Supreme Court of India
JYOTENDRASINHJIversusS.L. TRIPATHI AND ORS.
- Citation
- 1993 INSC 138
- Decided
- 2 April 1993
- Disposal
- Dismissed
- Bench
- B P JEEVAN REDDY
Holding
The Court held that the Settlement Commission’s order is not liable to be set aside merely because its interpretation of the trust deeds may be erroneous; the order is only interferable if it contravenes a provision of the Income‑Tax Act, and the trusts in question are revocable under Section 63, making the income taxable in the hands of the settlor and thereafter the appellant, with the Revenue’s option under Section 166 being valid.
Summary
The appellant's father created three U.S. and two U.K. settlement trusts for family members and reported the trusts' income in his Indian tax returns from 1964‑65 to 1969‑70. After his death in 1969, the appellant filed returns for 1970‑71 including the same income and later contended that the trusts were discretionary, that the income was already taxed abroad, and therefore not taxable in India. The Settlement Commission held the U.S. trusts to be revocable under Section 63 and the U.K. trusts to be specific, taxing the income in the hands of the settlor and subsequently the appellant. The Supreme Court examined whether the Commission’s order could be reviewed under Article 136 and whether the trusts fell within Section 63 and Section 166. It held that the only ground for interference is a breach of the Income‑Tax Act; the Commission’s interpretation of the deeds, even if erroneous, does not constitute such a breach. The U.S. trusts are revocable and their income is taxable under Section 63 during the settlor’s life and, after his death, under Section 166 in the hands of the appellant. The U.K. trusts’ income was likewise taxable. Consequently, the appeals were dismissed.
Issues considered
- The scope of judicial review of Settlement Commission orders under Article 136.
- Whether the U.S. settlement deeds constitute revocable transfers within the meaning of Section 63 of the Income‑Tax Act, 1961.
- Whether the U.S. trusts are discretionary and, if so, whether tax can be levied only on the trustees or also on the beneficiaries under Section 166.
- Whether the U.K. trusts are specific or discretionary and the taxability of their income.
- Whether double taxation provisions exempt the income from Indian tax.
- The effect of the Commission’s interpretation of the trust deeds on the legality of its order.
Legislation cited
- Income Tax Act, 1961s. 160(1)(iv), s. 164(1), s. 166, s. 245-1, s. 245-C, s. 245-D, s. 245-E, s. 245-F, s. 245-H, s. 245-HA, s. 245-L, s. 5, s. 61, s. 63
Subjects
Income TaxSettlement CommissionArticle 136Section 63Section 166Discretionary trustRevocable trustDouble taxationJudicial reviewForeign trust income
Judgment
y
A
~
JYOTENDRASINHJJ
v.
S.l. TRIPATHI AND ORS.
APRIL 2, 1993
,.,.
B [B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.)
Constitution of India, I950: Altic/es 136, 226 read with provisions in
Chapter XIX-A. Income Tax Act 1961-Settlement Commission's order-In-
-
terference or judicial review under Arlicle 226 or 136-Scop,,_.<;ommission 's
c interpretation of settlement deeds-Effect of
~
Income Tax Act, 196I: Sections 61, 63, 164(1), 166-U.S. settlement
deed/trnst deed-Whether discretionary-Revocability under section 6J-
Sett/or's power under U.S. deed-Extent of-Revenue's. option to tax income
froni a discretionary trnst in the hands of trnstees or beneficiaries.
D
Income Tax Act, 1961: Sections 5, 63, 164( I T-f.J.K. settlement
deed/tn1st deed--lncome declared and .shown in Tax returns by sett/or and
after his death by his son--Taxability of-Payment of taxes in UK or USA on
E
Income from settlement deeds-{f proved, not taxable in India.
>-
Imerpretation of Documenr-u.SA. or U.K. settlement deeds or trnst
deeds-Constrnction_,'Transfer': "family members". "descendants of the Jami-
ly members''-i'ffeaning of-Income derived from such trnsts whether taxable
in India.
-
F The apl"'llant's father executed on 1.1.1964, three deeds of settle-
ments (trust deeds) in the United States of America. The terms in them ~
all were identical. The object of these trusts was to provide for the educa-
tion, maintenance and up-keep of the members of the settlor's family and
their descendants. He also executed two settlements in U.K. with the very
same object.
G
The settlor (appellant's father) was iiling returns of his income in ~
India including therein whole of the income arising from the trusts. For
the assessment years 1964-65 to 1969-70, he iiled the returns. Since he died
on 22-8-1969, i.e. in the middle of the accounting year (relevant to the
H assessment year 1970-71), two returns \Vere fiJed, one up to the date of his
938
JYOTENDRASINHJJ v. S.J. TRIPATHI 939
..,.
death and the other from the date of bis death to the end of the accounting A
year, by bis eldest son, the appellant, including the whole of the income
from the trusts.
The appellant filed appeals against the assessment orders pertain·
y ing to the assessment years 1965-66 and 1966-67 contending that. the
income from U.S. trusts was not taxable in India either in the hands of B
settlor or in his hands and that the inclusion of the said income in the
-
returns by the settlor and by the appellant was a mistake.
The appellant preferred revisions against other assessment orders,
where appeal was barred, taking the plea of non-taxability with respect to
the income from U.K. trusts and from the U.S. trusts.
c
-y- The Appellate Assistant Commissioner allowed the appeals.
The Revenue's appeals to the Tribunal were allowed holding that the
A.A.c. acted contrary to Rule 46(2) of the Income Tax Rules in admitting the
D
additional grounds and in looking into new material. The Tribunal remitted
the appeals back to A.A.C. At that stage the appellant approached the
settlement commission under Chapter XIX(A) of the Income Tax Act, 1961.
The Settlement Commission went into all the aspects of the matter
and computed the taxable income of appellant's father and his income for E
"""- the assessment years 1964-65 to 1970-71 and 1970-71 to 1982-83. It
directed the l.T.O. to compute the total income for each of the said
- assessment years accordingly and raise demand for the tax due.
The appellant preferred two sets of appeals before this Court
against the two orders .of the Settlement Commission. C.A.s. ·1301-07 of F
1991 related to the assessment years 1964-65 to 1970- 71 and C.As.1288-
'T 1300of1991 related to the assessment years 1970-71to1982-83.
The_ appellant contended that the settlement Commission erred in
law in holding that the U.S. trusts were revocable trusts within the mean-
ing of Section 63 of the Act; that for attracting Section 63, the deed of G
transfer must give the transferor a right to re-transfer directly or indirect•
)... ly whole or any part of the income or assets to the transferor or it mus\.
give him a right to re-assume power directly or indirectly over the whole
or any part of income or assets; that in the present case such power was
not given to the transferor; that U.S. trusts were discretionary trusts and H
940 SUPREME COURT REPORTS (1993] 2 S.C.R.
'r
A therefore the assessment could be made only upon the trustees and not
~
upon the beneficiaries-recipients; that the revenue could not take ad-
vantage of the mistake of law on the part of the settlor or the appellant;
that with the death of the settlor, the U.S. trusts ceased to be revocable
trusts and the appellant could not be taxed on the income received by him
from the said trust, because only the trustee could be taxed; that the.U.K.
..,.,
B trusts were also discretionary trusts and not specific trusts as held by the
Settlement Commission and the assessment could be made only upon the
trustees and not upon the beneficiaries-recipients; that the Settlement
Commission committed a legal error in including the income from the
U.K. trusts in the total income of the settlor and the appellant even though
-
c it was not paid out by the trustee nor received by the assessees in India;
that in the U.S.A. and U.K.; tax was levied upon the respective trust
incomes under the laws of those countries; that levying tax over again in ~
India on the very same income amounted to double taxation and therefore
· the tax levied in India was to be waived.
D
The Revenue submitted that even if any principles were decided by the
Settlement Commission, they did not bind the Income"Tax authorities in
proceedings relating to subsequent years; that the order of the Commission
was relevant to and was confined only.to the assessment years to which it
E
related; that this Court under Article 136 of the Constitution would not be
able to go into the merits of the order; that .the Settlement Commission's .,.
interpretation <)n the U.S. and U.K. trusts was perfectly in order and did not
call for any interference by this court; that during his life-time, the settlor
F
had declared that he had received income from the U.K. and U.S. trusts and
had included the same in his returns of income for each of the assessment
years relevant herein; that the appellant too acted similarly and therefore
·-
the argument of not receiving the iacome ·from UK trusts was a mere
after-thought and should not be given any credence; that a trustee or the -....
trustees was/were expected to act reasonably and in furtherance of the object
or the trusts; that they were to apply the income for the purposes specified,
because they could not just accumulate it; that applying. the test of
G reasonableness, it was to be held that ordinarily, the trustee ought to
distribute the income each year; and that it was to be held that the income
from the UK trusts had rightly been taken into account by the Commission ,.,J...,
while passing its orders.
