Income Tax Appellate Tribunal - Pune
Mirje Family Trust vs Income-Tax Officer on 26 February, 1986
Equivalent citations: [1986]18ITD25(PUNE)
ORDER
V.S. Gaitonde, Accountant Member
1. This appeal is filed by the assessee-trust against the order of the Commissioner dated 6-3-1984 for the assessment year 1980-81, under Section 263 of the Income-tax Act, 1961 ('the Act').
2. The assessee is a trust governed by the provisions of the trust deed executed on or about 2-8-1976. There was no income assessable for the assessment year 1977-78. Assessments for 1978-79 and 1979-80 have been completed as if the shares are determinate, in the hands of the beneficiaries. For the assessment year 1980-81, the ITO processed the return dated 28-6-1980 on the same lines as in the past. He held that the income returned Rs. 1,52,300 should be modified to Rs. 1,54,790 for the purpose of determining the definite shares of 9 groups of beneficiaries. The ITO did not frame an assessment on the trustees in like manner as in the case of beneficiaries but chose to assess the beneficiaries direct under Section 166 of the Act (vide order dated 21-3-1983). The assessment order does not enlighten us on the question whether the ITO had applied his mind to certain provisions of law applicable for the first time.
3. The Commissioner called for the records and found that the action of the ITO is prima facie erroneous insofar as it is prejudicial to revenue, thus, warranting action under Section 263. Accordingly, he issued notice under Section 263 dated 5-1-1983 (p. 73 of compilation). The substance of this, notice is that the ITO failed to consider the impact of Explanation 1 to Section 164 of the Act inserted by the Finance (No. 2) Act, 1980 with effect from 1-4-1980. The other contents of the Commissioner's notice refer to certain factual and legal aspects which need not be referred here as they are dealt with separately below.
4. The assessee gave his reply, the contents of which are summarised by the Commissioner in paragraphs 7-10 of his order. The Commissioner rejected the main and alternative arguments and directed the ITO to treat the assessee as discretionary trust and, hence, liable to be assessed at maximum rates. It was pointed out to us that for the assessment year 1981-82, the assessee's contention was accepted by the IAC under Section 144A of the Act.
5. Dr. G.S. Mirje settled Rs. 1,000 on trust on or about 2-8-1976 and reduced the terms to writing. There were four trustees who accepted the funds for utilisation in the manner indicated by the settlor. Trustees were entitled to carry on business, which they did and fetched for the beneficiaries whopping profits as seen above. The beneficiaries were defined in Chapter II Clause 1(a). They are not mentioned here separately as they come into the picture again in Chapter IV, which gives the relevant provisions touching the issue as below :
CHAPTER IV:
The trustees shall hold and stand possessed of the trust fund upon the trust with and subject to the powers, provisions, acts, directions and discretions hereinafter referred to contain and concerning the same that is to say.-
1. Distribution of income
(a) Upon trust in the first instance to collect the dividends, interest, rents and/or other income of the trust fund and out of the same in the first place pay or cause to be paid charges and expenses of and incidental to collection thereof and all outgoings in respect of the trust fund including any income-tax, wealth-tax, expenditure tax, cess, levies, inposts and any other taxes levied or assessed upon the trust and trust properties and assets and including all the outgoings including the remuneration of the trustees and also the costs of the ordinary repairs and maintenance of the immovable properties whether agricultural or non-agricultural and of any movable property or properties for the time being subject to the trust hereof and also costs, charges and expenses (except stamp duty) incidental to the execution of the trust and powers hereunder contained.
(b) Subject to the provisions of Sub-clause (a) of this Clause the trustees shall hold, receive from the benefit of and divide the income amongst the beneficiaries for the income as under :
The trustees shall divide the income of the trust fund into nine equal parts and each such part shall be held, received and distributed as under:
1. The 1st part shall be held, received and distributed amongst the beneficiaries of the first group as under :
Equally amongst such of the daughters of Mr. Chandrakant Mirje, namely, Geeta Mirje, Bharati Mirje, Radhika Mirje, Gouri Mirje and Rima Mirje who are unmarried, or survivor of them.
