TMI Blog2008 (9) TMI 512X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain to the assessment year 1990-91 and 1991-92. 2. Tax Appeals Nos. 224 to 228 of 2002 were admitted by this court on July 24, 2002, formulating the following substantial questions of law : "(i) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has erred in law in its interpretation and/or application of clauses 3(2) and 4 of the U. K. trusts in holding that the same are specific trusts and not discretionary trusts ? (ii) Whether on the facts and circumstances of the case, the Tribunal has erred in holding that even if the U. K. settlements are to be treated as discretionary trusts, the assessee shall be liable to be taxed under section 166 of the Income-tax Act for the income not distributed or receivable on his behalf, entire income of the trust having been retained by the trustees ? (iii) Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in following the order of the Settlement Commission as well as the hon'ble Supreme Court for earlier assessment years in spite of the fact that the appellant has not received any income from any of the trusts for the year under appeals ?" 3. Tax Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es ? (3) Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in following the order of the Settlement Commission as well as the hon'ble Supreme Court for the earlier assessment years in spite of the fact that the appellant has not received any income from any of the trusts for the year under appeals ?" 5. During the course of hearing of these appeals, Mr. K. C. Patel, learned advocate appearing for the appellant in all these appeals, has proposed to formulate one more question of law for all these years which is as under : "Whether on the facts and circumstances of the case, the Tribunal has erred in law in ignoring that the income in question having been taxed in the U. K., the same income could not have been taxed again in India resulting in double taxation ?" 6. From the perusal of the above, it is clear that eight appeals are preferred by the appellant and in all the eight appeals, three substantial questions of law are formulated by this court, while in Tax Appeal No. 229 of 2002 for the assessment year 1987-88, one more question is raised in relation to inclusion of income from the U. S. trusts along with income from the U. K. trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent orders, revision applications before the Commissioner of Income-tax were preferred. 10. The Revenue went in appeal to the Tribunal and the Tribunal allowed the appeals of the Revenue and set aside the orders of the Appellate Assistant Commissioner and remanded the appeals back. 11. The appellant, thereafter, approached the Settlement Commission under Chapter XIX-A of the Income-tax Act, 1961. The Settlement Commission passed two orders one relating to the assessment years 1964-65 to 1970-71 (in the case of Vikramsinhji) and the other for the assessment year 1970-71 to 1982-83 (in the case of the appellant). 12. The appellant being aggrieved by the aforesaid findings preferred two appeals before the hon'ble Supreme Court. After hearing both the parties, the hon'ble Supreme Court, vide order dated April 2, 1993, which is reported in Jyotendrasinhji v. S. I. Tripathi [1993] 201 ITR 611 confirmed the orders of the Settlement Commission holding that the U. S. trusts are discretionary trusts whereas the findings of the Settlement Commission that the U. K. trusts are specific trusts was not disturbed being academic as the income arising from the U. K. trusts was shown in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the U. K. are discretionary in nature ?" 1. So far as the first issue, namely, whether the trusts are discretionary or specific trusts is concerned, Mr. Patel has contended that there are various reasons for establishing that the U. K. trusts are discretionary trusts rather than specific trusts. Apart from the tax planning, the settlor may be actuated to establish discretionary trust with a view to protect the beneficiary against creditors, or to continue to exercise control over improvident beneficiaries or to react to changes in the circumstances. It is often considered unwise to put a large sums of money at the disposal of beneficiaries, if they are young or extravagant. The common experience is that a rich young beneficiary may become idle and indulge in overspending and wasting the inheritance. Under the discretionary trust, each member of the class of beneficiary is entitled only to that amount of money which the trustees think fit to allocate him in exercise of their discretion. 2. Mr. Patel has further submitted that some of the purposes the grantor has in mind in the establishment of this trust are the education of the family members and their descendants in any co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances before it that any delay in appointment of the discretion exerciser beyond one year should be normally treated as a default unless otherwise explained. The Commission held that having regard to the language of clause 3(2) of the U. K. trust deed, there was no scope for contending that clause 4 can come into operation only if the power to make appointment under the said clause has been abdicated, renounced or in any manner disowned. The Commission, therefore, concluded that the total inaction on the part of the trustees and the beneficiaries during the last 25 years is more in keeping with the understanding of the provisions of the trust deeds by the trustees and beneficiaries as specific rather than discretionary. Shri Vikramsinhji during his life time and Shri Jyotindrasinhji after the former's death had ample resources and so asked for no funds from the trustees. The other beneficiaries knew that they were entitled to nothing so far as clause 4 operated and the trustees had no occasion to allocate any income because they knew that as per clause 4 which operated the entire income belonged to Shri Vikramsinhji and after his death to Shri Jyotindrasinhji. Hence, unless these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of discretion exercisers. 