http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 23  

PETITIONER: JYOTENDRASINHJI

       Vs.

RESPONDENT: S.I. TRIPATHI AND ORS.

DATE OF JUDGMENT02/04/1993

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) VENKATACHALA N. (J)

CITATION:  1993 AIR 1991            1993 SCR  (2) 938  1993 SCC  Supl.  (3) 389 JT 1993 (2)   664  1993 SCALE  (2)408

ACT: Constitution  of India, 1950.  Articles 136, 226  read  with provisions    in    Chapter   XIX-A.    Income    Tax    Act 1961--Settlement    Commission’s   order--Interference    or judicial      review      under     Article      226      or 136--Scope--Commission’s   interpretation   of    settlement deeds--Effect of. Income  Tax  Act, 1961: Sections 61, 63,  164(1),  166--U.S. settlement             deed/trust              deed--Whether discretionary--Revocability   under  section   63--Settlor’s power  under U.S. deed--Extent of--Revenue’s, option to  tax income  from a discretionary trust in the hands of  trustees or beneficiaries. Income   Tax  Act,  1961:  Sections  5,   63,   164(1)--U.K. settlement deed/trust deed--Income declared and shown in Tax returns   by   settlor   and  after   his   death   by   his son--Taxability of--Payment of taxes in UK or USA on  Income from settlement deeds--If proved, not taxable in India. Interpretation  of Document--U.S.A. or U.K settlement  deeds or trust deeds--Construction--’Transfer", "family  members". "descendants  of  the  family  members"--Meaning  of--Income derived from such trusts whether taxable in India.

HEADNOTE: The appellant’s father executed on 1.1.1964, three deeds  of settlements  (trust deeds) in the United States of  America. The  terms in them all were identical.  The object of  these trusts was to provide for the education, maintenance and up- keep  of  the  members of the  settlor’s  family  and  their descendants.  He also executed two settlements in U.K.  with the very same object. The  settlor (appellant’s father) was riling returns of  his income  in  India  including therein  whole  of  the  income arising  from the trusts.  For the assessment years  1964-65 to  1969-70, he filed the returns.  Since he died  on  22-8- 1969, i.e. in the middle of the accounting year (relevant to the assessment year 1970-71), two returns were filed, one up to the date of his 938 939 death and the other from the date of his death to the end of the  accounting  year,  by his eldest  son,  the  appellant,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 23  

including the whole of the income from the trusts. The  appellant filed appeals against the  assessment  orders pertaining  to  the  assessment years  1965-66  and  1966-67 contending that the income from U.S. trusts was not  taxable in India either in the hands of settlor or in his hands  and that the inclusion of the said income in the returns by  the settlor and by the appellant was a mistake. The  appellant preferred revisions against other  assessment orders,  where  appeal was barred, taking the plea  of  non- taxability  with respect to the income from U.K. trusts  and from the U.S. trusts. The Appellate Assistant Commissioner allowed the appeals., The  Revenue’s appeals to the Tribunal were allowed  holding that  the A.A.C. acted contrary to Rule 46(2) of the  Income Tax Rules in admitting the additional grounds and in looking into  new material.  The Tribunal remitted the appeals  back to  A.A.C.  At  that  stage  the  appellant  approached  the settlement commission under Chapter XIX(A) of the Income Tax Act, 1961. The  Settlement Commission went into all the aspects of  the matter and computed the taxable income of appellant’s father and  his income for the assessment years 1964-65 to  1970-71 and  1970-71 to 1982-83.  It directed the I.T.O. to  compute the  total  income  for each of the  said  assessment  years accordingly and raise demand for the tax due. The  appellant  preferred two sets or  appeals  before  this Court  against the two orders of the Settlement  Commission. C.A.s. 4301-07 of 1991 related to the assessment years 1964- 65  to  1970- 71 and C.As.12881300 of 1991  related  to  the assessment years 1970-71 to 1982-83. The appellant contended that the settlement Commission erred in law in holding that the U.S. trusts were revocable trusts within  the  meaning  of Section 63 of  the  Act;  that  for attracting  Section 63, the deed of transfer must  give  the transferor  a  right to retransfer  directly  or  indirectly 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 income or  assets; that  in  the present case such power was not given  to  the transferor; that U.S. trusts were discretionary trusts and 940 therefore  the  assessment  could  be  made  only  upon  the trustees and not upon the beneficiaries-recipients; that the revenue  could not take advantage of the mistake of  law  on the  part  of the settlor or the appellant;  that  with  the death of the settlor, the U.S. trusts ceased to be revocable trusts  and the appellant could not be taxed on  the  income received  by  him  from the said  trust,  because  only  the trustee  could  be  taxed; that the U.K.  trusts  were  also discretionary trusts and not specific trusts as held by  the Settlement Commission and the assessment could be made  only upon the trustees and not upon the beneficiaries-recipients; that  the Settlement Commission committed a legal  error  in including  the  income  from the U.K. trusts  in  the  total income  of the settlor and the appellant even though it  was not paid out by the trustee nor received by the assessees in India;  that in the U.S.A and U.K, tax was levied  upon  the respective trust incomes under the laws of those  countries; that levying tax over again in India on the very same income amounted to double taxation and therefore the tax levied  in India was to be waived. The  Revenue  submitted  that even if  any  principles  were decided by the Settlement Commission, they did not bind  the Income Tax authorities in proceedings relating to subsequent years; that the order of the Commission was relevant to  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 23  