H Dismissing the appeals, this Court,
~·
JYOTENDRASINHJI v. S.I. TRIPATHI 941
r
HELD : 1.01. The finality clause contained in Section 245-1 does not A
and cannot bar the jurisdiction of the High Court under Article 226 or the
jurisdiction of this court under Article 32 or under Article 136, as the case
may be. But that does not mean that the jurisdiction of this court in the
appeal preferred directly in this court is any different than what it would
'y
be if the assessee had first approached the High Court under Article 226
and then come up in appeal to this court under Article 136. A party does
B
-
not and cannot gain any advantage by approaching this Court directly
under Article 136, instead of approaching the High Court under Article
226. This is not a limitation inherent in Article 136; it is a limitation which
"1 this court imposes on itself having regard to the nature of the function
performed by the Commission and keeping lo view the principles of c
judicial review. [955. D-E]
..,...
1.02. The scope of enquiry, whether by High Court under Article 226
br
or this Court under Article 136 is also the same • whether the order of
the Commission is contrary to any of the provisions of the Act and if so,
has it prejudiced the petitioner/appellant-apart from ground of bias, D
fraud & malice which, of course, constitute a separate and independent
category. [956-B)
1.03. The appellant power under Article 136 is similar to power of
.<( j'!dicial review, where the appeal is directed against the orders of the E
Settlement Commission.
- Sri Ram Durga Prasad v. Settlement Commission, 176 l.T.R. 169 and
Chief Constable of the N. W. Police v. Evans, [1982] 1 W.L.R. 1155, referred
to. [956-D]
F
,,.. 1.04. The only ground upon which this Court can interfere in these
appeals is that the order of the Commission is contrary to the provisions of
the Act and that such contravention has prejudiced the appellant. [956-EJ
1.05. The main controversy in these appeals relates to the inter-
pretation of the settlement deeds - though it is true, some contentions of G
law are also raised. The commission has interpreted the trust deeds in a
A particular manner. Even if the interpretation placed by the commission on
the said deeds is not correct, it would not be a ground for interference in
these appeals, since a wrong interpretation of a deed of trust cannot be
said to be a violation of the provisions of the Income Tax Act. [956-F) H
942 SUPREME COURT REPORTS [1993) 2 S.C.R.
'i'
A 1.06. The interpretation placed upon the said deeds by the Commis-
sion does not bind the authorities under the Act in proceedings relating
to other assessment years. [956-G]
B
1.07. Though it is not necessary, strictly speaking, to go into the
correctness of the interpretation placed upon the said deeds by the commis-
sion, and it is enough if this court confines itself to the question whether the
order of the Commission is contrary to the provisions of the Act, yet, for the
sake of completeness, the Court examine whether the order of Commission
-y '
is vitiated by any such wrong interpretation. [956-H, 957-A)
-
c 2.01. A discretionary trust is described as a trust where the trustees
have been vested with a discretion in the matter of distribution of trust
income among the specified class of beneficiaries. In the case of such
trusts, the trustees have a discretion to pay whole or part of the income to "t
such member or members of the designated class as they think lit and in
such proportion as they deem appropriate. [957 C-D)
D
Snell's Principles of Equity, 25th Edn. (1965) page 129, referred to.
(957-E)
2.02. The US settlement deed empowers the trustee to hold, manage,
invest and re-invest the principal of the trust fund, to collect and receive
E
the income thereof and to pay or apply so much of the net income as the >-
trustee shall in his absolute and uncontrolled discretion deem advisable
to or to the use of one of more members of the settlor's family. It is thus
F
a discretionary trust.
2.03. P.ara 1(2) of the U.S. Deed empowers the settlor/transferor and
-
the trustee, acting together to direct the trustee, at any time, to pay over
the entire income and/or entire corpus or a part thereof to such member -(
of the settlor's family or their descendants as they may direct. The said
power cannot be exercised hy the settlor acting .alone. [958-B)
G 2.04. The power, properly construed, is given to the settlor to, be
exercised together with the trustee · and not to the trustee to be.:exercised
together with the settlor. The trustee is anyhow vested with an absolute ~
discretion to distribute the income of or the principal of the trust to such
member of the family, as he thinks appropriate, under the clause preced-
H ing and paras following para 1(2). If so, there was no point in saying that
JYOTENDRASINIDI v. S.l. TRIPATHI 943
t'
he can, together with the settlor, be empowered to pay over part or whole A
of income/principal to "such one or more members or a class composed or
the family members living.• It cannot also be forgotten that the trustee in
this case is a Bank - one of the largest in the U.S.A. - and not an individual
acquaited with the affairs of the settlor's family. [958-H, 959-A)
y
2.05. Section 63 doe5 not say that the power or revocation vesting in B
.. the transferor should be absolute. or unconditional. (959-B)
- 2.06. Section 63(1) also does not say that the deed of transfer must
confer or vest an unconditional or an exclusive power in the transferor to
give the power/direction of the nature contemplated by iL Merely because
c
the concurrence of the trustee bad lo be obtained by the transreror/settlor
for giving the said direction it cannot be said that the deed does not
T contain a provision giving the transferor a right to re-assume power
directly or indirectly over the whole or any part of income or assets within
the meaning of Section 63(a)(ii) of the Act. (960 B·CJ
D
2.07. During the lifetime of the settlor, the entire income arising from
the three U.S. trust deeds was bound to be and was rightly included in the
income of the settlor by virtue of Section 63 read with Section 61. (961~8]
2.08. With the death of the settlor, Section 63 ceased to apply even
though the aforesaid clause empowers not only the settlor but also the E
Maharaja for the time being to exercise the said power. (961-C]
--- 2.09. Section 63 is attracted only where such power Is given to the
transferor - and the appellant (the son of the settlor) is not and cannot be
called the transferor. It is not denied that so far as the income from the
U.S. trusts is concerned, it was indeed received by the appellant. (961-D] F
)"" 2.10. The trustees in the case of a trust declared by a duly executed
instrument in writing are treated as representative assessees (Section
160(l)(iv)). It is equally true that in the case of a discretionary trust,
trustees are liable to be taxed in respect of the income received by them at
G
the rate specified in Section 164(1). (%1-F]
2.11. Section 166 states in unmistakable terms that nothing coo-
tained in the preceding provisions in the chapter shall preclude the
Revenue from making a direct assessment upon the beneficiary-and/or
recovering the tax payable from such person. [962-B] H
944 SUPREME COURT REPORTS [1993) 2 S.C.R.
·-.f
A 2.12. By virtue or Section 166, the Revenue has an option in the case
or a discretionary trust either to make an assessment upon the trustees or
to make an assessment upon the beneficiaries. or course, both the trustee
and the beneficiary cannot be simultaneously taxed in respect or the same
income. The assessments made by the Commission on the deceased-settlor
and the appellant are thus unexceptionable. (966-D]
B
Beltramji Sorabji v. Commissioner oflncome Tax, Bombay, 16 I.T.R. ...
c
301; Commissioner of Income Tax,' Bombay City v. Ratilal Nathalal, 25
1.T.R. 426; Tanmendra Nath Tagore v. Commr. of Income Tax, 33 I.T.R. 492
(Calcutta); K. Subramania Pillai v. Agricultural Income Tax Officer,
Thukalay, 53 l.T.R. 764; Commissioner of Income Tax, Punjab v. Raghubir
-
Singh, 57 I.T.R. 408; Nagappa v. C.I. T., 73 I.T.R. 626 and Ram Swaroop Das
v. T71e State of Bihar, 42 I.T.R. 770, referred to.
Sevantilal. Maneklal v. C./. T., 67 l.T.R. I, distinguished.
D C.l. T. v. Kama/ini Khatau, 112 l.T.R. 652" (Gujarat) (F.B.) Agreed
with the dissenting opinion.
