Bombay High Court
Commissioner Of Income-Tax vs The Trustees Of Staff Gratuity Fund Of ... on 1 November, 1985
Equivalent citations: (1986)88BOMLR84, (1987)59CTR(BOM)92, [1986]162ITR471(BOM), [1987]30TAXMAN426(BOM)
JUDGMENT Bharucha, J.
1. These eight references at the instance of the Revenue raise identical questions. They are :
"(1) Whether, on the facts and in the circumstances of the case, it can be held that all the employees of the assessee-company were the beneficiaries under the trust 'Trustees of the Staff Gratuity Fund of Shree Ram Mills Limited ?' (2) Whether on construing the trust deed and the surrounding circumstances, it can be held that the beneficiaries and their shares were determinate at the end of each accounting year ?
(3) Whether, on the facts and in the circumstances of the case, the income is rightly assessable under the provisions of section 161 of the Income-tax Act, 1961, and not under section 164 of the said Act ?"
2. The assessment years involved are 1963-64 and 1965-66 to 1971-72. The accounting years for each of these assessment years are the calendar years preceding the assessment years.
3. The assessees, it will noted, are the trustees of the Staff Gratuity Fund of Shree Ram Mills Ltd. The trust was brought into existence by by an indenture dated November 11, 1953, between Shree Ram Mills Ltd., as the settlor, and Pratap Bhogilal, Naraindas Meghraj and Nagardas Chaturdas, as the trustees. A copy of the indenture has been exhibited.
4. The indenture recites that Shree Ram Mills were "desirous of setting aside and creating a fund for payment of gratuity to, inter alia, the class of their employees covered by the judgment of the Industrial Court of Bombay in References Nos. 43 of 1947 and 17 of 1948 and also to such others whom the Mills by reason of their long and/or faithful service consider to deserve a gratuity". It also recites that for the purpose "of securing the gratuity payable as aforesaid to the said class of employees covered by the judgment of the said Industrial Court in the said reference and the same or any other gratuity to such other employees whom the Mills consider deserving", the Mills had paid to the trustees a sum of Rs. 2,29,850-8-0 and were desirous of irrevocably settling the said sum upon the trust and for the objects mentioned in the indenture. Clause 1 of the indenture states that the said sum was equal to the computed liability in respect of all employees as at December 31, 1962, on the basis of one month's salary for every year of completed service with the Mills and in any case not exceeding 15 months' salary and the Mills agreed and covenanted withjthe trustees to pay thereafter on or before December 31, of each year, an amount equal to one month's salary in case of employees who had not completed 15 years' service together with the difference due to an increase in salary in the amount previously transferred in respect of the Mills' annual contribution; and a further amount equal to the difference, if any, due to increase of salary in the amount previously transferred in the case of such employees who had previously completed 15 years' service. Under clause 2(a), the trustees were required to pay "gratuity to such of the employees of the Mills who are whole time bona fide employees of the Mills... and who have become eligible under the terms specified and above recited in the judgment of the Industrial Court..... and also to such other or future employees of the Mills, who shall be wholetime bona fide employees..... as the directors of the Mills may hereafter in their absolute discretion think fit to award a gratuity or gratuities....." Only one other provision of the indenture needs to be mentioned and that is clause 2(e). Thereunder "an employee who has been dismissed for dishonesty or misconduct shall not be entitled to claim gratuity".
5. The assessee had claimed before the Income-tax Officer that the income derived by them was exempt under section 10(25) of the Income-tax Act, 1961. The Income-tax Officer rejected the claim and the Appellate Assistant Commissioner, in appeal, agreed with the Income-tax Officer. The assessees came up in second appeal to the Income-tax Appellate Tribunal, but did not there press the claim to exemption under section 10(25). What was urged was that the trust was essentially for the benefit of the employees and not of the Mills and that, since the beneficiaries and their shares were know and determined, the income should be brought to tax in the hands of the assessees not under section 164 but under section 161 of the Income-tax Act, 1961, by charging tax in like manner and to the same extent as would be levied and recoverable from the Mills' employees. The Tribunal accepted the assessees' submission.
6. It was the submission of Mr. Jetly, learned counsel for the Revenue, that the beneficiaries under the indenture and their shares were indeterminate; and that it was imperative that the indenture should specify the beneficiaries and their shares for section 161 to apply. Mr. Jetly relief upon the fact that the employees of the Mills eligible to obtain gratuity under the indenture were not only those covered by the judgment of the Industrial Court but also those whom the Mills nominated. He also pointed out that the employees who were dismissed go no gratuity. These provisions in the indenture, in his submission, made it patent that the body of beneficiaries under the indenture was fluctuating.
7. Mr. Kolah, learned counsel for the assessee, submitted that it was known at the end of each accounting year on whose behalf the trustees had received the income of the trust, being those employees who were eligible under the Industrial Court's judgment and those employees who had been nominated by the Mills. Hence, in his submission, section 164 did not apply and the assessment had to be governed by section 161.
8. It is necessary to reproduce the relevant provisions of section 160, 161 and 164. The relevant portion of section 160 reads thus :
"160. (1) For the purposes of this Act, 'representative assessee' means -
(i) in respect of the income of a non-resident specified in clause(i) of sub-section(1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163;
(ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot;.....
(iv) in respect of income which a trustee appointed under a trust declared by a duty executed instrument in writing whether testamentary or otherwise (including any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (VI of 1913), receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees.
161. (1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.
(2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act.