was  confined  I only to the assessment years  to  which  it related;   that  this  Court  under  Article  136   of   the Constitution would not be able to go into the merits of  the order,  that the Settlement Commission’s  interpretation  on the U.S. and U.K. trusts was perfectly in order and did  not call  for  any interference by this court; that  during  his life-time,  the  settlor had declared that he  had  received income  from the U.K. and U.S. trusts and had  included  the same  in  his returns of income for each of  the  assessment years   relevant  herein;  that  the  appellant  too   acted similarly  and therefore the argument of not  receiving  the income  from UK trusts was a mere after-thought  and  should not  he given any credence; that a trustee or  the  trustees was/were  expected to act reasonably and in  furtherance  of the object of the trusts; that they were to apply the income for  the  purposes specified, because they  could  not  just accumulate it; that applying the test of reasonableness,  it was  to  be  held  that ordinarily,  the  trustee  ought  to distribute the income each year; and that it was to be  held that  the income from the UK trusts had rightly  been  taken into account by the Commission while passing its orders. Dismissing the appeals, this Court, 941 HELD:  1.01. The finality clause contained in Section  245-1 does  not and cannot bar the jurisdiction of the High  Court under  Article 226 or the jurisdiction of this  court  under Article  32 or under Article 136, as the case may  be.   But that  does not mean that the jurisdiction of this  court  in the appeal preferred directly in this court is any different than  what it would be if the assessee had first  approached the High Court under Article 226 and then come up in  appeal to  this  court  under Article 136.  A party  does  not  and cannot pin any advantage by approaching this Court  directly under  Article  136, instead of approaching the  High  Court under  Article  226.  This is not a limitation  inherent  in Article 136; it is a limitation which this court imposes  on itself having regard to the nature of the function performed by  the  Commission and keeping In view  the  principles  of judicial review. [955 D-E] 1.02.  The  scope of enquiry, whether by  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, has  it  prejudiced the petitioner/appellant-apart from ground of bias, fraud  & malice   which,  of  course,  constitute  a   separate   and independent category. [956-B] 1.03.  The appellant power under Article 136 is  similar  to power  of  judicial  review, where the  appeal  is  directed against the orders of the Settlement Commission. Sri  Ram Durga Prasad v. Settlement Commission,  176  I.T.R. 169 and Chief Constable of the N. W. Police v.  Evans,[1982] 1 W.L.R. 1155, referred to. [956-D] 1.04. The only ground upon which this Court can interfere in these  appeals  is  that  the order  of  the  Commission  is contrary  to  the  provisions  of  the  Act  and  that  such contravention has prejudiced the appellant. [956-E] 1.05.  The main controversy in these appeals relates to  the interpretation  of the settlement deeds  though it is  true, some contentions of law are also raised.  The commission has interpreted the trust deeds in a particular manner.  Even if the  interpretation  placed by the commission  on  the  said deeds  is  not  correct,  it  would  not  be  a  ground  for interference in these appeals, since a wrong  interpretation of  a deed of trust cannot be said to be a violation of  the provisions of the Income Tax Act. [956-F]

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 23  

942 1.06.  The interpretation placed upon the said deeds by  the Commission  does not bind the authorities under the  Act  in proceedings relating to other assessment years. [956-G] 1.07.  Though it is not necessary, strictly speaking, to  go into the correctness     of  the interpretation placed  upon the said deeds by the commission, and it     is  enough   if this court confines itself to the question whether the order of the Commission is contrary to the provisions of the  Act, yet, for the sake of completeness, the Court examine whether the  order  of  Commission is vitiated  by  any  such  wrong interpretation. [956-H, 957-A] 2.01.  A discretionary trust is described as a  trust  where the  trustees  have  been vested with a  discretion  in  the matter  of distribution of trust income among the  specified class  of  beneficiaries.  In the case of such  trusts,  the trustees  have  a  discretion to pay 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. [957 C-D] Snell’s  Principles  of Equity, 25th Edn. (1965)  page  129, referred to. [957-E] 2.02.  The US settlement deed empowers the trustee to  hold, manage, invest and reinvest the principal of the trust fund, to  collect  and receive the income thereof and  to  pay  or apply so much of the net income as the trustee shall in  his absolute and uncontrolled discretion deem advisable to or to the  use of one of more members of the settlor’s family,  It is thus a discretionary trust. 2.03.   Para   1(2)   of  the   U.S.   Deed   empowers   the settlor/transferor  and  the  trustee,  acting  together  to direct  the  trustee, at any time, to pay  over  the  entire income and/or entire corpus or a part thereof to such member of  the  settlor’s family or their descendants as  they  may direct.   The said power cannot be exercised by the  settlor acting Alone. [958-B] 2.04. The power, properly construed, is given to the settlor to,  be exercised together with the trustee  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 of or the principal of the  trust  to such  member of the family, as he thinks appropriate,  under the clause preceding and paras following para 1(2).  If  so, there was no point in saying that 943 he can, together with the settlor, be empowered to pay  over part  or  whole  of 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.SA.   and  not  an individual  acquaited  with  the affairs  of  the  settlor’s family. [958-H, 959-A] 2.05.  Section 63 does not say that the power of  revocation vesting   in   the   transferor  should   be   absolute   or unconditional. [959-B] 2.06.  Section  63(1)  also does not say that  the  deed  of transfer  must  confer  or  vest  an  unconditional  or   an exclusive   power   in   the   transferor   to   give    the power/direction  of the nature contemplated by  it.   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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 23  

within the meaning of Section 63(a)(ii) of the Act. [960  B- C] 2.07. During the lifetime of the settlor, the entire  income arising from the three U.S. trust deeds was bound to be  and was rightly included in the income of the settlor by  virtue of Section 63 read with Section 61. [961.B] 2.08.  With the death of the settlor, Section 63  ceased  to apply even though the aforesaid clause empowers not only the settlor but also the Maharaja for the time being to exercise the said power. [961-C] 2.09. Section 63 is attracted only where such power is given to  the  transferor   and  the appellant  (the  son  of  the settlor) is not and cannot be called the transferor.  It  is not denied that so far as the income from the U.S. trusts is concerned, it was indeed received by the appellant. [961-D] 2.10. The trustees in the case of a trust declared by a duly executed instrument in writing are treated as representative assessees (Section 160(1)(iv)).  It is equally true that  in the case of a discretionary trust, trustees are liable to be taxed in respect of the income received by them at the  rate specified in Section 164(1). [961-F] 2.11. Section 166 states in unmistakable terms that  nothing contained  in the preceding provisions in the chapter  shall preclude  the Revenue from making a direct  assessment  upon the beneficiary-and/or recovering the tax payable from  such person. [962-B] 944 2.12. By virtue of Section 166, the Revenue has an option in the  case  of  a  discretionary  trust  either  to  make  an assessment  upon the trustees or to make an assessment  upon the  beneficiaries.   Of course, both the  trustee  and  the 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. [966-D] Behramji  Sorabji v. Commissioner of Income Tax, Bombay,  16 I.T.R.  301;  Commissioner  of Income  Tax  Bombay  City  v. Ratilal  Nathalal, 25 I.T.R. 426; Tarunendra Nath Tagore  v. Commr.   of  Income  Tax,  33  I.T.R.  492  (Calcutta);   K. Subramania  Pillai  v.  Agricultural  Income  Tar   Officer, 7hukalay, 53 I.T.R. 764; Commissioner of Income Tar,  Punjab v.  Raghubir  Singh,  57 I.T.R. 408; Nagappa  v.  C.I.T,  73 I.T.R. 626 and Ram Swaroop Das v.  The  State of  Bihar,  42 I.T.R. 770, referred to. Sevantilal Maneklal v. C.I.T., 67 I.T.R. 1, distinguished. C.I.T  v. Kamalini Khatau, 112 I.T.R. 652  (Gujarat)  (F.B.) Agreed with the dissenting opinion. 3.01.Both the settlor and the appellant have been  receiving the income from     the   UK  trusts  during   the   several assessment   years  concerned  herein.   The   settlor   had voluntarily included the entire income from the U.K.  trusts in his income in the returns filed by him for the assessment years 1964-65 to 1969-70.  It is unlikely that he would have so  included  unless he really received  it  The  Commission treated  those declarations as proof of the  settlor’s  real intention.   The Commission also relied upon  certain  other circumstances including the manner in which the accounts  of these  trusts  were maintained in support of  their  opinion that all concerned with the trusts, acted on the basis  that the  trust income was flowing to the settlor, and after  his death  to  the  appellant.   The  Commission  also  referred specifically  to similar declarations made by the  appellant in  his  returns.   Even  subsequent to  the  death  of  the settlor, the Commission pointed out, the appellant has  been making similar declarations from time to time. [967 C-E]