In case, none of the daughters of Chandrakant Mirje are entitled to the income (being either married or not surviving) the 1st part shall be held, received and paid to the wife of Mr. Chandrakant Mirje provided she is living with him during his lifetime and so long as she is not remarried after his death.
In case, wife of Mr. Chandrakant Mirje is also not surviving or is not living with him, then the trustees shall hold, receive the 1st part and pay the same to Mr. Chandrakant Mirje.
In case of death Mr. Chandrakant Mirje, trustees shall distribute the first part equally amongst the legal heirs of Mr. Chandrakant Mirje other than the settlor.
2. The 2nd part shall be held, received and distributed amongst the beneficiaries of the 2nd group as under :
Equally amongst Nitin Mirje and such of the daughters of Suryakant Mirje, namely, Anjali Mirje, Rohini Mirje who are unmarried, or survivor of them.
In case, none of Nitin, Rohini, Anjali are entitled to the income either on account of death or marriage in case of daughters, namely, Rohini and Anjali Mirje 2nd part shall be held, received and paid to the wife of Suryakant Mirje provided she is living with him during his lifetime and so long as she is not remarried after his death.
In case, wife of Suryakant Mirje is also not surviving or not living with him, then the trustee shall hold, receive the 2nd part and pay the same to Suryakant Mirje.
In case of death of Suryakant Mirje trustee shall distribute the 2nd part equally amongst the legal heirs of Suryakant Mirje other than the settlor.
3. 3rd part shall be held, received and distributed amongst the beneficiaries of 3rd group as under :
To Padmaja Mirje so long as she is not married, on marriage of Padmaja Mirje or her death before marriage, 3rd part shall be held, received and paid to the wife of Manohar Mirje provided she is living with him during his lifetime and so long as she is not remarried after his death.
In case, wife of Manohar Mirje is also not surviving, or is not living with him, then the trustees shall hold, receive the 3rd part and pay the same to Manohar Mirje.
In case of death of Manohar Mirje trustees shall distribute the 3rd part equally amongst the legal heirs of Manohar Mirje other than the settlor.
4. 4th part shall be held, received and distributed amongst the beneficiaries of the 4th group as under :
Equally amongst Rakesh and such of the daughters of Ramesh Mirje, namely, Rita Mirje, Rakhi Mirje who are unmarried, or survivor of them.
In case, none of Rakesh, Rita, Rakhi are entitled to the income either on account of death or marriage in case of daughters Rita and Rakhi, the 4th part shall be held, received and paid to the wife of Ramesh Mirje provided she is living with him during his lifetime and so long as she is not remarried after his death.
In case, wife of Ramesh Mirje is also not surviving or not living with him then the trustees shall hold, receive the 4th part and pay the same to Ramesh Mirje.
In case of death of Ramesh Mirje the trustees shall distribute the 4th part equally amongst the legal heirs of Ramesh Mirje other than the settlor.
5. 5th part shall be held, received and distributed amongst the beneficiaries of the 5th group as under :
Equally amongst Sudesh Mirje and daughter Sucheta Mirje so long as Sucheta is unmarried or survivor of them.
In case none of Sudesh, Sucheta Mirje are entitled to the income either on account of death or marriage in case of Sucheta Mirje, the 5th part shall be held, received and paid to the wife of Vasant Mirje provided she is living with him during the lifetime and so long as she is not remarried after his death.
In case, wife of Vasant Mirje is also not surviving or is not living with him then the trustees shall hold, receive the 5th part and pay the same to Vasant Mirje.
In case of death of Vasant Mirje trustees shall distribute the 5th part equally amongst the legal heirs of Mr. Vasant Mirje other than the settlor.
6. 6th part shall be held, received and distributed amongst the beneficiaries of the 6th group as under :
Equally amongst Parag Mirje and such of the daughters of Ashok Mirje namely, Nutan Mirje, Nayan Mirje, Kshitija Mirje who are unmarried or survivor of them.
In case, none of Parag, Nutan, Nayan and Kshitija Mirje are entitled to the income either on account of death or marriage in case of daughters Nutan, Nayan and Kshitija 6th part shall be held, received and paid to the wife of Ashok Mirj provided she is living with him during his lifetime and so long she is not remarried after his death.
