TMI Blog1984 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... trustees could be assessed in their representative capacity under section 160(1)(iv) in respect of the income of each beneficiary as claimed by the assessee ?" The short facts, relevant for the purpose of the case, could be stated as follows: The assessee, the Parthas Trust, Kottayam, is a private trust, of which the author (hereinafter referred to as the founder ") is Smt. Ramachandru Ammal, the widow of Lakshmana Reddiar, the founder of the two business houses known as " Parthas Textiles, Kottayam " and " Parthas Textiles, Attingal ". The firm which conducted the business at Kottayam and in its branches, had 7 partners, all of them being the sons of the said Lakshmana Reddiar (now deceased), and the firm which conducted the business at Attingal had six partners, three of them being his sons, two being his daughters-in-law and one being his brother-in-law. The two firms together had 10 persons as partners, the three sons of Lakshmana Reddiar being common partners in the said firms. There are two partners admitted to the benefits of the partnership in the Kottayam firm; and one among them (Sivakumar) is a partner in the Attingal firm also. There are altogether 28 beneficiaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for Rs. 1,40,000 was drawn payable to Parthas Trust, the said cheque was not presented for payment. The persons who issued the cheques were, however, debited with the amounts and credit given to the trust in the books of the Kottayam firm. The trust deed was made out and registered on August 4, 1971. The deed declared that Smt. Ramachandru Ammal was the founder of the trust, her son, Mohan Raj, her brother, Srinivasa Reddiar, and one Sri Varada Venkata Raju were the trustees. The preamble to the trust mentioned 28 persons as beneficiaries, of which 12 were minors. According to the deed, the 28 persons had agreed with the founder to deliver to her the business assets of the two firms and a sum of Rs. 1.40,000. It specified the shares of the beneficiaries and generally outlined the rights and duties of the trustees. The trust was to be determined on August 16, 1978 ; the income of the trust was to be used for the maintenance, welfare and comfortable living of the beneficiaries (annexures C and D at pages 10 to 20 of the paper book are the trust deed and the rectification deed respectively). On August 6, 1971, in pursuance of the declaration in the trust deed, the partners of the tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without a valid transfer. The Appellate Assistant Commissioner found that (i) when the trust deed was considered as a whole, the minors were not the authors of the trust; (ii) the immovable properties were not the subject-matter of the trust; and (iii) sections 5 and 6 of the Trusts Act had been satisfied. Having found that the beneficiaries under the trust were known and their shares were ascertainable, the Appellate Assistant Commissioner held that the assessment was to be under section 161 of the Income-tax Act. The Tribunal upheld the findings of the Appellate Assistant Commissioner giving reasons in paragraphs 18 to 25 of the order (annexure H-1). Shri N. R. K. Nair, counsel for the Revenue, submitted that it could be seen that Smt. Ramachandru Ammal, who claimed to be the founder of the trust, had no money to be contributed or transferred to the trust, and, therefore, the trust founded by the beneficiaries without the founder having contributed anything to it was invalid. We find that there is no factual foundation for this submission. On August 3, 1971, a sum of Rs. 1,40,000 was made available by the two firms to the founder; and that had become her property, before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs have not transferred the property. It is further represented that majors have transferred property, to the trust for the minors with the specific direction that the funds are transferred for the corpus of the trust. He also represented that Smt. Ramachandru Ammal has transferred sums in respect of her two minor children, K. L. Sivakumar and K. L. Indumathy. In support of the assessee's claim he filed copies of the journal entries by which the transfer entries for the corpus of the trust were made. These journal entries filed were verified by me with reference to the books produced and found correct. It was also submitted by the representative that for this transfer of the sum, no court sanction is necessary. It was also argued by the representative that the transfer of the business of the two firms was made after the formation of the trust, i. e., the trust was formed on August 4, 1971, and the transfers were made on August 6, 1971, and August 17, 1971. Hence, it was argued by the assessee's representative that the subsequent act does not affect the validity of the trust. " (emphasis supplied) Section 7(b) of the Trusts Act, reads as follows: 7. Who may create trusts.