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PETITIONER: GOSAR FAMILY TRUST, JAMNAGAR ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, RAJKOT ETC.

DATE OF JUDGMENT28/04/1995

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) SEN, S.C. (J) NANAVATI G.T. (J)

CITATION:  1995 AIR 1644            1995 SCC  (4) 576  JT 1995 (4)   424        1995 SCALE  (3)538

ACT:

HEADNOTE:

JUDGMENT:           J U D G M E N T B.P. JEEVAN REDDY.J.      Leave granted in Special Leave Petitions.      A common  question arises in this batch of appeals. For the sake  of convenience and with the consent of the counsel for the  parties, we treat the facts in Civil Appeal No.1160 of 1991  (Gosar Family Trust, Jamnagar) as representative of the facts  in all  the cases.  It is  agreed by  the learned counsel for the appellants that the relevant recitals in the Trust Deeds  concerned in all the appeals are identical. The appeals arise  from the  judgment and  orders of the Gujarat High Court.      The High Court has answered the following two questions referred to  it, at  the  instance  of  the  Revenue,  under Section 256(2)  of the  Income Tax  Act  in  favour  of  the Revenue and against the assessee:           "(1) Whether,  in law  and  on  facts  and  having      regard to  the provisions of sub-section (1) of section      164 of  the Income  tax  Act,  1961,  the  assessee  is      entitled to the concessional rate of tax?      (2) Whether,  in law  and on  facts and  in view of the      provisions of  the trust  deed,  the  trust  cannot  be      subjected to maximum marginal rate of tax?"      By a deed dated October 3, 1981, Sri Hirji Pethraj Shah created a private trust known as "Gosar Family Trust". S/Sri Devchand Shamji Shah, (2) Sri Deepak Devchand Shah, (3) Smt. Ladhiben Shamji  Shah and  (4) Smt. Sunanda Rajesh Shah were named as  trustees. The  trust was  created with  a  sum  of Rupees five  hundred. Clause (7) of the Trust Deed, however, permitted the trustees to accept from any person desirous of making contributions  to the  Trust  fund  such  amounts  or properties and  upon such  terms and  conditions as they may think fit  subject, of  course,  that  the  objects  of  the contributions are  not inconsistent  with the objects of the

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trust. There  are  two  sets  of  beneficiaries.  The  first category comprises  three individuals,  viz., (1)  Sri Gosar Devashi Jakharia,  (2) Smt. Lakhmaben Gosar Jakharia and (3) Sri Mukesh  Gosar Jakharia.  (Nos.2 and  3 are  wife and son respectively of  No.1). The second category of beneficiaries are: (1) Smo.Lakhmaben Gosar Jakharia, (2) family members of Sri Devchand  Shamji Shah  and (3)  Smt. Kankuben Gulabchand Shah upto  three generations. The recitals in the trust deed are little unusual and may be noticed (as condensed by us): (1) The  life of  the trust is eighteen years. But after the expiry of  two years,  the trustees  have the  discretion to terminate the trust at any time. (2) With  respect to  the income  from the trust properties, the trustees  have been  given  an  absolute  discretion  to distribute the  same among  the first category beneficiaries in such  manner and  in such proportion and at such times as they  think   appropriate.  The  trustees  are  vested  with absolute discretion  not to distribute the income to any one and to accumulate it. (3) At  the end  of eighteen  years or  at such  time as the trustees put  an end  to the  trust, the corpus of the trust and all  income accumulated,  if any,  shall be  distributed among the  second  category  beneficiaries,  again  in  such proportion and in such manner as the trustees may decide. (4) The trustees have been expressly empowered to invest the trust funds  in any  firm or  joint stock companies in which any one  or more  of the trustees may be partners, directors or share-holders, as the case may be.      The trust  is undoubtedly  a discretionary  trust.  The only question  in this  appeal is  whether the income of the trust taxed  in the  hands of  the trustees is chargeable at the maximum  marginal rate  or at the rate applicable to the association of  persons within the meaning of Section 164(1) of the  Income Tax Act. While the Tribunal has held that the rate applicable  is the  rate relevant to the association of persons by virtue of proviso (i) to Section 164(1), the High Court is of the opinion that proviso (i) is not attracted in this case  and, therefore,  the income  is chargeable at the maximum marginal  rate. It  would  be  appropriate  to  read Section 164(1) insofar as it is relevant at this stage:           "Charge  of   tax  where  share  of  beneficiaries      unknown.      164. (1)  Subject to the provisions of sub-sections (2)      and (3),  where any  income in  respect  of  which  the      persons mentioned  in clauses  (iii) and  (iv) of  sub-      section (1) of section 160 are liable as representative      assessees or  any  part  thereof  is  not  specifically      receivable on  behalf or  for the  benefit of  any  one      person or 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      (such income,  such part of the income and such persons      being  hereafter   in  this   section  referred  to  as      "relevant  income",   "part  of  relevant  income"  and      "beneficiaries", respectively), tax shall be charged on      the relevant  income or  part of relevant income at the      maximum marginal rate:      Provided that in a case where--      (i) none  of the  beneficiaries has  any  other  income      chargeable under  this Act exceeding the maximum amount      not chargeable  to tax in the case of an association of      persons  or   is  a   beneficiary   under   any   other      trust.........      (Clauses (2), (3) and (4) omitted as unnecessary.)      tax shall  be charged on the relevant income or part of

