Madras High Court
L. Gouthamchand And Anr. vs Commissioner Of Income-Tax on 24 January, 1989
Equivalent citations: [1989]176ITR442(MAD)
JUDGMENT Ratnam, J.
1. At the instance of the assessee in T.C. Nos. 114 to 119 of 1979, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), he following question of law in respect of the assessment years 1969-70 to 1974-75, has been referred for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the share income of the trust should be assessed in the hands of the assessee ?"
2. The same question for the same assessment years has been referred under section 256(1) of the Act at the instance of the assessee in T.C. Nos. 108 to 112 of 1979.
3. The assessee in T.C. Nos. 114 to 119 of 1979, one Lalchand Sowar created a trust by name "Suresh Trust" by means of a deed dated October 14, 1968. On the same day, his wife, Smt. Madan Bai, created another trust by name "Ashok Trust". In the first trust, the assessee in T.C. Nos. 114 to 119 of 1979 had a 5/34ths share and in the second a 10/75 ths share. The assessee in T.C. Nos. 108 to 112 of 1979, L. Gouthamchand, had a 10/34ths and 15/75ths share, respectively, in the two trusts. The first trust was created for the benefit of the prospective wife of the minor son of Lalchand, viz., Suresh. Likewise, the second trust was created for the benefit of the would be wife of Ashok, another minor son of Lalchand. The provision was made in the first trust deed that if Suresh did not get married before attaining the age of 30, or died without marrying, the corpus of the trust as well as the accretions should be conveyed to the other son, Ashok. In the second trust deed also, a similar provision was made thif Ashok did not get married before attaining the age of 30 or died without marrying, the amounts set apart under the trust with the accumulated income should be conveyed to the other son, Suresh. In the course of the assessment proceedings for the years in question, the Income-tax Officer assessed the share income of the assessees from the trust funds in their hands on the ground that the trusts depended upon an uncertain event, viz., the marriage of Suresh and Ashok and that the beneficiaries were also uncertain. On appeal by the assessees, the Appellate Assistant Commissioner, purporting to follow the decision of the Tribunal in I.T.A. Nos. 261 to 263/Mds/1974-75 dated April 28, 1976 (a reference from which was dealt with and answered by this court in the decision reported in CIT v. P. Bhandari ), held that the trusts were valid and that the share income from both the trusts cannot be assessed in the hands of the assessees. On further appeals before the Tribunal, at the instance of the Revenue, it was contended on behalf of the Revenue on the strength of another decision of the Tribunal in I.T.A. Nos. 1617, 1618 and 2233/Mads/1976-77 dated November 19, 1977, that the share income from the two trusts should be assessed in the hands of the assessee. The assessees, however, maintained that the share income from the trusts could not be assessed in their hands. Referring to the clauses in the trust deeds, the Tribunal took the view that in both the trust deeds, there is no provision as to what should happen in the event of Suresh and Ashok not being in existence at a time when they may become entitled to take the corpus and the accretions and that the trusts would, therefore, fail and under section 83 of the Indian Trusts Act, 1882, there would be a resulting trust in favour of the author of the trust and his wife, in which case, there could not be a transfer of the amounts set apart under the two trust deeds and the share income from the trust funds necessarily had to be assessed in the hands of the assessees.
4. Learned counsel for the assessees contended that the Tribunal fell into an error in applying section 83 of the Indian Trusts Act and that the share income of the assessees from the trust cannot be assessed in their hands, as it cannot be postulated that the trust is incapable of execution, especially when some of the events contemplated under the provisions of the respective trust deeds have not happened during the relevant assessment years is question. Learned counsel also submitted that Suresh and Ashok got married and there was thus no possibility of any resulting trust at all attracting the application of section 83 of the Indian Trusts Act. Strong reliance was also placed by learned counsel upon the decision in CIT v. P. Bhandari . On the other hand, learned counsel for the Revenue contended that the trusts in question would fail, in the event of Suresh and Ashok not being in existence at that point of time contemplated under the relevant clauses of the trust deeds and that it would have the effect of creating a resulting trust in favour of the assessee and his wife as to justify the assessment of the share income of the assessees in the trust funds in their hands. Reference was also made in this connection to the decision reported as Indian Molasses Co. Ltd. v. CIT .