3.01. Both the settlor and the appellant have been receiving the
income from the UK trusts during the several assessment years concerned
herein. The settlor had voluntarily included the entire income from the
E U.K. trusts in his income in the returns filed by him for the assessment
years 1964-65 to 1969-70. It is unlikely that he would have so included
unless he really received it. The Commission treated those declarations as
proof of the settlor's real intention. The Commission allso relied upon
certain other circumstances including the manner in which the accounts
F or these trusts were maintained in support or their .opinion that all
concerned with the trusts, acted on the basis that the trust income was
flowing to the settlor, and after his death to the appellant. The Commis·
sion also referred spe,cifically to similar declarations made by the appel-
lant in his returns. Even subsequent to the death of the settlor, the
G Commission pointed out, the appellant has been making similar declara-
tions from time to time. (967 C-E)
3.02. The appellant did not say that he did not receive the income
from the U.K. trusts. All he said was, since it is a discretionary trust, its
income is not taxable in his hands. If he had not received the income, he
H would have put forward that fact in the forefront. But be did not. Section
I
JYOTENDRASINHJI v: S.I. TRIPATHI [REDDY, J.] 945
5 of the Act is wide enough to bring all such income to tax. Io case A
appellant proves that any income has been taxed in U.S. or U.K., the same
income shall not be taxable over again in India. (967-H-, 968-D)
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1301-07
Y of 1991
B
.. From the Judgment and Order dated 31-3-89 of the Income Tax
- Settlement Commission Bombay in Settlement Application No. 10/5/41/78-
IT.
Ashok Desai, Debi Pa~ B.K. Mehta, N.K. Sahu, U.K. Sagar and P.H.
Parekh for the Appellant.
C
Dr. V. Gaurishankar and S. Rajappa for the Respondents.
The Judgment of the Court was delivered by
D
B.P. JEEVAN REDDY, J. These appeals are preferred against the
orders of the Settlement Commission dat~d March 31, 1989 in pursuance
of the offers of settlement made by the appellant. Civil Appeals 13.01-07 of
1991 relate to the assessment years 1964-65 to 1970-71 while Civil Appeals
1288-1300 of 1991 relate to the assessment years 1970-71 to 1982-83. Under
its orders, the Settlement Commission computed the taxable income of the E
appellant's father (who died on August 22, 1969} and of the appellant for
-
the aforesaid assessment years and gave certain directions, applying which
the l.T.O. was directed to compute the total income for each of the said
assessment years and raise demand for the tax due. The main issue in all
these matters is the assessability of income from five foreign trusts created F
by the appellant's father, Sri Vikramsinhji.
Sri Vikramsinhji, Ex-ruler of Gonda! executed three deeds of settle-
ments (trusts deeds) in the United States of America on December 19,
1963 and two deeds in the United Kingdom on January 1, 1964. The three
settlements executed in U.S. are in identical terms. Similarly, the two G
settlements, executed in U .K. are similar. The two sets of settlements,
however, differ from each other in certain particulars, though both the sets
are meant for the benefit of the settlor and the members of his family. We
may refer to the relevant clauses in the settlements executed in U.S. in the
first instance. H
946 SUPREME COURT REPORTS [1993] 2 S.C.R.
A Under the U.S. settlements, The National City Bank, New York is
constituted the sole trustee. The trust is created for the benefit of the
grantor/settlor, his wife and children and their spouses (referred to as
family members) and their descendants. The trustee is empowered to
collect the income from the trust properties and to apply the same among
the family members and/or their descendants in such manner as he thinks
B appropriate. He is also authorised to terminate the trusts for any reason
(including tax reasons) and to transfer, convey and pay off the property
held thereunder to any person or persons then eligible to receive the
C
income of the trusts. On such termination, the entire assets in the hands
of the trustee are to be paid over to the then Maharaja (Ruler) or to his
living male descendants in equal shares per stripes. The clause which is
-
relevant herein, which according to the Revenue, makes the trusts
revocable ones - we may refer to it as para 1(2) for the sake of convenience
- reads thus:
D ."Anything hereinabove to the contrary notwithstanding, at
any iime and from time to time the Trustee shall transfer,
convey and pay over any portion of the income of the trust
fund .and any portion or all of the principal held in trust
to or to the use of such one or more members of a class
composed of the Grantor, the wife or widow of the Gran-
E tor, the children of the Grantor living from time to time,
the spouse of any child of the Grantor then living or
-
deceased (hereinafter referred to as the "Family Mem-
bers"), and the descendants of the Family Members living
from time to time, in such amounts1 shares and propor-
F tions, either absolutely or in trust, and upon such terms
and conditions (including the grant of a further power to
appoint) as the Trustee and a Maharaja who shall have
attained the age of eighteen ( 18 years) shall at any time
and from time to time appoint and direct in a written
instrument which refers to and specifically exercises this
G power and which is duly executed by the Maharaja and
by the Trustee then acting here-under. The foregoing
power to appoint may be released in whole, or in part by
the Maharaja or by the Trustee or by both at any time by
one or more written instruments duly executed by the
Maharaja or by the Trustee or by both and delivered to
JYOTENDRASINHJI v. S.I. TRIPATHI [REUUY, J.J 947
the Trustee then acting here-under, provided, however, A
that if either the Maharaja or the Trustee, but not both
of them, shall release such power, then the party not so
releasing shall continue to have the power to appointment
hereinbefore provided, acting alone.'
B
Clauses (2) and (3) of the deeds confer an absolute discretion upon
the trustee to pay over or apply in his discretion, any part or whole of
income or any part of or whole of the principal to "any person then eligible
to receive the income of this trust" at such time and in such manner, as he
may decide in his absolute discretion. Clause {3) says further that "the
Trustee may omit eligible members of the class from any and all such c
payments and applications, and no such payment or application or ommis-
sion of a person from participation therein shall cause a charge against or
otherwise effect the future interest or share of any person here under.' Any
determination made by the trustee in good faith in exercising the said
discretion is held lo be binding and conclusive. It is not necessary to notice D
other clauses of these settlements except to say that the object of these
trusts is to provide for the education, maintenance and up-keep of the
members of the settlor's family and their descendants.
The settlor died on August 22, 1969. During his lifetime, the settlor, E
Vikramsinhji was filing returns of his income in India including therein
-- whole of the income arising from the U.S. trusts. The returns were filed by
him for the assessment years 1964-65 to 1969-70 (both years inclusive).
Since he died in the middle of the accounting year relevant to the assess-
ment year 1970-71, two returns were· filed for the said assessment yeijr, one
upto the date of the death of the scttlor and the other from the date of the F
death of settlor to the end of the accounting year. These returns were filed
by his elder son, Jyotendrasinhji, appellant.in these appeals. In these
returns too, the appellant included whole of the income from the U.S.
trusts in the respective returns. At this stage, the appellant says. he was
advised that the income from U.S. trusts was not taxable in India .either in G
the hands of settlor or in his hands and that inclusion of the said income
in the returns by the settlor and by the appellant was a mistake. Urging the
said contention, the appellant filed appeals against the assessment orders
pertaining to the A.Ys. 1965-66 and 1966-67. Inasmuch as the appeals we~e
barred with respect to other assessment orders, he preferred revisions H
....
948 SUPREME COURT REPORTS [1993) 2 S.C.R.
A before the Commissioner of Income Tax. {It may be mentioned at this stage
itself that the income from U .K. trusts was included in the aforesaid returns
just as the income from U.S. trusts was included. Similarly, the plea of
non-taxability was urged with respect to the income from U .K. trusts on
the same basis as was urged with respect to the income from the U.S. y
B trusts).
The Appellate Assistant Commissioner, Rajkot admitted additional
grounds and allowed the aforesaid aiJpeals by his orders dated April 4,
1975 and August 20, 1975. The Revenue went-up in appeal to Tribunal.
-
The Tribunal allowed the appeals holding that the A.A.C. acted contrary
c to Rule 46(2) of the Income Tax Rules in admitting the additional grounds
and in looking into new material. Accordingly it stt aside his orders and
remitted the appeals back to A.A.C. It is at this stage that the appellant
approached the settlement commission under chapter XIX(A) of the
Income Tax Act, 1961.
