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PETITIONER: C.I.T., ANDHRA PRADESH

       Vs.

RESPONDENT: TRUSTEES OF H.E.H.. THE NIZAM’S FAMILY TRUST

DATE OF JUDGMENT30/09/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. MUKHARJI, SABYASACHI (J)

CITATION:  1987 AIR  107            1986 SCR  (3) 973  1986 SCC  (4) 352        JT 1986   601  1986 SCALE  (2)558

ACT:      Indian Income  Tax Act,  1922,  s.  147-Nizam’s  Family Trust Deed-Income  arising from  Reserve Fund  and  Expenses Account- Whether  can be aggregated in one single assessment -  Settlor-Whether  has  a  right  to  create  separate  and distinct trusts by a single document.

HEADNOTE:      By a  Deed of  Trust dated  May 10,  1950, the Nizam of Hyderabad created a Family Trust. A corpus of nine crores in Government securities  was transferred lo the trustees under that Deed,  which was  notionally  divided  into  175  equal units, 5  units to  constitute a  fund called  the  ’Reserve Fund’, 31/2  units to  constitute the ’Family Trust Expenses Account’ and  the remaining  116 1/2  units were allotted to the relatives  mentioned  in  the  Schedule  in  the  manner provided therein.  The Trust  Deed provided:  (1)  that  the income or  corpus of  the Reserve  Fund shall be applied for any special,  unusual, unforeseen  or emergency expenses for the benefit of the members of the settlor’s family specified in the  Schedule; (2)  that if  there was  a deficit  in the Family Trust  Expenses Account, a definite proportion of the income or  corpus of the Preserve Fund had to be transferred to the  Family Trust  Expenses Account;  (3)  that  the  net income of the Family Trust Expenses Account shall be applied to the charges for the collection of the income of the Trust Fund and the remuneration of the trustees and of the members of the  Committee of Management and to other costs, charges, expenses and  outgoings relating to the members, (4) that on the  death   of  any   of  the   settlor’s,   relatives,   a proportionate share  of the  corpus of the Reserve Fund must be added  to the  unit or  units of  the corpus of the Trust Fund allocated  to such member, and the amounts so amalgama- ted are  to be  applied in  accordance with the terms of the trust deed;  and (5)  that the  corpus of  the Family  Trust Expenses Account  has to  be ultimately  handed over  to the Settlor’s successor  to the dignity of Nizam and falling him to his  eldest male  descendant in  the direct  male line of succession in accordance with the rule of primogeniture. 974      The income  of the  two Funds  were separately assessed

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for the  assessment years 1960-61 and 1961-62. Subsequently, the Income-tax officer, being of opinion that there was only one  settlement   under  the   Trust  Deed,   reopened   the assessments for  the assessment  years 1960-61  and  1961-62 under clause(a)  of s.  147 of  the Income Tax Act, 1961 and assessed the  trustees for  each of  the assessment years on the combined income of the Reserve Fund and the Family Trust Expenses Account. Following the same line, separate original assessments for the assessment years 1962-63 to 1965-66 were also made.  On  appeal  by  the  asses  see,  the  Appellate Assistant Commissioner cancelled the assessments for all the years. The  Income Tax Appellate Tribunal and the High Court confirmed the order of the Appellate Assistant Commissioner.      In the  appeals by  the Revenue  to this  Court, on the question whether  the incomes  arising from the Reserve Fund and the  Expenses Account  of the  Nizam’s Family Trust Deed can be  aggregated in  a single  assessment for  each of the assessment years 1960-61 to 1965-66. ^      HELD: 1.  The High  Court was  right that  the  Settlor intended to create separate Trusts in respect of the Reserve Fund and  the Family  Trust Expenses  Account, and  that the respective incomes  arising from  the corpus of those Trusts cannot be  aggregated in  one single  assessment but must be assessed separately. [979A-B]      2. It  is open  to a  Settlor to constitute two or more distinct trusts by a single document. [978C]      In the  instant case,  there is  no doubt that separate funds were created, even though the division of the original Trust Fund may have been notional. The objects for which the trustees held the Reserve Fund and the Family Trust Expenses Account are  clearly demarcated  and there is no overlapping or duplication. There is also no intermingling of the Funds. The transfer  of a portion from one to the other cannot lead to a  confusion in  the separate identity of the two Trusts. [978B-E]      3. Although  the corpus of the Trust Fund vested in the same trustees,  the trustees  nonetheless held  distinct and severable portions  of the  corpus of  the Trust  Fund under those  separate   trusts.  That  this  construction  of  the document accords  with the intention of the Settlor is borne out by  the provisions  of sub-clause (4) of clause 3 of the Trust Deed, which specifically provides that on the death of the Settlor  the corpus  of the Trust Fund was to be divided or to be created as notionally 975 divided into the 175 equal units mentioned therein for being allocated  to  the  Settlor’s  relatives  specified  in  the Schedule. [977G-H; 978A-B]