5. We may now refer to the relevant clauses, viz., clauses (5) and (6) in the deed creating "Suresh Trust" dated October 14, 1968, executed by Lalchand. They run as follow :
"(5) As soon as he said Suresh gets married, the capital amount together with all its accretions accrued and earned up to that date including the balance of income that had arisen thereon shall be conveyed by the trustees to the said wife of Suresh absolutely, provided she is of 21 years of age, otherwise the same shall be conveyed to her on her attaining the age of 21 years.
(6) If Suresh does not get married before attaining the age of 30, as contemplated in the earlier clauses or dies without marrying, the trustees shall convey the capital amounts with all he income accumulated therefrom to my son, Sri Ashok, who shall be entitled to hold and enjoy the same absolutely."
6. There is no dispute that in the trust deed executed by Smt. Madan Bai on October 14, 1968, creating "Ashok Trust", there is a similar provision. The Income-tax Officer was of the view that the trusts so created are invalid for uncertainty and that the beneficiaries under the trusts are also uncertain and unknown and on that reasoning, the share income of the assessees in the trust funds was assessed in their hands. However, the Appellate Assistant Commissioner took a contra view on the strength of the decision of the Tribunal in Second ITO v. P. Bhandari (I.T.A. Nos. 261 to 263/Mad/1974-75). We may point out that the decision of the Tribunal in I.T.A. Nos. 261 to 263/Mds/1974-75 was the subject-matter of a reference in T.C. Nos. 1019, 1020 and 1045 of 1977 and this court had occasion to consider the validity of the trust in those references. The decision thereon is reported in CIT v. P. Bhandari relied on by learned counsel for the assessees. In that case also, two trusts were created by the assessee and his wife for the benefit of the prospective wives of their two minor sons and cash gifts were made to the two trusts on various dates by the assessee and his wife. The Income-tax Officer subjected to tax the proportionate share income of the trust in the hands of the assessee on the ground that the trusts were invalid, but the Appellate Assistant Commissioner, on appeal, held that the trusts in favour of the prospective daughters-in-law were valid. The Tribunal took the view that the trusts were valid and, consequently, the share income of the assessee in the trusts could not be included in the income of the assessee While dealing with the reference in CIT v. P. Bhandari , it was pointed out that to constitute a valid trust, the author of the trust must indicate with reasonable certainty his intention to create a trust, the purpose of the trust, the beneficiary, the trust property and also the transfer of the property to that trust and that though it is not possible to say at the stage of the execution of the trust as to who is the actual person who is to be benefited by the trust, so long as the trust deed gives the description of the person to be benefited, the beneficiary cannot be said to be uncertain or that the trust would be otherwise invalid. It was also laid down that the initial object of the trust is to benefit the would-be daughter-in-law through the second son and if that failed for the reason that he did not marry during his lifetime, the other beneficiary would be the would-be daughter-in-law through the first son and only if those clauses failed, hen, the question would arise whether the ultimate object was either vague or indefinite and that with reference to the beneficiaries, who are either named or can be ascertained, the trust cannot be said to be invalid. In this case also, under clause 6 of the deed of trust, referred to earlier, provision is made to the effect that if Suresh did not get married before attaining the age of 30 or died without marrying, then, he trustees were directed to convey the capital amount as well as the accretions to the other son, Sri Ashok. Similarly, in the other trust deed relating to "Ashok Trust", executed by the wife of the assessee in T.C. Nos. 114 to 119 of 1979, a similar provision has been made to the effect that if Ashok did not get married before attaining the age of 30 or died without marrying, the amounts set apart together with the accretions should be conveyed to the other son, Suresh. It is seen that in clause 5 of the respective trust deeds, the beneficiary has been indicated with certainty, though the identity could get fixed only on the marriage of Suresh and Ashok taking place, in which case, their respective wives would be entitled to the trust funds with the accretions. The beneficiaries under clause 5 of the trust deeds having been indicated with reasonable certainty, the trusts cannot be held to fail for want of certainty about the beneficiary. Clause 6 of the respective trust deeds merely provided for a contingency which may or may not arise and in the events that have happened, could not have arisen at all, as it was stated at the bar that Suresh and Ashok go married and this has not been disputed. There is, therefore, no scope whatever for clause 6 of the respective trust deeds coming into force. We are of the view that the Tribunal was clearly in error in applying section 83 of the Indian Trusts Act to the trusts in question. Section 83 runs as follow :
"Where a trust is incapable of being executed, or where the trust is completely executed with out exhausting the trust property, the trustee, in the absence of a direction to the contrary, must hold the trust property, or so much thereof a is unexhausted, for the benefit of the author of he trust or his legal representative."