In case of wife of Ashok Mirje is also not surviving or is not living with him then the trustees shall hold,receive the 6th part and pay the same to Ashok Mirje.
In case of death of Ashok Mirje trustees shall distribute the 6th part equally amongst the legal heirs of Ashok Mirje other than the settlor.
7. 7th part shall be held, received and distributed amongst the beneficiaries of the 7th group as under :
To Rahul Mirje during his life time.
In case of death of Rahul Mirje, 7th part shall be held, received and paid to the wife of Deepak Mirje provided she is living with him during his lifetime and so long as she is not remarried after his death.
In case, wife of Deepak Mirje is also not surviving or is not living with him then the trustees shall hold, receive the 7th part and pay the same to Deepak Mirje.
In case of death of Deepak Mirje trustees shall distribute the 7th part equally amongst the legal heirs of Deepak Mirje other than the settlor.
8. 8th part shall be held, received and distributed amongst the beneficiaries of 8th group as under :
Equally amongst Kumar Katte and such of the daughters of Mrs. Shakuntala Katte, namely, Asha Katte who are unmarried or survivor of them.
In case, none of Kumar, Sadhana, Asha are entitled to the income either on account of death or marriage in case of daughters Sadhana and Asha 8th part shall be paid, received and paid to Mrs. Shakuntala Katte.
In case of death of Mrs. Shakuntala Katte trustees shall distribute the 8th part equally amongst the legal heirs of Mrs. Shakuntala Katte other than the settlor.
9. 9th part shall be held, received and paid to the trustees of Ratnabai Balappa Mirje Charitable Trust being sole beneficiaries in the 9th group so long as said trust is not dissolved, determined or closed. The trustees of this trust shall hand over the 9th part subject to the other provisions of the deed to the successor charity to the said charitable trust.
However,
(i) The trustees are hereby expressly empowered that during the continuance of this trust they can in their absolute discretion by a resolution passed 3 months prior to the beginning of any accounting year decide the share of each of the group or that of each of the beneficiary in each of the group in the entire income of the trust fund or any part thereof for the following accounting year different from the share stipulated between groups or the beneficiaries for the income under Clause (b) above. This power shall include power to exclude any one or more of them (i.e., group and/or beneficiary in each of the group) or to give the entire income or only a part thereof to any one to the entire exclusion of all others and this power shall also include the power to give income to any one of the beneficiaries for the income who is not given any shares under Clause (b) above. Such resolution can be made for a specified number of accounting years also and once passed, the resolution shall be irrevocable for the concerned number of year or years ;
(ii) So long as the trustees have not exercised the discretion given to them under Sub-clause (i) above in respect of the entire income of the trust fund or any part thereof, the trustees shall have absolute discretion by passing a resolution 3 months prior to the beginning of any accounting year, to accumulate the said entire income of the trust fund or said part thereof as the case may be in respect of which the trustees have not exercised powers under Clause (i) and to add the said entire income or the said part to the corpus to the entire exclusion of all the beneficiaries to the income of the trust fund. Such resolution can be made for one or more accounting years. Once passed, the resolution shall be irrevocable for the concerned number of accounting year or years. On passing such resolution the relevant income of the trust or part thereof as the case may be which in pursuance of the resolution referred to hereinabove is not held and received in the manner stated in Clause (b) or as resolved under Sub-clause (i) above for these respectively beneficiaries shall be accumulated in the way of the compound interest by investing the same and the resulting income thereof and adding the same to the corpus of the trust to be treated as one fund for all purposes.
(iii) In case the trustees do not exercise the discretion and pass resolution by virtue of or in pursuance of the powers vested in them under Clause (i) and/or (ii) of the resolution passed by virtue of or in pursuance of powers vested in them under Sub-clause (i) and/or (ii) becomes ineffective by efflux of time then the trustees shall hold, receive the income of the trust fund and distribute the same amongst the beneficiaries as provided in Clause (b) above.