D
We may now notice the relevant clauses in the deeds of settlements
executed in U.K. Under these settlement deeds, one Mr. Robert Hampton
Robertson McGill was designated as the trustee, referred to in the deeds
as "the original trustees". These trusts too were created for the benefit of
E the settlor, the members of his family and their descendanis, referred to as
'beneficiaries'. The deeds define the expression "the trustees" to mean and
include the original trustee or the other trustees for the time being ap-
pointed in terms of the deeds of settlement. The expression "the
beneficiaries" was defined to mean and include (a) the settlor, (b) the
-
F children and remoter issue for the time being in existence of the settlor,
and (c) any person for the time being in existence who is the wife or widow
of the settlor or the wife or widow or husband or widower of any of them,
the children and remoter issue of the settlor. The clauses which are
relevant for our purposes read thus: (We have, for the sake of convenient
G reference, numbered them as clauses (3) and (4)).
"3. THE Settlor hereby directs that the Trustee shall and
accordingly the Trustees shall stand possessed of the Trust
Fund and the income thereof upon the trusts following
H that it 1 to say :-
JYOTENDRASINHJI v. S.l. TRIPATIII [REDDY, J.] 949
(1) UPON TRUST to raise and pay out of the capital A
thereof any further estate duty which may still be
payable thereon in respect of the death of the Settlor's
father His Late Highness Shri Bhojrajji Maharaja
Saheb of Gonda! who died on the Thirty first day of
July One Thousand nine hundred and fifty two and any
interest payable on such duty and any costs incurred
B
in connection with the ascertainment or payment of
such duty. and interest.
(2) Subject as aforesaid UPON TRUST for all or such
one more and more exclusively of the others or other c
of the Beneficiaries at such age or time or respective
ages or times if more than one in such shares and with
such trusts for their respective benefit and such
provisions for their respective advancement and main-
tenance and education at the discretion of the Trustees
or of any other person or persons as the person who D
for the time being is the Maharaj a or (of the title is
abolished) would have been the Maharaja had the title
not been abolished shall at any time during the
specified period by any deed or deeds revocable or
irrevocable appoint AND in default of and subject to E
any such appointment upon he trusts and with and
- subject to the powers and provisions hereinafter
declared and contained concerni_ng the same
PROVIDED ALWAYS that the foregoing power of
appointment shall not be capable of being exercised :-
F
(a) by anyone other than the Settlor or the Elder son or
the Younger Son; or
. (b) in favour of the person making the appointment save
with the consent of the Trustees (being at least two G
in number or a trust Corporation) such consent to be
testified by their being parties to the deed of appoint-
ment and executing the same ...... .
4. SUBJECT aforesaid the Trustees shall stand possessed
of the Trust Fund and the income thereof upon the trusts H
950 SUPREME COURT REPORTS [1993] 2 S.C.R.
A following that is to say :-
(1) The income of the Trust Fund accruing during the life
of the Settlor shall belong and be paid to the Settlor
y
{2) Subject as aforesaid the income of the Trust Fund
B accruing during the life of the Elder Son shall belong L
and be paid to the Elder Son ........
(3) Subject as aforesaid the Trust Fund shall be held in
Trust for the person who (being a descendant of the
-
Elder Son) first during the specified period :
c
(a) becomes the Maharaja or would become the Maharaja
if his title had not been abolished and
r
D
(b) attains the age of eighteen years ......... "
It is not necessary to notice the other provisions/clauses of these
..
deeds.
During his lifetime, the settlor, Vikramsinhji, was including the whole
of the income from these trusts in his returns of income just as he was
doing in the case of U.S. trusts. The said income was also included in the
E
two returns filed by his son for the A.Y.1970-71. Thereafter, however, the
appellant took the stand, as mentioned hereinbefore, that the income from
these trusts is not includible in his income. He also took the stand that the
inclusion of the said income in the returns submitted by his father for the
A.Ys.1964-65 to 1969-70 and by him in the returns relating to A.Y.1970-71
F was under a mistake. This submission too was the subject matter of the
appeals and the revisions filed before the A.A.C. and the Commissioner of
Income Tax, referred to hereinbefore. When the appellant approached the
settlement commission with an application for settlement, it related to the
income from U.K. trusts as well.
G The Settlement Commission heard the arguments in extenso spread
over sev.eral days and disposed of the matter under two elaborate orders.
One order relates to A.Ys: 1964-65 to 1970-71 (Vikramsinhji) and the other
to A.Ys.1970-71to1982-83 (Appellant). The findings of the Commission
which constitute the bases for its orders may briefly be stated as the
H folloWing :
'
)' JYOTENDRASINHJI v: S.I. TRIPATiil fREDDY, J,J 951
(i) Though the U.S. settlements are in the nature of discretionary trusts, A
they fall within the mischief of sub-clause (ii) of Clause (a) of Section 63
of the Act. For this reason, the whole of the income arising from the trust
properties was liable to be included and was rightly included in the income
y of the settlor/transferor, Sri Vikramsinhji.
(ii) On the death of the settlor, the U.S. settlement deeds ceased to be B
revocable but inasmuch as the entire income thereunder was received by
- the appellant, Sri Jyotendrasinhji, it constitutes his income and could be
and was lawfully. taxed in his hands.
(iii) So far as the U.K. trusts are concerned, clause (3) did never come into
operation inasmuch as no additional trustees were appointed as con-
c
templated by it. If so, clause (4) sprang into operation where under the
entire income under the settlements flowed to the settlor during his liftime
and on his death,. to his elder son, the appellant herein. In other words,
these settlements are in the nature of specific trusts. In any event, the entire
income from these trusts was received by the settlor during his lifetime and D
after the settlor's death, by the appellant. Therefore, the said income was
rightly included in the total income of the settlor and the assessee during
the respective assessment years.
-~
On the above bases, the Commission computed the taxable income E
of the settlor under both the sets of trusts for A.Ys.1964-65 to 1970-71
( upto the date of the death of the settlor) as also the income of the
appellant for the A.Ys.1970-71 to 1982-83. The appellant then preferred
these two sets of appeals against the two orders.
y At the stage of granting leave, this court ordered (vide the order F
dated March 22, 1991) that the appellant shall not be entitled to question
the jurisdiction of the settlement commission to decide the issues before it
and that he will "confine himself in appeal only to the questions relatjng to
correctness or otherwise of the CommiSsioner's order."
Sri Ashok Desai, learned counsel for the appellant urged the follow-
G
,I._
ing contentions :
(1) The settlement commission erred in law in holding that the U.S. trusts
are revocable trusts within the meaning of Section 63 of the Act. For
attracting Section 63, the deed of transfer should give the transferor a right H.
952 SUPREME COURT REPORTS (1993] 2 S.C.R.
A to re-transfer directly or indirectly whole or any part of the income .or
assets to the transferor or it must give him a right to re-assume power
directly or indirectly over the whole or any part of income or assets. In this
case, the relevant clause does not give the transferor such a power. The
power is given to the trustee to be exercised with the concurrence of the y
transferor/senior. Even if, for any reason, the clause is construed as giving
B
such a power to the settlor/transferor, Section 63 is not attracted inasmuch
as the power. is given not to him as such but jointly to him and the trustee.
Such a power does not attract the mischief of Section 63.
(2) The U.S. trusts are discretionary trusts. In such a case, the assessment
-
C can be made only upon the trustees and not UP.On the beneficiaries-
recipients. The Revenue has no option in such a situation. It must neces-
sarily tax the trustees and trustees alone. The Revenue cannot take ~.
advantage of the mistake of law on the part of the settlor or the appellant.
(3) At any rate, with the death of the settlor, the U.S. trusts ceased to be
D revocable trusts, assuming that they were so during his lifetime. So far as
the appellant is concerned, he ca11not be taxed on the income recei*'d by
him from the said trust. Only the trustee can be taxed.
(4) So far as U.K. trusts are concerned, the settlement commission has
E committed an error of law in holding that clause (3) could come into
operation only if and when the settlor appointed the additional trustees as
contemplated by it. In fact, the trust had come into existence with the sole
trustee (McGill) and it did not depend upon the appointment of additional
trustees. Clause (3) prevails over clause (4). If so, the U.K. trusts/settle-
ments are also discretionary trusts and not specific trusts as held by the
F Settlement Commission. In such a case again the assessment can be made
only upon the trustees and not upon the beneficiaries recepients.
(5) So far as U .K. trusts are concerned, no income was received by the
settlor or the appellant either in U .K. or in India. So Io·ng as the trustees
decided not to exercise the discretion to distribute the income, no income
G arose to any of the beneficiaries. The deeds do not prescribe a time-limit
within which the trustees should exercise their discretion to distribute ~
income. Until the trustees take a decision to distribute and distribute the
income, the beneficiaries have no right to income nor can it be said that
the income accrues to them. The Settlement Commission committed a legal
H error in including the income from the U .K. trusts in the total income of
JYOTENDRASINHJI v. S.I. TRIPATHI (REDDY, J.) 9S3
the settlor and the appellant even though it was not paid out by the trustee A.
nor received by the assessees. At any rate, no income was received in India.
