1981 (1) TMI 9 - HC - Income Tax

Interpretation of statutes - determination of the estate duty payable by the accountable person - reservation of interest by implication in the trust deed - property passable upon the settlor s death - applicability of the two contingencies referred to in s. 12(1) of the Estate Duty Act 1953 - Inclusion of the value of Kale Bhawan in the dutiable estate under Section 12 - binding nature of the authorities - HELD THAT - When the settlor himself becomes a trustee or managing trustee a change undergoes in his capacity from one of an owner of property to that of trustee holding the trust property for the benefit of the beneficiaries or for the purpose of working out the directions in the deed of trust. If for such work any remuneration is provided for by the terms of the trust deed that would not in our view amount to the reservation of any interest for the purposes of s. 12(1). Though no authority for this proposition is really needed we may refer to the decision of this court in CED v. Sultan Alam Khan 1977 (12) TMI 10 - BOMBAY HIGH COURT to which one of us was party. In that case we were dealing with a wakf one of the clauses of which was that the settlor who was himself the trustee was permitted to occupy one of the flats in the trust property in order to manage the trust properties and it was held that a provision permitting occupation of the trust property by the trustee for the purposes of the management of the trust property did not amount to a reservation of any interest in the property settled by the settlors. The Department was therefore not entitled to rely on cls. 6 and 19 to contend that there was reservation of interest of the trust property and therefore the value of Kale Bhawan was liable to be treated as a part of the dutiable estate. The provisions of the Trusts Act will therefore not be of much help so far as the power of revocation in the case of a public charitable trust is concerned. Apart from the express words of s. 1 there is also a decision of the Madras High Court in Krishnaswamy Pillai v. Kothandarama Naicken 1914 (8) TMI 1 - MADRAS HIGH COURT where a Division Bench of the Madras High Court has observed that Under the Trusts Act (2 of 1882) which applies in terms only to private trusts it is not open to a settlor to revoke a completed settlement. Therefore so far as the revocation of a public trust is concerned the power cannot be found in the provisions of the Trusts Act. As a matter of fact the view taken by us is sufficient to dispose of this reference in favour of the accountable person. We may however in addition point out that so far as the State of Maharashtra is concerned the public trusts are subject to the control and supervision of the Charity Commissioner who has to function according to the provisions of the Bombay Public Trusts Act. It is not in dispute that the trust in question has been registered not only under the provision of the Bombay Public Trusts Act but that it was registered even under the M. P. Public Trusts Act 1951 which was the relevant Act in force in the Vidarbha Region prior to the applicability of the Bombay Public Trusts Act. Apart from the fact that none of the purposes for which the trust has been created by the settlor in this case can stand exhausted even in a case where the original object of the public trust has failed there is power in the Charity Commissioner under s. 55 of the Bombay Public Trusts Act to require the trustee to apply within the prescribed time for directions to the court within the local limits of whose jurisdiction the whole or part of the subject-matter of the trust is situate . It is obligatory that the trustees should comply with the requisition. There is power in the court under s. 56 of the Act to give appropriate directions so far as it may be expedient practicable desirable necessary or proper in public interest to give effect to the original intention of the author of the public trust or the object for which the public trust was created. If the court is of opinion that the carrying out of such intention or object is not wholly or partially expedient practicable desirable necessary or proper in public interest there is power in the court to direct the property or income of the public trust or any portion thereof to be applied cypres to any other charitable or religious object . There is also power in the Charity Commissioner to remove and appoint fresh trustees and see that the intention of the settlor is given effect to. Therefore apart from the general principle that in the case of a public trust where dedication is complete a power of revocation does not vest in the settlor in so far as the present trust is concerned there could not be any ground which could fall within cl. 23 and indeed the provision in cl. 23 could be wholly irrelevant because there are overriding provisions of the Bombay Public Trusts Act under which if a public trust is not being given effect to the Charity Commissioner can step in and see that the trust funds were applied to a charitable purpose. It is therefore clear that the so-called power of revocation is wholly redundant and ineffective. If the power of revocation was redundant and ineffective and indeed wholly invalid the mere reservation of a power by a clause in the trust deed could not attract the applicability of the provisions of s. 12(1) of the Act. It is therefore wholly unnecessary for us to decide Whether the Department was entitled to challenge the correctness of the order of the Asst. Charity Commissioner by which he declined to give effect to the resolution passed by the trustees the controversy relating to which has been made the subject-matter of question No. 2. In the view we have taken we answer the questions referred to the court as follows Question No. 1 -In the affirmative and against the Revenue; Question No. 2 - Need not be answered. and Question No. 3 - In the negative and against the Revenue.

Summary

The core legal questions considered by the Court in this matter are threefold: (1) Whether the trust deed created any interest in the property for life or any other period determinable by reference to the settlor's death, or whether any right was reserved to the settlor enabling restoration or reclamation of absolute interest in the property known as "Kale Bhawan"; (2) Whether the finding by the Assistant Charity Commissioner that the trust was irrevocable was binding on the authorities under the Estate Duty Act and the Tribunal; and (3) Whether the value of "Kale Bhawan" was includible in the dutiable estate under section 12 of the Estate Duty Act, 1953.

