficial interest has to be taxed and not the entire trust fund. The Tribunal, after consideration, upheld the Appellate Assistant Commissioner's directions. The finding of the Tribunal is expressed in the following terms in the concluding portion of its order :
"... The interest in the present case, looking to the ratio of the later Gujarat decision, would, therefore, be only a contingent interest in the corpus of the trust till the beneficiary attained the stipulated age. Hence, what could be included in the hands of the assessee would be the interest of the beneficiary in terms of the trust deed and not the corpus of the trust itself. Therefore, the appeals of the Revenue, on this point, fail."
11. Aggrieved by the aforesaid decision of the Tribunal, the Commissioner of Wealth-tax filed applications under section 27(1) of the Wealth-tax act requiring the Tribunal to refer certain questions of law to this court for consideration. That is how the present references are laid before us.
12. We have heard Sri Krishna Koundinya, learned junior standing counsel for the Revenue, and Shri P. Venkatarama Reddy, learned counsel for the respondent-assessee. The short contention urged by learned counsel for the Revenue before us is that the Wealth-tax Officer never purported to make an assessment on the beneficial interest of the beneficiary in each case. It is submitted that the officer made the assessment on the trust as such on the entire trust fund in view of the fact that on the valuation date corresponding to each of these assessment years, the beneficiary did not possess any interest in the trust fund. According to learned counsel, the assessments were made on the trustee under section 21(4) of the Act although it was not specifically expressed in the assessment orders. Learned counsel urges that the intention of the officer in making an assessment in the hands of the trustees as such on the entire value of the trust fund is clear as, at no stage, did he refer to any intention to assess the beneficial interest of the beneficiary in each trust. It is pointed out that even the assessee did not think the assessments to be erroneous as appeals were not filed before the Appellate Assistant Commissioner on that ground. It was only by means of an additional ground that the pattern of assessment is challenged before the Appellate Assistant Commissioner by mistakenly thinking that the officer purported to make the assessment on the beneficial interest of the trust fund. Learned counsel referred to the terms of the trust deed and urged that, in the facts and circumstances, the provisions contained in section 21(4) were clearly applicable and the assessment made on the trustees in each case was in accordance with law.
13. Learned counsel for the respondent-assessee Sri Venkatarama Reddy, claims that the interest of the beneficiary in each one of these cases is a contingent interest on the corresponding valuation date and the value of such a contingent interest alone could be assessed in the hands of the trustee under section 21(1) of the Act. Learned counsel urged that merely because the sole beneficiary had a contingent interest in the trust fund, it cannot be said that the interest of such beneficiary in the trust fund is either indeterminate or unknown so that the provisions of section 21(4) of the Act could be applied. Learned counsel urged that the share of the beneficiary which extended to the whole of the trust fund cannot be held to be indeterminate or unknown. Learned counsel, therefore, urged that, if anything, the officer could have assessed the value of the contingent interest possessed by each beneficiary in the trust fund on the corresponding valuation dates and that the assessment of the entire trust fund is improper. Learned counsel relied on certain judicial pronouncements in support of his contentions to which we shall make reference a little later.
14. We have carefully considered the arguments of learned counsel and we have also gone through out the record. It does not appear that there was any misapprehension in the mind of the trustee when he filed the wealth-tax return for the purpose of assessment in each case. In the returns filed, the trustees declared the value of the entire trust fund. The return was not filed by the trustee on behalf of the beneficiary nor was there any claim before the Wealth-tax Officer that the returns related to the beneficial interest of the concerned beneficiary. The only dispute before the Wealth-tax Officer was regarding the valuation of the shares held in India Fruits Private Limited, Kadiam, by the trustee on behalf of the beneficiary. For instance, in the wealth-tax return for the assessment year 1975-76 in R.C. No. 37 of 1983, the net wealth returned was Rs. 1,35,025 valuing the 150 shares held in India Fruits Private Ltd. at Rs. 1,877 per share. The Wealth-tax Officer rejected the valuation of the shares and determined the same at Rs. 2,675 per share and quantified the wealth assessable on that basis at Rs. 2,53,500. The returns for all the other years were filed on the same basis. The appeal filed before the Appellate Assistant Commissioner was only against the valuation of the shares held in India Fruits Private Limited. It was only during the course of the hearing of the appeal that an additional ground was taken to the effect that the Wealth-tax Officer should have made the assessment on the beneficial interest of the beneficiary and should not have subjected to tax the value of the entire trust fund. The fact that, in the return filed, the trustee himself had offered for assessment the entire trust fund in his hands obviously escaped the notice of the Appellate Assistant Commissioner, when he entertained the new plea of the assessee during the courses of the hearing of the appeal. Seeing that the trustee himself had filed returns disclosing the entire wealth, it seems to us that the Appellate Assistant Commissioner was in error in permitting the additional ground to be raised. Even otherwise, since this is a new plea, he should have sent the matter back for proper consideration as an entirely inconsistent plea was raised during the course the appeal proceedings. If the matter was remitted to the officer for fresh consideration, much of the confusion which prevailed in this ground of cases could have been cleared.
