Holding

The Supreme Court held that no interest was reserved by the settlor; therefore, Section 12(1) and Section 10 of the Estate Duty Act, 1953 are not applicable to the trust property.

Summary

The Nizam of Hyderabad created a charitable trust in 1950, transferring government securities to trustees and directing that, during his lifetime, the trust defray his Haj expenses and those of his family, as well as fund religious offerings and charitable purposes. Upon his death in 1967, the Assistant Controller of Estate Duty held the trust property liable to estate duty under Section 10 of the Estate Duty Act, 1953, a view affirmed by the Appellate Controller and the Tribunal, which later invoked Section 12. The High Court upheld the inclusion of the trust property in the estate under Section 12. The Supreme Court examined whether the settlor had retained any interest in the trust property, either for maintenance or otherwise, that would attract Section 12(1) or Section 10. It held that the settlor neither received any benefit nor retained any life interest, and the direction to pay Haj expenses did not constitute a reservation of interest. Consequently, neither Section 12 nor Section 10 applied, and the trust property was not deemed to pass on the settlor’s death. The appeal was allowed, setting aside the High Court’s order.

Issues considered

Whether the trust property is deemed to pass on the death of the settlor under Section 12(1) of the Estate Duty Act, 1953.
Whether Section 10 of the Estate Duty Act, 1953 applies to the trust property in view of any benefit retained by the settlor.

Subjects

Estate dutyTrust propertySection 12Section 10Reservation of interestCharitable trustHaj expensesHyderabad

Judgment

TRUSTEES OF H.E.H. NIZAM'S PILGRIMAGE A
MONEY TRUST, HYDERABAD
v.
COLLECTOR OF ESTATE DUTY, HYDERABAD

JULY 21,1998
B
[SUJATA V. MANOHAR AND K. VENKATASWAMI, JJ.]

Estate Duty Act, 1953 :

Section 12(1) and Explanation-Property on Sett/or's death-Deemed C
passing of-Applicability-Trust created for certain charitable and religious
purposes-Property transferred absolutely to the trustees-However, trustees
were directed during the lifetime of the sett/or to defray the expenses of Ha)
of stellar and his family members accompanying him on pilgrimage to various
shrines and holy places-Sett/or also had the right to direct the expenditure
on religious and charitable purposes from the trust fund-Held: Under these D
circumstances, no interest retained by the stellar for life in the trust property-
Hence, S. I 2 (I) not applicable.

Section JO-Property on sett/or's death- Diem.e.d passing of -
Applicability-Trust created for certain charitable and religious purposes- E
Trustees were directed, during lifetime of the sett/or, to defray ·the expenses
of Ha) of sett/or and his family members accompanying him on pilgrimage to
various shrines and holy places-Held: Under these circumstances, S JO not
applicable- This is more so since, in fact, the sett/or received no benefit from
the trust.
F
The Nizam of the erstwhile State of Hyderabad created a Trust under
which the settlor set apart Government securities yielding an annual income
for certain religious purposes. Under the settlement, the said property was
transferred absolutely to the trustees. However, under a Clause of the
settlement, the trustees were directed, during the lifetime of the settlor, to G
defray the expenses ofHaj of the settlor and all such members of his family
who might accompany him on pilgrimages to various Mohammedan Shrines
and holy places and for making religious offerings and expenditure money
for charitable purposes. The said clause also provided for expending income
as well as part of the corpus of the trust fund for religious and charitable
purposes as the settlor might direct. H
827
828 SUPREME COURT REPORTS [1998] 3 S.C.R.
~

A On the death of the settlor the Assistant Controller of Estate Duty held ~

that the Trust property was liable to be included in the estate to the deceased
for estate duty under Section 10 of the Estate Duty Act, 1953. The Appellate
Controller of Estate Duty dismissed the appeal. The Tribunal held that the
property was includible in the estate of the deceased under Section 12 of the
Act also. The High Court upheld the view of the Tribunal. Hence this appeal.
B
Allowing the appeal, this Court
~
HELD : 1.1. In the present case, the settlor has not reserved any right t
to receive maintenance either for himself or for any of his relatives. Hence
the Explanation to Section 12(1) of the Estate Duty Act, 1953 in not relevant.
c The direction in the trust deed that the expenses of the settlor for pilgrimage
performed for religious purposes be paid out of the trust fund, wm not be
equivalent to reserving an interest in the property for life. Nor will payment
towards religious and charitable purposes at the direction of the settlor
constitute a reservation of any interest by the settlor of himself in such
D property for life. This will be more so since, in fact, the settlor did not
receive any amount from the said trust during his lifetime. Nor did he
undertake any pilgrimage. 1835-F-Gl

1.2. The fact in the present case do not indicate that any interest within
the meaning of Section 12 of the Act was retained by the settlor in the settled
E property for life or any other period determinable by reference to his death.
Hence Section 12(1) is not attracted. 1832-B)

CED v. R. Kanakasabai, 89 ITR 251, relied on.