As and when the trustees wish tp exercise the powers vested in them by virtue of or in pursuance of the Sub-clause (i) and/or (ii) the trustee shall not be bound to take into consideration any other income which the beneficiaries to the income or any one or more of them may have been receiving from time to time, nor have any regard to the circumstances in the life of the beneficiaries to be entitled to the benefits hereof, nor his prospects in life nor any other property or interest in property to which the beneficiaries or any one or more of them may be entitled from time to time, but the trustees shall have absolute discretion which they shall exercise in the manner and to the extent stated and stipulated in Sub-clauses (i) and (ii) and the decision of the trustees in that respect shall be final and binding on all parties and shall not be questioned at any time in any Court of Law or otherwise, howsoever provided further that the trustees shall not be responsible or accountable in any way to any person whatsoever for any income held, received and distributed by them pursuant to powers mentioned hereinabove, nor for any act, deed of thing bona fide done by them in execution of the powers mentioned hereinabove.
6. According to the Commissioner, the above provisions when read in the light of the Explanation to Section 164 (newly added) render the trust liable to assessment as such at maximum rate. It is this decision of the Commissioner which has given rise to this appeal.
7. Shri Dastur took us through the relevant clauses of the trust deed. According to him the alleged offending Clause enabling the trustees to alter the shares or to accumulate the profits does not have the effect of rendering a specific trust into a discretionary one. Firstly, the power can be exercised only prospectively. The previous year is samvat year. Unless the trustees pass a resolution altering the shares or directing accumulation at least 3 months before the commencement of accounting period, the original specific shares stand. Secondly, trustees have not passed any resolution at any time. Thirdly, one has to examine the specification of shares in reality in the accounting period and not in imagining all possibilities and probabilities. The main Clause specifying beneficiaries is precise and makes provision for possibilities regarding death, marriage, renunciation, etc., by the beneficiaries. If such possibilities do not make the trust discretionary there is no reason why mere existence of Clause enabling the trustees to alter the position regarding shares should render the trust discretionary. Shri Dastur explained this aspect with some illustration. If for example the trustees have a discretion to alter the shares only after a period of 10 years, could it be said that the trust is discretionary right from the beginning when the trustees in fact had no discretion ? Again if originally the trustees had a discretion and they decide not to exercise the discretion in any manner other than specific shares for a specified period could the trust be held to be discretionary during such period ? Further, if the trust deed specifies shares on the basis of place of stay of the beneficiary do the shares become indeterminate merely because the beneficiary is likely to change his place of stay ?
8. Elaborating his point further Shri Dastur pointed out that the trustees knew precisely for whom they were holding the income in terms of the trust deed. Th e provision speaks of income receivable or received. Such income cannot be considered without linking the same with the corresponding previous year. Trustees cannot do anything after a particular date which falls within 3 months prior to the commencement of the accounting period.
9. Explanation 1 to Section 164 reads as under (inapplicable words, omitted) :
Explanation 1 : For the purposes of this section,-
(i) any income in respect of which the persons mentioned...are liable as representative assessee...shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf...such income...is receivable during the previous year is expressly stated...the instrument of trust...and is identifiable as such on the date of...instrument...
Shri Dastur pointed out that the Commissioner has himself not invoked the above provision, but as the assessee has in his reply referred to it, he would give his contentions. The Explanation will not apply to the assessee as there is more than one beneficiary. Besides the beneficiary is identifiable as such. Shri Dastur referred to the word previous year appearing in the above Explanation and submitted that although the second part of the Explanation invoked by the Commissioner does not refer to previous year, from the context one has to consider previous year for all incomes.
10. The teaser part of the Explanation is as below (unwanted words deleted) :
(ii) the individual shares of the persons on whose behalf or for whose benefit such income...is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income...is receivable, are expressly stated in...the instrument of trust...and are ascertain-able as such on the date of such...instrument...