7. Mr. Patel has further submitted that the definition clause contained in clause 2 defines "trustees" to mean and include the original trustee also. If, therefore, the interpretation, which has commended to the Commission, is accepted to be correct, there would be clear frustration of the trust which on recognized principles of interpretation of documents, should be avoided. 8. Mr. Patel has further submitted that the conclusion of the Com-mission is in contradiction of its terms. On the one hand, it holds that in view of the admitted position that the power of appointment was not exercised by the Maharaja, there were neither competent trustees nor any discretion exercisers and on the other hand, it holds that in that view of the matter, the trust was a specific trust. 9. Mr. Patel has further submitted that if the property was settled upon the original trustee, as provided in the opening part of the deed of settlement, it would be fair and reasonable to take the view that the question of appointment of trustees was kept open till the Maharaja exercised the power. The only reasonable view on the principle of harmonious interpretation of such claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act with special reference to assessment order, appeals to the Commissioner of Income-tax (Appeals) and appeal preferred by the assessee under section 260A of the Act raising substantial questions of law. The Settlement Commission is not a regular Tribunal. Its function is different from those of other quasi-judicial authorities created by the Income-tax Act. As the name itself suggests, it is a settlement a sort of composition. The order of the Commission is relevant to and is confined only to the assessment years to which it relates. It is a package deal for those years only. (b) The Tribunal in its order having considered irrelevant facts and ignored relevant facts and materials on record, its finding is vitiated in law and is perverse. © Sections 3 and 4 of the Income-tax Act, 1961, impose general liability to tax upon all income in all cases in which receipt is sought to be taxed as income. The burden lies on the Department to prove that it is within the taxing provision. Reliance is placed on the decision of the hon'ble Supreme Court in the case of Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532. (d) The income from the U. K. trusts neither arose, accrued, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as the net income of the trusts by positive act retained by the trustees and carried forward and brought forward from year to year. This positive act taken by the trustees sufficiently establishes that the trusts are discretionary trusts. (i) The dictionary meaning of the word "retain" is relevant to decide the issue. International Webster New Encyclopedic Dictionary defines the word "retain" as hold back, keep, to keep possession of ; to continue to use or practice ; as, to retain a system ; to continue to hold or have ; ; as, to retain heat or moisture ; to keep in mind ; remember ; to hold in place or position ; to engage, esp. by the payment of a preliminary fee, as a lawyer. More or less the same meanings are assigned to the word "retain" in Chambers Twentieth Century Dictionary, The Random House Dictionary, The New Oxford Illustrated Dictionary, Black's Law Dictionary, Bouvier's Law Dictionary and Webster's New World Dictionary. (j) Nothing is receivable in these years by any of the beneficiaries and hence, the option under section 166 is not available to the Revenue. For this purpose, reliance is placed on the decision of the hon'ble Supreme Court in the case of CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the present matters, Mr. Patel has strongly urged that all these appeals are required to be decided in favour of the assessee and against the Revenue. (2) Mr. Pranav G. Desai, learned standing counsel appearing for the Revenue in tax appeals for the assessment years 1984-85 to 1989-90 submitted that the appellant earlier approached the Settlement Commission for the same subject-matter relating to the assessment years 1964-65 to 1982-83. The Settlement Commission passed order dated March 31, 1989. Being aggrieved by the order of the Settlement Commission, the appellant preferred appeals before the hon'ble Supreme Court and the hon'ble Supreme Court, after considering the facts and circumstances of the case as well as the questions of law, passed a detailed judgment and order dated April 2, 1993, which is reported in Jyotendrasinhji v. S. I. Tripathi [1993] 201 ITR 611 (SC). He has, therefore, placed heavy reliance upon the decision of the Settlement Commission dated March 31, 1989, as well as the judgment and order of the hon'ble Supreme Court. (3) Mr. Desai has further submitted that the hon'ble Supreme Court has observed in its judgment that the main issue in the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, no income was received by the settlor or the appellant and so long as the trustees have not decided to exercise power of distribution of income earned in favour of any of the beneficiaries, it cannot be taxed in their hands. The Settlement Commission committed legal error in including the income from the U. K. trusts in the taxable income of the settlor or the appellant, even though it was not paid out by the trusts nor was it received by the assessee. Mr.Desai has further submitted that the hon'ble Supreme Court, after noting the submissions on facts and law by both the sides observed that the question to be examined whether the order of the Commission is contrary to the provisions of the Act and whether the order of the Com-mission is vitiated by any such wrong interpretation of the deeds. So far as the U. K. trusts are concerned, the hon'ble Supreme Court noted the contentions of the appellant that the Commission wrongly construed clause 3 with respect to the U.K. trusts and that clause 3 creates a discretionary trust and that clause 4 has not and had never came into operation and that no income ever earned or accrued to the settlor or the appellant under clause 4 and that c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission, the assessee had not declared the income from the U. K. trusts. The Tribunal also arrived at the finding of fact that in the present the assessment years 1984-85 to 1989-90, a note is written by the appellant that the remittance received from the trust is not included as according to the assessee's opinion, the trust being discretionary trusts, the receipt is not income and further stated by the appellant in the said note that the return is subject to filing petition before the Settlement Commission. The said note was filed in the return of the assessment year 1984-85 and similar note has been filed in the assess-ment year 1986-87. The Tribunal also found that the assessee has shown less figure of trust income, after claiming deduction under section 80L of the Act. The Tribunal has come to the final decision on facts by noting that for assessment years under reference, the assessee has proceeded on the basis of the admitted position that the assessability of the income from the U. K. trusts would be governed by the decision of the hon'ble Supreme Court and/or by the decision of the Settlement Commission, obviously the facts and issues are identical in all the years. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trust which has already been declared a specific trust as discretionary trust. The appellant cannot take advantage of non-performance of the duty by the settlor and the appellant. If for the period of about 44 years, the duty is not fulfilled by the settlor and the appellant, the appellant cannot take any advantage from his own default in performance of duty by contending that clause 4 will not come into operation. He has further submitted that on any default of not making appointment, the original trustee who has been appointed has to fulfil his duty to apply the income of the trust accruing during the life of the settlor to the settlor and thereafter to the appellant as provided in clause 4 and clause 4 cannot be made nugatory because of non-performance of the duty by the settlor and the appellant. (9) Mr. Desai has further submitted that the contention of the appellant that since the opening words of clause 4 of the trust deed indicates "subject to aforesaid", clause 4 will not come into operation unless and until the appointment is made by the appellant is misconceived, untenable and devoid of any substance. The words "subject to aforesaid" in clause 4 has to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no adequate means to maintain his family which can be seen from the statement of income submitted showing either meagre income or loss. If the object is to advancement, maintenance and education and if the contention of the appellant is accepted then it will tantamount to the trustee abdicating the duties whereby the object and purpose of the trust is defeated which could never be the intention of the settlor in any view of the matter. 11. Mr. Desai has further submitted that for the assessment years in question, details of income from the U. K. trusts have been filed by the assessee where the income from the U. K. trusts were declared. This is borne out from the paper books submitted by the appellant as well as the fact duly recorded by the fact finding authorities. In view of this decision, where the appellant has filed the statement of income showing the income falling into the hands of the appellant, the contention in the present appeal is misconceived and devoid of any substance. Mr. Desai has, therefore, submitted that in view of the finality arrived at with regard to the inter-pretation of the U. K. trusts as well as the U. S. trusts by the decision of the Settlement Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the hon'ble Supreme Court that the Revenue has thus been given an option to tax the income from a discretionary trust either in the hands of the trustees or in the hands of beneficiaries. Hence, it was held that even in a case of discretionary trust, the income can either be taxed in the hands of the trustees or beneficiary. Thus, the nature of the U.K. trusts, whether specific or discretionary has no relevance in view of the above observation of the hon'ble Supreme Court in respect of the U. S. trusts. 13. Mr. Bhatt has further submitted that regarding the assessee's contention that he has neither received any income from the U. K. trusts nor has shown any income received from the U. K. trusts in his return, it is factually incorrect. In his return of income for the assessment years 1990-91 and 1991-92, the assessee has appended a note forming part of the income-tax return. The relevant part of the said note states that the asses-see has not shown the income from the U. K. trust and the U. S. trust for the year ended March 31, 1990, for the reason that the Settlement Com-mission has given their findings about the tax liability of the income of trusts. The assessee has mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the fact that Shri Jyotindrasinhji is admittedly the sole legal successor of the wealth of the deceased Shri Vikramsinhji and still he is not showing the income and wealth of his father late Shri Vikramsinhji in his individual returns and has not offered the same to tax. The income and wealth of the foreign trusts has to be taxed somewhere. It cannot be made subject to exemption from all the hands which appears to be the intention of the assessee's legal heir. 15. Mr. Bhatt has further submitted that clauses 3 and 4 of the settlement have already been interpreted by the Settlement Commission and thereafter by the hon'ble Supreme Court. Clause 4 uses the phrase the specified period. clause 9 specifically uses the word only during the period allowed by law . . . only be exercisable during the specified period and during such further period if any (whether definite or indefinite) as in the case of the particular power in question the law may allow . . . The settlement were executed during accounting year 1963-64. Part VIII of the trust and trust property where maximum period is of 12 years. Thus, in any view of the matter, irrespective of the above, after a lapse of 12 years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the income from the U. S. trusts in any case cannot be taxed in the hands of the appellant for the assessment year 1987-88. 