COMMISSIONER OF INCOME-TAX vs. SUBHASH FAMILY TRUST

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ITR/111/1984HC GujaratGJHC24011785198411 November 1998Author: HONOURABLE MR. JUSTICE R.BALIA,HONOURABLE MR. JUSTICE ANIL R. DAVE3 pages
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What did the High Court hold?

The High Court held that the trust is a specific trust and not a discretionary trust. The reasoning was based on the interpretation of clauses 8(a) and 8(b) of the Trust Deed, which mandate the trustees to pay and distribute 50% of the net income to the beneficiaries. The Court found that the provision for adding undistributed income to the corpus does not negate the determinate nature of the beneficiaries' shares or the trustees' duty to distribute 50% of the income. This interpretation aligns with the High Court's prior decision in the case of Tanvi Sajni Family Trust, which had identical clauses. Consequently, the Tribunal's finding that Section 164 of the Act was not applicable was justified. The questions were answered in favour of the assessee and against the Revenue. No order as to costs was made.

What were the facts?

The Commissioner of Income-tax referred two questions of law to the High Court of Gujarat concerning Assessment Year 1979-80, arising from an Income Tax Appellate Tribunal (ITAT) order dated 12.9.1983. The assessee is Subhash Family Trust, created for minors Monash and Milesh. The Income Tax Officer (ITO) considered it a discretionary trust, invoking Section 164, as trustees were not obligated to distribute earnings. The Appellate Assistant Commissioner (AAC) allowed the assessee's appeal, holding it was not discretionary and trustees had an obligation to distribute earnings to determinate beneficiaries. The ITAT affirmed the AAC's decision, relying on its own prior rulings. The High Court noted that similar questions regarding the trust's nature had been decided by the court in favour of the assessee in a related case.

What were the issues?

1. Whether the trust is a discretionary trust or a specific trust, and consequently, whether Section 164 of the Income Tax Act, 1961, is applicable? (Question of law) The Assessee contended that the trust deed imposes an obligation on the trustees to distribute 50% of the net income to determinate beneficiaries, making it a specific trust. Therefore, Section 164, which applies to discretionary trusts, should not be invoked. The Revenue contended that the trust deed allows trustees discretion in distributing the entire net income, as any undistributed income is added to the corpus. This, according to the Revenue, makes it a discretionary trust, and Section 164 is applicable. The Revenue relied on the ITO's initial assessment.

Which sections of the Income-tax Act were involved?

Section 164

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 111 of 1984

For Approval and Signature:

Hon'ble MR.JUSTICE R.BALIA. and MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? 1 to 5: No -------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus SUBHASH FAMILY TRUST -------------------------------------------------------------- Appearance: MR MIHIR JOSHI for MR MANISH R BHATT for Petitioner NOTICE SERVED for Respondent No. 1

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CORAM : MR.JUSTICE R.BALIA. and MR.JUSTICE A.R.DAVE Date of decision: 11/11/98

ORAL JUDGEMENT (per R. Balia, .)

The Income Tax Appellate Tribunal, Ahmedabad Bench 'A', at the instance of the Commissioner of Income-tax, Gujarat, has referred the following two questions of law stated to be arising out of its order dated 12.9.1983 in I.T.A. No. 2074/Ahd/1982 relating to Assessment Year 1979-80. 2. The facts in short are that the assessee is a trust created for Minors Monash and Milesh. On perusal of the Trust Deed, particularly clause 8(a) & (b) of the trust, the ITO found that, under the terms of deed, the trustees are not under an obligation to distribute the earnings. Therefore, the trust is a discretionary trust and the provisions of Sec. 164 are applicable. Aggrieved with the order of that assessment, the assessee preferred an appeal before the A.A.C. who allowed the appeal by holding otherwise that the trust is not a discretionary trust and the trustees are under an obligation to distribute the earnings amongst the beneficiaries and the beneficiaries are determinate. The Tribunal, on further appeal, following its own decision in the case of the assessee for the earlier years as well as in the case of Tanvi Sajni Family Trust in ITA Nos. 29 and 30 of 1980, affirmed the findings of the A.A.C.

3.

We are told at the time of hearing that the questions of law about the nature of the trust and reference being made in the case of said Tanvi Sajni Family Trust have since been decided by this court in favour of the assessee and against the Revenue in (1994) 76 Taxman (Tax Reports) 236. 4. For the present purposes it would be profitable to reproduce clauses 8(a) & (b) of the Trust Deed in question.

8.

Subject to the payments mentioned in the previous clause, it is hereby agreed and declared that the trustees shall hold the trust fund upon trust following :-

(a) Up to and including 31st March, 1997 the trustees shall pay and distribute 50% of the net income of the trust fund to and amongst......... or the survivors for his or their absolute use and benefit provided however that the whole or any part of the net income of the trust fund as any not have to be distributed by the trustees in any year shall be at the end of the year be added to and held as accretion of the capital and form part of the corpus of the trust fund and shall be dealt with accordingly.

(b) Up to and including 31.3.1997, the trustees shall pay and distribute 50% of the net income of the trust fund to and amongst ......... or the survivor or survivors for his or their absolute use and benefit provided however that the whole or any part of the net income of the trust fund as may not have to be distributed by the trustees in any year shall at the end of the year be added to and held as accretion to capital and form part of the corpus of the trust fund."

5.

It is not in dispute that the trust deed in Tanvi Sajani Family Trust's case was couched in identical terms which is also apparent from the clauses of the trust deed quoted in the judgment referred to above. Sub-clause (b) of clause 8 in the said trust deed also provided "however that the whole or any part of the net income of the trust fund as may not have to be distributed by the trustees in any year shall at the end of the year be added to and held as accretion to capital and form part of corpus of the trust fund." This court, while construing the pari materia clauses of the trust deed with the present case, was of the opinion that the aforesaid provision does not militate against the fact that the shares of the beneficiaries are determinate and definite and a duty is enjoined upon the trustees to distribute 50% of the income of the trust to the true beneficiaries. The court came to the conclusion that, in view of the aforesaid conclusions, the Tribunal was justified in not holding the trust to be a discretionary trust but a specific trust and the provisions of Sec. 164 of the Act were not applicable. It is on all fours applicable in the facts and circumstances of the present case.

6.

We therefore answer the questions referred to us in favour of the assessee and against the Revenue by holding that the assessee trust is a specific trust and the finding to that effect of the appellate tribunal is justified on material on record. There shall be no order as to costs.

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