TMI Blog1993 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years 1970-71 to 1982-83. Under its orders, the Settlement Commission computed the taxable income of the appellant's father (who died on August 22, 1969 ) and of the appellant for the aforesaid assessment years and gave certain directions, applying which the Income-tax Officer was directed to compute the total income for each of the said assessment years and raise demand for the tax due. The main issue in all these matters is the assessability of income from five foreign trusts created by the appellant's father, Sri Vikramsinhji. Sri Vikramsinhji, Ex-ruler of Gondal, executed three deeds of settlement (trust deeds ) in the United States of America on December 19, 1963, and two deeds in the United Kingdom on January 1, 1964. The three settlements executed in the United States are in identical terms. Similarly, the two settlements, executed in the United Kingdom are similar. The two sets of settlements, however, differ from each other in certain particulars, though both the sets are meant for the benefit of the settlor and the members of his family. We may refer to the relevant clauses in the settlements executed in the U. S. in the first instance. Under the U. S. sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both of them, shall release such power, then the party not so releasing shall continue to have the power to appointment hereinbefore provided, acting alone. " Clauses 2 and 3 of the deeds confer an absolute discretion upon the trustee to pay over or apply in his discretion, any part or the whole of the income or any part of or the whole of the principal to " any person then eligible to receive the income of this trust" at such time and in such manner, as he may decide in his absolute discretion. Clause 3 says further that " the trustee may omit eligible members of the class from any or all such payments and applications, and no such payment or application or omission of a person from participation therein shall cause a charge against or otherwise affect the future interest or share of any person hereunder Any determination made by the trustee in good faith in exercising the said discretion is held to be binding and conclusive. It is not necessary to notice the other clauses of these settlements except to say that the object of these trusts is to provide for the education, maintenance and upkeep of the members of the settlor's family and their descendants. The settlor died on A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the U. K. Under these settlement deeds, one Mr. Robert Hampton Robertson McGill was designated as the trustee, referred to in the deeds as " the original trustees ". These trusts too were created for the benefit of the settlor, the members of his family and their descendants, referred to as " beneficiaries ". The deeds define the expression " the trustees " to mean and include the original trustee or the other trustees for the time being appointed in terms of the deeds of settlement. The expression " the beneficiaries " was defined to mean and include (a) the settlor, (b) the children and remoter issue for the time being in existence of the settlor, and (c) any person for the time being in existence who is the wife or widow of the settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the settlor. The clauses which are relevant for our purposes read thus : (We have, for the sake of convenient reference, numbered them as clauses 3 and 4). "3. THE settlor hereby directs that the trustee shall and accordingly, the trustee shall stand possessed of the trust fund and the income thereof upon the trusts following that is to say : (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears . . . ..." It is not necessary to notice the other provisions/clauses of these deeds. During his lifetime, the settlor, Vikramsinhji, was including the whole of the income from these trusts in his returns of income just as he was doing in the case of the U. S. trusts. The said income was also included in the two returns filed by his son for the assessment year 1970-71. Thereafter, however, the appellant took the stand, as mentioned hereinbefore, that the income from these trusts is not includible in his income. He also took the stand that the inclusion of the said income in the returns submitted by his father for the assessment years 1964-65 to 1969-70 and by him in the returns relating to the assessment year 1970-71 was under mistake. This submission too was the subject-matter of the appeals and the revision filed before the Appellate Assistant Commissioner of Income-tax, referred to hereinbefore. When the appellant approached the Settlement Commission with an application for settlement, it related to the income from the U. K. trusts as well. The Settlement Commission heard the arguments in extenso spread over several days and disposed of the matter under two elaborate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Commission erred in law in holding that the U. S. trusts are revocable trusts within the meaning of section 63 of the Act. For attracting section 63, the deed of transfer should give the transferor a right to retransfer directly or indirectly the whole or any part of the income or assets to the transferor or it must give him a right to reassume power directly or indirectly over the whole or any part of the income or assets. In this case, the relevant clause does not give the transferor such power. The power is given to the trustee to be exercised with the concurrence of the transferor/settlor. Even if, for any reason, the clause is construed as giving such a power to the settlor/transferor, section 63 is not attracted inasmuch as the power is given not to him as such but jointly to him and the trustee. Such a power does not attract the mischief of section 63. (2) The U. S. trusts are discretionary trusts. In such a case, the assessment can be made only upon the trustees and not upon the beneficiaries-recipients. The Revenue has no option in such a situation. It must necessarily tax the trustees and trustees alone. The Revenue cannot take advantage of the mistake of law on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made, the Commission either accepts it or rejects it subject to such conditions and terms as it thinks fit to impose in that behalf. As the name itself suggests, it is a settlement a sort of composition. It need not even give reasons for its order. Even if any