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TMI Blog1963 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... ited companies. A public charitable trust called the Thiagarajar Educational Trust was constituted on April 29, 1956, by the assessee along with his brother, Sundaram Chettiar, and his father, Karumuthu Thiagaraja Chettiar. These founders of the trust were themselves to be trustees of the institution. At the inception they transferred the shares held by each of them in Saroja Mills Limited, Singanallur, Coimbatore District. Subsequently, the assessee transferred certain other block of shares held by him in Sundaram and Company Limited, Meenakshi Mills Limited, Manickavasagam (Private) Limited and Rajendra Mills Limited to the trust. We shall refer to the terms of the trust a little later. In the previous years relevant to the assessment years 1957-58 and 1958-59 the trustees aforesaid received dividends of ₹ 1,86,108 and ₹ 1,93,919 respectively from the transferred shares. The net dividends when grossed up amounted to ₹ 2,52,350 and ₹ 2,78,222. A good portion of this dividend income of the trust was advanced as loan to three companies, Rukmani Mills Limited, Meenakshi Mills Limited and East India Corporation Limited, in which companies the trustees in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d....In our opinion by the enabling provision of the trust deed, the assessee derives the necessary indirect benefit out of the income of the trust to exclude him from the exemption envisaged in the last proviso to section 16(1)(c)." The relevant statutory provision upon which both the department and the assessee rely reads as follows: "16. (1) In computing the total income of an assessee--.... (c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of revocable transfer of assets shall be deemed to be income of the transferor: Provided that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settlor, disponer or transferor a right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and from which income the settlor or disponer derives no direct or indirect benefit, is not within the main provision of section 16(1)(c). In other words, where there is a transfer of assets irrevocable for a period exceeding six years, the income accruing to the settlee by reason of such transfer should be deemed to be the income of the settlee and should not be included in the income of the settlor. But the important condition is that the settlor should not derive any benefit, direct or indirect. This, in brief, is the substance of the statutory provision. The first proviso to section 16(1)(c) is a commentary on the word "revocable" found in the main provision. Income from a revocable transfer of assets shall be deemed to be income of the transferor. The true nature of a transfer, whether revocable or not, can be ascertained from the terms of the transfer, express or implied. By the first proviso the statute creates a fiction of revocability, if the transfer deed contains a provision of retransfer of income to the transferor directly or indirectly, or if the settlor reserves or retains a power to reassume directly or indirectly his rights over the income or assets. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to obtain an indirect benefit or pecuniary advantage out of the trust funds. It cannot be controverted that the trustees cannot benefit themselves directly from the trust funds. Clauses 2, 3 and 4 of the trust deed state that Karumuthu Thiagaraya Chettiar, Sundaram Chettiar and Manickavasagam Chettiar (the assessee herein) have transferred shares belonging to them in Saroja Mills Limited, Singanallur, for a period of seven years from the date of the indenture. The transfer purports to be both as regards the corpus and the income of the shares. It is in favour of Thiagarajar Educational Trust. There is, therefore, an irrevocable transfer for a minimum period of seven years from the date of the trust. The statutory condition necessary to attract the third proviso, so far as irrevocability is concerned, is satisfied. There does not appear to be any provision in the trust deed wherefrom it can be postulated that there was any hidden purpose in the constitution of the trust so as to enable the trustees to obtain personal advantages under cover of a public trust. The objects of the trust are set out and enumerated in clause 11 of the deed. They are, to establish, run and maintain educat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fiduciary vis-a-vis the cestui que trust. The law is very jealous of the right and interests of the beneficiary for whose benefit the trust is created and is intolerant with the trustee who swerves from the straight line of his duty. It is an established rule that the trustee shall not gain any personal advantage from the administration of the trust property or exploit his position to derive any pecuniary benefit. For example, a trustee who receives an illegal gratification for investing trust money must account for the amount of bribe received: In re Smith [1896] 1 Ch. 171. This forbidden thing cannot be done directly or indirectly. The reason for the rule is that a person in a fiduciary position is not entitled to put himself in a position where his interest and duty conflict. Thus, a trustee is absolutely prohibited while he remains a trustee from purchasing, leasing or accepting a mortgage of trust property either from himself or his co-trustees, however fair the transaction may be, unless under an express power in the instrument of trust or with the sanction of a competent court. The question is whether a trustee can borrow money for his own personal purposes from the trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n regard to a clause in a deed of settlement or trust, the one literal but contrary to law and the other restricted but consistent with law, the courts should prefer the latter construction as it would be improper to assume that the authors of the instrument determined to do something which was neither proper nor legal. We are inclined to take the view that the proper construction of clause 19 of the instrument of trust should be that the trustees have not been authorised to invest moneys of the trust with themselves. Learned counsel for the department cited the decision of the Bombay High Court in Commissioner of Income-tax v. Sir Kikabhai Premchand [1948] 16 I.T.R. 207 in support of the contention that a power reserved by the settlor in the instrument of trust to lend money to himself with or without interest would amount