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 23  

3.02. The appellant did not say that he did not receive  the income from the U.K. trusts.  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.  Section 945 5 of the Act is wide enough to bring all such income to tax. In  case appellant proves that any income has been taxed  in U.S.  or  U.K., the same income shall not  be  taxable  over again in India. [%7-H, 968-D]

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeal Nos. 1301-07  of 1991 From the Judgment and Order dated 31-3-89 of the Income  Tax Settlement  Commission Bombay in Settlement Application  No. 10/5/41/78IT. Ashok Desai, Debi Pal B.K. Mehta, N.K. Sahu, U.K. Sagar  and P.H. Parekh for the Appellant. Dr. V. Gaurishankar and S. Rajappa for the Respondents. The Judgment of the Court was delivered by B.P.  JEEVAN REDDY, J. These appeals are  preferred  against the orders of the Settlement Commission dated March 31, 1989 in  pursuance  of  the  offers of  settlement  made  by  the appellant.   Civil  Appeals 1301-07 of 1991  relate  to  the assessment  years  1964-65 to 1970-71  while  Civil  Appeals 1288-1300 of 1991 relate to the 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 I.T.O. 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 settlements  (trusts 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 U.S. are in   identical  terms.   Similarly,  the  two   settlements, executed in U.K. 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 U.S. in  the first instance. 946 Under the U.S. settlements, The National City Bank, New York is  constituted the sole trustee.  The trust is created  for the  benefit of the grantor/settlor, his wife  and  children and their spouses (referred to as family members) and  their descendants.  The trustee is empowered to collect the income from  the trust properties and to apply the same  among  the family members and/or their descendants in such manner as he thinks appropriate.  He is also authorised to terminate  the trusts  for  any  reason  (including  tax  reasons)  and  to transfer, convey and pay off the property held thereunder to any person or persons then eligible to receive the income of the  trusts.  On such termination, the entire assets in  the hands  of  the  trustee  are to be paid  over  to  the  then Maharaja (Ruler) or to his living male descendants in  equal shares  per stripes.  The clause which is  relevant  herein,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 23  

which  according to the Revenue, makes the trusts  revocable ones   we  may  refer to it as para 1(2)  for  the  sake  of convenience reads thus:               "Anything   hereinabove   to   the    contrary               notwithstanding, at any time and from time  to               time  the Trustee shall transfer,  convey  and               pay  over  any portion of the  income  of  the               trust  fund  and  any portion or  all  of  the               principal  held in trust to or to the  use  of               such  one or more members of a class  composed               of the Grantor, the wife or widow of the Gran-               tor,  the children of the Grantor living  from               time  to time, the spouse of any child of  the               Grantor  then living or deceased  (hereinafter               referred to as the "Family Members"), and  the               descendants of the Family Members living  from               time  to  time, in such  amounts,  shares  and               proportions,  either absolutely or  in  trust,               and upon such terms and conditions  (including               the  grant of a further power to  appoint)  as               the  Trustee  and a Maharaja  who  shall  have               attained the age of eighteen (18 years)  shall               at any time and from time to time appoint  and               direct in a written instrument which refers to               and  specifically  exercises  this  power  and               which is duly executed by the Maharaja and  by               the  Trustee  then  acting  here-under.    The               foregoing power to appoint may be released  in               whole,  or in part by the Maharaja or  by  the               Trustee or by both at any time by one or  more               written  instruments  duly  executed  by   the               Maharaja  or  by the Trustee or  by  both  and               delivered to 947               the Trustee then acting here-under,  provided,               however,  that if either the Maharaja  or  the               Trustee,  but not 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 whole of income or any part  of  or 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  and  all  such   payments   and applications,   and  no  such  payment  or  application   or commission  of  a person from  participation  therein  shall cause  a  charge  against or  otherwise  effect  the  future interest   or   share  of  any  person  here   under."   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 other clauses  of these  settlements  except to say that the object  of  these trusts is to provide for the education, maintenance and  up- keep  of  the  members of the  settlor’s  family  and  their descendants. The  settlor died on August 22, 1969.  During his  lifetime, the  settlor, Vikramsinhji was filing returns of his  income in India including therein whole of the income arising  from the  U.S.  trusts.  The returns were filed by  him  for  the assessment years 1964-65 to 1969-70 (both years  inclusive).

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 23  

Since he died in the middle of the accounting year  relevant to  the assessment year 1970-71, two returns were filed  for the said assessment year, one upto the date of the death  of the  settlor  and the other from the date of  the  death  of settlor  to the end of the accounting year.   These  returns were  filed by his elder son, Jyotendrasinhji, appellant  in these appeals.  In these returns too, the appellant included whole  of the income from the U.S. trusts in the  respective returns.  At this stage, the appellant says. he was  advised that  the income from U.S. trusts was not taxable  in  India either  in  the hands of settlor or in his  hands  and  that inclusion  of the said income in the returns by the  settlor and  by  the  appellant  was a  mistake.   Urging  the  said contention,   the  appellant  filed  appeals   against   the assessment orders pertaining to the A.Ys. 1965-66 and  1966- 67.   Inasmuch  as the appeals were barred with  respect  to other assessment orders, he preferred revisions 948 before the Commissioner of Income Tax. (It may be  mentioned at  this stage itself that the income from U.K.  trusts  was included  in the aforesaid returns just as the  income  from U.S.  trusts  was  included.  Similarly, the  plea  of  non- taxability  was urged with respect to the income  from  U.K. trusts  on the same basis as was urged with respect  to  the income from the U.S. trusts) The   Appellate  Assistant  Commissioner,  Rajkot   admitted additional grounds and allowed the aforesaid appeals by  his orders dated April 4, 1975 and August 20, 1975.  The Revenue went-up  in  appeal to Tribunal.  The Tribunal  allowed  the appeals holding that the A.A.C. acted contrary to Rule 46(2) of the Income Tax Rules in admitting the additional  grounds and in looking into new material.  Accordingly it set  aside his orders and remitted the appeals back to A.A.C. It is  at this  stage  that the appellant  approached  the  settlement commission under chapter XIX(A) of the Income Tax Act, 1961. We  may  now  notice the relevant clauses in  the  deeds  of settlements  executed in 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  Trustees               shall  stand possessed of the Trust  Fund  and               the  income thereof upon the trusts  following               that it 1 to say :- 949               (1)  UPON  TRUST to raise and pay out  of  the               capital thereof any further estate duty  which               may still be payable thereon in respect of the               death   of  the  Settlor’s  father  His   Late               Highness  Shri  Bhojrajji  Maharaja  Saheb  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 23  