principles are decided by the Commission, they do not bind the income-tax authorities in proceedings relating to subsequent years. The order of the Commission is relevant to and is confined only to the assessment years to which it relates. The jurisdiction of this court under article 136 in an appeal against the orders of the Settlement Commission must be conditioned by the above considerations. This court would not be able to go into the merits of the order. The Commission's order cannot be dissected, inasmuch as it is a package deal. Either it stands or falls as a whole. (ii) The interpretation placed by the Commission on both the U. S. and the U. K. trusts is perfectly in order and does not call for any interference by this court. Indeed, under the impugned orders, several benefits have been conferred upon the settlor and the appellant like waiving of penalties, interest and other liabilities attaching to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uly authorised in this behalf, and after examining such further evidence as may be placed before it or obtained by it, the Settlement Commission may, in accordance with the provisions of this Act, pass such order as it thinks fit on the matters covered by the application and any other matter relating to the case not covered by the application, but referred to in the report of the Commissioner under sub section (1) or sub-section (3)." Section 245E empowers the Commission to reopen the completed proceedings in appropriate cases, while section 245F confers all the powers of an income-tax authority upon the Commission. Section 245H empowers the Commission to grant immunity from penalty and prosecution, with or without conditions, in cases where it is satisfied that the assessee has made a full disclosure of his income and its sources. Under section 245HA, the Commission can send back the matter to the Assessing Officer, where it finds that the applicant is not co-operating with it. Section 245-1 declares that every order of settlement passed under subsection (4) of section 245D shall be conclusive as to the matters stated therein and no matter covered by such, order shall, save as oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. In this context, it is relevant to note that the principle of natural justice (audi alteram partem) has been incorporated in section 245D itself. The sole overall limitation upon the Commission thus appears to be that it should act in accordance with the provisions of the Act. The scope of enquiry, whether by the High Court under article 226 or by this court under article 136 is also the same-whether the order of the Commission is contrary to any of the provisions of the Act and if so, apart from ground of bias, fraud and malice which, of course, constitute a separate and independent category, has it prejudiced the petitioner/appellant. Reference in this behalf may be had to the decision of this court in R. B. Shreeram Durga Prasad and Fatechand Nursing Das v. Settlement Commission (I. T. and W. T.) [1989] 176 ITR 169, which too was an appeal against the orders of the Settlement Commission. <?xml:namespace prefix = st2 /> Sabyasachi Mukharji I. , speaking for the Bench comprising himself and S. R. Pandian J., observed that, in such a case, this court is " concerned with the legality of the procedure followed and not with the validity of the order ". The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income among the specified class of beneficiaries. In the case of such trusts, the trustees have a discretion to pay the whole or part of the income to such member or members of the designated class as they think fit and in such proportion as they deem appropriate. Section 164(1) sets out the same idea in the following words: " . . . . Where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown. . . ..". In Snell's Principles of Equity, 25th Edn. (1965), p. 129, a discretionary trust is defined in the following words : " A discretionary trust is one which gives the beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit.... The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. " That these trusts are discretionary trusts is not in controversy. The main question is whether paragraph 1(2), quoted hereinbefore, makes it a revocable trust within the meaning of section 63. The said clause begins with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature contemplated therein and not where such a power has to be exercised by the transferor jointly with another person or with the concurrence or consent of another person. Indeed, he argues that the said power is really given to the trustee to be exercised in concert with the settlor. We find it difficult to agree with learned counsel. Firstly, the power, properly construed, is given to the settlor to be exercised together with the trustees and not to the trustee to be exercised together with the settlor. The trustee is anyhow vested with an absolute discretion to distribute the income or the principal of the trust to such member of the family as he thinks appropriate, under the clause preceding and paragraph following paragraph 1(2). If so, there was no point in saying that he can, together with the settlor, be empowered to pay over a part or the whole of the income/principal to " such one or more members of a class composed of the family members living ". It cannot also be forgotten that the trustee in this case is a bank one of the largest in the U. S. A. and not an individual acquainted with the affairs of the settlor's family. Now coming to section 63, it is equally not pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely because the concurrence of the trustee had to be obtained by the transferor/settlor for giving the said direction, it cannot be said that the deed does not contain a provision giving the transferor a right to reassume power directly or indirectly over the whole or any part of income or assets within the meaning of section 63(a)(ii) of the Act. In this view of the matter, it is not necessary for us to refer to other decisions cited before us in any detail. The decision of this court in CIT v. Ratilal Nathalal [1954] 25 ITR 426, emphasises that the power of revocation must be given to the settlor as settlor and not in any other capacity. In the deeds before us, the power is indisputably conferred upon the settlor in the very same capacity and not in any different capacity. The other decision of this court in CIT v. Jayantilal Amratlal [1968] 67 ITR 1 is distinguishable for the reason that the power of the settlor therein was merely to choose among the several objects of the trust and, therefore, it was held that it does not attract section 63. On the other hand, Tarunendra Nath Tagore v. CIT [1958] 33 ITR 492 (Cal) was a case where the trust deed empowered the settlor to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuted instrument in writing are treated as representative assessees (section 160(1)(iv)). It is equally true that, in the case of a discretionary trust, the trustees are liable to be taxed in respect of the income received by them at the rate specified in section 164(1). 