Karnataka High Court
Commissioner Of ... vs Indumathi R. Kirloskar on 18 November, 1988
Equivalent citations: ILR1990KAR893, 1988(3)KARLJ377
JUDGMENT S. Rajendra Babu, J.
1. These are common references at the instance of the Revenue for the years 1970-71 to 1973-74 arising under the Income-tax and the Wealth-tax Acts. The common questions referred for our consideration are as follow :
"(i) Whether under the trust deed dated October 4, 1945, the assessee had the power to relinquish her beneficial interest in the trust properties during coverture ?
(ii) Whether there was a valid relinquishment of her interest under the Indian Trusts Act, 1882, by execution of the release deed dated August 23, 1969, by the assessee ?
(iii) Whether the Tribunal was right in holding that the income from the trust funds was not assessable in the hands of the assessee after August 23, 1969 ?
(iv) Whether the Tribunal was right in holding that the assessee had no life interest in the trust properties after execution of the release deed dated August 23, 1969, which can be included in her net wealth for he assessment years 1670-71 to 1973-74 ?"
2. A trust was created on October 4, 1945, by the late Lakshman Kashinath Kirloskar in favour of his four daughters-in-law for their life; after their death, the interest in the trust was to pass to his four sons and after them to their progeny. By virtue of clause 5 of the said trust deed, the assessee was appointed the first beneficiary for life for the income after deducting expenses. In default of appointment, it is provided in the trust deed, that the capital and income would go to the male children of Ravi Kirloskar as tenants-in-common by succession, and in default of appointment and in case of there being no male issue, the capital and income would go for the purposes and to the persons appointed by Ravi Kirloskar. Lastly, the said capital and income would go to Ravi Kirloskar's next-of-kin ascertained as per law.
3. By a deed of appointment dated August 23, 1969, Ravi Kirloskar appointed his son, Vijay Kirloskar, as the sole beneficiary in respect of the capital and income of the trust fund. On August 23, 1969, the assessee, as well as her husband, Ravi Kirloskar, by two separate deeds, surrendered their life interest in favour of the trustee. The Income-tax Officer held that Ravi Kirloskar was not empowered to appoint his son, Vijay Kirloskar, as his sole beneficiary. By a deed dated August 23, 1969, the assessee had released without consideration in favour of the trustees all the income arising from the trust fund and her beneficial life interest so that her beneficial life interest so that her beneficial life interest may be determined and the same shall vest in the trustees to deal with the beneficial interest as though the life interest in her favour had become extinct. The next person in the order of beneficiaries, i.e., the assessee's husband, Ravi Kirloskar, also executed a similar deed of release and by another deed appointed his son, Vijay Kirloskar, as the sole beneficiary. The Income-tax Officer took the view that since the appointment was made under clause 2(ii) of the deed of settlement dated October 4, 1945 which did not authorise him to make any appointment, the same was invalid.
4. On behalf of the assessee, it was contended, relying upon a decision of the Bombay High Court in CIT v. Smt. Kasturbai Walchand Trust [1964] 51 ITR 255 (Bom), as also section 9 of the Indian rusts Act, 1882, that by virtue of the principle of acceleration, Vijay Kirloskar had become he beneficiary with effect from August 23, 1969. The Income-tax Officer referred to the contention based on section 9 of he Indian Trusts Act and held that a disclaimer under section 9 of the aforesaid Act could be made only by a proposed beneficiary and not by a beneficiary who had already accepted the benefits of the trust. He also held that there was a prohibition of anticipation during coverture and the intention of the settlor being that the assessee shall not have power to deal in advance or before due time with her life interest when she is legally deemed to be under the protection of her husband, transfer of the same was completely restrained. He drew analogy for this proposition from the provisions of section 58 of the Indian Trusts Act. The Income-tax Officer distinguished the ruling of the Bombay High Court in Kasturbai Walchand Trust's case [1964] 51 ITR 255, that there was no such restraint herein and held that the principle of acceleration cannot be invoked as the prior disposition has not come to an end in the manner contemplated by the settlor in the settlement deed. He further held that the assessee could not surrender her beneficial interest during coverture and that she continued to be the beneficiary. According to the Income-tax Officer, the release effected by Ravi Kirloskar lost its significance and, therefore, he brought to tax the assessee's income from the trust fund in the hands of the assessee. He applied the same principle in regard to the assessment under the Wealth-tax Act also and included the value of the beneficial interest of the assessee amounting to Rs. 2,37,102 in the assessee's net wealth.