             Gondal  who  died on the Thirty first  day  of               July  One Thousand nine hundred and fifty  two               and any interest payable on such duty and  any               costs   incurred   in  connection   with   the               ascertainment  or  payment of  such  duty  and               interest.               (2) Subject as aforesaid UPON TRUST for all or               such  one  more and more  exclusively  of  the               others  or other of the Beneficiaries at  such               age  or  time or respective ages or  times  if               more  than  one in such shares and  with  such               trusts  for their respective benefit and  such               provisions  for their  respective  advancement               and   maintenance   and   education   at   the               discretion  of  the Trustees or of  any  other               person  or persons as the person who  for  the               time being is the Maharaja or (of the title is               abolished)  would have been the  Maharaja  had               the title not been abolished shall at any time               during  the  specified period by any  deed  or               deeds revocable or irrevocable appoint AND  in               default of and subject to any such appointment               upon  he  trusts and with and subject  to  the               powers and provisions hereinafter declared and               contained concerning the same PROVIDED  ALWAYS               that the foregoing power of appointment  shall               not be capable of being exercised:               (a)  by anyone other than the Settlor  or  the               Elder son or the Younger Son; or               (b)  in  favour  of  the  person  making   the               appointment  save  with  the  consent  of  the               Trustees  (being at least two in number  or  a               trust   Corporation)   such  consent   to   be               testified  by their being parties to the  deed               of appointment and executing the same.......               4. SUBJECT aforesaid the Trustees shall  stand               possessed  of  the Trust Fund and  the  income               thereof upon the trusts 950               following that is to say :-               (1)  The  income of the  Trust  Fund  accruing               during  the life of the Settlor  shall  belong               and be paid to the Settlor               (2)  Subject  as aforesaid the income  of  the               Trust  Fund  accruing during the life  of  the               Elder  Son  shall belong and be  paid  to  the               Elder Son........               (3) Subject as aforesaid the Trust Fund  shall               be  held in Trust for the person who (being  a               descendant of the Elder Son) first during  the               specified period :               (a)  becomes the Maharaja or would become  the               Maharaja  if his title had not been  abolished               and               (b) attains the age of eighteen years......... 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  U.S. trusts.   The  said  income was also  included  in  the  two returns  filed by his son for the  A.Y.1970-71.  Thereafter, however,   the  appellant  took  the  stand,  as   mentioned hereinbefore,  that  the  income from these  trusts  is  not includable  in his income.  He also took the stand that  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 23  

inclusion of the said income in the returns submitted by his father  for  the A.Ys.1964-65 to 1969-70 and by him  in  the returns  relating to A.Y.1970-71 was under a mistake.   This submission too was the subject matter of the appeals and the revisions  filed before the A.A.C. and the  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 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 orders.  One order relates to A.Ys. 1964-65 to 1970-71  (Vikramsinhji)  and the other  to  A.Ys.1970-71  to 1982-83  (Appellant).  The findings of the Commission  which constitute the bases for its orders may briefly be stated as the following : 951 (i)Though  the  U.S.  settlements are  in  the  nature  of discretionary trusts, they fall within the mischief of  sub- clause  (ii)  of Clause (a) of Section 63 of the  Act.   For this reason, the whole of the income arising from the  trust properties  was  liable  to  be  included  and  was  rightly included  in  the  income  of  the  settlor/transferor,  Sri Vikramsinhji. (ii) On the death of the settlor, the U.S. settlement  deeds ceased  to  be revocable but inasmuch as the  entire  income thereunder    was   received   by   the    appellant,    Sri Jyotendrasinhji, it constitutes his- income and could be and was lawfully. taxed in his hands. (iii)  So far as the U.K. trusts are concerned,  clause  (3) did  never  come into operation inasmuch  as  no  additional trustees  were  appointed  as contemplated by  it.   If  so, clause  (4)  sprang into operation where  under  the  entire income  under the settlements flowed to the  settlor  during his  lifetime  and  on  his death, to  his  elder  son,  the appellant herein.  In other words, these settlements are  in the  nature  of specific trusts.  In any event,  the  entire income from these trusts was received by the settlor  during his   lifetime  and  after  the  settlor’s  death,  by   the appellant.  Therefore, the said income was rightly  included in  the total income of the settlor and the assessee  during the respective assessment years. On  the  above bases, the Commission  computed  the  taxable income  of  the settlor under both the sets  of  trusts  for A.Ys.1964-65  to 1970-71 (upto the date of the death of  the settlor)  as  also  the  income of  the  appellant  for  the A.Ys.1970-71 to 1982-83.  The appellant then preferred these two sets of appeals against the two orders. At the stage of granting leave, this court ordered (vide the order dated March 22, 1991) that the appellant shall not  be entitled  to  question the jurisdiction  of  the  settlement commission  to decide the issues before it and that he  will "confine himself in appeal only to the questions relating to correctness or otherwise of the Commissioner’s order." Sri Ashok Desai, learned counsel for the appellant urged the following contentions’: (1)The settlement 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 952 to  retransfer directly or indirectly whole or any  part  of the income or assets to the transferor or it must give him a right  to  re-assum power directly or  indirectly  over  the whole  or any part of income or assets.  In this  case,  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 23  

relevant  clause does not give the,transferor such a  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 a& 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 the part of the  settlor or the appellant. (3)  At  any rate, with the death of the settlor,  the  U.S. trusts  ceased  to be revocable trusts, assuming  that  they were  so during his lifetime.. So " far as the appellant  is concerned, he cannot be taxed on the income received by  him from the said trust.  Only the trustee can be taxed. (4)  So  far  as U.K trusts are  concerned,  the  settlement commission  has  committee an error of law in  holding  that clause  (3) could come into operation only if and  when  the settlor appointed the additional trustees as contemplated by it.   In fact, the trust, had come into existence  with  the sole  trustee  (McGill)  ;and it did  not  depend  upon  the appointment  of  additional trustees.  Clause  (3)  prevails over  clause  (4).  If so, the U.K.  trusts/settlements  are also discretionary trusts and not specific trusts as held by the  Settlement  Commission.   In  such  a  case  again  the assessment can be made only upon the trustees and not  upon, the beneficiaries recipients.. (5)  So  far  as U.K. trusts are  concerned  no  income  was received,by  the settlor or the appellant either in U.K.  or in  India.  So long as the trustees decided not to  exercise the discretion to distribute the income, no income arose  to any  of the beneficiaries.  The deeds, do not  prescribe,  a time-limit  within which the trustees should exercise  their discretion to distribute income.  Until the trustees take  a decision   to  distribute  and  distribute  the   income,the beneficiaries  have  no right to income nor can it  be  said that the income     accrues   to   them.    The   Settlement Commission  committed a legal error in  the income from  the U.K. trusts in the total income of 953 the  settlor and the appellant even though it was  not  paid out  by the trustee ,nor received by the assessees.  At  any rate, no income was received in India. (6)In both the U.S. and U.K., tax has been levied upon the respective trust incomes under the laws of those  countries. Levying  tax  over again in this country on  the  very  same ’income amounts to double taxation.  On this ground too, the tax levied in India must be waived. On  the other hand, Dr. Gauri Shankar, the  learned  counsel for the Revenue made the following submissions: (i)The  Settlement Commission is not a  regular  Tribunal. Its   function  is  different  from   other   quasi-judicial authorities  created by the Income Tax Act.  Where an  offer of  settlement 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 23  