Dipti Narayan Srimani v. CED, 172 ITR 477, and Ravindra Gunvantilal
F v. CED, held inapplicable. ,
"
CED v. Mahant Umesh Narain Puri, 135 ITR 139, referred to.

2. In the present case, the settlor, never, in fact enjoyed any benefit
under the said trust at any time although the settlor is entitled to have Haj
G expenses of himself and any accompanying fa111ily members paid out of the
trust fund. Therefore, there can be no application of Section I 0 of the Act.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2803 of
1984.

H From the Judgment and Order dated 2.12.83 of the Andhra Pradesh High
T. OF 'tl.E H. NIZAM'S PM Tr. COLLEC OF E. DUTY (SUJATA V MANOHAR, J.] 829

Court in C.R.No. 100 of 1978. A
Murli Krishna and Mrs. A.K. Verma for M/s. JBD and Co., for the
Appellant.

T.L.V. Iyer, Dhruv Metha, T.C. Shanna and B.K. Prasad for the Respondent.
B
The Judgment of the Court was delivered by

MRS .. SUJATA V. MANOHAR, J. The appellants are the trustees of
H.E.H. Nizam Pilgrimage Money Trust, Hyderabad. On 2.11.1950, H.E.H. Nizam
of the erstwhile State of Hyderabad created a trust under which the settlor
set apart Government of India Loan Securities of the face value of Rs.22.20 C
lakhs yielding an annual income of Rs. 66,600 for certain charitable and
religious purposes. The relevant clause of this settlement is Clause 3(c). The
relevant provisions of Clause 3 are as under:

"3. The Trustees shall hold and stand possessed of the Trust Fund
UPON TRUST:- D
(a) To manage the Trust Fund and to recover the interest and other
income thereof;

(b) To pay and discharge out of the income of the Trust Fund all E
expenses and charges for collecting and recovering the income of the
Trust Fund and all other costs, charges, expenses and outgoings of
and incidental to the trusts of these presents and the administration
thereof;

(c) During the lifetime of the Settlor to defray the expenses of Haj of F
\
the Settlor and of such of the members of his family as he may take
with him and of their visit and pilgrimage to various Mohmmedan
Shrines and holy places in Hedjaz and Iraq and for making religious
offerings and expending moneys for charitable purposes at such places
and for such other religious or charitable purposes as the Settlor in G
his absolute discretion may from time to time think fit and require out
of the income as well as the corpus of the Trust Fund in such manner
and to such extent as the Settlor may from time to time direct and for
all or any of such purposes as aforesaid to pay such moneys out of
the income or the corpus of the Trust Fund as the Settlor may from
time to time require." H
830 SUPREME COURT REPORTS [I 9<t'S] 3 S. C.R.

A The settlor appointed himself as one of the trustees along with other
trustees. The settlor died on 24.2.1967. The Assistant Controller of Estate
Duty held that the settlor was not completely excluded from enjoying the
benefit of the corpus of the trust and hence under Section I 0 of the Estate

B
Duty Act, 1953 the property which was the subject matter of the settlement
was includible in the estate of the deceased. On appeal, the Appellate Controller
of Estate Duty also held Section 10 to be applicable. In second appeal before
the Tribunal, three contentions were raised on behalf of the revenue invoking
Section 12 as a more relevant section, and submitting that under Section 12
<
also the property which was the subject matter of the settlement was includible
in the estate of the deceased. This contention was upheld by the Tribunal.
c From the decision of the Tribunal, the following question was referred
to the High Court under Section 64(1) of the Estate Duty Act, 1953 :

"Whether on the facts and in the circumstances of the case, the trust
property of the value of Rs. 13,57,205 is liable to be included in the
D estate duty assessment of the deceased as property deemed to pass
- (a) either under Section 12 of the Estate Duty Act, (b) or under
section 10 of the Estate Duty Act?"