Before coming to his arguments Shri Dastur took us through the memorandum explaining the provision in [1980] 123 ITR (St.) 159. The relevant portion is as under :
Under the existing provisions, the flat rate of 65 per cent is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust...This provision has been misused in some cases by giving discretion to the trustees to decide the allocation of income every year and in other ways. In such a situation, the trustees and beneficiaries are able to manipulate the arrangements in such a manner that a discretionary trust is converted into a specific trust whenever it suits them tax-wise. In order to prevent such manipulation, it is proposed to provide that unless the beneficiaries and their shares are expressly stated...the instrument of trust...and are ascertainable as such on the date of such order, instrument...the trust will be regarded as a discretionary trust and assessed accordingly.
Shri Dastur contended that it is permissible to see such memorandum to understand the scope of the provision, which, for the purpose of interpretation, is to be seen in the light of Heydon's Mischief Rule from [1980] 123 ITR (St.) 159 would be clear that the Explanation was intended to cover these discretionary trusts which could masquerade as specific trusts, by introducing a Clause enabling the trustees to specify beneficiaries and shares each year. In the present appeal, the trust in question did not have any such clause, opening the doors for manipulation. The trust has all along been specific as explained above.
11. Shri Dastur then pointed out that the CBDT circular on which reliance is placed by the Commissioner in paragraph 13 of his order clearly goes beyond the scope of the provision. The CBDT cannot issue instructions on a point of law curtailing the unfettered authority of the ITO to apply his mind objectively to the provision of law. Reliance was placed on K.P. Varghese v. ITO [1981] 131 ITR 597 (SC) and Sirpur Paper Mill Ltd. v. CWT [1970] 77 ITR 6 (SC). It was admitted, however, that there is nothing to show that the ITO applied his mind actually to the provision of law or the CBDT circular. The extract from the circular is given below :
...A trust under which a discretion is given to the trustees to decide the allocation of income every year...will...be regarded as discretionary trust and assessed accordingly.
Before closing his aspect, Shri Dastur submitted, without prejudice that the circular does not apply to the assessee. It applies only to those cases where trustees exercise the discretion when the pattern of income of the trust and beneficiary is ascertainable opening the doors of manipulation. It would be impossible for the trustee to predict the shape of things 3 months before the commencement of accounting period, all the more so when one has to consider the vagaries of business.
12. Apart from the concept that Explanation 1 does not apply to trusts of this type, Shri Dastur contended that the only change in law is that now one should not have to look into anything outside the trust deed. This is the scope of the second limb of Explanation 1(ii) of Section 164 regarding ascertainment of shares from the instrument.
13. Coming to the case law relied upon by the Commissioner, Shri Dastur pointed out that CIT v. Lady Ratanbai Mathuradas [1968] 67 ITR 504 (Bom.) at p. 512, dealt with a case where the discretion was total. In this case, the facts were that the trustees held the property in trust for A and B during their lifetime and thereafter for their children in such proportion as the trustees think fit. A and B by renouncing their interest, underwent a civil death qua the trust leaving the trustees with the remaining obligation which was discretionary. It was held that the actual division by the trustees amongst the beneficiaries in a particular proportion did not render the trust anytheless discretionary. The context is, thus, materially different.
14. Padmavati Jaykrishna Trust v. CWT [1966] 61 ITR 66 (Guj.) relied upon by the Commissioner actually helps the assessee's case as their Lordships have clearly held that the situation is to be seen on the relevant date for each year of taxation. In the case under appeal, there was no doubt about the situation in the accounting period, there being no resolution prior to June 1978 which alone would have the effect of nullifying the main Clause regarding group of 9 specific beneficiaries. CWT v. Trustees of H.E.H. Nizam's Family (Ramainder Wealth) Trust [1977] 108 ITR 555 (SC) which deals with wealth-tax relied upon by the Commissioner ia paragraph 14 of his order also supports the assessee's case as one has to see the actual real position during the relevant period and not all imaginary possibilities.
15. Lastly, Shri Dastur contended that a deeming provision should receive strict interpretation as held in CIT v. Sodra Devi [1957] 32 ITR 615 (SC), CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 (Guj.) (FB) and CIT v. P.K. Kaimal [1980] 123 ITR 755 (Mad.).