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1856-61 of 1974 etc.      From the  Judgment and  order dated  16.1.1974  of  the Andhra Pradesh High Court in Case Referred No 2 of 1977      V.S. Desai,  Ms. A.  Subhashini and  B.B. Ahuja for the Appellant.      Y.Ratnakar and D.N. Misra for the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.  These appeals  have been  preferred by  the Revenue against  the common  judgment of  the High  Court of Andhra Pradesh  answering the  following questions in favour of the assessee:

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         "(1)  Whether,   on   the   facts   and   in   the           circumstances of  the case,  the  incomes  arising           from the  Reserve Fund and the Expenses Account of           the Nizam’s  Family Trust  Deed dated  s 10.5.1950           can be  aggregated in a single assessment for each           of the assessment years 1960-61 to 1965-66?           (2) If  the answer to the above question is in the           affirmative, whether  the assessments  made  under           section 148  of the  Act for  the assessment years           1960-61 and 1961-62 were legal and valid?"      By a  Deed of  Trust dated  May 10,  1950 the  Nizam of Hyderabad created a Family Trust. A corpus of nine crores in Government securities  was transferred to the trustees under that Deed.  The corpus was notionally divided into 175 equal units. Five  units were  to constitute  a  fund  called  the ’Reserve Fund’,  and 3  1/2 units  were  to  constitute  the ’Family Trust Expenses Account". The remaining 166 1/2 units were allotted  to the relatives mentioned in the Schedule in the manner  provided therein,  the number of units allocated to each individual relative being specified there.      Two clauses  of the  Trust Deed  hold the centre of the stage in 976 these appeals˜.  Clause 6  creates a Reserve Fund comprising five equal  units of  the corpus  of  the  Trust  Fund.  The trustees hold  the Reserve  Fund upon  trust  to  apply  the income  or   corpus  thereof   for  any   special,  unusual, unforeseen or  emergency expenses  for the  benefit  of  the members of  the Settlor’s  family specified in the Schedule. Additionally, if  the income  of the  Family Trust  Expenses Account is  insufficiently meet the charges of collection of the income  of the  Trust Fund  and the  remuneration of the trustees and  of the  Committee of  Management and the other costs, charged,  expenses  and  outgoings  relating  to  the Trust, the  trustees are  enjoined to make good such deficit out of  the income  or corpus  of the  Reserve Fund, and for that purpose  they may transfer to the Family Trust Expenses Account such sums as may be required. It is further provided that  on  the  death  of  any  of  the  Settlor’s  relatives specified in the Schedule the trustees must set apart out of the Reserve  Fund a certain portion calculated in accordance with the  directions contained in the clause and to add such portion to  the units  of  the  corpus  of  the  Trust  Fund allocated to  the member  specified in  the Schedule  and to amalgamate the  same, and to hold it upon the same trusts as those hereinafter  declared and  contained of and concerning the unit  or units of the corpus of the Trust Fund allocated to such relative of the settlor as aforesaid.’      Clause 7 directs the trustees to hold 3 1/2 equal units of the  corpus of  the Trust  Fund allocated  to the  Family Trust Expenses  Account, and to apply the net income of that Fund to  the charges for the collection of the income of the Trust Fund  and the  remuneration of the trustees and of the members of  the Committee  of Management and to other costs, charges, expenses and outgoings relating to the Trust. There is  a   further  provision.   After  all  the  other  Trusts constituted under  the Deed have been fully administered and carried out  and the  corpuses of  all such  units have been handed over  and  transferred  to  the  ultimate  respective beneficiaries the trustees are enjoined to transfer and hand over the  3 1/2  units comprising  the Family Trust Expenses Account to  the Settlor’s  successor who  may be describe as the Nizam  of by any other title or rank or designation, and failing such  person, to  the eldest  male descendant in the direct male  line of  succession of  the Settlor accordmg to