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    relevant incomes  as if  it were the total income of an      association of persons:      (Rest of the section omitted as unnecessary.)      The sub-section contemplates charging of tax at maximum marginal rate in two situations, viz., (a) where any income, in respect  of  which  the  trustees  (omitting  unnecessary categories  of   persons)  are  liable  to  be  assessed  as representative assessees,  is not specifically receivable on behalf or  for the  benefit of  any one person and (b) 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.  The first  proviso, however, says inter alia that where none of the beneficiaries has any other income chargeable under this Act exceeding the maximum amount not  chargeable to  tax in the case of an association of persons  or is  a beneficiary  under any other trust, tax shall be  charged on  the relevant  income as if it were the total income  of an  association of  persons. In  this case, none of  the first category beneficiaries has taxable income under the  Act within  the meaning of proviso (1), while the second category  beneficiaries do  have  such  income.  This means that  if the  second category  beneficiaries are  also treated as beneficiaries for the purpose of proviso (i), the trust income is liable to be charged at the maximum marginal rate. If,  on  the  other  hand,  only  the  first  category beneficiaries are  treated as  beneficiaries  (and  not  the second category beneficiaries) within the meaning of proviso (i), then  the trust  income is  liable to be charged in the hands  of  the  trustees  at  the  rate  applicable  to  the association of  persons. For  this  reason,  the  assessees’ contention  has   been  that   only   the   first   category beneficiaries  are   beneficiaries  within  the  meaning  of proviso (i)  while the Revenue contends to the contrary. The reasoning of the High Court on which it has held against the assessee is to be found in the following three paragraph:      "There is no dispute about the fact that the income was      not specifically  receivable on  behalf of  or for  the      benefit of  any one  person  and  that  the  individual      shares of  beneficiaries were indeterminate or unknown.      Therefore,  the   provisions  of   section  164(1)  are      attracted to  the type  of arrangement  made under this      trust.  The   argument  that  only  the  first  set  of      beneficiaries who  may receive the income are the class      envisaged by sub-section (1) of section 164 and not the      type of  beneficiaries who  may,  ultimately,  get  the      accumulated income  on distribution is not warranted by      the wording  of the provision which includes the entire      class of  beneficiaries on  whose behalf  or for  whose      benefit the income is receivable by the trustee.           The trustees  receive or  are entitled  to receive      the income  (under the  deed) on  behalf of  or for the      benefit of both the sets of beneficiaries and are their      representative assessees under section 160 (1) (iv). It      cannot be  said that they do not receive the income for      the  benefit   of  the   second  set   or   "tier"   of      beneficiaries (described  as corpus beneficiaries). The      trustees are empowered to accumulate the income for the      benefit  of   the  second  set  of  beneficiaries  and,      therefore, they  receive or are entitled to receive the      income on  behalf of  or for the benefit of such second      set of beneficiaries also notwithstanding the existence      of the  first set  of beneficiaries  to whom  they  may      distribute the  income if  they so  choose to  do.  The      existence of  the authority of the trustees to disburse      the income  they receive  under the  trust to the first

