TMI Blog1968 (9) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... ent provided for the disposal of the income after meeting the expenses of management and preservation of immovable property, if any, purchased out of the trust funds and of them, clause 3, which is the material clause for the purpose of the present reference, ran as follows : " 3. Subject to the provisions contained in clauses 1 and 2 hereof the trustees shall stand possessed of the settled premises upon trust until the death of the last survivor of the first settlor and the said Ravindra, Bipin, and Yogesh to apply the net income for and towards the maintenance and personal support of all or such one or more exclusively of the other or others of the following persons, namely, the first settlor, the second settlor, the children of the first settlor and the widow and issues if any of the sons if any of the first settlor in such manner and if more than one in such shares and proportions as the trustees may from time to time think proper with power to the trustees in their absolute discretion to pay the whole or any part of the net income of the settled premises to any one or more of them to the exclusion of the other or others of them. " The disposition of the corpus was dealt wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e met from any other source for the benefit of the first settlor the second settlor or any child or remoter issue of the first settlor. Clause 9 was relied upon before the Central Board of Direct Taxes on behalf of the revenue but no reliance was placed upon it before us and it is therefore not necessary to make any reference to it. Some reference was made in the course of the arguments to clause 10 which conferred power on the deceased to give directions to the trustees in certain matters but in our view it is not a material clause and nothing turns upon it. Clause 11 was the next clause on which the strongest reliance was placed on behalf of the revenue and it made the following provision: " 11. The first settlor shall have power in addition to the general power contained in the last preceding clause from time to time to direct the trustees in the management of the trust hereby created : (a) to allow him and/or the second settlor to live from time to time in any part or parts of any immovable property comprised in the settled premises free of rent ; (b) to direct any part or parts of the settled premises to be let or given in the occupation of any person free of rent or u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... properties forming the subject-matter of the settlement. Several contentions were raised by the accountable person against the applicability of section 12(1) which was the provision under which the value of the properties forming the subject-matter of the settlement was included in the principal value of the estate by the Assistant Controller. But out of those contentions barring one, all were rejected by the Central Board of Direct Taxes. The one contention which found favour with the Central Board of Direct Taxes was that section 12(1) could not possibly be invoked for the purpose of including the value of the property settled by Bai Jasud, for that section had applicability only to property passing under a settlement made by the deceased and not to property passing under a settlement made by any person other than the deceased. The Central Board of Direct Taxes thus excluded the property settled by Bai Jasud from the operation of section 12(1) but the ultimate decision was still against the accountable person for the Central Board of Direct Taxes took the view that that property was, by reason of clauses 8, 10 and 11 of the settlement, property which the deceased was at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as found at the death of the deceased. But when it was pointed out to him that this contention, even if valid, would not make much difference to his client in terms of financial liability and might, in a certain view, even result in enhancement of the financial liability, he wisely did not press this contention. We therefore say no more about it. Turning to the arguments urged on behalf of the accountable person, the first question which arises for consideration is whether the properties forming the subject-matter of the settlement could be deemed to have passed on the death of the deceased under section 12(1). The determination of this question obviously depends on a true interpretation of section 12(1). That section reads as follows : " 12. (1) Property passing under any settlement made by the deceased by deed or any other instrument not taking effect as a will whereby an interest in such property for life or any other period determinable by reference to death is reserved either expressly or by implication to the settlor or whereby the settlor may have reserved to himself the right by the exercise of any power, to restore to himself or to reclaim the absolute interest in such p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference was also made to clause 11, sub-clauses (a) and (b), of the settlement but in the view we are taking as to the interpretation of clauses 3 and 8, it is not necessary to discuss the impact of clause 11, sub-clauses (a) and (b). Clause 3 created a discretionary trust in regard to the income of the settled properties and it provided that, until the death of the last survivor of the deceased and his three sons, the trustees shall apply the net income " for and towards the maintenance and personal support of all or such one or more exclusively of other or others " of the deceased, his wife, his children and the widow and issues, if any, of any of his sons " in such manner and if more than one in such shares and proportions as the trustees may from time to time think proper with power to the trustees in their absolute discretion to pay the whole or any part of the net income of the settled premises to any one or more of them to the exclusion of the other or others of them ". The trustees were thus given a discretion in regard to the application of the net income of the settled properties and in exercise of such discretion, they could pay the whole of the net income or such part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rehend