(6} In both the U.S. and U .K., tax bas bei:n levied upon the respective trust
incomes under the laws of those countries. Levying tax over again in this
country on the very same income amounts to double taxation. On this
ground too, the tax levied in India must be waived. B
- On the other band, Dr. Gauri Sbankar, the learned counsel for the
Revenue made the following submissions :
(i) The Settlement Commission is not a regular Tribunal. Its function is C
different from other quasi-judicial authorities created by the Income Tax
Act. Where an offer of settlement has been made, the commission either
accepts it or rejects it subject to such conditions and terms as it thinks fit
to impose in that behalf. As the name itself suggests, it is a settlement - a
sort of composition. It need not even give reasons for its order. Even if any
principles are decided by the Commission, they do not bind the Income D
Tax authorities in proceedings relating to subseql!ent years. The order of
the commission is relevant to and is confined only to the assessment years
to which it relates. The jurisdiction of this court under Article 136 in an
appeal against the orders of settlement commission must be conditioned
by above considerations. This court would not be able to go into the merits. E
of the order. The commission's order cannot be dissected, inasmuch as it
is a package deal. Either it stands or falls as a whole.
(ii) The interpretation placed by the commission on both U.S. and U.K.
trusts is perfectly in order and does not call for any interference by t~
court. Indeed, under the impugned orders, several benefits have been F
conferred upon the settlor and the appellant like waiving of penalties,
interest and other liabilities attaching to the assessees under the Act. While
accepting the same, the appellant cannot be allowed to disown those
features of the order whi~h go against him. ,.
(iii) The argument of not receiving the income from U.K. trusts is a mere G
after-thought and should not be given any credence. During his lifetime,
the settlor had declared that he had received income from both the U .K.
and U.S. trusts and had included the same in bis returns of ineome for
each of the assessment years relevant herein. The appeUant too acted
siniilarly. H
954 SUPREME COURT REPORTS (1993) 2 S.C.R. . .
A (iv) A trustee or the trustees, as the case may be, are expected to act
reasonably and in furtherance of the object of the trusts. They must, apply
the income for the purposes specified. They cannot just accumulate it.
Applying the test of reasonableness, it must be held that ordinarily, the
trustee ought to distribute the income each year. As a matter of fact, it was y
so distributed. If so, it must be held that the income from these U .K. trusts
B
has rightly been taken into account by the commission while passing its
orders.
The first question we have to answer is the scope of these appeals
preferred under Article 136 of the Constitution against the orders of the
·- •
c Settlement Commission. The question is whether all the questions of fact
and law as may have been decided by the commission are open to review =t
in this appeal. For answering this question one has to have regard to the
scheme of Chapter XIX·A. The said chapter was inserted by the Taxation
Laws (Amendment) Act, 1975 with effect from April 1, 1976. A somewhat
D similar provision was contained sub-sections (lA) to (10) of Section 34 of
the Income Tax Act, 1922, introduced in the year 195¢. The provisions of
Chapter XIX-A are, however, qualitatively different and more elaborate
than the said provisions in the 1922 Act. The proceedings under this
chapter commence by an application made by the assessee as contemplated
by Section 245-C. Section 245-D prescribes the procedure to be followed ~
E by the commission on receipt of an application under Section 245-C.
Sub-section (4) says: 'after examination of the records and the report .of
the commissioner received under sub-section (1), and the report, if any, of
the commissioner received under sub-section (3), and after giving an
opportunity to the applicant and to the commissioner to be heard, either
-
F in person or through a representative duly authorised in this behalf, and
after examining such further evidence as may be placed before it or ......
obtained by it, the settlement commission may, in accordance with the
provisions of this Act, pass such order as it thinks fit on the matters covered
by the application and any other matter relating to the case not covered by
the application, but referred to in the report of the commissioner under
G sub-section (1) or sub-section (3).' .Section 245-E empowers the Commis-
sion to re-open the completed proceedings in appropriate cases, while ..l..
Section 245-F confers all the powers of an Income Tax authority upon the
Commission. Section 245-H empowers the Commission to grant immunity
from penalty and prosecution, with or without conditions, in cases where
H it is satisfied that the assessee has made a full disclosure of his income and
,,
JYOTENDRASINHJI v. S.I. TRIPATHI [REDDY, J.] 955
its sources. Under· Section 245-HA, the Commission can send back the A
matter to assessing officer, where it finds that the applicant is not cooperat-
ing with it. Section 245-1 declares that every order of settlement passed
under sub-section (4) of Section 245(0) shall be conclusive as to the
matters stated therein and no matter covered by such order shall, save as
otherwise provided in Chapter XIX-A, be re-opened in any proceeding
R
under the Act or under any other law for the time being in force. Section
245-L declares that any proceedings under chapter XIX-A before the
settlement commission shall be deemed to be a judicial proceeding within
the meaning of Sections 193 and 228 and for the purposes of Section 196
of the Indian Penal Code.
c
It is true that the finality clause contained in Section 245-1 does not
and cannot bar the jurisdiction of the High Court under Article 226 or the
jurisdiction of this court under Article 32 or under Article 136, as the case
may be. But that does not mean that the jurisdiction of this Court in the
appeal preferred directly in this court is any different than what it would D
be if the assessee had first approached the High Court under Article 226
and then come up in appeal to this court under Article 136. A party does
not and cannot gain any advantage by approaching this Court directly
under Article 136, instead of approaching the High Court under Article
226. This is not a limitation inherent in Article 136; it is a limitation which
this court imposes on itself having regard to the nature of the function E
performed by the Commission and keeping in view the principles of judicial
review. May be, there is also some force in what Dr. Gauri Shankar says
viz., that the order of commission is in the nature of a package deal and
that it may not be possible, ordinarily speaking, to dissect its order and that
the assessee should not be permitted to accept what is favourable to him F
and reject what is not. According to learned counsel, the Commission is
not even required or obligated to pass a reasoned order. Be that as it may,
the fact remains that it is open to the Commission to accept an amoont of
tax by way of settlement and to prescribe the manner in which the said
amount shall be paid. It may condone the defaults and lapses on the part
of the assessee and may waive interest, penalties or prosecution, where it G
thinks appropriate. Indeed, it would be difficult to predicate the reasons
and considerations which induce the commission to make a particular
order, unless of course the commissioµ itself chooses to· give reasons for
: its order. Even if it gives reasons in a given case, the scope of 'enquiry in
· the appeal remains the. same as indicated above viz., whether it is roiltrary H
'
956 SUPREME COURT REPORTS [1993) 2 S.C.R.
l '
A to any of the provisions of the Act. In this context, it is relevant to note
that the principle of natural justice (audi alteram partem) has been incor-
porated in Section 245-D itself. The sole overall limltation upon tire Com-
mission thus appears to be that it should act in accordance with the
B
provisions of the Act. The scope of enquiry, whether by High Court under
Article 226 or by this Court under Article 136 is also the same - whether
the order of the Commission is contrary to any of the provisions of the Act
"'
and if so, has it prejudiced the petitioner/appellant apart from ground of
bias, fraud & malice which, of course, constitute a separate and ·
independent category. Reference in this behalf may be had to the decision
of this Court in Sri Ram Durga Prasad v. Settlement Commission 1761.T.R.
---
c 169, which too was an appeal against the orders of the Settlement Com-
mission. Sabyasachi Mukharji; J ., speaking for the Bench comprising him-
self and S.R. Pandian, J. observed that in such a case this Court is
"concerned with the legality of procedure followed and not with the validity
of the order." The learned Judge added "judicial review is concerned not
D with the decision but with the decision-making process." Reliance was.
placed upon the decision of the House of Lords in Chief Constable of the
N. W. Police v. Evans, [1982) 1 W.L.R.1155. Thus, the appellate power
under Article 136 was equated to power of judicial review, where the
appeal is directed against the orders' of the Settlement Commission. For
all the above reasons, we are of the opinion that the only ground up<m
E which this Court can interfere in these appeals is that order of the Com-
mission is contrary to the provisions of the Act and that such contravention
has prejudiced the appellanL The main controversy in these appeals relates
to the interpretation of the settlement de~ds· - though it is true, some
contentions of law are also raised. The c6mmission has interpreted the
trust deeds in a particular manner, Even if the interpretation placed by the
F
commissic. Jn the said deeds is not correct, it would not be a ground for
interference in these appeals, since a wrong interpretation of a deed of
trust cannot be said to be a violation of the provisions of the Income Tax
Act. It is equa!Jy clear that the interpretation placed upon the said deeds
by the Commission does not bind the authorities under the Act in proceed-
G ings relating to other assessment years.
