Income Tax Appellate Tribunal - Madras
Cumi Employees' Welfare Trust vs Wealth-Tax Officer on 13 July, 1998
ORDER
OF REFERENCE TO THIRD MEMBER
13. 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 with effect from April 1, 1980, affects the liability of the assessee-trust to wealth-tax ?"
ORDER OF THIRD MEMBER T.V. Rajagopala Rao (President)
1. While disposing of the appeals in W.T.A. Nos. 324, 325 and 326/Mds. of 1989, 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, 1061 with effect from April 1, 1980, affects the liability of the assessee-trust to wealth-tax ?"
2. The President, Income-tax Appellate Tribunal, 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 November 20, 1989. Therefore, in view of that order, as President, Income-tax Appellate Tribunal, I took up the difference of opinion for consideration and give my orders hereunder.
3. The assessee is Cumi Employee's Welfare Trust, Madras. Admittedly, Carborandum Universal Ltd., contributed Rs. 14 lakhs for the welfare of the employees to this public charitable trust. The assessee-trust was created by Carborandum Universal Ltd. for the welfare of its employees by a deed dated February 20, 1980. The provisions of section 40A(11) of the Income-tax Act, were inserted by the Finance Act with retrospective effect from April 1, 1980. The said provisions along with heading of section 40A read as follows :
"40A. Expenses or payments not deductible in certain circumstances. - .....
(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."
4. By a resolution dated August 23, 1984, Carborandum Universal has made a claim for repayment of the unutilised contribution of Rs. 19 lakhs each for the 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 June 30, 1982, June 30, 1983 and June 30, 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 April 1, 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 Carborandum Universal Ltd. to the assessee trust could not be regarded as belonging to the assessee trust for the purpose of the Wealth-tax Act, even from April 1, 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 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) ownership has a residuary character.
5. 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 v. Prem Behari Khare [1989] 177 ITR 97. He also took into consideration, the budget speech delivered by the then Finance Minister, while introducing the Finance Act, 1984 which was recorded in [1984] 146 ITR (St.) 65. The then Finance Minister, inter alia, explained the following to 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 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."
6. He had also taken into consideration CBDT Circular No. 387 (see [1985] 152 ITR (St.) 1), dated July 6, 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 (pages 8 and 9). 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.
7. 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 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.
8. At the end of para. 11 (page 11), the learned Judicial Member after discussing the combined effect of section 40A(11) as well as the promulgation of the Benami Transactions (Prohibition) Act, 1988 ([1988] 174 ITR (St.) 37), and after duly taking into consideration the effect of the hon'ble Supreme Court judgment in Mithilesh Kumari v. Prem Behari are [1989] 177 ITR 97, 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 the 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 with effect from April 1, 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 April 1, 1980, when the company was entitled to adopt the expenditure as its own thereby appropriating the income."
9. In para. 12 (page 12), the learned Judicial Member held that the provisions of section 40A(11) are retrospective in operation and should be applied even from April 1, 1980. While examining the claim of liability from April 1, 1980, of returning the unspent amount which was contributed by 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. v. Finsbury Borough Council [1951] 2 All ER 587; [1952] AC 109 (HL), 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."
10. 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 (page 12) 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 (page 12) "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 April 1, 1980, when these provisions came into force to acknowledge the right of ownership of the company to the fund". In other words, the learned 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 April 1, 1980. The learned Judicial Member further stated as follows (page 12) :
"Even if we view the matter only with reference to the possession of funds from April 1, 1980, until the claim was made for repayment, we cannot ignore the legal liability of the trust to repay the funds which accrued from April 1, 1980, itself and thus cancel out the value of any assets which may be regarded as belonging to the assessee during the period April 1, 1980, to the date of the claim for repayment."
11. In para. 15 (page 13), 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 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 effected, 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) where construed, properly creates certain liability but not a contingent liability. Under the said provision the unspent amount from April 1, 1980, belongs to the donor and no longer belongs to the assessee-trust. In order to buttress 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 the 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 April 1, 1980, only is to be accepted, even in such a case since the deed itself was executed on February 1, 1980, and since under the provisions of section 40A(11) the amount can be rightfully claimed by the donor any moment from April 1, 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 [1969] 72 ITR 801 (SC), 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 April 1, 1980, onwards from which date section 40A(11) came into operation and, therefore, he directed the Wealth-tax Officer to exclude the funds of Rs. 14.45 lakhs from the net wealth of the assessee trust.