16. Shri Dastur then referred to the alternative contention which was raised before the Commissioner, who did not find any force in it. The accounting period of the assessee ended on 20-10-1979. On 21-10-1979 the trustees with the consent of beneficiaries, decided to delete the discretion Clause retrospectively from the date of execution of the deed. It was contended that this aspect was accepted in the assessment year 1981-82 and that the document explains the intention of the parties right from the beginning. Though executed later it should be seen from the purpose of determining the real intention of the parties. Such amendment is permitted under Section 56 of the Indian Trusts Act, 1882. The Commissioner erred in rejecting this contention for the reasons given by the Commissioner in paragraph 12 of his order.
17. Shri Dastur then raised another alternative contention which though not specifically raised before the Commissioner raises a purely legal issue. Explanation 1 to Section 164 was introduced by the Finance (No. 2) Act, 1980. The Bill was introduced in the Lok Sabha on 18-6-1980 and the Act was made operative from 1-4-1980, in terms of Section 1(2) of the Finance Bill. The Explanation can, therefore, apply if at all to income of the previous year commencing on or after 1-4-1980 and not for year ending 20-10-1979. A similar issue came in CIT v. Bombay Photo Stores (P.) Ltd. [1970] 76 ITR 84 (Cal.). In the case of closely-held companies, statutory percentage was changed by the Finance Act, 1959, which received the assent of the President on 28-4-1959 with effect from 1-4-1960. It was held that the new percentage would apply to distribution made after that date. Reliance was also placed on a Special Bench decision that the disallowance of expenditure under Section 44C of the Act which came into effect from 1-6-1976 refers to expenditure incurred after 1-6-1976-American Express International Banking Corporation v. IAC [1985] SOT 263 (Bom.) (SB).
18. In reply Shri Sathe again took us through the relevant part of the trust deed. The provision of Chapter IV if analysed properly would show that specification of definite shares is subject to an overriding discretionary power. Consequently, the shares of beneficiary initially indeterminate, became specific, not because of the Clause specifying shares, but because of forbearance and indulgence shown by the trustees. It cannot, therefore, be said that the shares are ascertainable from the trust deed. What is required under the Explanation is that the shares should be ascertainable once for all on the date of execution of the trust deed. The volition of beneficiaries would doubtless affect the shares but what the Legislature had in mind was the volition of the trustees. Thus, the non-exercise of discretion by the trustees is another way of exercise of discretion so as to result in benefit to specific beneficiaries. Thus, the specific benefit is not in consequence of the specification of individual shares of beneficiaries, but in consequence of the discretion of the trustees to permit the relevant Clause to operate. Thus, if the main Clause and proviso are read together, beneficiaries were not identifiable with the requisite certainty in August 1976 when the deed was executed. Regarding the concept of mischief rule, Shri Sathe contended that rule does not say that one should put a forced construction on the provision. The law requires that the ITO should examine the trust deed in the light of the relevant provisions of law. Even under the mischief rule, the mischief which is attempted to be removed is not regarding discretionary trust masquerading as specific trust, but regarding the need for specification of shares and identification at the time of execution of the trust. Referring to Chaturvedi and Pithisaria's Income-tax Law, Third edn., Vol. 3, p. 3301, Shri Sathe pointed out that the question posed is 'Determination of the nature of beneficiaries'share, whether to be from year to year'. In Explanation I individual shares are taken as indeterminate unless such shares are expressely stated in the instrument and are ascertainable as such. The word 'expressly' is in contradistinction with the words 'by implication' which is the case here. Referring to CIT v. Puthiya Ponmanichintakam Wakf [1962] 44 ITR 172 (SC), Shri Sathe pointed out that without specification of individual shares for the purpose of their ascertainment the trust would fall within the mischief of the Explanation.
19. Shri Sathe then pointed out that the very word 'deeming' means that the expression is otherwise not clear. There is, thus, no scope for strict or liberal interpretation. The fiction created by law has to be taken to its logical end. One has to go by the letter of law, alleged hardship or unreasonableness being irrelevant. Regarding the case law, Shri Sathe's contention was that the same was referred to only for the purpose of explaining the background there being no decided case so far directly explaining the scope of Explanation 1 to Section 164. One has to consider both Clauses (i) and (ii) of Explanation 1 though the Commissioner may have initially referred only to Clause (ii).