164. Charge of tax where share of beneficiaries unknown. -Where any income in respect of which the persons mentioned in clauses(iii) and (iv) of sub-section(1) of section 160 are liable as representative assessees or any part thereof, is not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable(which persons are hereinafter in this section referred to as the beneficiaries) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total income of an association of persons, or where such income or such part thereof is actually received by a beneficiary, then at the rate or rates applicable to the total income or total world income of the beneficiary if such course would result in a benefit to the Revenue."
9. Under section 160, the trustees appointed under a trust in writing are representative assessee in respect of income which they receive or are entitled to receive on behalf of, or for the benefit of, any person and are deemed to be an assessee for the purposes of the Act. Under section 161, tax upon such income shall be levied upon and recovered from the representative assessee "in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him". Where, however, the persons on whose behalf or for whose benefit such income is receivable are indeterminate or unknown or their shares are indeterminate or unknown, tax shall be charged as if such income were the total income of an association of persons.
10. The real question before us is : at what point of time has the test of known or determinate beneficiaries and shares under the trust deed to be applied. Is it to be applied afresh on the last day of each accounting year ? Having regard to the words used in the selections, what must be seen is whether the beneficiaries and their shares werejknown or determinable from the trust deed when the income was received by the representative assessee, that is, at the end of each accounting year, when the net income becomes calculable. It does not appear necessary that the beneficiaries should be named in the trust deed. It is enough, if at the end of each accounting year it can be ascertained, having regard to the terms of the trust deed, who the beneficiaries in that accounting year were.
11. Mr. Jetly laid emphasis upon the fact that section 160(1)(iv) spoke of the trust deed. In his submission, the trust deed had, therefore, to specify who the beneficiaries were; if it did not so specify, the provisions of section 164 would be attracted.
12. Section 160 defines a representative assessee and says that he will be treated as an assessee under the Act. How a representative assessee shall be taxed in provided for by sections 161 and 164. An assessee must be a representative assessee before either section 161 or 164 can apply. It is not the case of either the Revenue or the assessees before us that the assessees are nor a representative assessee. The issue between them is as to whether the assessees, as a representative assessee, have to be taxed employing the provisions of section 161 or of the provisions of section 164. Mr. Jetly's emphasis upon the mention in the trust deed of section 160 is we think, misplaced.
13. No decision has been pointed out to us which deals with the issue before us. There are, however, two Bombay judgments which suggest that the conclusion that we have reached is correct.
14. The first is the judgment in Yakub Versey Laljee v. CIT ([1946] 14 ITR 548 (Bom)). Stone C.J. and Kania J., delivered separate but concurring judgments. They were concerned principally with interpreting the first proviso to section 41(1) of the Income-tax Act, 1922, which read thus : "Provided that where any such income, profits are gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate." The learned judges interpreted the word "or" therein as equivalent to "and" and held that it had to be determined not only what was the quantum of the share but also who was the beneficiary who was entitled to it and test for the application of the proviso was whether both the shares and the beneficiaries who were to take the same were not indefinite or unknown. In his judgment, Kania J. observed (at page 553), and this is what is relevant here, that the question before the court was necessarily in respect of the accounting year only and did not affect the rights of the parties in respect of the income which might accure in a later year.
15. In B. P. Mahalaxmiwala v. CIT ([1954] 26 ITR 177 (Bom)), a Division Bench comprising Chagla C.J. and Tendolkar J., found that the aforementioned case of Yakub Verses Laljee ([1946] 14 ITR 548 (Bom)), had been wrongly decided in that the word "or" used in the proviso was disjunctive and not conjunctive. Towards the end of the judgment, Chagla C.J. noted that Mr. Palkhivala who appeared for the assessee had wanted to rely on an order by which the trustees had been ordered to pay the beneficiaries the income of the trust in a certain manner. The court said that the order had been passed after the relevant assessment years and it would express no opinion on the effect this order might have upon the question as to whether the case had been taken out of the proviso.
16. Mr. Jetly did not argue with any seriousness that the share of eachjemployee to gratuity was not determinable under the indenture. It is clearly determinable, so that section 164 cannot apply on that account.
17. What Mr. Jetly did stress was clause 2(e) of the indenture. Thereunder, an employee who had been dismissed for dishonesty or misconduct was not entitled to claim gratuity. The phraseology of clause(e) does not prescribe a pre-condition for entitlement to gratuity. It suggests, rather that the right to gratuity vests in such an employee of the Mills as is covered by the Industrial Court's judgment or is nominated by the Mills, with the contingency of divestment should he be dismissed for dishonesty or misconduct. This being so, clause(e) cannot sustain Mr. Jetly's argument that the body of beneficiaries under the indenture is indeterminate and fluctuating.
18. Whether or not the persons on whose behalf the representative assessee receives income are indeterminate or unknown or their individual shares are indeterminate or unknown has, we hold, to be determined on the last day of the accounting year in which the income is received. In the instant case, on the last day of the relevant accounting years, the employees who were eligible to obtain gratuity under the indenture and their share thereof was determinable. The assessees, as a representative assessee, must, therefore, be assessed not under the provisions of section 164 but under the provisions of section 161.
19. The Tribunal, we find, was right in having so held, although for reasons which are somewhat different. We do not agree with the Tribunal's view that "each and every employee is interested in the gratuity fund". if the Tribunal meant by this that all employees of the Mills were beneficiaries under the indenture.
20. We answer the question thus :
Question No. 1 : In the negative.
Question No. 2 : In the affirmative and in favour of the assessees.
Question No. 3 : In the affirmative and in favour of the assessees.
21. The Revenue shall pay to the assessees the costs of the references.