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  settlement  commission must  be  conditioned by 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 U.S. and 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  assessees under  the  Act.  While accepting the  same,  the  appellant cannot  be  allowed to disown those features  of  the  order which go against him. (iii)  The  argument,of not receiving the income  from  U.K. trusts  is a mere after-thought and should not be given  any credence.   During  his lifetime, the settlor  had  declared that  he  had received income from both the  U.K.  and  U.S. trusts  and had included the same in his returns  of  income for  each  of  the assessment years  relevant  heroin.   The appellant too acted similarly. 954 (iv)  A  trustee  or the trustees, as the case  may  be  are expected to act reasonably and in furtherance of the  object of the trusts.  They must apply the income for the  purposes specified.   They cannot just accumulate it.   Applying  the test of reasonableness it must be held that ordinarily,  the trustee  ought  to distribute the income each  year.   As  a matter of fact, it was so distributed If so, it must be held that  the  income from these U.K. trusts  has  rightly  been taken  into  account  by the commission  while  passing  its orders.  The first question we have to answer is the scope of  these appeals  preferred  under Article 136  of  the  Constitution against  the  orders  of  the  Settlement  Commission.   The question is whether all the questions of fact and law as may have  been decided by the commission are open to  review  in this  appeal.  For answering this question one has  to  have regard to the scheme of Chapter XIX-A.  The said chapter was inserted  by  the Taxation Laws (Amendment) Act,  1975  with effect from April 1, 1976.  A somewhat similar provision was contained  sub-sections  (1A) to (1D) of Section 34  of  the Income  Tax  Act,  1922 introduced in the  year  1954.   The provisions  of  Chapter XIX-A  are,  however,  qualitatively different and more elaborate than the said provisions in the 1922 Act.  The proceedings under this chapter commence by an application made by the assessee as contemplated by  Section 245-C.   Section  245-D  prescribes  the  procedure  to   be followed  by  the commission on receipt  of  an  application under   Section   245-C.   Sub-section  (4)   says:   ’after examination   of   the  records  and  the  report   of   the commissioner received under sub-section (1), and the report, if any, of the commissioner received under sub-section  (3), and after giving an opportunity to the applicant and to  the commissioner  to  be heard, either in person  or  through  a representative  duly  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 23  

commissioner  under  sub-section (1)  or  sub-section  (3)." Section   245-E  empowers  the  Commission  to  reopen   the completed  proceedings in appropriate cases,  while  Section 245-F confers all the powers of an Income Tax authority upon the  Commission.Section  245-H 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 955 its sources.  Under- Section 245-HA, the Commission can send back, the matter to assessing. officer, where it finds  that the  applicant  is not cooperating with it.   Section  245-1 declares  that every order of settlement passed  under  sub- section (4) of, Section 245(D) shall be conclusive as to the matters  stated therein and no matter covered by such  order shall, save as otherwise provided in, Chapter XIX-A, be  re- opened  in any proceeding under the Act or under  any  other law  for  the time being in force.  Section  245-L  declares that   any  proceedings  under  chapter  XIX-A  before   the settlement  commission  shall  be deemed to  be  a  judicial proceeding  within the meaning of Sections 193 and  228  and for the purposes of Section 196 of the Indian Penal Code. It  is  true that the finality clause contained  in  Section 245-I  does not and cannot bar the jurisdiction of the  High Court  under Article 226 or the jurisdiction of  this  court under  Article 32 or under Article 136, as the case may  be. But  that does not mean that the jurisdiction of this  Court in  the  appeal  preferred directly in  this  court  is  any different  than what it would be if the assessee  had  first approached the High Court under Article 226 and then come up in appeal to this court under Article 136.  A party does not and  cannot  gain any advantage by  approaching  this  Court directly under Article 136, instead of approaching the  High Court under Article 226.  This is not a limitation  inherent in Article 136; it is a limitation which this court  imposes on  itself  having  regard to the  nature  of  the  function performed  by  the  Commission  and  keeping  in  view   the principles  of judicial review.  May be, there is also  some force in what Dr. Gauri Shankar says viz., that the order of commission  is in the nature of a package deal and  that  it may  not  be possible, ordinarily speaking, to  dissect  its order  and  that  the assessee should not  be  permitted  to accept  what  is favourable to him and reject what  is  not. According  to  learned counsel, the Commission is  not  even required or obligated to pass a reasoned order.  Be that  as it  may, the fact remains that it is open to the  Commission to  accept  an  amount of tax by way of  settlement  and  to prescribe the manner in which the said amount shall be paid. It  may condone the defaults and lapses on the part  of  the assessee  and may waive interest, penalties or  prosecution, where it thinks appropriate.  Indeed, it would be  difficult to predicate the reasons and considerations which induce the commission to make a particular order, unless of course  the commission  itself chooses to, give reasons for  its  order. Even  if  it  gives reasons in a given case,  the  scope  of enquiry  in the appeal remains the same as  indicated  above viz., whether it is,contrary 956 to any of the provisions of the Act.  In this context, it is relevant to note that the principle of natural justice  (and alteram  partem)  has  been incorporated  in  Section  245-D itself.   The sole overall limitation upon  tire  Commission thus  appears, to be that it should act in  accordance  with the provisions of the Act.  The scope of enquiry, whether by High Court under Article 226 or by this Court under  Article