The High Court held that Section JO of the Estate Duty Act, 1953 was
not attracted but Section 12 was attracted. Therefore, the subject matter of
E the settlement had been rightly included in the estate of the deceased. The
present appeal has been preferred before us under a certificate granted by the
High court.

Considerable arguments were advanced before the High Court on the
question whether a property settled on trust, as in the present case comes
F within the definition of "settled property" under Section 2(19) of the Estate
Duty Act, 1953. The High Court has held in the affirmative. There is no
dispute before us that the property which is the subject matter of the trust
in the present case can be considered as settled property as defined in
Section 2( 19). The first question is, whether Section 10 of the Estate Duty Act,
G 1953 is attracted in the present case. Section 10 is as follows:

"10. Gifts whenever made where donor not entirely excluded-Property
taken under any gift, whenever made, shall be deemed to pass on the
donor's death to the extent that bona fide possession and enjoyment
of it was not immediately assumed by the donee and henceforward
H retained to the entire exclusion of the donor or of any bel'efit to him
T. OF H.E.H. NIZAM'S P.M.T v. COLLEC. OF E. DUTY [SUJATA V. MANOHAR,J.] .831

by contract or otherwise: A
Provided that the property shall not be deemed to pass by reason
only that it was not, as from the date of the gift, exclusively retained
as aforesaid, if, by means of the surrender of the reserved benefit or
otherwise, it is subsequently enjoyed to the entire exclusion of the
donor or of any benefit to him for at least two years before the death: B
Provided further ............ "

This section, as its marginal note suggests, deals with gifts whenever
made where the donor is Pot entirely excluded. Under the main part of the
section, any property taken under any gift, if bona fide possession and C
enjoyment is not immediately assumed by the donee and retained by him to
the exclusion of the donor, would be property deemed to pass on the donor's
death to the extent of such retention of benefit. This section also provides
that if any benefit in the property given as a gift is retained by the donor by
contract or otherwise, that benefit shall be deemed to pass on the donor's
death. The proviso lays down that if after the date of the gift, either by means D
of an express ~urrender of the retained benefit by the donor or otherwise, the
property is enjoyed to the exclusion of the donor for at least two years before
his death, such property shall not be deemed to pass on the death of the
donor. In the present case, the settlor, H.E.H. Nizam of Hyderabad, never, in
fact, enjoyed any benefit under the said trust at any time. Therefore, there can E
be no application of Section I 0 in the present case, in any event.

The parties before us have, therefore, focused their arguments on Section
12 of the Estate Duty Act, 1953. The relevant provisions of Section 12 are as
follows:

"12. Settlements with reservation.-(!) Property passing under any F
settlement made by the deceased by deed or any other instrument not
taking effect as a will whereby an interest in such property for life
or any other period determinable by reference to death is reserved
either expressly or by implication to the sett/or or whereby the settlor
m_ay have reserved to himself the right by the exercise of any powe.r, G
to restore to himself or to reclaim the absolute interest in such property
shall be deemed to pass on the settlor's death:

Provided that the property shall not be deemed to pass on the
settlor's death by reason only that any such interest or right was so
reserved if by means of the surrender of such interest or right the H
832 SUPREME COURT REPORTS [1998] 3 S.C.R.

A property is subsequently enjoyed to the entire exclusion of the settlor
and of any benefit to him by contract or otherwise, for at least two
years before his death:

Provided further. .........