5. Against this order of the Income-tax Officer, an appeal was filed before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner examined the matter from a slightly different angle and held that the Income-tax Officer had misunderstood the meaning of the words "without power of anticipation during coverture" as no settlor can compel an unwanted settlement on a beneficiary and the beneficiary has the right to release herself from the settlement by surrendering her interest. He has held that by executing the release deed, the assessee had brought to an end the beneficial interest in the trust property so that the interest of the successor would be accelerated. He also held that the release deed dated August 23, 1969, was valid in law and was not hit by the proviso to section 58 of the Indian rusts Act. His view was that the assessee had validly surrendered her rights under the trust so that her rights became extinguished and that it was not necessary, therefore, to consider whether the appointment of Vijay Kirloskar as the beneficiary of Ravi Kirloskar was valid because after the extinguishment of the interest by the assessee, no income accrued to her from the trust benefits. As a result of the surrender by the assessee, the interest of her husband, Ravi Kirloskar, as the next beneficiary was accelerated. Though clause 2(ii) had been mentioned in the deed of appointment by Ravi Kirloskar, clause 5(ii) of the settlement deed gave power to Ravi Kirloskar to make appointments and in exercise of that power appointment has been made and the mere wrong mention of clause 2(ii) did not affect the validity of the appointment at all. The Appellate Assistant Commissioner did not agree with the view of the Income-tax Officer that even if the surrender was valid the income would have to be assessed in the hands of the assessee under section 64 of the Income-tax Act as, in his view, there was, in fact, no transfer of interest by the assessee to her husband and, therefore, section 64 of the Income-tax Act was not applicable at all. Whatever came to the assessee's husband or her son in consequence of the surrender was the result of the provisions made in their favour in the original settlement deed and the release deed did not transfer any property in their favour. Accordingly, the Appellate Assistant Commissioner held that in so far as the assessment year 1970-71 is concerned, the income arising after August 23, 1969, had to be excluded from the assessment of the assessee while for the rest of the years, the entire income had to be excluded. Following the same reasoning, the Appellate Assistant Commissioner deleted the sum of Rs. 2,37,102 included by the Income-tax Officer in the assessee's wealth-tax assessment.
6. On further appeal to the Tribunal by the Revenue, it was contended that the surrender by the assessee in favour of the trust was invalid because she had no power under the trust deed dated October 4, 1945, and her life interest was without the power of anticipation during coverture. It was also contends that the restraint on the power of anticipation was equal to a restraint on the power of alienation. The surrender by the assessee was an alienation of property and, therefore, was invalid.
7. Countering this argument, it was contended on behalf of the assessee that the power of anticipation was equal to the power of alienation and there was no alienation in the case at all. What the assessee had done in the case was to efface herself by executing a release or a surrender of her beneficial interest; while an alienation requires two parties, the transferor and the transferee, in this case, it was a unilateral act on the part of the assessee and, therefore, there was no transfer involved. The argument was further developed that the legal consequences of the act of the assessee was that the surrender was a merger of a lesser interest with a higher interest and did not amount to a transfer. It was contended that if the restraint on the right of transfer by the assessee or to efface herself was absolute, the restraint would be void. On the effect of the proviso to section 58 of the Indian Trusts Act, it was stated that it did not exactly restrain the power of anticipation and without a transfer, a person can deprive himself of his life interest. For the Revenue, the answer given was that the assessee had deprived herself of her beneficial interest and, therefore, the release can be construed as a gift to the trustees. In fact, according to the Department, it was a gift by the assessee to her son although her husband had also intervened being the next in line of beneficiaries, and thus there was a transfer involved and the same was invalid. The Tribunal held that there cannot be a compulsion on a married woman who had given the property subject to restraint of anticipation that she must receive the income during coverture whether she asked it or not and that she cannot, by any means such as relinquishment, release or disclaimer, get rid of the income even during coverture. It further held that the execution of the release deed did not amount to a transfer of asset by the assessee in favour of the minor children because of he provision made in their favour under the original deed of settlement and the release deed did not create any interest in their favour. It took the view that the surrender of interest by a prior beneficiary accelerates the interest on the subsequent beneficiary both under the Transfer of Property Act and the Succession Act and the same principle was applicable to settlements. The Tribunal examined the scope of section 9 of the Indian Trusts Act and held that a disclaimer can be made even after accepting the benefits under the trust for some time. After examining the scope of sections 56 and 58 of the Indian Trusts Act, the Tribunal did not agree with the Department that the assessee had no power to deprive herself of her beneficial