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 23  

136 is also the same  whether the order of the Commission is contrary to any of the provisions of the Act and if so,  has it prejudiced the petitioner/appellant apart from ground  of bias, fraud & malice which, of course, constitute a separate and  independent category.  Reference in this behalf may  be had to the decision of this Court in Sri Ram Durga Prasad v. Settlement  Commission  176  I.T.R. 169, which  too  was  an appeal  against  the orders of  the  Settlement  Commission. Sabyasachi  Mukharji J., 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  procedure followed  and  not  with the validity  of  the  order.’  The learned  Judge added ’judicial review is concerned not  with the decision but with the decision-making process." Reliance was placed upon the decision of the House of Lords in  Chief Constable of the N.W. Police v. Evans, [1982] 1  W.L.R.1155. Thus,  the appellate power under Article 136 was equated  to power  of  judicial  review, where the  appeal  is  directed against  the orders’ of the Settlement Commission.  For  all the  above  reasons,  we are of the opinion  that  the  only ground upon which this Court can interfere in these  appeals is  that  order  of  the  Commission  is  contrary  to   the provisions  of  the  Act and  that  such  contravention  has prejudiced  the  appellant  The main  controversy  in  these appeals  relates  to the interpretation  of  the  settlement deeds   though it is true, some contentions of law are  also raised.  The commission has interpreted the trust deeds in a particular manner, Even if the interpretation placed by  the commission the said deeds is not correct, it would not be  a ground  for  interference in these appeals,  since  a  wrong interpretation  of  a deed of trust cannot be said to  be  a violation  of  the provisions of the Income Tax Act.  it  is equally  clear that the interpretation placed upon the  said deeds by the Commission does not bind the authorities  under the Act in proceedings relating to other assessment years. In  view of the above, though it is not necessary,  strictly speaking,  to go into the correctness of the  interpretation placed  upon  the said deeds by the commission,  and  it  is enough  if we confine ourselves to the question whether  the order of the Commission is contrary to the provisions of the 957 Act,  we propose to, for the sake of  completeness,  examine also whether the order of Commission is vitiated by any such wrong interpretation?      U. S. TRUSTS.    The sole trustee under this settlement deed is the  First National City Bank, New York.  The deed empowers the trustee to  hold, manage, invest and reinvest the principal  of  the trust fund, to collect and receive the income thereof and to pay or apply so much of the net income as the trustee  shall in  his absolute and uncontrolled discretion deem  advisable to  or  to the use of one or more members of  the  settlor’s family.  It is thus a discretionary trust.  A  discretionary trust  is described as a trust where the trustees have  been vested  with a discretion in the matter of  distribution  of trust income among the specified class of beneficiaries.  In the  case of such trusts, the trustees have a discretion  to pay whole or part of the income to such member or members of the  designated  class  as  they  think  fit  and  it   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............

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 23  

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 Para 1(2), quoted hereinbefore, makes it a revocable trust within the  meaning of  Section 63?  The said clause begins with a  non-obstante clause,   "anything   hereinabove  to  the   contrary.   not withstanding’  thereby giving it an overriding  effect  over what  has been said in the earlier-recitals.  It  then  says that  "at any time and from time to time, the trustee  shall transfer, convey and pay over any portion or of the income 958 of  the trust fund and any portion or of all  the  principal held  in trust’, to such member of the settlor’s family  ’as the  trustee and a maharaja who shall have attained the  age of 18 years shall at any time and from time to time  appoint and  direct  in  a written instrument which  refers  to  and specifically exercise this power and which is duly  executed by the Maharaja and the trustee then acting here-under.’  In other words, the said clause empowers-the settlor/transferor and  the trustee, acting together to direct the trustee,  at any  time,  to  pay over the  entire  income  and/or  entire corpus.  or  a pan thereof to such member of  the  settlor’s family  or their descendants as they may direct.   The  said power cannot be exercised by the settlor acting alone.   The question is whether the said clause attracts Section 63? Section 63 defines the expressions ’transfer’ and ’revocable transfer’.  It says that for the purposes of Sections 60, 61 and  62, ’a transfer shall be deemed to be revocable if  (i) it  contains any provisions for the retransfer  directly  or indirectly of the whole or any part of the, income or assets to the transferor or (ii) it in any way gives the transferor a  right to reassume power directly or indirectly  over  the whole  or any part of the income or assets.’ The  expression "transfer"  is  defined to include  any  settlement,  trust, covenant, agreement or arrangement.  The expression  ’family members’  occurring  in the aforesaid clause  in  the  trust deeds  is defined in the deeds to mean "the children of  the grantor  living from time to time, the wife or widow of  the grantor, the spouse of any child of the grantor then  living or deceased.’ The "descendants of the family members’  which expression  also occurs in the aforesaid clause  is  defined ’in the deeds to mean "the descendants of the family members living from time to time during the trust term.’ The  contention of Sri Ashok Desai the learned  counsel  for the  appellant  is that Section 63 will be  attracted  ’only where  the  transferor is vested with the  exclusive  and/or absolute power to give direction of the 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 the learned counsel.   Firstly,  the  power, properly construed, is given to the settlor to be  exercised together  with  the trustee  and not to the  trustee  to  be exercised together with the settlor.  The trustee is  anyhow

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 23  

vested with an absolute discretion to distribute the  income of  or  the  principal of the trust to such  member  of  the family, as he 959 thinks  appropriate,  under the clause preceding  and  paras following  para 1(2).  If so, there was no point  in  saving that he can, together with the settlor, be empowered to  pay over part or whole, of 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 possible  to  agree with the learned counsel.  Section 63 does not say that  the power  of  revocation vesting in the  transferor  should  be absolute or unconditional.  As pointed out by Chagla, CJ. in Behramji Sorubji v. Commissioner of Income Tar, Bombay,  (16 I.T.R. 301), "the only question that has got to be asked  is whether  the  transfer is capable of being  revoked  by  the assessee  or  not..... it may be that before  the  power  is exercised, the consent of two beneficiaries might have to be taken but even so, although the revocation may be contingent or  conditional, still the deed remains a revocable deed  of trust." The same idea was reiterated by Tendulkar, J. in the said judgment, in the following words:               "It is urged by Sir Jamshedji on behalf of the               assessee  that the words "revocable  transfer"               in  this  section require  that  the  transfer               should  be revocable absolutely  and  uncondi-               tional and that by reason of the fact that the               transfer  in  this case could not  be  revoked               under clause 10 of the trust deed without  the               consent  of the wife and the children  or  any               two-of-them,  it is not a  revocable  transfer               within the meaning of Section 16(1)(c).  Apart               from any authority, and reading the section by               itself,  I  am  unable  to  agree  with   this               contention.  It would involve my reading  into               the section words which are not there, and the               Court  is  not  entitled to do  so  unless  it               appears  that giving effect to the section  as               it  stands would lead to an obvious  absurdity               or  inconvenience  which could not  have  been               contemplated  by  the  legislature.   No  such               position arises in this case." We  find  ourselves  in agreement with  the  said  opinions. Section  63  of the present Act corresponds to  the  proviso appended  to  Section 16(1)(c) of the 1922 Act.   The  first proviso  read thus: "provided that for the purposes of  this clause  the- settlement, disposition or a transfer shall  be deemed to be revocable if it contains any provision for  the retransfer directly or 960 indirectly of the income or assets to the settlor,  disponer or  transferor  or  in any way gives  settlor,  disponer  or transferor a right to. reassume power directly or indirectly over the income or assets.’ Section 63(1) also does not  say that the deed of transfer must confer or vest an conditional or  an  exclusive-power  in  the  transferor  to  give   the power/direction   of  the    nature  contemplated  by   it., Accordingly, we hold that 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 23  