15. It should first be remembered that whenever an assessment is made on a trustees, such an assessment is always subject to the provisions contained in section 21 of the Wealth-tax Act. No assessment can be made on a trustee de hors section 21. We may notice the following observations of the Supreme Court in CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust :
"Let us assume that the trustee of a trust would be assessable in respect of the trust properties under section 3, even in the absence of section 21. But section 3 imposes the charge of wealth-tax 'subject to the other provisions' of the Act and these other provisions includes section 21. Section 3 is, therefore, made expressly subject to section 21 and it must yield to that section in so far as the latter makes special provision for assessment of a trustee of a trust.... Every case of assessment on a trustee must necessarily fall under section 21 and he cannot be assessed apart from and without reference to the provisions of section 21."
16. The above observations of the Supreme Court make it clear at once that whenever a trustee is sought to be assessed for purpose of wealth-tax, an assessment has to be made keeping in mind the provisions of section 21(1) and section 21(4) of the Wealth-tax Act. The scheme of section 21 is succinctly explained by the Supreme Court in Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust's case . It is useful to refer to the following observations of the Supreme Court :
"Sub-section(1) of section 21 provides that in respect of trust properties held by a trustee, wealth-tax shall be levied upon him 'in the like manner and to the same extent' as it would be leviable on the beneficiary for whose benefit the trust properties are held. This provision obviously, can apply only where the trust properties are held by the trustees for the benefit of a single beneficiary or, where there are more beneficiaries than one, the individual shares of the beneficiaries in the trust properties are determinate and known... So also where beneficiaries are more than one, and their shares are indeterminate or unknown, the trustees would be assessable in respect of their total beneficial interest in the trust properties. Obviously, in such a case, it is not possible to make a direct assessment on the beneficiaries in respect of their interest in the trust properties, because their shares are indeterminate or unknown and that is why it is provided that the assessment may be made on the trustees as if the beneficiaries for whose benefit the trust properties are held were an individual."
17. These broad propositions should be kept in mind for the purpose of determining, in a given case, whether the assessment should be made under section 21(1) or under section 21(4). This is turn would depend upon the terms of the trust deed. Let us, therefore, look into the crucial terms which have a bearing on the determination of this issue. We have already extracted above the relevant terms contained in each one of the trust deeds. We have pointed out that the settlor had directed that the corpus of the trust fund and the accumulations of income, if an, over the period should be handed over to the three grandchildren only on their attaining 25 years of age and to the daughter on her attaining 45 years of age. We are told that on the valuation dates corresponding to each of the assessments under reference before us, the beneficiaries had not attained that age. We have also noticed from the trust deed that the beneficiaries cannot compel the trustee to make any payment to them as of right, for their maintenance, education or advancement. That is a matter entirely left to the discretion of the trustees, vide clause 18. The result, therefore, is that on each of the valuation dates corresponding to the assessments under reference, the beneficiary has no enforceable right against the trustee to utilise the whole or any portion of the trust fund for his or her benefit. The rights of the beneficiaries come into existence at a future date when the condition regarding their survival is fulfilled. in view of these terms, learned counsel for the assessee contended before us that the interest of the beneficiary is contingent upon survival and on the relevant valuation dates, it is only a contingent interest. Learned counsel urged that if an assessment of the beneficial interest can be made at all, it can only be in respect of such a contingent interest. We have no difficulty in accepting this part of the contention of learned counsel for the respondent-assessee.