interest and, therefore, the release was invalid and ineffective. In its view, the expression "without power of anticipation during coverture" did not mean that during coverture, a woman had no power to deprive herself of her beneficial interest and she was not compelled to receive he benefit for her natural life. The expression used in the settlement deed was not what was contained in sections 56 and 58 of the Indian Trusts Act, but what is ordinarily understood under the English law. Therefore, it did not mean that the assessee had no power to efface herself by surrender or relinquishment. The Tribunal also noticed the distinction in the language of section 10 of the Transfer of Property Act and sections 56 and 58 of the Indian Trusts Act and held that the assessee had power to execute the release deed so as to accelerate the subsequent interest. The expression used in the trust deed was to give the income to the assessee during her life absolutely but without power of anticipation during coverture and after her demise to her husband, Ravindra, and after him to the male children of Ravindra, etc. The words did not indicate that the settlor intended that the interest of Ravindra should arise only on the natural death of the assessee and in no other event. Since the assessee had, under law, a right to disclaim the interest, she had under the settlement disclaimed and released it and, therefore, the ulterior interests got accelerated. Thus, he Tribunal agreed with the view taken by the Appellate Assistant Commissioner and dismissed the Department's appeals. The Tribunal also took the view that the assessee had no life interest to be included in her net wealth.
8. In this court, the contentions raised before various authorities were reiterated by both the parties. It was submitted on behalf of the Revenue that the trust deed directed payment of the residue of such interest, dividends and other incomes to the assessee during her life absolutely but without power of anticipation during coverture and, therefore, the proviso to section 58 of the Indian Tusts Act was attracted to the case. According to learned counsel, by the trust deed in this case, the property had been transferred for the benefit of the assessee, a married woman, with he condition that she shall not have the power to deprive herself of her beneficial interest during the subsistence of her marriage and, therefore, the relinquishment made by her is invalid as being contrary to sections 9, 56 and 58 of the Indian rusts Act. Learned counsel for the assessee contended that though there was difference in the expressions used in he trust deed and the proviso to section 58 of the Indian Trusts Act, there is no difference in essence inasmuch as what was prohibited or restricted under the trust deed was only that the assessee shall not have the power of anticipation during coverture, while what was prohibited under the proviso to section 56 or 58 of the Indian trusts Act was that she cannot transfer her interest bring the subsistence of her marriage and anticipation could be equated with alienation or transfer. It was contended that the proviso to section 58 of the Indian Trusts Act was not attracted to the present case inasmuch as the assessee had merely surrendered her interest, the same did not amount to a transfer and hence did not attract the prohibition contained in sections 56 and 58 of the Indian Trusts Act.
9. In the light of the contentions advanced, the first point to be considered is as to the meaning of the words "transfer", "surrender" or "relinquishment", and whether surrender or relinquishment would amount to transfer in this case.
10. Shri Srinivasan, learned counsel for the Revenue, contended that the meaning to be attributed to the expression "transfer" in section 58 of the Indian Trusts Act is one as defined under section 2(47) of the Income-tax Act and not what is given under the Transfer of Property Act. The meaning of the expression "transfer" given in the Income-tax Act is only for the purpose of income-tax and that is concerned or confined only in relation to a capital asset and not a general meaning of the expression "transfer". Therefore, the argument developed on the basis of importing the definition of the Income-tax Act to the Indian Trusts Act is fundamentally wrong and is devoid of merit. The expression "transfer" is not defined under the Indian Trusts Act. Transfer of property is governed by the provisions of the transfer of Property Act, Even in respect of a trust, if there is any transfer of property, the expression used in the Transfer of Property Act can be looked at because the Indian Trusts Act is not a code and the preamble to the Act provides that "Whereas it is expedient to define and amend the law relating to private trusts and trustees", and, therefore, the same is not exhaustive on all the aspects relating to trusts. Now, it is a well-established principle of interpretation that if the expressions used in an enactment have acquired a legal meaning, the Legislature is presumed to be aware of the same and it must be deemed that the expression used in the prior enactments or the allied enactment or law thereof declared by courts was borne in mind by the Legislature in using the expressions in the later enactments. The use of the expression "define and amend" without the expression "consolidated" in the preamble to the Indian Trusts Act leads one to the conclusion that while the Act is exhaustive in respect of matters provided for in it, it is not exhaustive in respect of all matters relating to private trusts. In cases where the provisions of the Indian Trusts Act do not cover a situation, then, general principles of law could be invoked. Therefore, the expression "transfer" used in the Indian Trusts Act will have to be understood in the same sense as it is understood under the Transfer of Property Act and the general law applicable to the same.