to a derivation of benefit which would take away the exemption created by the third proviso to section 16(1)(c) of the Indian Income-tax Act. In that case a trust deed was executed by Sir Kikabhai Premchand for the purpose of establishing a sanatorium called Lady Lily Kikabhai Premchand Sanatorium at Poona for the benefit of the deserving and needy persons and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the learned Chief Justice to this limited extent. But here, we are dealing with a case where we do not find any provision in the trust deed which would enable the authors of the trust to obtain any benefit directly or indirectly from the trust funds by loaning trust amounts to themselves. As stated already, clause 19 of the trust deed would not permit such an user of the trust fund. The department contends that in fact the trustees have obtained a benefit by utilising the trust funds as advances to various limited companies in which the trustees held large block of shares. We shall now examine the particulars of the share position of the assessee and the other trustees in the borrowing companies, the details of loans advanced from the Thiagarajar Educational Trust and the extent to which the borrowing companies were indebted to the trust in proportion to their other indebtedness. In Rukmani Mills Limited (one of the borrowing companies) the share position as on March 31, 1957, of the assessee, his father and brother was as follows: Karumuthu Thiagaraja Chettiar 187 shares. T. Sundaram Chettiar 1,126 " T. Manickavasagam Chettiar (assessee) 1,126 " Total of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly. The first is that the share position of the assessee in the borrowing companies was not such as to give him a dominant position of control over the company. The second is that the extent of the borrowings itself was a negligible fraction of the total borrowings of these companies. Learned counsel for the department, however, contends that the taking of the loans by the three companies from the trust would itself amount to an indirect benefit to the assessee who was both a trustee and a shareholder in the borrowing companies. In support of the contention that in certain circumstances a loan would amount to a benefit obtained by the borrower from the lender, reliance has been placed on the decision of the House of Lords in St. Aubyn v. Attorney-General [1952] A.C. 15; 3 E.D.C. 292. One of the questions raised in that case related to the proper interpretation of section 46 and 47 of the Finance Act, 1940. Section 46, in so far as it is material, runs thus: "Where a person dying after the commencement of this Act has made to a company to which this section applies a transfer of any property (other than an interest limited to cease on his death or property which he transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to express a confident opinion. It is indeed strange that no reference is made to a transaction of loan, and the result of holding such a transaction to be a benefit must, as learned counsel for the Crown was constrained to admit, have strange results. But I have come to the conclusion, nevertheless, that the contention of the Crown must be upheld. I cannot escape from the fact that as each periodical loan was made to Lord St. Levan there was a payment to and receipt by him. And I cannot think that he received it any the less for his own benefit because he had, or his estate had, at a later date to repay it. He had the beneficial use of what he received and can fairly be said to have received it for his own benefit." Lord Radcliffe, who concurred with the judgment of Lord Simonds, observes thus at page 57 [1952] A.C. 15: "I would answer this question by saying that they were benefits because section 47 of the Act has declared them so to be. That section does in terms declare that among the things to be treated as benefits accruing to a deceased transferor from a company are any periodical payments out of the resources of the company which the deceased received for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey was lent on commercial terms, and that the subsequent waiver of interest could not, respectively, have the effect of altering the original nature of the loan. The Court of Appeal held that the loan was a distribution within the meaning of section 36. At page 523 Sir Raymond Evershed M.R., after referring to St. Aubyn's case [1952] A.C. 15; 3 E.D.C. 292, observed as follows: "Having due regard therefore to the weight of all the observations made in each of those cases, I cannot find that they really assist at all towards a solution of the present problem. I have said more than once that had it not been for the three matters of what I have called context I should have been comforted by the language of Lord Morton of Henryton in concluding that the phrase 'applied for the benefit of any person' did not include an ordinary loan; but I have also said--and I am but repeating myself-that the other indications in this section seem too compelling to allow me to conclude the matter of construction on those words alone and to decide in favour of the appellant company." Earlier at page 522 Sir Evershed M.R. observes [1953] 34 Tax Cas. 509: "I should not const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be benefit. Anything which is abstract, remote or contingent cannot be called a benefit. The characteristic of a benefit is that it is real, and not notional, concrete and not abstract, certain and not conjectural. The argument of benefit to the assessee (shareholder) runs thus. The company gets a benefit by borrowing from the trust. This benefit to the company permeates to the shareholder who are the residuary beneficiaries, whether the company functions or not. This argument, in our opinion, is unsound. Every borrowing by the company would not redound to the benefit of the shareholder. The "benefit" to the shareholders under such circumstances would be illusory. Now, the word "company" has no strictly technical meaning: per Buckley J. in In re Stanley [1906] 1 Ch. 131, 134. A company so constitutes a distinct legal person subject to legal duties and entitled to legal rights separate from those of its members. It is a fiction created by law. It cannot be said that it is a conglomeration of the personality of its component members. Its individual and separate character distinct from its shareholders is really beyond question. "Since the Salomon cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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