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 commissioner,of  Income  Tax, Bombay   City   v.   Ratilal   Nathalal   25   I.T.R.   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 Sevantilal Maneklal v. C.I.T. 67 I.T.R. 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.  Commr.  of Income  Tax  33 I.T.R. 492  Calcutta was a  case  where  the trust  deed empowered the settlor to cause a re-transfer  of the  trust assets, in certain specified contingencies.   The question  was whether such a provision makes the transfer  a revocable  one  within the meaning of the first  proviso  to Section 16(1)(c) of the 1922 Act.  It was held that it does, notwithstanding the fact that the power had to be  exercised only  in certain specified contingencies.  The  decision  of the Madras High Court in K Subramania Pillai v. Agricultural Income  For Officer, Thukalay 53 I.T.R. 764 was also a  case where the power of revocation was to be exercised in certain specified contingencies alone.  Even so, it was held that it was a revocable settlement. Commissioner  of  Income Tax, Punjab v.  Raghabir  Singh  57 I.T.R.  408 was case where the trust deed provided, for  the application  of, the trust income, for satisfying the  debts which  the-  settlor was under an obligation  to  discharge. The question was whether the provision makes the deed a 961 revocable  one.   It was held that it did not,  inasmuch  as there was no provision for re-transfer of the income or  the assets  to the settlor, It was observed that the  mere  fact that the settlor’s debts had to be discharged from the trust income did not bring it within the four corners of the first proviso to Section 16(1)(c). In  the light of the above discussion it must be  held  that during  the  lifetime  of the settlor,  the,  entire  income arising from the three U.S. trust deeds was bound to be  and was rightly included in the income of the settlor by  virtue of  Section  63 read with Section 61.   The  commission  was right in holding so. With  the  death of the settlor Section 63 ceased  to  apply even  though  the  aforesaid clause empowers  not  only  the settlor  but  also  the  Maharaja for  the  time  being  to- exercise  the  said ;power.  Section 63  is  attracted  only where  such  power  is  given to  the  transferor   and  the appellant  (the  son of the settlor) is not  and  cannot  be called the transferor.  It is not denied that so far as  the income  from  the U.S. trusts is concerned,  it  was  indeed received  by  the  appellant.  The  only  argument  is  that inasmuch these trusts are discretionary trusts, the,  income therefrom must necessarily be taxed and can only be taxed in the  hands  of  the trustees and not in  the  hands  of  the beneficiary.  It is argued that the Revenue has no choice to tax either the trustees or the beneficiaries in such a case. We  are unable to agree The trustees in the case of a  trust declared  by  a.  duly executed instrument  in  writing  are treated  as representative assessees  (Section  160(1)(iv)). It  is  equally  true that in the case  of  a  discretionary

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 23  

trust,  trustees  are liable to be taxed in respect  of  the income  received  by them at the rate specified  in  Section 164(1). (Section 164(1) has undergone several changes  since 1962 The sub-section as introduced by the Finance Act,  1970 with  effect from April 1, 1970 provided that in  such  case "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) @65%, 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 962 of  the person, on whose behalf or for whose benefit  income therein  referred  is receivable or the recovery  from  such person  of  the  tax payable in  respect  of  such  income." Language  of  this  section is clear.   The,  opening  words "nothing  in the foregoing sections in this chapter"   which means  chapter XV, wherein Sections 159 to 165  among  other sections  occur   give  it an over-riding  affect  over  the preceding provisions in the chapter.  The Section states  in unmistakable  terms that nothing contained in the  preceding provisions  in the chapter shall preclude the  Revenue  from making a direct assessment upon the beneficiary and/or  from recovering  the tax payable from such person.   The  Revenue has  thus  been  given an option to tax the  income  from  a discretionary  trust either in the hands of the trustees  or in the hands of the beneficiaries.  This Court in Nagappa v. C.I  T., 73 I.T.R. 626 and the majority of High Courts  have understood  this  Section in this manner.  In  Nagappa,  the appellant   had  executed  seven  separate  trusts   setting specific  properties for the benefit of his minor  children. He  appointed himself, his wife and his married daughter  as the trustees.  Under each deed, a portion of the income  was to   be  utilised  immediately  for  the  benefit   of   the beneficiary  and  the  balance accumulated for  his  or  her benefit and handed over to the beneficiary on the  specified date.  The entire income of the trusts (including the income accumulated)  was  included in the income of  the  appellant (Nagappa)  which was questioned by him.  His contention  was that  the "I.T.O. was bound to assess the income under  each deed  of trust separately in the hands of ’the  trustees  as "representative trustees and was incompetent in view of  the express  enactment  of  sub-section (2) of  Section  161  to assess  the  income  in  the hands  of  Nagappa  or  of  the beneficiaries" The contention was rejected with reference to Section 161(1) and Section 166 by Shah, J. (speaking foe the Bench  comprising  Shah, Ramaswami and Grover, JJ.)  in  the following words:               "It  is implicit in the terms. of  sub-section               (1)  that the Income-tax Officer may assess  a               representative  assessee, but he is not  bound               to   do   so.   He  may  assess   either   the               representative   assessee   or   the    person               represented  by  him.  That  is  expressly  so               enacted in section 166 which states:               "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 963               to  is receivable, or the recovery  from  such

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 23  

             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  rep-               resented 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               representative assessee is assessed to tax  in               exercise  of  the option of  the  revenue,  he               shall be assessed tinder Chapter XV and  shall               not  ’in  respect of that income  be  assessed               under any other provision of the Act.  We will               presently  state the reasons why the rule  was               so  enacted by Parliament.  But on  the  plain               words  used by Parliament the plea  raised  by               counsel:  that  the.  representative  assessee               alone  may  be assessed as regards  income  in               respect  of  which  he  is.  a  representative               assessee cannot be accepted. The learned Judge then went to explain the reasons for which section 166 among other provisions was enacted. In another case arising under the Bihar Agricultural  Income Tax Act, 1948, a Bench of this Court comprising J.L.  Kapur, M. Hidayatullah and 964 J.C. Shah, JJ. took a similar view in Ram Swaroop Das v. The State  of Bihar 42 I.T.R. 770, even though that Act and  did not contain a provision similar to Section 166.  Section  13 of the Bihar Act provided:               "Where  any  person  holds  land,  from  which               agricultural  income  is derived as  a  common               manager appointed under any law. from the time               being  in force, or under any agreement or  as               receiver, administrator or the like on  behalf               of persons jointly interested ’in such land or               in  the agricultural income derived  therefrom               the   aggregate   of  the  sums   payable   as               agricultural income-tax by each person on  the               agricultural income derived from such land and               received  by  him shall be  assessed  on  such               common manager, receiver, administrator or the               like,  and  he  shall  be  deemed  to  be  the               assessee   in  respect  of  the   agricultural               income,tax so payable by each such person  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 23  