12. The learned Accountant Member struck a note of dissent from this conclusion reached by the learned Judicial Member. He held that the Wealth-tax Officer noticed that the contribution made by the donor to the assessee trust was Rs. 14.45 lakhs. He also held that the Wealth-tax Officer 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 lakhs 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 the provisions of section 40A(11), the sum of Rs. 14 lakhs represented a repayable liability. The Wealth-tax Officer 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 the passing of 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 Wealth-tax Officer held that the liability to return back the amount of Rs. 14 lakhs to the donor came into existence only in August, 1984, and till then there was no such liability. The Commissioner of Income-tax (Appeals) agreed with this point. In appeal, the learned Commissioner of Income-tax (Appeals) found that the company passed a resolution calling back the amount of contribution only on August 21, 1984, and till that date the trust was making use of the fund treating the same as its own money. The Commissioner of Income-tax (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 Commissioner of Income-tax (Appeals)' order also and according to his reading of section 40A(11), the unutilised amount shall be repaid as soon as as may be. The learned Accountant Member took note of sections 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 CWT v. Bhogilal Maganlal Shah [1968] 69 ITR 288 wherein it is stated that a 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 spes successionis on the other. He has relied upon the decision of the Madras High Court in CWT v. Pierce Leslie and Co. Ltd. [1963] 48 ITR 1005 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 proposition that a future contingent liability is not a debt due or owing. It is not only not due, but being contingent, may never 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 and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767 (SC) 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 page 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 praesenti 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 Raja Sir Harinder Singh Brar Bans Bahadur v. WTO [1967] 64 ITR 394, 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 are whether the amount is payable in praesenti or in futuro : debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened."
13. After observing several case law, 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., 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. 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 April 1, 1980, itself and therefore, the liability to return the funds even from April 1, 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 Accountant Member. 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 State of Punjab v. Mohar Singh [1955] AIR 1955 SC 84 was quoted in the order of the learned Accountant Member and ultimately he held the following findings :
Bearing in mind the judgments which had been 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.
14. In para. 9 (page 20), the learned Accountant Member 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 CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC); Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC) and CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 (SC) 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 CIT v. Godavari Sugar Mills Ltd. [1967] 63 ITR 310 for the proposition that it is the law which prevailed on the date of the annual general meeting which has to be taken into account in considering the legal validity of the order under section 23A made by the Income-tax Officer. Again he had given the following findings (page 20) :
"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 counsel for the appellant in this case".
15. Then, the learned Accountant Member had quoted from McDowell and Co. Ltd.'s case [1985] 154 ITR 148 (SC) discussed it and then catalogued his ultimate conclusion at para. 9 (page 20) 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 measure meant to plug the loophole in the Income-tax Act by denying the benefit of deduction for contribution to dubious welfare trust cannot be interpreted as conferring a benefit to the trust itself in the matter of wealth-tax assessment."
16. 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 without minding whether while giving full effect to the retrospective operation, the provisions of the Wealth-tax Act are likely to be contravened. He submitted that the sum of Rs. 19 or Rs. 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., April 1, 1980. Therefore, even though on April 1, 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 lakhs of Rs. 19 lakhs, 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 April 1, 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(11) actually revokes the trust or makes the trust revocable to the extent of Rs. 19 lakhs or Rs. 14 lakhs, 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."
17. The trust deed was executed on February 20, 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 paid before the 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, Parliament conferred a right to the donor who had contributed the funds to the irrevocable trust before March 1, 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 April 1, 1980, the assessee company in that case had claimed refund of not only of 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 was 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 headnote 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 of 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)(i). This unutilised amount because of retrospective operation should be deemed to be returnable even by April 1, 1980. To put in other words, from April 1, 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 a 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 the 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 Appellate Assistant Commissioner was upheld."
18. 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 Judicial Member was justified on the facts and in law to allow the claim of the assessee trust in this case.