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the rule of primogeniture.      For the  assessment year  1959-60  and  the  assessment years prior thereto the incomes accruing to the Reserve Fund and the  Family Trust  Expenses Account were aggregated in a single assessment made on the trustees of the Nizam’s Family Trust. But thereafter the asses 977 see’s appeals having been allowed by the Appellate Assistant Commissioner of  Income-tax against  the assessments for the years 1955-56  to 1959-60, the incomes of the two Funds were separately assessed  for the  assessment years  1960-61  and 1961-62, the assessee being described in the one case as the trustees of  the Nizam’s  Family Trust  Reserve Fund, and in the other  as the  trustees  of  the  Nizam’s  Family  Trust Expenses Account. Subsequently, the Income-tax officer being of opinion  that there  was only  one settlement  under  the Trust Deed,  reopened the  assessments  for  the  assessment years 1960-61  and 1961-62 under clause (a) of s. 147 of the Income Tax  Act, 1961 in order to assess the trustees on the combined income  of the  Reserve Fund  and the  Family Trust Expenses Account.  Following the same line, he made separate original assessments  for the  assessment years  1962-63  to 1965-66. On  appeal by the assessee, the Appellate Assistant Commissioner relied on an order of the Appellate Tribunal in the  Wealth   Tax  Appeals  pertaining  to  the  same  trust arrangements and  cancelled  the  assessments  for  all  the years. The  Revenue appealed  to the  Income  Tax  Appellate Tribunal, but  the view  taken by  the  Appellate  Assistant Commissioner was  upheld by  the Appellate  Tribunal and the appeals were  dismissed. Upon  that, the  Revenue obtained a reference to  the High  Court of  Andhra Pradesh  on the two questions of  law set forth earlier for the assessment years 1960-61 to  1965-66. By  its judgment dated January 16, 1974 the High  Court answered both the questions in the negative. And hence these appeals.      For the  subsequent assessment years 1967-68 to 1970-71 the High  Court adopted the same view in regard to the first question. The  second  question  did  not  arise  for  those assessment years.  Special Leave  Petition Nos. 4171 to 4174 of 1978  have been  filed against  the judgment  of the High Court in  those cases.  We  grant  special  leave,  and  the consequent appeals  are  also  being  disposed  of  by  this judgment.      The primary  question in  these appeals  is whether the incomes arising  from the  Reserve Fund and the Family Trust Expenses Account of the Nizam’s Family Trust can be assessed separately or must be aggregated in a single assessment.      It seems  to us  clear that  by the Deed of Trust dated May 10,  1950 the  Nizam created  a number  of separate  and distinct Trusts. They were created for specific and distinct purposes, and  although the  corpus of the Trust Fund vested in the same trustees, the trustees nonetheless held distinct and severable portions of the corpus of the Trust Fund 978 under those  separate trusts.  That this construction of the document accords  with the intention of the Settlor is borne out by  the provisions  of sub-clause (4) of clause 3 of the Trust Deed, which specifically provides that on the death of the Settlor  the corpus  of the Trust Fund was to be divided or to  be treated  as notionally  divided into the 175 equal units mentioned therein for being allocated to the Settlor’s relatives specified  in the  Schedule, 166  1/2 units  being apportioned between the relatives in the proportion set out, five equal units to constitute the Reserve Fund and the last 3 1/2  equal units  to constitute  the Family Trust Expenses

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Account. There  is no  doubt that  separate funds  were thus created, even though the division of the original Trust Fund may have  been notional. There is also no denying that it is open to  a Settlor to constitute two or more distinct trusts by a single document. See Commissioner of Income-tax, Bombay v. Manilal  Dhanji, [1962]  44 I.T.R.  876, 886.  The entire position becomes absolutely clear if regard is had to clause 10 of  the Trust  Deed which  permits the  trustees to  have separate Trust  Deeds made  and executed  in respect  of the different funds  carved out  of the  175 equal  units of the corpus of the Trust Fund.      It is  also apparent  that the  objects for  which  the trustees held the Reserve Fund and the Family Trust Expenses Account are  clearly demarcated  and there is no overlapping or duplication. There is also no intermingling of the Funds. It is  true that  if there  is a deficit in the Family Trust Expenses Account, a definite portion of the income or corpus of the  Reserve Fund  has to  be transferred  to the  Family Trust Expenses  Account. But  the two Funds, remain distinct from each other at all times, The transfer of a portion from one to  the other cannot lead to a confusion in the separate identity of the two Trusts.      A further  indication evidencing  the creation  of  two distinct  Trusts  is  the  completely  different  manner  of disposal of  the corpus  of the  two Funds.  As regards  the Reserve Fund  we have  seen that  on the death of any of the Settlor’s relatives  a proportionate  share of the corpus of the Reserve  Fund must  be added to the unit or units of the corpus of  the Trust Fund allocated to such members, and the amounts so  amalgamated are to be applied in accordance with the terms  of the  Trust Deed mentioned earlier. In the case of the  Family Trust  Expenses Account,  the corpus  of that Fund has  to be  ultimately handed  over  to  the  Settlor’s successor to  the dignity  of Nizam  and failing  him to his eldest male descendant in the direct male line of succession in accordance with the rule of primogeniture.      We agree  with the High Court that the Settlor intended to create 979 separate Trusts  in respect  of the  Reserve  Fund  and  the Family Trust  Expenses  Account,  and  that  the  respective incomes arising  from the  corpus of  those Trusts cannot be aggregated in  one single  assessment but  must be  assessed separately. The first question in these Appeals is therefore answered in  the negative,  in favour  of the  assessee  and against the Revenue.      Inasmuch as  the answer to the first question is in the negative, the second question does not arise and we need not consider that question in these Appeals.      The Appeals are dismissed with costs. M.L.A.                                    Appeals dismissed. 980