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    set of  beneficiaries does  not militate  against their      entitlement to  receive the  income on behalf of or for      the  benefit  of  the  other  set  for  whom  they  can      legitimately accumulate  it for  eventual distribution.      The trustees  were entitled to receive the income under      this trust  on behalf  of or  for the  benefit  of  the      entire class  of beneficiaries notwithstanding the fact      that they had a discretion to bestow the benefit to one      beneficiary or  one set of beneficiaries at the cost of      the others.  The fact  that the  income so  received is      disbursed to some and not to others or is disbursed now      or accumulated  for future  disbursement should make no      difference and  will  not  change  the  nature  of  the      arrangement made  under the  trust,  namely,  that  the      trustees receive  or are entitled to receive the income      for the  benefit of or on behalf of the entire class of      beneficiaries name in the trust.           The fact  that the  trustees are  not  obliged  to      disburse the income or accumulate it for the benefit of      the first set or the second set of beneficiaries or any      of them  would  itself  indicate  that  the  income  is      receivable by  the trustees  for  the  whole  class  of      beneficiaries irrespective  of the  ultimate manner  in      which the income is distributed."      The High Court further pointed out that for the purpose of Section  164, it  is not necessary that the beneficiaries do actually  receive the  income. It is sufficient, it held, that the  income is  receivable  by  the  trustees  for  the benefit of  the persons  named in  the trust. The High Court observed, "the real question is whether the persons named in the trust have an interest, whether vested or contingent, in the income  that is receivable on their behalf" and answered the  question   by  saying   that  both  the  categories  of beneficiaries mentioned  in the  trust deed have an interest in the  trust and the income of the trust is received by the trustees on their behalf.      Sri Eradi,  learned counsel for the assessees contended that the  second category  of beneficiaries cannot be called "beneficiaries" with  respect to the income of trust for the reason that  they are not entitled to any portion of income; they are  entitled  only  to  the  corpus.  Only  the  first category beneficiaries  are entitled  to the  income of  the trust, it  is submitted.  When Section  164 speaks of income and it  being taxed  at a  particular rate,  it is having in mind the  particular year in which the income is received by the trustees  and is  being taxed  in their  hands.  Counsel further submitted  that even  if the  trustees decide not to distribute the  income and  accumulate it,  it forms part of the corpus  which is  distributed among  the second category beneficiaries at  the  end  of  eighteen  years  or  earlier whenever the trust is put an end to by the trustees in their discretion. Strong  reliance is  placed upon the decision of the Bombay  High Court  in Commissioner  of  Income  Tax  v. B.A.Sanghrajka  Trust   (181  I.T.R.484)   where  construing similar terms  of a  trust deed,  the Bombay High Court held that the  second category beneficiaries cannot be treated as beneficiaries within  the meaning  of provision  (1). It  is brought to  our notice  that  the  said  decision  has  been followed later  by the  same High  Court in  Commissioner of Income Tax v. Mrs.Pushpaben Family Trust (207 I.T.R. 5877.      We must say that the trust deed in question is rather a curious one. It is effective only for a limited period which can be  as short  as two years. If, in case, the trustees do not choose to put an end to the trust, even then the maximum life of the trust is eighteen years only. One beneficiary is