Regarding the first issue, the Court examined the relevant provisions of section 12(1) of the Estate Duty Act, which treats property passing under any settlement made by the deceased whereby an interest for life or any other period determinable by reference to death is reserved, or where the settlor reserves the right to revoke the trust or reclaim absolute interest, as deemed to pass on the settlor's death. The Court analyzed clauses 6, 19, and 23 of the trust deed, which the Revenue argued evidenced such reservation.

Clause 6 provided remuneration to the managing trustee, initially the settlor's wife and thereafter the settlor himself if he chose to accept the office, capped at Rs. 2,000 per month or 25% of trust income. Clause 19 contemplated the settlor acting as managing trustee for life or until resignation. The Revenue contended that these provisions amounted to a reservation of interest under section 12(1). The Court rejected this, reasoning that a settlor's appointment as trustee or managing trustee, including remuneration for managing the trust property, does not constitute reservation of interest as contemplated by the statute. The settlor's role changes from owner to trustee, holding property for beneficiaries, and remuneration for management duties is lawful and does not amount to interest reservation. The Court cited precedent where occupation of trust property by a trustee for management purposes was held not to constitute reservation of interest.

The second limb of the first issue concerned clause 23, which reserved a conditional power of revocation to the settlors, exercisable only after ten years and if the trust could not function for any reason. The Revenue argued this amounted to reservation of a revocation right under section 12(1). The Court held that the mere presence of a revocation clause in a public charitable trust deed does not suffice to invoke section 12(1). The power of revocation must be valid and legally exercisable. The Court emphasized that in the context of a public charitable trust, such a power is generally invalid and ineffective, especially where statutory provisions govern the trust's administration and dissolution.

The Court further examined whether the settlor could validly reserve or exercise a power of revocation in a public charitable trust. It noted that the Indian Trusts Act, 1882, which allows revocation under certain conditions, expressly excludes application to public or private religious or charitable endowments. Thus, sections 77 and 78 of the Trusts Act, relied upon by the Revenue to support revocation, were held inapplicable.

The Court then considered authoritative legal principles and precedents regarding irrevocability of charitable trusts. It observed that once a valid dedication to a charitable purpose is complete, the settlor loses power to revoke the trust or reclaim the property. This principle was supported by judicial decisions, including those of the Madras and Allahabad High Courts, and the Supreme Court, as well as legal treatises such as Halsbury's Laws of England and the writings of Justice B.K. Mukherjea. The Court quoted that "once an absolute dedication of the property had been made... the former owners... had no legal authority to go behind that dedication." It further noted that allowing revocation would open the door to abuse, enabling settlors to reclaim more property than originally settled.

In the present case, the Court found that the trust was a public charitable trust, duly registered under the Bombay Public Trusts Act and earlier under the M.P. Public Trusts Act. The trust's purposes had not been exhausted, and the Bombay Public Trusts Act provided for supervision and control by the Charity Commissioner, including powers to ensure the trust's objects are fulfilled and to apply property cy-pr`es if necessary. The Court held that these statutory controls render any reserved power of revocation redundant and ineffective.

Consequently, the Court concluded that the clause reserving revocation power in the trust deed was invalid and could not attract the provisions of section 12(1) of the Estate Duty Act. The Court deemed it unnecessary to decide the second question regarding the binding nature of the Assistant Charity Commissioner's order, given the invalidity of the revocation power reservation.

On the third question, whether the value of "Kale Bhawan" was includible in the dutiable estate, the Court held in the negative. Since no interest was reserved under section 12(1), and the trust was irrevocable, the property did not pass on the settlor's death for estate duty purposes. The Court upheld the Tribunal's order excluding the value of the property from the dutiable estate.

The Court's significant holdings include the following verbatim legal reasoning:

"When the settlor himself becomes a trustee or managing trustee a change undergoes in his capacity from one of an owner of property to that of trustee holding the trust property for the benefit of the beneficiaries or for the purpose of working out the directions in the deed of trust. If for such work, any remuneration is provided for by the terms of the trust deed, that would not, in our view, amount to the reservation of any interest for the purposes of s. 12(1)."

"When s. 12(1) refers to the reservation by the settlor of the right to exercise the power of revocation, it obviously presupposes that such a power of revocation can be validly and legally reserved by the settlor. In other words, even if the document of trust does contain a clause expressly reserving the power of revocation if in law such a power of revocation is impossible to be either reserved or exercised, in our view, the Department would not be entitled to rely on the latter part of s. 12(1) merely because in the settlement the settlors purported to reserve the power of revocation."

"The applicability of the Trusts Act is expressly excluded in the case of public or private religious or charitable endowments."

"Once an absolute dedication of the property had been made... the former owners of the property had no legal authority to go behind that dedication."

"In the case of a charitable endowment or trust once the dedication is completed there is no power of revocation left with the settlors. Even though in a given case the settlor has reserved the power to revoke the trust, in our view, such a reservation would be wholly invalid and the power cannot be invoked so as to undo the settlement."

"If the power of revocation was redundant and ineffective and indeed wholly invalid the mere reservation of a power by a clause in the trust deed could not attract the applicability of the provisions of s. 12(1) of the Act."

In conclusion, the Court affirmed that the trust was irrevocable and that no interest was reserved by the settlor in the trust property for the purposes of section 12(1) of the Estate Duty Act. The value of "Kale Bhawan" was not includible in the dutiable estate, and the findings of the Assistant Charity Commissioner and the Tribunal were upheld. The Revenue was directed to pay the costs of the reference.