In V:ew of the above, though it is not necessary, strictly speaking, to
go into the correctness of the interpretation placed upon the said deeds by
the commission, and it is enough if we confine ourselves 'lo the question
H whether the order of the Commission is contrary to the provisions of the
JYOTENDRASINHJI v. S.I. TRIPA1HI [REDDY, J.) 957
Act, we propose to, for the sake of completeness, examine also whether A
the order of Commission is vitiated by any such wrong interpretation?
U.S. TRUSTS:
The sole trustee under this settlement deed is the First National City
Bank, New York. The deed empowers the trustee to hold, manage, invest B
and re-invest the principal of the trust fund, to collect and receive the
income thereof and to pay or apply so much of the net income as the
- trustee shall in· his absolute and uncontrolled discretion deem advisable to
or to the use of one or more members of the settlor's family. It is thus a
discretionary trust. A discretionary trust is described as a trust where the C
trustees have been vested with a discretion in the matter of distribution of
trust income among the specified class of beneficiaries. In the case of such
trusts, the trustees have a discretion to pay whole or part of the income to
such member or members of the designated class as they think fit and in
such proportion as they deem appropriate. Section 164{ 1) sets out the same
idea in the following words: D
"Where the individual shares of the persons on whose
behalf or for whose benefit such income or such part
thereof is receivable are indeterminate or unknown .......... "
E
In Snell's Principles of Equity, 25th Edn. {1%5), P.129, a discretion-
ary trust is defined in the following words:
- "A discretionary trust is one which gives the beneficiary
no right to any part of the income of·the trust property,
but vests in the trustees a discretionary power to pay him, F
or apply for his benefit, such part of the income as they
think fit... .... The beneficiary thus has no more than a hope
that the discretion will be exercised in his favour."
That these trusts are discreti_onary trusts is not in controversy. The
main question is whether Para 1(2), quoted hereinbefore, makes it a G
revocable trust within the meaning of Section 63? The said clause qegins
\vith a non-obstante clause, "anything hereinabove to the contrary. not-
withstanding" thereby giving it an overriding effect over what has been said
in the· earlier recitals. It then says that "at any time and from time to time,
the trustee shall transfer, convey and pay over any portion or of the income H
1
9S8 SUPREME COURT REPORTS [1993) 2 S.C.R.
~
A of the trust fund and any portion or of all the principal held in trust", to
such member of the senior's family "as the trustee and a maharaja who
shall have attained the age of !8 years shall at any time and from time to
lime appoint and direct in a written instrument which refers to and
specifiCljlly exercise this power and which is duly executed by the Maharaj a
and the trustee then acting here-under.' In other words, the said clause y
B
empowers the settlor/transferor and the trustee, acting together to direct
~trustee, at any time, to pay over the entire income and/or entire corpus.
or a ·par1 thereof to such member of the settlor's family or their descen·
dants as they may direct. The said power cannot be exercised by the settlor
acting alone. The question is Whether the said clause attracts Section 63?
-
c
·Section 63 defines the expressions "transfer" and "revocable transfer".
It says that for the purposes of Sections 60, 61 and 62, "a transfer shall be -f
deemed to be revocab/e if (i) it contains any provisions for the re-transfer
directly or indirectly of the whole or any part of the income or assets to
the transferor or (ii) it in any way gives the transferor a right to re-assume
D power directly or indirectly over the whole or any part of the income or
assets." The expression "transfer" is defined to include any settlement, trust,
covenant, agreement or arrangement. The expression "family members"
occurring in the aforesaid clause in the trust deeds is defined in the deeds
to mean "the children of the grantor living from time to time, the wife or
E widow of the grantor, the spouse of any child of the grantor then living or
deceased.' The "descendants of the family members" which expression also
occurs in the aforesaid clause is defined in the deeds to mean "the descen·
dants of the family members living from time to time during the trust terrn."
-
F The conlentjon of Sri Ashok Desai, the learned counsel for the
appeUant is that Section 63 will be attracted 'only where the transferor is
vested wilh the exclusive and/or absolute power to give direction of .ne 1
UQ(urc contemplated therein and not where such a power has .lo be
exercised by the transferor jointly with another person or with the concur·
rence or consent of another person. Indeed, he argues that the said power
G is really given to the trustee to be exercised in concert with the Settlor..We
fihd it difficult to agree with the learned counsel. Firstly, the power,
..I.,
properly construed, is given to the settlor to be exercised together with the
trustee • and not to the trustee to be ex~rcised together with the settlor.
The trustee is anyhow vested with an absolute discretion to distribute the
H income of or the principal of the_ trust to such member of the family, as he
JYOTENDRASINHJ! ,._ S.I. TRIPATHI [REDDY, J.) 959
thinks appropriate, under the clause preceding and paras following para A
1(2). If so, there was no point in saying that he can, together with the
settlor, be empowered to pay over part or whole of income/principal to
"such one or more members of a class composed of the family members
living". It cannot also be forgotten that the trustee in this case is a Bank -
one of the largest in the U.S.A. - and not an individual acquainted with the
affairs of the settlor's family. Now coming to Section 63, it is equally not
B
possible Ill agree with the learned counsel. Section 63 does not say that the
- power of revocation vesting in the transferor should be absolute or uncon-
ditional. As pointed out by Chagla, 0. in Beliramji Sorabji v. Commissio11er
of I11come Tax, Bombay, (16 l.T.R. 301), "the only question that has got to
be asked is whether the transfer is capable of being revoked by the assessee C
or not... ..it may be that before the power is exercised, the consent of two
beneficiaries might have to be taken but even so, although the revocation
may be contingent or conditional, still the deed remains a revocable deed
of trust." The same idea was reiterated by Tendulkar, J. in the said
judgment, in the following words:
D
"It is urged by Sir Jamshedji-011 behalf of the assessee that
the words "revocable transfer" in this section require that
the transfer should be revocable absolutely and uncondi-
tional and that by reason of the fact that the transfer in
this case could not be revoked under clause 10 of the trust E
deed without the consent of the wife and the children or
- any two·ot"-them, it is not a revocable transfer within the
meaning of Section 16(1)(c). Apart from any authority,
and reading the section by itself, I am unable to agree with
this contention. It would involve my reading into ~he
F
section words which are not there, and the Court is not
entitled to do so unless it appears that giving effect to the
section as it stands would lead to an obvious absurdity or
inconvenience which could not have been contemplated
by the legislature. No such position arises in this case."
G
We find ourselves in agreement with the said opinions. Section 63 of
the present Act corresponds to the proviso appended to Section 16(1)(c)
of the 1922 Act. The first proviso read thus: "provided that for the purposes
of this clause the settlement, disposition or a transfer shall be deemed to
be revocable if it contains any provision for the re-transfer directly or H
~
960 SUPREME COURT REPORTS (1993] 2 S.C.R. ....
A indirectly of the income or assets to the settlor, disponer or ·transferor or
in any way gives settlor, disponer or transferor a right to-re-assume power
directly or indirectly over the income or assets." Section 63(1)" also does
not say that the deed of transfer must confer or vest an unconditional or
an exclusive power in the transferor to give the power/direction of the
y
nature contemplated by it. Accordingly, we hold that merely because the
B concurrence of the trustee had to be obtained by the transferor/settlor for
giving the said direction it cannot be said that the deed does ·not contain
a provision giving the transferor a right to re-assume power directly or
indirectly over the whole or any part of income or assets within the meaning
of Section 63(a)(ii) of the Act.
-
c
In this view of the matter, it is not necessary for us to refer to other
decisions cited before us in any detail. The decision of this Court in
Commissioner of Income Tax, Bombay City v. Ratila/ Natliala/, 25 I.T.R.
-r
426 emphasises that the power of revocation must be given to the settlor
as settlor and not in. any 0ther capacity. In the deeds before us, the power
D is indisputably conferred upon the Settlor in the very same capacity and
not in any' different capacity. The other decision of this court in Sevantilal
Maneklat v. C.I. T. 67 I.T.R. 1 is distinguishable for the reason that the
power of the settlor therein was merely to choose among th\'>.several objects
of the trust and, therefore, it was held that it does not attract Section 63.