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common to  both  the  first  and  second  categories,  viz., Smt.Lakhmaben Gosar  Jakharia. The  trustees are not obliged to  disburse  or  distribute  the  income  among  the  first category beneficiaries  in the  year they  receive it.  They need not pay & single pie to any of the beneficiaries in the first category at any time during the currency of the trust; they are  entitled to accumulate the whole income which will then pass  to the  second category beneficiaries as and when the trust  comes to  an  end.  In  other  words,  the  first category beneficiaries  have no right to receive the income. So have  the  second  category  beneficiaries  no  right  to receive any  income though they may ultimately get the whole or part of the income along with the corpus on the expiry of the period  of trust. The trustees are expressly entitled to deposit the  monies of  the trust  fund in any firm or joint stock company  in which  any one  or  more  of  them  is/are partners/directors/share-holders,  which   means  that   the trustees could  as well  have decided  not to  distribute  a single pie and invest all the income and corpus fund for the full period  of  eighteen  years  in  their  own  firms  and concerns. No less surprising is the provision that the trust started with  a mere  Rupees five  hundred and  the trustees have been  given absolute  discretion not only in the matter of distribution  of income  but also  in the  matter of very continuance of  the trust.  At any  time after the expiry of two years they can put an end to it if they so choose.      The ingenuity  of the  assessee and  the naivete of the department in  espousing  and  accepting  such  a  trust  is remarkable. Be  that as  it  may,  we  have  to  answer  the question, whether  the second category beneficiaries are not "beneficiaries" within the meaning of proviso (i) to Section 164(1) on  the above facts? We are of the considered opinion that   the    second   category   beneficiaries   are   also beneficiaries as  rightly pointed  out by the High Court. If the income  is not  distributed  among  the  first  category beneficiaries, the  whole income - or such part of it as may not have been distributed among the first category - goes to the second  category. There  is no  reason why  it cannot be said that  the income  is received by the trustees on behalf of both the categories of beneficiaries. Indeed, there is no distinction between  the two categories so far as the income of the trust is concerned. The members of the first category too have  no right  to demand or receive income. They may or may not receive any income. It may well happen that they may not get  a single pie either in the year concerned or during the entire  period of the trust. If so, how it is being said that income  is being  received on  their behalf. The second category beneficiaries  too have  no right to the income but yet they  may get  whole of it or such part of it as may not have been  distributed or  paid  to  first  category.  Thus, neither category  has a  right but  only an  expectation  to receive  income.  In  this  sense,  members  of  the  second category are  as much  beneficiaries as  the members  of the first category.  The trustees  are entitled to choose not to pay a  pie out of the income to any one and invest the whole of it  in their  own  concerns.  They  were  also  under  no obligation to  disburse or distribute the income received in an year  in that  year or  in the  following year.  For  the purpose of  Section 164(i)  what is  relevant  is  that  the income is  receivable on  behalf of the beneficiaries. It is not  necessary   that  the   income  is   received  by   the beneficiaries. It  is, therefore,  difficult to  say in  the light of  the recitals  of the trust deed that the income is receivable only  on behalf  of the first category but not on behalf of the second category beneficiaries. Indeed, Section

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164(1)  or  the  proviso  (i)  thereto  does  not  make  any distinction between beneficiaries and beneficiaries - nor is the said expression defined in the Act. It would, therefore, be reasonable  to construe  and  understand  the  expression "beneficiaries" in  its ordinary  and  normal  sense,  which means that  both  categories  are  beneficiaries.  Situation could probably  have been  different if  there had  been  an obligation  upon  the  trustees  to  distribute  the  income received in  an year  in that  very year or in the following year(s) in  which event  it could  probably be said that the trust income  is receivable  by the trustees on behalf of or for the benefit of the first category beneficiaries only. In this case,  there is  no such  obligation and the income not distributed ultimately  goes to  the second  category. It is immaterial whether  that income  becomes a part of corpus or not. What  is  material  is  that  it  goes  to  the  second category. It  cannot, therefore,  be  said  that  income  is received only  on behalf  of the  first category and not the second category  beneficiaries. Either  category could  have received the  income wholly to the exclusion of the other or both could  have received  it partly in the manner explained above.  We   are,  therefore,   unable  to  agree  with  the contentions urged  by the learned counsel for the assessees. The charging  of maximum  marginal rate  was not contrary to law.      Now, coming to the decision of the Bombay High Court in Sanghrajka Trust,  the High  Court has  construed the  trust deed concerned  therein to  mean  that  the  daughter-in-law (comparable to  second category in our case) had no right or interest in  the income of the trust for any year but it did not attach sufficient importance to the other recital in the trust  deed   that  the  trustees  were  entitled  in  their discretion not to disburse any income to the grand daughters (comparable to first category in our case) of the settlor in which  case  the  entire  income  would  have  gone  to  the daughter-in-law at the expiry of the trust. The daughter-in- law may not have had a right to the income of the trust, but so did  the grand  daughters too did have no right. The said decision,  therefore,   cannot  advance   the  case  of  the appellants herein.      We must  say that  the policy  of law as disclosed from Section 164(1)  is to  discourage  discretionary  trusts  by charging the  income of such trusts in the hands of trustees at the  maximum marginal  rate except  in certain  specified situations.  The   trust  deed   concerned   herein   is   a discretionary trust  of an  extremely unusual type. Since it is stated that the Tribunal has found the trust deed to be a genuine one,  we do  not wish  to say  anything more on this score.      For  the  above  reasons,  the  appeals  fail  and  are dismissed with costs.