B Explanation · A settlor reserving an interest in the settled property
f9r the maintenance of himself and any of his relatives (as defined in
section 27) shall be deemed to reserve an interest for himself within
the meaning of this section. t
+
(2) ..................."
c In the present case under the settlement the property has been transferred
absolutely to the trustees. However, under Clause 3 of the settlement, the
trustees are directed, during the lifetime of the settlor, to defray the expenses
ofHaj of the settlor and all such members of his family who may accompany
him on pilgrimage to various Mohammedan Shrines and holy places in Hedjaz
D and Iraq and for making religious offerings and expending money for charitable
purposes. The said clause also provides for expending ircome as well as part
of the corpu~ of the trust fund for religious and charitable purposes as the
settlor may direct. Can this be considered as the settlor retaining interest in
the settled property for life or any other period determinable by reference to
his death? The Explanation to Section 12 expressly provides that where a
E
settlor reserves an interest in the settled property for the maintenance of
himself or any of his relatives, he shall be deemed to reserve an interest in
the settled property for himself within the meaning of Section 12(1 ). In the
present case, however, the settlor has not reserved any right to receive
maintenance either for himself or for any of his relatives. Hence the Explanation
F is not relevant here. However, the settlor is entitled to have Haj expenses of .
himself and any accompanying family members paid out of the trust fund. The ,
settlor has also reserved the right to direct the religious and charitable
purposes on which the trust fund may be spent. These are not benefits which
accrue directly to the settlor himself, as in the case of his own maintenance.
The pilgrimage expenses, however, of the deceased and any accompanying
G family members are to be defrayed out of the trust fund ifand when the settlor
goes on such a pilgrimage. As a matter of fact the deceased never went on
any pilgrimage as specified in Clause 3(c) and did not receive any benefit
directly or indirectly under the said trust. In our view, the direction in the trust '"~
deed that the expenses of the settlor for pilgrimage performed for religious
H purposes, be paid out of the trust fund, will not be equivalent to reserving
T. OF H.E.H. NIZAM'S P.M.T" COLLEC. OF E. DUTY [SUJATA V. MANOHAR, J.] 833
an interest in the property for life. Nor will payment towards religious and A
charitable purposes at the direction of the settlor constitute a reservation of
any interest by the settlor for himself in such property for life.

Our attention in this connection has been drawn to a decisio11 of this
Court in the case of Controller of Estate Duty v. R. Kanakasabai and Ors.,
89 ITR 251. In that case, the deceased had executed separate deeds of B
settlement in favour of his sons, grandsons, daughter and wife, settling
properties severally in favour of the respective beneficiaries absolutely and
with full power of alienation. The deeds in favour of the sons and grandsons,
however, provided for payment of Rs. 1,000 per annum to the settlor; and the
deed in favour of the daughter provided for the maintenance of the settlor C
and his wife during their lifetime. It was held by this Court that Section 12
was wholly inapplicable to the facts of the case. On the question of
applicability of Section 12, the Court observed as follows:

"So far as the applicability of section 12(1) is concerned, it is nobody's
case that the beneficiaries became entitled to the properties settled on D
them after the death of the deceased. There is no support for the
contention of the revenue that an interest in the properties settled
was reserved to the deceased during his lifetime or for any period
after the properties were settled; nor is there any provision in the
deeds enabling the deceased to reclaim the property or its possession
under any circumstance. None of the conditions laid down in section E
12(1) are attracted to the provisions contained in the deeds of
settlement."

On the applicability of Section 10, the Court considered whether the
donor had retained in the property gifted, any benefit to himself by contract
or otherwise. The Court said that the deceased should be entirely excluded F
from the property or from any benefit by contract or otherwise. Provisions for
annual payments and maintenance made in the deeds were not charged on
the properties settled. Hence, the deceased could not be said to have retained
any interest in the properties settled. Therefore, Section 10 was not applicable.
In the present case, the deceased has not retained any benefit to himself. As G
we have set out already, Section 10 in any case, will not be attracted in the
present case.

The application of Section 12 was considered by this court in the case
of Dipti Narayan Srimani v. Controller of Estate Duty, West Bengal, 172 ITR
477. In this case, the settlor executed two deeds of trust. In the first deed, H
SUPREME COURT REPORTS [1998] 3 S.C.R.
834
A the settlor transferred to himself four items of property to be held on trust:
(I) to set apart I/4th of the net income for effecting certain additions and
alterations to the property; (2) to make over another I/4th of the net income
to the shebait of a deity; (3) to apply I/4th of the net income to certain
charities; and (4) to apply the remaining I/4th for the personal benefit of the
settlor during his lifetime and to his heirs thereafter. In the second deed, the
B settlor transferred six other items of property to himself and his son as
trustees: (I) to pay I/4th of the net income to the shebait of another deity,
(2) to spend I/4th on charities, and (3) to utilise the balance of one-half for
the development of two of the properties and after completion of development,
for the benefit of the settlor during his lifetime and his heirs thereafter. The
C settlor provided one room in one of the properties for his residence free. The
settlor also constituted himself as shebait during his lifetime and thereafter
his heirs were to be the shebaits of the two deities. This Court held that
Section 12( I) was attracted. It, inter alia, observed that the reservation of
interest so as to attract Section 12(1 ), had to be in the property comprised
in the settlement as such. Mere collateral benefits reserved by the settlor ·
D emanating from some other property or from other source, independent of the
property so settled, would not attract this section. But in the case before the
Court, the benefits reserved emanated from the very property constituting the
subject matter of settlements and could not be said to be collateral in their
nature. The Court observed, (page 487,) that having regard to the special
E nature of the office of a shebait and the rights and interests that go with it,
it is possible to contend that when a settlor endows property to an idol and
reserves the right of shebaitship to himself, he would be reserving an interest
in the property. Distinguishing the earlier judgment of this court in controller
of Estate Duty, Bihar v. Mahan/ Umesh Narain Puri, 135 !TR 139, this Court
said that the position of an elected Mahant in Math properties was different.
F In that case, no interest passes on the death of a Mahan! duly elected, and
Section 12 is not attracted. But the case of a settlor who himself endows
property to an idol and constitutes himself as shebait is obviously different.
The Court, however, did not finally pronounce on the effect of reservation of
shebaitship by a settlor in the context of Section 12( I). In the English cases
G which have been referred to in the said judgment, the settlors had reserved
a benefit to themselves, their wives or children in the income of the settled
property for their maintenance. The English court observed that this amounted
to an interest in the settled property.