)-
E
On the other hand, Tanmendra Nath Tagore v. Commr. of Income
Tax 33 l.T.R. 492 - Calcutta was a case where the trust deed empowered
the seitlor to cause a re-transfer of the trust assets, in certain specified
contingencies. The question was whether such a provision makes the
transfer a revocable one within the meaning of the first proviso to Section
-
F
16(I)(c) of the 1922 Act. It was held that it does, notwithstanding the fact
--('
that the power had to be exercised only in certain specified contingencies. [
The decision of the Madras High Court in K Subramania Pillai v. Agricul-
turlll Income lax Officer, 17iukalay 53 I.T.R. 764 was also a case where the
power of revocation \Vas io be exercised in certain specified contingencies
G alone. Even so, it was held that it was a revocable settlement.
~
Commissioner of Income Tax, Punjab v. Raglmbir Singh 57 I.T.R. 408
was case where the trust deed provided for the application of the trust
income for satisfying the debts which the settlor was under an otligation
H to discharge. The question was whether the provision makes the deed a
JYOTENDRAS!NHJI v. S.l. TRIPATHI [REDDY, J.] 961
revocable one. It was held that it did not, inasmuch as there was no A
provision for re-transfer of the income or the assets to the settlor. It was
observed that the mere fact that the settlor's debts had to be discharged
from the trust income did not bring it within the four corners of the first
'( proviso to Section 16(I)(c).
In the light of the above discussion, it must be held that during the B
lifetime of the settlor, the entire income arising from the three U.S. trust
- deeds was bound to be and was rightly included in the income of the settlor
by virtue of Section 63 read with Section 61. The commission was right in
holding so.
c
With the death of the settlor, Section 63 ceased to apply even though
the aforesaid clause empowers not only the settlor but also the Maharaja
for the time being to exercise the said power. Section 63 is attracted only
where such power is given to the transferor - and the appellant (the son of
the settlor) is not and cannot be called the transferor. It is not denied that D
so far as the income from the U.S. trµsts is concerned, it was indeed
received by the appellant. The only argument is that inasmuch these trusts
are discretionary trusts, the income therefrom must necessarily be taxed
and can only be taxed in the hands of the trustees and not in the hands of
the beneficiary. It is argued that the Revenue has no choice to tax either
E
the trustees or the beneficiaries in such a case. We are unable to agree.
The trustees in the case of a trust declared by a duly executed instrument
in writing are treated as representative assessees (Section 160(1)(iv)). It is
equally true that in the case of a discretionary trust, trustees are liable to
be taxed in respect of the income received by them at the rate specified in
Section 164(1). (Section 164(1) ha5 undergone several changes since 1962. F
The sub-section as introduced by the Finance Act, 1970 with effect from
April 1, 1970 provided that in such case "tax shall be charged - (i) as if the
relevant income or part of relevant income were the total income of the
association of persons, or (ii) @65%, whichever course would be more
beneficial to the Revenue.'" FoF the purpose of this case, it is not necessary G
to notice the provisos appended to sub-section (1) or the subsequent
amendments to the sub-section).
At the same time, Section 166 expressly declares that "nothing in the
foregoing sections in this chapter shall prevent either the direct assessment H
962 SUPREME COURT REPORTS -(1993) 2 S.C.R.
A of the person, on whose behalf or for whose benefit income therein
referred is receivable or the recovery from such person of the tax payable
in respect of such income.' Language of this section is clear. The opening
words 'nothing in the foregoing sections in this chapter' - which means
chapter XV, wherein Sections 159 to 165 among other sections occur - give .y
B it an over-riding affect over the preceding provisions in the chapter. The
Section states in unmistakable terms that nothing contained in the preced-
ing provisions in the chapter shall preclude the Revenue from making a
direct assessment upon the beneficiary and/or from recovering the tax
payable from such person. The Revenue has thus been given an option to
tax the income from a discretionary trust either in the hands of the trustees
c or in the hands of the beneficiaries. This Court in Nagappa v. C./. T., 73
I.T .R. 626 and the majority of High Courts have understood this Section t
in this manner. In Nagappa, the appellant had executed seven separate
·trusts settling specific properties for the benefit of his minor children. He
appointed himself, his wife and his married daughter as the trustees. Under
D each deed, a portion of the income was to be utilised immediately for the
benefit of ihe beneficiary and the balance accumulated for his or her
benefit and handed over to tho beneficiary on the specified date. The entire
income of the trusts (including the income accumulated) was included in
the income of the appellant (Naf!Oppa) which was questioned by him. His
E contention was that the "I.T.O. was bound to assess the income under each
deed of trust separately in the hands of the trustees as "representative
trustees' and was incompetent in view of the express enactment of sub-sec-
tion {2) of Section 161 to assess the income in the hands of Nagappa or of
the beneficiaries." The contention was rejected with reference to Section
161(1) and Section 166 by Shah, J. (speaking for the Bench comprising
F
Shah, Ramaswami and Grover, JJ.) in the following words:
'It is implicit in the terms of sub-section (1) that the
Income-tax Officer may assess a representative assessee,
but he is not bound to do so. He may assess either the
G representative assessee or the person represented by him.
That is expressly so enacted in section 166 which states:
"Nothing in the foregoing sections in this Chapter shall
prevent either the direct assessment of the person on
H whose behalf or for whose benefit income therein referred
)'- JYOTENDRASINHJI v. S.l. TRIPATHI [REDDY, J.) 963
to is receivable, or the recovery from such person of the A
tax payable in respect of such income."
The Income-tax Officer may, therefore, assess the per- '
'-'<( son represented in respect of the income of the trust
property and the appropriate provision~ of the income-tax
A~t relating to the computation of the total income and B
•
the manner in which the income is to be computed will
- apply to that assessment. The Income-tax Officer may in
appropriate cases assess the representative assessee in
respect of that income and limited to that extent, and tax
may be levied and recovered from him to the same extent c
as may be leviable and recoverable from the person rep-
resented by him.
The contention raised by counsel for Nagappa that,
since the trustees were assessable in respect of the income
of the beneficiaries under Section 161(1), that income D
could not by virtue of sub-section (2) of Section 161 be
assessed in the hands of the beneficiary is contrary to the
plain terms of Section 166. Sub-section (2) of Section 161
does not purport to deny the Income-tax Officer the
option to assess the income in the hands of the person E
represented by the representative assessee;: it merely
-- enac;_ts that when a representative assessee is assessed to
tax in exercise of the option of the revenue, he shall be
assessed under Chapter XV and shall not in respect of
that income be assessed under any other provision of the
Act. We will presently state the reasons why tile rule was F
y
so enacted by Parliament. But on the plain words used by
Parlia~ent the plea raised by counsel· that the repre-
sentative assessee alone may be assessed as regards in-
come in n;~pect of which he is a representative assessee
. cannot be accepted." G
>.-. The learned Judge then went on to explain the reasons for which
section 166 among other provisions was enacted.
In another case arising under the Bihar Agricultural Income Tax Act,
I 948, a Bench of this Court comprising J .L. Kapur, M. Hidayatullah and H
~
964 SUPREME COURT REPORTS [1993) 2 S.C.R. ·>(
A J.C. Shah, JJ. took a similar view in Ram Swaroop Das v. The State of Bihar,
42 l.T.R. 770, even though that Act and did not ti:Jntam a provision similar
to Section 166. Section 13 of the Bihar Act prdVided:'
"Where any person holds land, from which' agricultural
~
income is derived, as a common manag~r appointed under
B any law from the time being in force, bt; uriddr'ky'agree-
ment or as receiver, administntor or th~ lik~ on behalf of •
persons jointly interested in such land or in the agricul-
tural income derived therefrom the aggregale of the sums
payable as agricultural income-taic by each person on the
-
c agricultural income derived from such land and received
by him shall be assessed on such common manager,
receiver, adminislrator or the like, and he shall be deemed 1'
to be the assessee in respect of the agricultural income-
taic so payable by each such person and shall be liable to
pay the same."
D
It was urged that because of Section 13, !he Receiver alone can be
assessed in respect of the income of the eslate under his charge and thal
no assessment can be made upon the person who actually received such
income from the receiver. The said contention was rejec!ed by Shah, J.