1 Section 164(l) has undergone several changes since 1962. The subsection as introduced by the Finance Act, 1970, with effect from April 1, 1970, provided that, in such cases " tax shall be charged (i) as if the relevant income or part of relevant income were the total income of the association of persons, or (ii) at 65 per cent., whichever course would be more beneficial to the Revenue ". For the purpose of this case, it is not necessary to notice the provisos appended to sub-section (1) or the subsequent amendments to the sub-section At the same time, section 166 expressly declares that " nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income ". The language of this section is clear. The opening words " no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vable, or the recovery from such person of the tax payable in respect of such income.' The Income-tax Officer may, therefore, assess the person represented in respect of the income of the trust property and the appropriate provisions of the Income-tax Act relating to the computation of the total income and the manner in which the income is to be computed will apply to that assessment. The Income-tax Officer may in appropriate cases assess the representative assessee in respect of that income and limited to that extent, and tax may be levied and recovered from him to the same extent as may be leviable and recoverable from the person represented by him. The contention raised by counsel for Nagappa that, since the trustees were assessable in respect of the income of the beneficiaries under section 161(1), that income could not by virtue of sub-section (2) of section 161 be assessed in the hands of the beneficiary is contrary to the plain terms of section 166. Sub-section (2) of section 161 does not purport to deny the Income-tax Officer the option to assess the income in the hands of the person represented by the representative assessee : it merely enacts that when a representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty from which income was derived in the year of account, be deemed to be an assessee and liable to pay tax, does not absolve the appellant, on whose behalf the income was received from the obligation to pay agricultural income-tax, Section 13 merely provides a machinery for recovery of tax, and is not a charging section. When property is in the possession of the receiver, common manager or administrator, the taxing authorities may, but are not bound, to treat such persons as assessees and recover tax. The taxing authorities may always proceed against the owner of the income and assess the tax against him. The definition in the connotation of 'person' undoubtedly include a receiver, trustee, common manager, administrator or executor, and by such inclusion, it is open to the taxing authorities to assess tax against any such persons ; but, on that account, the income in the hands of the owner is not exempt from liability to assessment of tax. " The principle of this decision does support our view, notwithstanding certain variance between the provision concerned in the said decision and those concerned herein. Sri Ashok Desai, however, placed strong reliance upon a Full Bench dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e beneficiary cannot be simultaneously taxed in respect of the same income. The assessments made by the Commission on the deceased-settlor and the appellant are thus unexceptionable. U. K Trusts: The first contention urged with respect to the U. K. trusts is that the Commission has wrongly construed clause 3 which we have extracted hereinbefore. Sri Desai argues that the trust had already come into existence with the appointment of the sole trustee, Mr. McGill, and that the coming into existence of the trust did not depend upon the appointment of additional trustees. The Commission was wrong in holding that until and unless the additional trustees are appointed, the trust in clause 3 does not come into existence. Properly construed, says Sri Desai, clause 3 creates a discretionary trust. Inasmuch as the sub-clause does not prescribe any time limit within which the trustees must decide to distribute the income among the beneficiaries says counsel, clause 4 has not and had never come into operation. In this case, the trustees never did decide not to exercise their discretion under clause 3. If so, no income ever arose or accrued to the settlor or the appellant under clause 4. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to our opinion, this income is not taxable as the U. K. trust is discretionary. However, as it has been taken last, the income may be included in the hands of Sri Jyotendrasinhji subject to our appeal". It is significant to notice the ground of non-taxability put forward in the said letter. The appellant did not say that he did not receive the income. All he said was, since it is a discretionary trust, its income is not taxable in his hands. If he had not received the income, he would have put forward that fact in the forefront. But he did not. Similarly, in the return relating to the assessment year 1973-74, a note was appended by the appellant to the following effect : Late H. H. Maharaja Vikramsinhji of Gondal has created trusts in the U. K. The assessee has been informed that income falling in the hands of the assessee is 12,627 pounds. This is, therefore, shown as income in his return." (emphasis added). It is true that the appellant had argued before the Commission that the settlor as well as himself had included the said income in their returns out of ignorance and on the basis of wrong legal advice but the said explanation has not been accepted by the Commission and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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