18. It is not necessary to refer to a number of cases bearing on this point. We would prefer to refer to the decision of the Bombay High Court in CWT v. Master Jehangir H. C. Jehangir [1982] 137 ITR 48. That was a case where the settlor created a trust for the benefit of his grandson. Clause 6(c) of the trust deed provided that during the lifetime of the beneficiary and until he attains the age of 27 years, the trustees shall pay to the beneficiary or expend or utilise on his behalf or for his benefit such sums of money out of the corpus of the remaining trust fund as the trustees may, in their absolute discretion, think proper from time to time. The Wealth-tax Officer held that the entire corpus of the trust fund was liable to be included in the assessment of the beneficiary. The matter was carried in appeals and eventually to the High Court. On appeal, the Tribunal held that as far as the corpus of the trust fund was concerned, the only right of the assessee during the relevant assessment years was the contingent right to receive the corpus or such part thereof as remained on his completing the age of 27 years, the said right being contingent, depending on the assessee completing the age of 27 years, that the beneficiary could not be taxed in respect of the value of the corpus of the trust fund and that until the beneficiary attained the age of 27 years, it was in the absolute discretion of the trustees to expend such part of the corpus as they thought fit for purposes specified in the trust deed for the benefit of the beneficiary. It was further held that the beneficiary has no right to demand from the trustees that they should spend any particular amount for any of the purposes specified in the trust deed and hence the beneficiary could not be said to possess any "asset" which could be included in his net wealth. On a reference, the High Court affirmed the decision of the Tribunal that the assessee had only a contingent interest which was not an "asset" which could be included in his net wealth.
19. We would prefer to refer to yet another decision and that it is the decision of a Division Bench of this court to which my Lord Justice Raghuvir is a party in R.C. No. 234 of 1978, dated September 6, 1984. That was also a case where a sum of Rs. one lakh was settled in trust for the benefit of a minor beneficiary. The trust deed provided that till the minor attained the age of 23 years, the trust fund or the interest accruing thereon shall not be paid to him. It was, however, open to the trustees to expend either the corpus of the trust or the income on education or other necessities of the minor. On these facts, the Wealth-tax Officer held that the entire trust fund was liable to be included in the net wealth of the beneficiary even before the beneficiary attained the age of 23 years. This court held that the trust fund was not liable to be included in the net wealth of the beneficiary as he had only a contingent interest.
20. We may point out that the decision of the Gujarat High Court in CWT v. Kum. Manna G. Sarabhai and the decision of the Bombay High Court in Maharani Shri Vijaykunverba Saheb of Morvi v. CIT [1975] 99 ITR 162 and the Full Bench judgment of the Gujarat High Court in CIT v. Kamalini Khatau support the above principle. Sri Venkatarama Reddy, however, argues that even if the beneficiary had no enforceable right against the trust fund on the valuation date, still it must be regarded that the share of the beneficiary in the trust fund is determinate and known and consequently assessment can be made only under section 21(1) of the Act. If no assessment can be made on the beneficiary because the interest of the beneficiary in the trust fund on the valuation date is a contingent interest which is not an asset, an assessment cannot also be made in the hands of the trustee as section 21(1) provides for an assessment in the hands of the trustees in the like manner and to the same extent as it would be leviable on the beneficiary for whose benefit the trust property is held. According to learned counsel, the provisions of section 21(4) are not attracted in the present case and hence the question of assessing the trustee does not arise. We are afraid we cannot accept this contention. If, on an interpretation of the terms of the trust deed, it has to be said that the trustees does not hold the trust fund for the benefit of the sole beneficiary on the valuation dates corresponding to the assessments under reference, section 21(1) has no application. On the terms of the trust deed, it must be held that on the valuation dates, the trustees was not holding the trust fund on behalf of or for the benefit of the beneficiary concerned. The fund is held by the trustees on behalf of and for the benefit of the beneficiary or the beneficiaries whose interest may come to surface at a future date depending upon the happening of the events provided in the trust deed. On the valuation dates under consideration, it is not possible to say that the trustees held the fund of the trust on behalf of or for the benefit of known beneficiaries and much less could it be said that the shares of the persons on whose behalf the trust fund is held are determinate and known. If these conditions are not satisfied, the provisions of section 21(4) automatically apply and an assessment has to be made on the trustee upon the trust fund and an assessment has to be made on the trust upon the trust fund as if it would be leviable upon the conclusion that, on the valuation dates corresponding to all the wealth-tax assessments under consideration, the trustees was not holding the trust fund on behalf of the beneficiaries who are known and whose shares in the trust fund are also determine. The provisions of section 21(4) are clearly applicable and the trustee will have to be assessed on the entire value of the trust fund in the status of an "individual". Although, unfortunately the Wealth-tax Officer did not go into all these aspects when he was completing the assessment (because they were not raised before him at that state), there is no error in the assessments made by him in these cases. We, accordingly, uphold the assessments made by the Wealth-tax Officer subject to any relief in the quantum granted either by the Appellate Assistant Commissioner or by the Income-tax Appellate Tribunal.
21. The question referred for our consideration in each one of the references is, accordingly, answered in the negative, that is to say, in favour of the Revenue and against the assessee. The parties shall bear their own costs.