E speaking for the Bench in the following words:
"
"In our view, there is no substance in the contention raised
by the appellant. The liability to pay taic is charged on the
agricultural income of every person. The income though
-
F collected by the Receiver was the income of the appellant.
By S.13, in addition to the owner, the Receiver is to be
deemed to be an assessee. But the fact- that the Receiver
1
may, because he held the property from which income was
derived in the year of account, be deemed to be ari
assessee and liable to pay tax, does not absolve the appel-
G lant,_ on whose behalf the income was received from the
obligation to pay agricultural income-taic. Section 13 mere- A
ly provides a machinery for recovery of tax, and is not a
charging section. When property is in the possession of
the Receiver, common manager or administrator, the
H taxing authorities may, but are not bound, to treat such
JYOTENDRAS!Nilll v. S.l. TRIPATIII [REDDY, J.] %5
persons as assessee and recover tax. The taxing authorities A
may always proceed against the owner of the income and
assess the tax against him. The definition in the connota-
tion of "person" undoubtedly incl~de a Receiver, trustee,_
common manager, administrator or executor, and by such
inclusion, it is open to thetaxing authorities to assess tax
against any such persons; but on that account the income
B
in the hands of the owner is not exempt from liability to
assessment of tax."
The principle .of this decision does support our view, notwithstanding
certain vari,ance between the provision concerned in the said decision and c
'f- those concerned herein.
Sri Ashok Desai, however, placed strong reliance upon a Full Bench
decision of the Gujarat High Court in C./. T. v. Kama/ini Khatau, 112 l.T.R.
652 where the majority (Divan, CJ. and B.K. Mehta, J. - with P.O. Desai,
D
J. dissenting) appears to take a contrary view. Before we deal with the
decision, it would be interesting to note that the counsel for the appellant
Sri N.A. Palkhivala who appeared for the appellant before the Settlement
Commission had himself repudiated this argument, though another coun-
-k sel, who appeared for the appellant at a later stage, did not agree with the
view expressed by Sri Palkliivala. The Commission has recorded the sub- E
mission of Sri Palkhivala in the following words:
=-- "We may mention here that when Shri N.A. Palkhivala
appeared before us on behalf of the applicant he had
stated that although according to the Gujarat High Court's F
decision in the case of Smt. Kamalini Khatau, ll2 !TR 652
the income of a discretionary trust is assessable only in
the hands of a representative assessed and not in the
hands of the beneficiaries, he would not object to assess-
ment of the amounts received by the beneficiaries in their
hands in the present case, for two reasons. Firstly, accord- G
~ ing to Shri N.A. Palkhivala the Gujarat High Court's
decision in question \Vas erroneous and it was dissently
judgment in that case to the contrary, which was correct.
Secondly, in the case before us, the representative asses-
sees, namdy, the trusts, being situated outside India, could H
SUPREME COURT REPORTS [1993] 2 S.C.R. ·-.(
A not be t;ixed in India and in such cases it would not be
proper not to assess the beneficiaries, for that will lead to
the entire income escaping the Indian income-tax in the
case of both the representative assessees and the
beneficiaries.•
B Be that as it may, we have been taken though both the opinions in
the Full Bench decision in extenso. We are told that an appeal is pending
against the said decision in this Court. In the circumstances, we are not
incµned to deal with the said opinions in a'l.y detail except to say that we
are inclined to agree with the dissenting opinion of P.O. Desai, J. and are
C not concerned with the reasoning of the majority.
For the above reasons, we cannot agree with Mr. Ashok Desai. We
hold that by virtue of Section 166, the Revenue has an option in the case
of a discretionary trust either to make an assessment upon the trustees or
to make an assessment upon the beneficiaries. Of course, both the trustee
D and the beneficiary cannot be simultaneously taxed in respect of the same
income. The assessments made by the Commission on the deceased-settlor
and the appellant are thus unexceptionable.
U.K TRUSTS:
E , The first contention urged with respect to U.K. trusts is that the
F
com.lussion has wrongly construed clause (3) which we have extracted
hereinbefore. Sri Desai argues that the trust had already come into exist-
ence with the appointment of the sole trustee, Mr. McGill, and that the
coming into existence of the trust did not depend upon the appointment
of additional trustees. The commission was wrong in holding that until and
-
unless the additional trustees are appointed,_ the trust in clause (3) does
not come into existence. Properly construed, says Sri Desai, clause (3)
creates a discretionary trust. Inasmuch as the sub-clause does not prescribe
any time limit within which the trustees must decide to distribute the
income among the .beneficiaries, says the counsel, clause (4) has not and
G had never come into operation. In this case the trustees never did decide
not to exercise their discretion under clause (3). If so, no income ever arose
or accrued to the Settlor or the appellant under clause (4). If the trustees
fail to exercise their discretion under clause (3), the only remedy for the
beneficiaries is to approach the court to compel the trustees to exercise
H their discretion one way or the other, but they cannot say that the trust
'r-·
}- JYOTENDRASINHJI <·. S.I. mIPATHI (REDDY, J.] 967
income has accrued to them. Clause (4) comes into operation, says the A
counsel, only where the trustees decide not to distribute the income among
the specified beneficiaries; only then does the trust income belongs to and
has to be paid over to the settlor - and after the death of the settlor to his
"f- elder son, the appellant. Accordingly, the counsel says, the Commission
was wrong in law in treating these trusts as specific trusts.
B
-
In our opinion, however, the question urged is academic in the facts
and circumstances of the case. As a matter of fact, both the settlor and the
appellant have been receiving the income from these trusts during the
several assessment years concerned herein. Sri Vikramsinhji had voluntarily
included the entire income from the U.K. trusts in his income in the returns c
..... filed by him for the assessment years 1964-65 to 1969-70. It is unlikely that
he would have so included unless he really received it. The Commission
treated those declarations as proof of the senior's real intention. The
Commission also relied upon certain other circumstances including the
manner in which the accounts of these trusts were maintained in support . D
of their opinion that all concerned with the trusts, acted on the basis that
the trust income was flowing to the settlor, and after his death to the
appellant. The Commission also referred specifically to similar declarations
made by the appellant in his returns. It referred to his statements madt in
k the two returns filed for the assessment year 1970-71, one relating to the
income received by his father till his death and the other with respect to E
-
the income received by him during the accounting year after the death of
his father. Even subsequent to the death of Sri Vikramsinhji, the Commis-
sion pointed 0ut, the appellant has been making similar declarations from
time to time. For instance, in the letter dated March 3, 1975 written by the
appellant to the l.T.O., A-Ward, Rajkot relating to the A.Y. 1972-73, he F
)'' had stated, "as per statement of U.K. sent herewith, the trustees have
arrived at income of 13,027 pounds for the benefit of Sri Jyotendrasinhji.
According to our opinion, this income is not taxable as U.K. trust is
discretionary. However, as it has been taken last, the income may be
included in the hands of Sri Jyotendrasinhji subject to our appeal". It is
significant to notice the ground of non-taxability put forward in the said G
))...
letter. The appellant did not say that he did not receive the income. All he
said was, since it is a discretionary trust, its income is not taxable in his
hands. If he had not received the income, he would have put forward that
fact in the forefront. But he did not. Similarly, in the return relating to the
A.Y. 1973-74, a note was appended by the appellant to the following effect: H
968 SUPREME COURT REPORTS (1993] 2 S.C.R. ~
A "Late H.H. Mabaraja Vikramsinhji of Gonda! has created trusts in UK.
The assessee has been informed that income falling in the hands of the
assessee is 12,627 pounds. This is, therefore, shows as income in his return.'
(emphasis added). It is true that the appellant had argued before the
commission that the settlor as well as himself had included the said income
in their returns out of ignorance and on the basis of wrong legal advice but
B the said explanation has not been accepted by the commission · and we
must go by the findings of the commission. It is not brought to out notice
that during any of the years concerned herein, d'd the appellant ever say
that .he did not receive the income from these trusts. If so, the question of
law urged is of mere acad€mic interest and need not be dealt with by us.
-
c Section 5 of the Act is wide enough to bring all such income to tax.
So far as the plea of double taxation is concerned, the observation ~
' made by the Commission in that behalf is quite adequate. It has stated that
in case appellant proves that any income has been taxed in U.S. or U.K.,
the same income shall not be taxable over again in India.
D
For the above reasons, the appeals fail and are dismissed. No costs.
V.P.R. Appeals dismissed.
-
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