7. In this case, the trusts cannot be said to have been executed without exhausting the trust property. What remains to be considered is, whether the trusts are incapable of being executed. We are unable to agree that the trusts are incapable of execution. It may be that provision has not been made in the deeds of trust as to what should happen in a situation that may arise when both Suresh and Ashok are not in existence. However, during the years of account relevant to the assessment years in question, both Suresh and Ashok had been very much in existence and there was thus no possibility of a resulting trust in favour of the assessee in T.C. Nos. 114 to 119 of 1979 and his wife in the relevant years. Considering the objects of the trusts and also the fact that the sons of the assessee in T.C. Nos. 114 to 119 of 1979, viz., Suresh and Ashok, had been in existence during the period in question and had also married, as we were informed at the bar, there is no scope for applying section 83 of the Indian Trusts Act at all on the facts and the circumstances of the case.
8. We now refer to the decision in Indian Molasses Co. (P.) v. CIT , relied on by the Revenue. By a trust deed executed by the assessee-company, a provision was made for the payment of a pension to its then managing director for the term of his life, should he live up to the age of 55 and then retire. Under clause 2 of the deed of trust, the trustees held a sum of Pounds 8,208-19-0, which was paid to them and they held the rupee equivalent of Pounds 326-14-0 which was the annual payment, which the assessee-company undertook to make upon a trust and spend the same and the income, if any, in taking out a deferred annuity policy with an insurance society in the name of the trustees on the life of the managing director. The policy was to cover the annuity of Pounds 720 per annum payable to the managing director for life from the date when he would attain he age of 55 years. Under clause 3 of the trust deed, it was contemplated that, should the managing director and his wife be alive on the date when the managing director retired, annuity would be payable to hem for their joint lives and thereafter to the survivor of the two. A further provision was also made that if the managing director should die before reaching the age of 55, but his wife should be alive, she would get an increased annuity. Nothing was made available to either the managing director or his wife, if both died before the date on which the managing director would reach the age of 55. Likewise, here was also no provision made in the deed that if the wife of the managing director should die before he reached the age of 55, in which event, no annuity would be payable. The assessee-company claimed that the payments thus made constituted expenditure within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held that if the managing director and his wife, both died before September 20, 1955, when the managing director was due to attain the age of 55, the trust would become incapable of being executed and the trust funds remained unexhausted and as there was no direction in the trust deed that in such a situation, monies paid to the trustees would follow any course other than that indicated in section 83 of the Indian Trusts Act, the trustees would hold the monies for the benefit of the assessee and, therefore, it could not be said that by creating a trust in such terms and putting the trustees in possession of the funds in accordance with its provisions, the assessee had wholly parted with its interest in the amounts concerned. Thus, the controversy in that case, though it incidentally involved the provisions of the deed of trust, really centred round claim for expenditure, as having been incurred within the meaning of section 10(2)(xv) of the Indian Income-tax, Act 1922, and was not in any manner exclusively concerned with the question of the validity of the trust as such. While examining the claim of the company under section 10(2)(xv) of the Indian Income-tax Act, 1922, as an expenditure, the court took into account the clauses in he trust deed and found that the amount spent would not really be an expenditure, having regard to the provisions in the trust deed. That decision cannot, therefore, be pressed into service by the Revenue to invalidate he truss in this case. We are, therefore, of the view that the Tribunal was wrong in applying section 83 of the Indian Trusts Act to hold that there was a resulting trust in favour of the husband and wife and that the share income from the trust funds has to be assessed in the hands of the assessees. We, therefore, answer the question referred to us in the negative and in favour of the assessees. There will be, however, no order as to costs in these references.