11. In view of what has been held in Thayyil Mammo v. Kottiath Ramunni, , and Kuppuswami Chettiar v. A. S. P. A. Arumugam Chettiar, , as also in Natvarlal Punjabhai v. Dadubhai Manubhai, , by the Supreme Court, surrender of property will not amount to transfer or alienation if it is mere self-effacement without an intention to transfer the same in favour of a person having no interest in it and if it is not contrary to the intention of the settlor of the trust. On the strength of his enunciation of law made by the Supreme Court, on behalf of the assessee, it was contended that the surrender made by her in favour of her husband who has a beneficial interest in those rights, merely resulted in acceleration of his rights. Thus, by surrender, she has merely effaced herself from the rights flowing from the trust deed and that act will not confer any new benefit at all one her husband but is only consequence flowing from he trust deed. The surrender on her part cannot amount to a transfer as contemplated in section 56 or 58 of the Indian Trusts Act. To counter this argument, it was argued on behalf of the Revenue that :
(i) In the trust deed, there is restraint on anticipation during coverture and this claim prohibits self-effacement or surrender or relinquishment and this is contrary on the intention of the settlor of the trust deed;
(ii) The renunciation is in favour of the trustees who have no beneficial interest in the trust and, therefore, relinquishment amounts to transfer;
(iii) the doctrine of acceleration cannot be applied to the present case (a) as the trust deed contains a clause of restraint on anticipation during the subsistence of marriage and is contrary to the intention of the set or of the trust; (b) the subsequent rights, after the assessee as provided in the trust deed, are all contingent rights; and
(iv) The contrary intention being expressed in the trust deed and the conditions for the application of the doctrine of acceleration not being fulfilled, there is a clog on surrender of her rights by he assessee and such relinquishment amounts to a transfer for purposes of sections 56 and 58 of the Indian Act.
12. The settlement deed provides that the assessee shall receive the residue of such interest, dividends and other income during her life absolutely but without power of anticipation during coverture and other provisions are made to be effective after her demise. Therefore, we have to consider the effect of the expression "without power of anticipation during coverture". This very concept is dealt with in Snell's Principles of Equity (27th Edition), at page 516, and also in Cheshire's Modern Law of Real Property (11th Edition), at page 911. If property was given to a married woman by words which indicated expressly or by necessary implication that she was to enjoy it for her sole and separate use, equity removed that property from the control of the husband by regarding him as a trustee, and conferred upon the wife full powers of enjoyment and disposition. But equity went further than this, for, perceiving the danger that a husband might over-persuade his wife to sell her separate property and hand the proceeds to him, it permitted the insertion in marriage settlements of what was known as restraint upon anticipation. The effect of such restraint was that a woman, while possessing full enjoyment of the income, was prevented during her coverture from alienating or charging the corpus of the property. She could devise, but could not sell or mortgage it. In Snell's Principles of Equity, the origin of the doctrine of restraint on anticipation in trust, is traced. It also states that the same stood abolished after the Married Women's Property Act, 1882, as it was considered unnecessary as a protection against her husband and would work unfairly against her creditors. But whatever that may be, the effect of such restraint is that if the property was given to a married woman, the same was effective until she died or again became single by the death of her husband or divorce or on remarriage and it only means that when a property was given for the separate use of a married woman without power of anticipation or words to that effect, she was disabled, during coverture, from alienating the property or the right to future income. Therefore, a condition of restraint on anticipation could be equated with restraint on alienation or transfer. It is, therefore, clear from a reading of the relevant clauses of the trust deed that the prohibition or restriction on the assessee is not to alienate her right and in the present case no such ground can be set up. The document does not say that she has no right to surrender her interest but what is prohibited is only alienation of her right. Hence, it must be held that there is no prohibition against surrender or relinquishment of interest in the trust deed and the intention of the settlor is not against such an act on the part of the assessee.