20. Regarding the first alternate contention Shri Sathe contended that the position is quite clear. When the Legislature refers to ascertainment as on the date of execution of the instrument, there is no scope of reading the latter document into the original during the period, when there was no such document. Indeed, the so-called document of clarification (page 97 of paper book) states that 'experience have shown that there is no need to continue with such powers.' Experience does not come within a split second from the date of execution and, therefore, the deletion could not have been retrospectively made from the date of original execution. When exactly did the so-called experience mature into a decision to delete the offending clause? The Commissioner is, therefore, justified in rejecting the contention.
21. Regarding the second alternate contention, referring to Kanga and Palkhivala's Law and Practice of Income-tax, p. 83, Shri Sathe pointed out that the Finance Bill always states 'unless the context otherwise requires'. In this case the context shows clearly the applicability for the assessment year 1980-81 as mentioned in paragraph 30.4 of the CBDT Circular No. 281, dated 22-9-1980 [1981] 131 ITR (St.) 4, 36. Even the memorandum explaining the provisions of the Bill [vide paragraph 50 [1980] 121 ITR (St.) 159] states that the provision is applicable for the assessment year 1980-81. In this connection the judgment in Bombay Photo Stores (P.) Ltd.'s case (supra) regarding statutory percentage of dividends and the Special Bench judgments are distinguishable. The former dealt with a position where quasi-penal measure was involved. The latter deals with expenditure from 1-6-1976 and is, therefore, considered in the context to operate from 1-6-1976 (not also from the previous year commencing after 1-6-1976). On the factual aspect Shri Sathe contended that Section 56 deals with transfer of property and not change in the clauses of the trust deed as it would amount to innovation and alteration beyond the trust mandate. Shri Sathe also wondered how the ninth group of beneficiary (charity) could have consented without the Court orders.
22. In his rejoinder, Shri Dastyr contended that the proposition of non-exercise of power of trustee as one of the modes of exercise of such powers so as to pave the way for bringing into play the Clause regarding distribution of specific shares is misconceived. The fact that the trustees could have exercised the power but did not, would ipso facto mean that the shares are definite. Besides the fact that the power can be exercised only prospectively would show that at any relevant point of time the shares were definite and unambiguously specified. Section 56 was referred only for showing that what the trustees and beneficiaries have done on 21-10-1979 is of much smaller magnitude than what is permitted by law. As charity was not adversely affected by the deed of clarification dated 21-10-1979, there was no question of trustees taking the Court's approval.
23. Both sides stated that they are not aware of any direct judgment of the Tribunal or the High Court or the Supreme Court on the issue. The main question is whether the trust is hit by the provisions of Explanation 1(ii) of Section 164. For this purpose it would be proper to deal with the preliminary points first as any decision on these points in favour of the assessee would render the main decision academic. On the question of applicability for the assessment year 1980-81, we agree with the departmental representative. The Finance (No. 2) Act, 1980 prefaces Section 1(2) with the remark 'save as otherwise provided in this Act, Sections 2 to 43 and Sections 52 and 53 shall be deemed to have come into force on the 1st day of April, 1980'. The impugned Clause is Section 27 of the Finance (No. 2) Act. Many other clauses have other operative dates, e.g., Section 17 of the Finance (No. 2) Act is effective from 1-4-1972. Sections 18-23 and 26 of the Finance (No. 2) Act are effective from 1-4-1981 (assessment year 1981-82). Section 24 dealing with validity of return comes into effect from 1-9-1980 indicating that it applies to return filed on or after 1-9-1980. Thus, where a Clause is procedural or penal it may come into effect in respect of returns filed after the date. Similarly, where a Clause deals with expenditure and comes into effect from a date other than the first day of the financial year it would be operative from that date. But where a substantive provision comes into effect from the first day of April, it would apply to the assessment year commencing on the first day of April as discussed by Kanga and Palkhivala's in Law and Practice of Income-tax, Seventh edn., Vol. 1, p. 83 as below :
Though the subject of the charge is the income of the previous year, the law to be applied is that in force in the assessment year, unless otherwise stated or implied.