19. 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 Departmental Representative, 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 April 1, 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 claimable then the amounts returnable or the property transferable still remain the assets of the trust and the assessee-trust only is liable to pay wealth-tax on the value of such assets. The learned Departmental Representative drew my attention to the Central Board of Direct Taxes Circular No. 387 (see [1985] 152 ITR (St.) 1) dated July 6, 1984, under the following captioned subject :
"The Finance Act, 1984-Explanatory notes on the provisions relating to direct taxes."
20. The Central Board of Direct Taxes circular is found extracted in [1985] 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 [1985] 152 ITR (St.) 1. The learned Departmental Representative argued that a debt should be allowed in the hands of the trust only after the claim is made, which is possible only after April 1, 1984. He stated that the learned Judicial Member in para. 10 (page 11) of his order had followed the Supreme Court decision in Mithilesh Kumari v. Prem Behari Khare [1989] 177 ITR 97. 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, 342. The learned Departmental Representative 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 and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. 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 August 23, 1984. Therefore, according to the learned Departmental Representative on and from August 23, 1984, or thereafter the unspent amount is returnable but not before that date. There was a possibility to treat this unspent amount of Rs. 19 lakhs or Rs. 14 lakhs as the case may be to be a debt due by the assessee trust only on and from August 23, 1984, and not earlier to that date.
21. In reply learned counsel for the assessee contended that the argument of the learned Departmental Representative virtually nullifies the retrospective operation of the provisions of section 40A(11), which came into operation from April 1, 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 into a debt owed by the assessee even from April 1, 1980. The latter part of section 40A(11)(i) 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 the 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 lakhs or Rs. 19 lakhs, as the case may be. 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).
22. 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 February 20, 1980, referred to above under which the assessee trust was created, no longer remains an irrevocable trust on and from April 1, 1980, and the amount which is returnable, viz., Rs. 14 lakhs or Rs. 19 lakhs, 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 the revocable trust from April 1, 1980, in which case, they should be held to be belonging to the donor company. Correspondingly, the unutilised amount which is the sum repayable to the donor with effect from April 1, 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, and the unutilised amount which is recoverable from the assessee trust from April 1, 1980, is deductible from the total value of the asset held by the assessee trust on the valuation dates subsequent to April 1, 1980.
23. After having considered the arguments of 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 Judicial Member's ultimate conclusion that the unutilised amount in the hands of the assessee-trust from out of the contributions made by the donor becomes a debt in the hands of the assessee-trust from April 1, 1980, itself under the provisions of section 40A(11), which are specifically held to be retrospective from April 1, 1980, is correct. The only point of difference as set out in the referred question is whether the retrospective operation of section 40A(11) with effect from April 1, 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 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 understood, 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 a 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 February 20, 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 April 1, 1980, by virtue of the 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 a revocable trust and does not remain irrevocable.
24. 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 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 latter 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., April 1, 1980. In this connection, the provisions of section 4(5) of the Wealth-tax Act are 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 the 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 the clear wording of section 40A(11) in that regard. I have already examined this position in ITO v. Tube Investment of India Ltd. [1990] 32 ITD 172 (Mad) from which I have already quoted. Therefore, when the unutilised amount and the accretions thereto 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 lakhs or Rs. 14 lakhs, as the case may be, can be considered officially as an asset in the donor-company's hands from April 1, 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 April 1, 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 Accountant Member, 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 40A(11) of the Income-tax Act. The first conclusion that on the relevant dates, viz., June 30, 1982, June 30, 1983 and June 30, 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 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 donee-trust can be termed as contingent liability which arose to the assessee after April 1, 1980. Another conclusion of the learned Accountant Member 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 an erroneous view of law or the meaning of section 40A(11). No discussion was there in the order of the learned Accountant Member in support of this conclusion. The difference as well as the discussion in relation to the Benami Transactions (Prohibition) Act, 1988, by both the learned Members, in my opinion, is not directly relevant for disposal of the case and the sixth conclusion of the learned Accountant Member, 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 lakhs or Rs. 14 lakhs, as the case may be, as a liability in the hands of the donee-trust for all the three assessment years under consideration.
25. 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.