13. The Supreme Court in Thayyil Mammo's case, , held that a registered instrument, styled as a release deed, releasing the right, title and interest of the executant in any property in favour of the releasee for valuable consideration may operate as a conveyance if the document clearly discloses the intention to effect a transfer. The decision in Kuppuswami Chettiar's case, , is to the effect that a relinquishment is not an alienation unless the intention to transfer is found to exist as when it is in favour of a person having no interest in it. In the present case, both the husband of the assessee and her son, Vijay Kirloskar, had already an interest as provided in the trust deed itself. Therefore, the relinquishment cannot be held to result in transfer of a right in favour of a person not having an interest merely because the relinquishment is in favour of the trustees. The trustees hold the rights arising from such relinquishment for the benefit of those mentioned in the settlement. This is a case of effacement of interest of the assessee and such effacement brings about an acceleration of interest of beneficiaries, next in succession, as provided in the trust deed.
14. The Act does not contain any provision relating to the acceleration of subsequent interests on the failure or premature determination of a prior interest. In cases covered by the Act, the provisions of the Act govern the matter but in cases not covered by the Act, the court is entitled to apply rules of equity and good conscience, and in order to ascertain the principles of equity and good conscience, the court may rely upon the English law. Acceleration of subsequent interest under the trust is a doctrine applicable in Indian both to trusts created by wills and to settlements inter vivos, provided two conditions are fulfilled, namely, that the settlor has not shown a contrary intention in the document creating the trust and that the subsequent interest is a vested interest and not a contingent interest. If the document expresses or indicates a contrary intention, the subsequent interests are not accelerated, but there is a resulting trust of the income in favour of the settlor or the assessee. This very aspect was considered by the Bombay High Court in Devlakshmi Harisukh Vahalia v. Vishwakant P. Bhatt. .
15. We have already held that the document of trust does not indicate any intention contrary to the applicability of the principles regarding surrender. The interest of the husband and son cannot be termed to be contingent because they were to get the right on the death of the assessee. Since he husband was to succeed to he beneficial interest in the trust and death being a certainty, it cannot be termed to be contingent. There is an obligation on the part of the husband to make appointment only in the absence of male heirs and the property would pass to male heirs. Therefore, we cannot read into the document an intention contrary to the principle or doctrine of acceleration and, therefore, we find no substance in the contentions raised on behalf of the Revenue. In this case, the surrender made by the assessee, therefore, does not come within the prohibited area of the proviso to section 58 of the Indian Trusts Act because there is no transfer of the assessee's interest in any manner. What has happened here is only acceleration of the interest. The document creating the trust did not disclose any contrary intention and the subsequent interest is not a contingent interest but a vested interest. There was nothing contrary indicated in the trust deed that the assessee would not surrender her interest. But, what was prohibited was only the power of anticipation which is equivalent to the power of alienation and, therefore, the Tribunal was right in coming to the conclusion that the proviso to section 58 of the Indian Trusts Act was not attracted to the present case. Thus, neither sections 56 and 58 of the Indian Trusts Act, nor the clauses in the trust deed, act as a bar to the assessee's surrendering or relinquishing her rights under the trust deed in favour of her husband.
16. It is next contended that section 9 of the Indian Trusts Act provides that a disclaimer or renunciation may be made only by the proposed beneficiary before the acceptance of the trust. A reading of section 9 of the Indian Trusts Act discloses that it prescribes only the mode by which a beneficiary may renounce his interest under the trust in recognition of the possibility of a beneficiary desiring to renounces interest under the trust. That is all and nothing more. The expression used is "may" and is only consistent with the section being construed as an enabling and not a disabling provision. Therefore, independent of section 9 of the Indian trusts Act, a beneficiary can surrender his rights notwithstanding Whatever may have been stated in the trust deed or in section 9 as long as the same does not contradict sections 56 and 58 of the Indian Trusts Act.
17. Therefore, the assessee had the power to relinquish her beneficial interest in the trust properties during coverture and, accordingly, we answer the first question in the affirmative and against the Revenue.
18. For the same reasons, we are also of the view that the relinquishment or the surrender of interest by the assessee under the trust is not contrary to the provisions of the Indian Trusts Act or any other law and the execution of the release deed dated August 23, 1969, is valid and results in a valid surrender or relinquishment. Therefore, our answer to the second question is in the affirmative and against the Revenue.
19. Consequently, the third question should also be answered in the affirmative holding that the income from the trust was not assessable in the hands of the assessee after August 23, 1969, and, therefore, the Tribunal was right in arriving at its conclusion. We answer the third question accordingly.
20. Thus, we hold that the assessee had no life interest in the trust property after the execution of the release deed dated August 23, 1969, which could be included in her net wealth for the assessment years 1970-71 to 1973-74 and answer the fourth question also in the affirmative and against the Revenue.