the whole interest in the fund. This is simply a reductio ad absurdum. The application of the word 'interest' is not confined to a vested or a necessarily contingent interest. The Act was meant to cast a wider net than such a construction would imply, The settlor here could only be deprived of the benefit he would otherwise get under the settlement by the exercise of the power of depriving him of such benefit which was vested in the trustees, and unless the trustees so deprived him he would necessarily get a benefit. This decision came to be considered by the Court of Appeal in England in Attorney-General v. Farrell. That was also a case of a discretionary trust and the question was : what is the meaning of the word " interest " in section 38(2)(c) of the Customs and Inland Revenue Act, 1881 ? Lord Hanworth M.R. said : " Does the chance that the deceased had of receiving some money before the trustees paid over the surplus rents and profits to his brother Edward constitute an interest within the meaning of section 38, sub-section (2)(c) ? I confess the matter is one by no means free from difficulty and doubt, but in Attorney-General v. Heywood, which was decided forty-th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rewell, the legislature, we have no doubt, would have used appropriate language to effectuate such intention. Moreover, it is always proper to construe an ambiguous word or phrase in the light of the mischief which the provision is obviously designed to prevent and the reasonableness of the consequences which follow from giving a particular construction. Here, if " interest " were given a narrow or technical meaning, it would be very easy to defeat the obvious purpose of the provision by setting up a discretionary trust and choosing trustees who might be expected to exercise their discretion in favour of the settlor. On the other hand, no unreasonable consequence would follow if the word were given a wider meaning, so as to include possible benefit that would come to the settlor in a certain event, namely, in the event of the trustee deciding that he should have the whole or part of the income. We are therefore of the view that, where a settlor is one of the objects of a discretionary trust and the trustees are given absolute discretion to pay the income of the settled properties to one or more of the objects to the exclusion of the others, the settlor has an interest in the settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der clause 8 an interest in the trust properties, limited though it was by the specification of the contingencies for which he could require the trustees to make payment to him out of the income and, if necessary, out of the corpus. We must therefore hold that since an interest in the settled properties for life was reserved to the deceased under the settlement, section 12(1) applied and the properties settled by the deceased must be deemed to have passed on the death of the deceased. That takes us to the next question whether the properties settled on trust, whether settled by the deceased or by his wife, fell within the ambit and coverage of section 6. Now, on the view taken by us as regards the applicability of section 12(1), it is unnecessary to consider whether section 6 also applied in the case of properties settled by the deceased but the argument in regard to the applicability of section 6 was common as regards both kinds of properties and, therefore, whatever we say as to the applicability of section 6 in regard to property settled by Bai Jasud would equally apply in regard to the properties settled by the deceased. Section 6 deals with the class of properties deemed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... administration or management, they shall be bound to do so. The clause does not empower the deceased to require the trustees to so dispose of the trust properties that they go out from the settlement altogether. We fail to see how this clause can avail the revenue for bringing the case within section 6. We now turn to clause 8 on which the strongest reliance was placed on behalf of the revenue for the purpose of attracting the applicability of section 6. The revenue contended that this clause gave to the deceased such an estate or interest as would enable him to dispose of the settled properties, for the deceased could, in exercise of his power under this clause, require the trustees to hand over to him for his benefit the entire corpus of the settled properties and he could then dispose them of in such manner as he liked. The revenue pointed out that in order to determine whether the deceased was competent to dispose of the settled properties, it was not necessary that he should be able to do so straightaway by a single act. It was sufficient, said the revenue, if the power to dispose of the settled properties was dependent upon a step which could be taken by the deceased at hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing unreasonable, require the trustees to pay such amount as he thought fit. But if any of these conditions was not satisfied--if, for example, payment was required to be made by the deceased for any other purpose--the trustees could resist the will of the deceased and refuse to make payment. These conditions therefore limited the power of the deceased to require the trustees to make payment out of income or corpus of the settled properties and it could not therefore be said that the deceased had absolute power exercisable at his will to require the trustees to hand over the entire corpus of the settled properties to him for his benefit so that he could dispose it of in such manner as he liked. The revenue however urged that the last of these conditions denoted by the words "other heavy expenses " was vague and nebulous and under its guise the deceased could call for payment of an amount representing the entire corpus of the settled properties and therefore the power of the deceased must be construed as an absolute and unlimited power. But this contention cannot be accepted, for in the juxtaposition of the words " expenses of illness, medical treatment, education ", the words " and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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