1985 (4) TMI 94 - AT - Income Tax

Summary

Issues Involved:
1. Justification of assessing the value of trust assets in the hands of trustees.
2. Determination of the value of beneficiaries' interest versus the corpus value.
3. Applicability of discounted value for assessment purposes.
4. Validity of the actuary's valuation.

Detailed Analysis:

1. Justification of Assessing the Value of Trust Assets in the Hands of Trustees:
The main issue was whether the department was justified in assessing the value of the assets held by the trust in the hands of the trustees instead of assessing a highly discounted value as returned by the assessee. The trustees of a private trust, created on 24-3-1966, were assessed for wealth-tax for the assessment years 1978-79 and 1979-80. The trustees had invested in shares of limited companies and referred the valuation of the beneficiaries' interest to an actuary, who determined the present value of the corpus at Rs. 19,608 and Rs. 21,399 for the respective years, based on a vesting period of 31 years. The Wealth Tax Officer (WTO) did not accept the discounted value and assessed the present value of the shares at Rs. 7,62,335 and Rs. 9,10,939 for the respective years.

2. Determination of the Value of Beneficiaries' Interest Versus the Corpus Value:
The Appellate Assistant Commissioner (AAC) accepted the contention that only the interest of the beneficiaries was assessable, not the entire corpus value. However, the AAC did not accept the discounted value proposed by the actuary, pointing out that the trust deed allowed for the vesting date to be preponed and that it was theoretically possible for the vesting date to be on the valuation date itself. Therefore, the AAC concluded that there was no justification for discounting the value of the corpus, and the trustees, having unlimited discretion, were assessable on the entire value of the corpus as on the valuation dates.

3. Applicability of Discounted Value for Assessment Purposes:
The assessee argued that under section 21 of the Wealth-tax Act, 1957, the trustees could only be assessed on the value of the beneficial interest, not the corpus. The Supreme Court decision in CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust supported this view. The contention was that the fictional individual beneficiary under section 21(4) should have their interest discounted based on the vesting date provided in the trust deed, which was 31 years later. The department argued that the WTO's method of assessment was correct.

4. Validity of the Actuary's Valuation:
The tribunal considered the submissions and accepted that the trustees could only be assessed under section 3, read with section 21, of the Act, meaning only the value of the beneficiaries' interest was assessable. However, the tribunal found that the actuary's assumption that the individual beneficiary would have no interest in the property for 31 years was incorrect. The trust was discretionary for both income and corpus, meaning the fictional beneficiary was entitled to income for those 31 years, which the actuary failed to account for. The tribunal concluded that the interest of the fictional beneficiary could not be less than the full value of the property, and the valuation given by the actuary was not acceptable.

Conclusion:
The appeals were dismissed, and it was held that the trustees were assessable on the entire value of the corpus of the trust as on the valuation dates, as the fictional beneficiary under section 21(4) was entitled to both income and corpus, and the actuary's valuation was based on incorrect assumptions.