From the context we do not see any scope of implying that the Explanation would come into operation for the assessment year later than the assessment year 1980-81. The Calcutta High Court judgment in Bombay Photo Stores (P.) Ltd.'s case (supra) and the Special Bench judgment in American Express International Banking Corpn.'s case (supra) have been correctly distinguished by the departmental representative.
24. We also agree with the departmental representative that the so-called clarification dated 21-10-1979 does not help the assessee not merely for the reason given by the Commissioner but also for the reason that Explanation 1 refers to ascertainment on the date of execution of the instrument (in this case about 2-8-1976). The terms of the trust deed are solemn and sacrosanct and cannot be undone in the manner attempted. Section 56 may enable the trustees to transfer the property but not to delete vital Clause inserted by the settlor and annexed to the ownership of the trust property. We express no opinion on the apparently contrary view held by the IAC under Section 144A for the assessment year 1981-82.
25. Explanation 1(i) is not applicable and has not been invoked by the Commissioner. We need to say no more on the rival contentions on this aspect.
26. The ingredients of Explanation l(ii) reproduced in paragraph 10 above are two-fold. The first one, viz., individual shares should be stated expressly in the instrument, makes it clear that there can be no statement by implication or intendment. The shares must be stated in certain or unambiguous terms. If the specific shares are subject to a rider depending on the whims of the trustees, it cannot be said that the individual shares are specified. The fact that the shares remain specific unless the trustees decide to do otherwise before the commencement of accounting period still keeps the shares determinable by implication or intendment and not in express terms. The second limb of Explanation l(ii) is more specific. Shri Dastur contended that if the first limb is given the interpretation as about the second limb would be redundant. According to him, the second limb merely implies that for ascertaining shares one should not go beyond the instrument. In this case the instrument is clear. We, however, hold that the word 'ascertain' means to find out for certain. It may be that sometimes the word is used in a loose sense as mentioned in case law in judicial dictionaries. The ascertainment which again should be from the instrument itself is not possible unless one embarks on an enquiry whether the trustees have in fact invoked their discretionary powers vested in them in the trust deed. This fact cannot be 'ascertained' from the instrument and, therefore, the assessee is hit by the second limb of Explanation l(ii). The omission of reference to the previous year [which features prominently Explanation l(i)] from Explanation l(ii) indicates that for getting out of the clutches of the provision, specification of shares from all times to come is contemplated. Shares may vary depending on the vicissitudes through which beneficiaries go (death, marriage, renunciation, etc.) but if such contingencies are mentioned in the deed the shares would still remain specific and ascertainable. But the very existence of a Clause giving overriding powers to trustees to vary the shares without giving any reasons, except their absolute discretion is fatal.
27. Coming to the case law, we agree that not much can be drawn from them as they do not deal directly with the legal provisions under consideration. The Bombay High Court judgment in Lady Ratanbai Mathuradas' case (supra), however, indicates that one cannot go by actual conduct of the trustees to decide whether shares are specific or not.
28. Regarding reference to memorandum accompanying the Finance Bill, as an aid, we do not find any force. They may be relevant for understanding the background but not for deciding the scope of a provision which has no ambiguity about it. It cannot be assumed from the memorandum alone that the intention was to hit only the discretionary trust which through a built-in provision in the trust deed, could change colour to suit the convenience from tax point of view. It may be mentioned here that the same memorandum states that the provision is applicable for the assessment year 1980-81. The CBDT's instructions may or may not have gone beyond the scope of the provision. The observations of the Commissioner are not all regarding the binding nature of the instructions. The question is whether the ITO ever applied his mind and whether he was even aware of the CBDT's circular. The question whether the CBDT can issue a circular of the type referred to by the Commissioner is now academic as we have held the above view independently of the circular. Whether instructions on a point of law are binding or not, the ITO could not have brushed aside the opinion and proceeded as if they did not exist. If he was aware of the contents of the circular the least that was expected is expression of respectful disagreement or reference under Section 144A. Neither course is adopted by the ITO.
29. Appeal is dismissed.