The Explanation to Section 12 expressly takes care of such a situation
H by providing that a settlor reserving a right to receive maintenance for himself
T. OF H.E.H. NIZAM'S P MT v. COLLEC. OF E. DUTY [SUJATA V. MA:-IOHAR, J.] 835
.. ,. or any of his relatives from the settled property or its income shall be deemed A
to reserve an interest in the settled property for himself within the meaning
of that section. Any other kind of an indirect benefit to the settlor under the
trust in certain eventualities will not amount to reservation of an interest in
the settled property by the settlor for himself.

In the case of Ravindra Gunvantilal v. Controller of Estate Duty, B
Gujarat, the Gujarat High Court (P.N. Bhagwati, CJ, as he then was and Divan,
j.
J.) considered a case where there was a joint settlement by the deceased and
his wife in respect of certain properties belonging separately to each of them.
" The deceased and his wife were appointed as trustees and the settlement
deed provided that until the death of the last survivor of the deceased and
his three sons, the trustee shall apply the net income for and towards
c
maintenance and personal support of all or such one or more exclusively of
the other or others of the deceased, his wife, his .children and widow and
issues, if any, of any of his sons. The application was to be in such shares
and proportions as the trustee may from time to time think proper. The
trustees also had the absolute discretion to pay the whole of the net income D
of the settled property to any one or more of these persons to the exclusion
of others, The Gujarat High Court held that where a settlor is one of the
objects of a discretionary trust and the trustees are given an absolute discretion
to pay the income of the settled properties to one or more of the objects to
the exclusion of others, the senior has an interest in the settled properties E
within the meaning of Section 12(1) and he must be held to have reserved to
I
himself an interest.in the settled properties for life sufficient to bring his case
' within Section 12(1).

In the present case, the settlor does not appear to have reserved for
;,..
~
himself any interest which would be sufficient to bring his case within Section F
12(1). All the cases which have been cited before us are cases in which the
settlor had, in some form or the other, reserved the right to receive income
or part of it from the settled property during his lifetime either by way of
maintenance or in a similar form. Such is not the case here. Provisions of
section 12( I) would not, therefore, be attracted to the present trust created
G
by the senior during his lifetime. This will be more so since, in fact, ihe settlor
did not receive any amount from the said trust during his lifetime. Nor did he
~~ undertake any pilgrimage.

In the order of the Appellate Commissioner, there was also a reference
to a release deed executed by the senior relinquishing all his powers which H
836 SUPREME COURT REPORTS (1998] 3 S.C.R.

A would be beneficial to him in the various trusts created by him. This trust was
also covered by the release deed. However, apart from this bare reference to
a Release Deed, no attempt has been made to bring the release deed on
record. No arguments have been advanced on this aspect. We are, therefore,
not examining this question from the point of view of the execution of a
release deed by the settlor. Looking, however, to the language of Section
B 12(1), the facts in the present case do not indicate that any interest within
the meaning of Section 12 was retained by the settlor in the settled property
for life or any other period determinable by reference to his death. Hence
Section 12( 1) is not attracted.

C The appeal is, therefore, allowed and the impugned order of the High
Court is set aside. The question referred is answered in the negative and in
favour of the appellant. There will, however, be no order as to costs.

v.s.s. Appeal allowed

....