             shall be liable to pay the same." It was urged that because of Section 13, the Receiver  alone can be assessed in respect of the income of the estate under his  charge  and  that no assessment can be  made  upon  the person who actually received such income from the  receiver. The  said contention was rejected by Shah, J.  speaking  for the Bench in the following words:               "In  our  view, there is no substance  in  the               contention  raised  by  the  appellant.    The               liability  to  pay  tax  is  charged  on   the               agricultural  income  of  every  person.   The               income  though collected by the  Receiver  was               the  income  of the appellant.   By  S.13,  in               addition  to the owner, the Receiver is to  be               deemed  to be an assessee.  But the fact  that               the Receiver may, because he held the property               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 appel-               lant, 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 965               persons  as  assessee 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  connota-               tion   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  decision  of  the  Gujarat High Court  in  CL  T.  v. Kamalini  Khatau, 112 I.T.R. 652 where the majority  (Divan, CJ.  and  B.K. Mehta, J.  with P.D.  Desai,  J.  dissenting) appears  to take a contrary view.  Before we deal  with  the decision,  it would be interesting to note that the  counsel for  the appellant Sri N.A. Palkhivala who appeared for  the appellant  before  the  Settlement  Commission  had  himself repudiated  this  argument,  though,  another  counsel,  who appeared  for the appellant at a later stage, did not  agree with  the view expressed by Sri Palkhivala.  The  Commission has  recorded  the  submission  of  Sri  Palkhivala  in  the following words:               "We  may  mention  here that  when  Shri  N.A.               Palkhivala appeared before us on behalf of the               applicant   he   had  stated   that   although               according to the Gujarat High Court’s decision               in  the case of Smt.  Kamalini Aatau, 112  ITR               652  the  income of a discretionary  trust  is               assessable   only   in   the   hands   of    a               representative  assessed and not in the  hands               of  the beneficiaries, he would not object  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 23  

             assessment  of  the amounts received  by:  the               beneficiaries  in their hands in  the  present                             case,  for two reasons.  Firstly, according  t o               Shri   N.A.  Palkhivala,  the   Gujarat   High               Court’s decision in question was erroneous and               it was dissently judgment in that case to  the               contrary, which was correct.  Secondly, in the               case, before us, the representative assessees,               namely,  the  trusts, being  situated  outside               India, could 966               not  be  taxed in India and in such  cases  it               would   not  be  proper  not  to  assess   the               beneficiaries,  for  that  will  lead  to  the               entire income escaping the Indian  ’income-tax               in   the  case  of  both  the   representative               assessees and the beneficiaries." Be  that  as  it may, we have been  taken  though  both  the opinions  in the Full Bench decision in extensor We are told that an appeal is pending against the said decision in  this Court.   In the circumstances, we are not inclined  to  deal with  the said opinions in any detail except to say that  we are  inclined to agree with the dissenting. opinion of  P.D. Desai,  J. and are not concerned with the reasoning  of  the majority. For the above reasons, we cannot agree with Mr. Ashok Desai. We  hold that by virtue of Section 166, the Revenue  has  an option  in the case of a discretionary trust either to  make an  assessment  upon the trustees or to make  an  assessment upon the beneficiaries.  Of course, both the trustee and the 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 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  the  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  the  trustees  fail  to exercise their discretion under clause (3), the only  remedy for the beneficiaries is to approach the court to compel the trustees to exercise their discretion one way or the  other, but they cannot say that the trust 967 income   has  accrued  to  them.   Clause  (4)  comes   into operation, says the counsel, only where the trustees  decide not   to   distribute  the  income   among   the   specified beneficiaries;  only then does the trust income  belongs  to and has to be paid over to the settlor  and after the  death of   the   settlor  to  his  elder   son,   the   appellant. Accordingly,  the counsel says, the Commission was wrong  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 23  

law in treating these trusts as specific trusts. in  our opinion, however, the question urged is academic  in the  facts  and circumstances of the case.  As a  matter  of fact, both the settlor and the appellant have been receiving the  income from these trusts during the several  assessment years  concerned herein.  Sri Vikramsinhji  had  voluntarily included  the  entire  income from the U.K.  trusts  in  his income in the returns filed by him for the assessment  years 1964-65  to 1969-70.  It is unlikely that he would  have  so included  unless  he  really received  it.   The  Commission treated  those declarations as proof of the  settlor’s  real intention.   The Commission also relied upon  certain  other circumstances including the manner in which the accounts  of these  trusts  were maintained in support of  their  opinion that all concerned with the trusts, acted on the basis  that the  trust income was flowing to the settlor, and after  his death  to  the  appellant.   The  Commission  also  referred specifically  to similar declarations made by the  appellant in  his returns.  It referred to his statements made in  the two  returns  filed  for the assessment  year  1970-71,  one relating to the income received by his father till his death and  the  other with respect to the income received  by  him during  the accounting year after the death of  his  father. Even  subsequent  to  the death  of  Sri  Vikramsinhji,  the Commission  pointed  out,  the  appellant  has  been  making similar  declarations from time to time.  For  instance,  in the  letter dated March 3, 1975 written by the appellant  to the I.T.O., A-Ward, Rajkot relating to the A.Y. 1972-73,  he had  stated,  "as per statement of U.K. sent  herewith,  the trustees  have  arrived at income of 13,027 pounds  for  the benefit  of Sri Jyotendrasinhji.  According to our  opinion, this  income is not taxable as 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  A.Y. 1973-74,  a  note  was  appended by  the  appellant  to  the following effect: 968 "Late  H.H.  Maharaja  Vikramsinhji of  Gondal  has  created trusts  in  UK. The assessee has been informed  that  income falling in the hands of the assessee is 12,627 pounds.  This is,  therefore,  shows 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 we must  go  by  the findings of the commission. It is not brought to out notice that  during  any  of the years concerned  herein,  did  the appellant  ever say that he did not receive the income  from these  trusts. If so, the question of law urged is  of  mere academic interest and need not be dealt with by us.  Section 5 of the Act is wide enough to bring all such income to tax. So  far  as the plea of double taxation  is  concerned,  the observation  made by the Commission in that behalf is  quite adequate.  It has stated that in case appellant proves  that any  income has been taxed in U.S. or U.K., the same  income shall not be taxable over again in India. For the above  reasons, the appeals fail and are  dismissed.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 23 of 23  

No costs. V.P.R.                                    Appeals dismissed. 969