19. Mr. P. G. Desai, learned standing counsel appearing for the Revenue has relied on the orders of the authorities below on this issue and submitted that the Tribunal has specifically discussed this issue in para-graph 23 of its order wherein it is observed that during the course of hearing, the Bench specifically called upon the learned counsel to furnish information regarding the disbursement made by the U. S. trusts to beneficiaries during the period relevant for the assessment year 1987-88 which would be liable to be assessed in the hands of the assessee as his income. The Tribunal has also referred to the contention raised on behalf of the assessee that no distribution has been made by the trustee. When called upon to substantiate the claim, the learned counsel expressed his help-lessness to furnish any such evidence. The Tribunal has also observed that the assessee has indicated in the income-tax return for the assessment year 1987-88 the break-up of the income in respect of each of the U. S. trusts and included such income subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant has not shown as taxable in the returns of all the years under appeal. (iv) On the contrary, the trusts have exercised their discretion in retaining the net income of the trusts by further carry forward and brought forward from year to year under appeal. (v) The appellant, as against the admitted position in the preceding years before the Settlement Commission and the hon'ble Supreme Court, has seriously objected to the additions in question before the Income-tax Officer, Commissioner of Income-tax (Appeals) and the Tribunal and having lost in the said proceedings, regular appeals are filed and admitted by this court under section 260A raising three substantial questions in all the eight years and one more question in Tax Appeal No. 229 of 2002 against the addition of the U. S. income for the first time and this court has raised the said question as a substantial question of law. (vi) So far as Tax Appeal No. 229 of 2002 is concerned, one more addition of the U. S. trusts 1, 2 and 3 income is made, despite the fact that it is not returned and it is distinctly stated that no distribution was made by the trustees. It was also stated that the appellant has not received th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rustee (McGill) and it did not depend upon the appointment of additional trustees. Clause 3 prevails over clause 4. If so, the U. K. trusts/settlements are also discretionary trusts and not specific trusts as held by the Settlement Commission. In such a case again the assessment can be made only upon the trustees and not upon the beneficiaries-recipients. (ii) So far as the U. K. trusts are concerned, no income was received by the settlor or the appellant either in the U. K. or in India. So long as the trustees decided not to exercise the discretion to distribute the income, no income 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 distri-bute 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 error in including the income from the U. K. trusts in the total income of the settlor and the appellant even though it was not paid out by the trustee nor received by the assessees. At any rate, no income was received in India. (iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have put forward that fact in the forefront. It was further observed that it was not brought to the notice of the hon'ble Supreme Court that, during any of the years concerned, the appellant did ever say that he did not receive the income from these trusts. If so, the question of law urged is of mere academic interest and need not be dealt with by the hon'ble Supreme Court. 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 hon'ble Supreme Court has observed that the observation made by the Commission in that behalf is quite adequate. It has stated that in case the appellant proves that any income has been taxed in the U. S. or the U. K., the same income shall not be taxable over again in India. The present appeals are to be decided in the light of the above observations of the hon'ble Supreme Court. In CIT v. Kamalini Khatau [1994] 209 ITR 101, the hon'ble Supreme Court has held that section 166 is clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that sections 160 to 165 do not bar the direct assessment of the person on whose behalf or for whose ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue. The Tribunal was, therefore, not right in holding that the income from the U. K. trusts was taxable in the hands of the assessee. 52. In Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746, the hon'ble Supreme Court has held that income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt ; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize. Similarly in the present case, no income was accrued or received by the assessee from the U. K. trusts. The note put up in the statement of income was condi-tional one. It nowhere suggests that the income has been received by the assessee. The deduction under section 80L was claimed only in case of a positive income. Despite the fact that the income was not received nor was it accrued to the assessee, simply on the basis of the note or similarity of facts, or on assumption of similarity of facts, which are not in effect, the income cannot be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced the accounts of the trusts wherein it is specifically stated that the income has been retained by the trustees and it was brought forward to the next years. It was also stated in such statement of accounts that the tax has been paid by the trustees of the U. K. trusts on the income so earned in the U. K. It appears that any of the authorities below, including the Tribunal has not considered this vital aspect of the matter and proceeded on the footing that the facts are identical and that the notes are similar to the notes of earlier years. If the income were retained by the trustees and it has not been distributed, nor has it been received by the assessee and no evidence has been brought by the Department to show that the same has been received by the assessee in India, such income cannot be taxed in the hands of the assessee. Section 5 of the Act has also no application. When the income has neither accrued nor received by the assessee, nor has it been received or accrued on his behalf either in India or outside India, such income cannot be taxed under section 166 of the Act as it is not the income receivable. Section 166 of the Act can be invoked only when the income is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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