-A tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the Sind High Court in Ismail Jakira Co. v. Burmah Shell Provident Trust Ltd., AIR 1942 Sind 47, that the mere fact that cheque was issued in favour of the founder, in the absence of proof of it having been encashed, would not make Smt. Ramachandru Ammal, the founder of the trust. On a careful reading of the decision in the above case, we find that the decision has absolutely no relevance to the present case. That was a case in which one Abdul Rahman Barkatullah, an employee of Messrs. Burmah-Shell Oil Storage and Distributing Co. of India Ltd., had contributed to the company's provident fund for its employees, called the Labour Provident Fund. On October 11, 1934, the plaintiff in the suit attached a certain sum out of the moneys lying to the credit of Abdul Rahman in the fund. On October 21, 1934, Abdul Rahman retired from the service of the company, whereupon the company paid to Abdul Rahman the entire sum that was due to him in accordance with the Provident Fund Rules. In 1936, the plaintiff applied for the sale of the moneys attached by the prohibitory order in the suit in the hands of the defendant-company. At the auction sale held on April 27, 1936, the plaintiffs we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed. We make therefore no order as to interest. The revision application is allowed with costs accordingly. " The above said facts and the decision rendered on these facts have no relevance at all to the present case. Another decision relied on by Shri Nair is the one by a learned single judge of the Madras High Court in C. D. Sankara Narayanan v. Egmore Benefit Society (Third Branch) Ltd., AIR 1964 Mad 256. That decision has no application to the facts of the present case. In that decision, what was held was (headnote): " Where a property not belonging to a testator is included in a will, the executor or executrix, as the case may be, cannot be deemed to have been constituted a trustee as regards his or her obligations towards the beneficiary in respect of that property as, in law, nothing authorises testator to bequeath a property which he could not have alienated inter vivos and consequently the executrix was not precluded from setting up a title to the property in question as the property in fact belonged to her and she had dealt with it as an owner even during the lifetime of the testator. In the circumstance no trust at all is created and the question of estoppel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceding), what is the status in which the trustees should be assessed ? (3) Whether, on the facts and in the circumstances of the case and particularly in view of the finding of the Tribunal that the cheque for Rs. 1.4 lakhs was never encashed, the Tribunal is right in law and fact in finding that Ramachandru Ammal had become the owner of Rs. 1,40,000 and she could declare a trust thereon ? (4) Whether, on the facts and in the circumstances of the case, and in view of the finding recorded by the Tribunal that 'according to the deed these twenty-eight persons had agreed with the founder to deliver to her the business assets of the two firms ........ the Tribunal is right in law and fact in holding that minors' properties have not been subjected to the trust ? (5) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the claim for deduction of Rs. 10,333 on account of the liability towards gratuity is proper and allowable ? " As per the order in O.P. Nos. 3146 of 1979G and 3223 of 1979A dated October 23, 1980, and O.P. No. 4251 of 1979F dated December 1, 1980, the following questions were referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direction in. O.P. No. 3125 of 1979E and questions Nos. 1, 3 and 4 referred to this court pursuant to the direction in O.P. Nos. 3146 of 1979G, 3223 of 1979A and 4251 of 1979F in the affirmative, that is, in favour of the assessee and against the Revenue. On question No. 2 in the reference pursuant to the direction in O.P. No. 3125 of 1979E and question No. 2 pursuant to the direction in O.P. Nos. 3146 of 1979G, 3223 of 1979A and 4251 of 1979F, we hold that the trustees are liable to be assessed as representative assessees. The questions referred to this court pursuant to the direction in O.P. Nos. 397 of 1979L and 394 of 1979L relate to the assessment years 1972-73, 1973-74 and 1974-75 and concerning the deductions on account of the alleged bad debts. These questions are answered in the negative, that is, in favour of the Revenue and against the assessee, in view of the findings on facts by the Tribunal, agreeing with the Income-tax Officer, that the conditions under section 36(2) or 37 of the Income-tax Act have not been satisfied. The parties would bear their respective costs. A copy of this judgment under the seal of the High Court and the signature of the Registrar will ..... X X X X Extracts X X X X X X X X Extracts X X X X
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