Satyanarayana Rao, J. -
(1.) THIS is a consolidated reference under Section 66(1), Income tax Act, by the Appellate Tribunal relating to the relevant assessment years 1942-1943 and 1948-1944; and also to the chargeable accounting period, 29th January 1941 to 18th January 1942 under the Excess Profits Tax Act.
(2.) THE questions referred to us are:
(1) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the executors did not cease to be executors, and, therefore, Section. 41, Income-tax Act, had no application?
(2) Whether on the facts of the case the Tribunal was right in upholding the decision of the department that the maintenance paid to the widow and the mother of the testator under the will was not an allowable deduction under the Income-tax Act?
The assessee is V. M. Raghavalu Naidu and Sons (by executors C. G. Krishnaswami Naidu and M. R Krishnaswami Naidu). They were assessed to income-tax during the assessment years as an association of persons. The executors were appointed under the will of one V.M.R. Seshachalam Naidu who died in 1936 leaving behind him a will dated 20th April 1936. At the time of the death of the testator, he was carrying on a lucrative timber business in Madras and had also agencies at Karachi, Calcutta and branches at Negapatam, Cocanada and Bombay. He also owned saw mills at Rangoon. He left behind him at the time of his death his mother and his widow besides three daughters and three sons. By Clause (3) of the will he appointed his son-in-law C.G. Krishnaswami Naidu and his manager whom he described as Basin Bridge Depot Manager, M.R. Krishnaswami Naidu, as executors and trustees of the will. The same clause also provided that his daughter Jumna Bai and his sons Badri Narayan alias S. Badrinath and Sampath Kumaran shall as soon as each of them attain the age of majority, i.e., age of 18, also became executors and trustees in addition to the two named persons and carry out the provisions of the will. C.G. Krishnaswami Naidu was appointed executive trustee Under Clause 6 of the will he directed that the business should be continued after his death so long as the business is running at a profit and should not be wound up even after the sons attained the age of majority and assume the management. Among the properties left by him this business was the most important asset and he had also other moveable and immoveable properties. Under Clause (8), there was a provision to purchase immoveable properties, after the total capital of the business reached Rs. 10,00,000, i.e., five lakhs for the business in India and five lakhs for the business in Burma. The executors under this clause should set apart immoveable properties of the value of Rupees 50,000 every year which they should acquire out of the profits of the business. Under Clause (9), the executors were empowered to convert the business of India into a limited concern soon after the capital of the business in India reaches five lakhs of rupees. Clauses 10 and 11 provide for payment of an amount to the mother and also some amounts to his widow for the maintenance of herself and the children. By Clause 12 he made provision for certain pecuniary legacies most of which are payable at a future date on the happening of the events mentioned therein. This clause also directs that the mortgage deed executed by the testator's wife's sister's son in his favour should be cancelled and delivered to him. Clause 13 provides for the setting apart of half anna per rupee of the net profits of the business every year and also half anna per rupee from the interest on capital, and for payment of the said sum to V.M.R. and Son Trust, which was established by the testator's mother so long as the charity continues to be carried on. Under Clause 17 the testator expressed his desire that his three sons-in-law should be trained in the business and that they should be taken as partners in the business and given a share of one and half annaa in the rupee for the first ten years and two annas in the rupee thereafter till their 65th year. There is also a provision for a monthly payment for their remuneration and maintenance from the time of their joining the service and working in the business. Clause 18 provides for the disposal of the residue. Under it the three sons are entitled to take the estate as tenants-in-common subject to the legacies and dispositions contained in the will but they would be entitled to enjoy the income and profits of the estate without any power of alienation during their lives and after their death the estate should be taken by the grandsons, by the sons, natural or adopted. The grandsons, it is provided, should be entitled to take the estate per stirpes provided, however, that their right to partition and possession of the estate shall be postponed until the majority of such of the grandsons as may be alive at the death of the last of the sons of the testator.
After the death of the testator, the two executors applied for and obtained probate in O. P. No. 164 of 1936 on the file of the High Court on 1st August 1936. The usual accounts, it is stated, were also submitted by the executors in due course. The business was continued by the executors. The major part of the income which was assessed by the income-tax officer, consists of the profits of the timber trade, the rest of it being income from business in paints and cocoanuts, rents and profits or property and interests on securities.
The main contention of the assessees was that they should not be assessed as an association of persons but should be assessed as trustees under Section 41, Income-tax Act. This section deals with cases of what may be described as vicarious assessments and if there are trustees constituted under a deed or a will, the measure of the liability is the actual interest of the beneficiary concerned. The trustees and other representatives contemplated by the section are in the nature of persons who merely receive the income but transmit the same to the beneficiaries. In other words, the estate of the beneficiary is what is charged to income-tax under the section. The other contention raised by the assessees was that the sum of Rs. 12,950 in the assessment year 1942-1943 and Rs. 12,900 in the subsequent year were paid by them as maintenance allowance to the widow and the mother of the deceased and that those amounts should be deducted from the income of the estate during the respective assessment years the contention being that the maintenance allowances were an allocation by the deceased of part of his income which were charged upon the estate and the executors had no right to such income. The amount actually paid during the period was not in dispute. These two contentions were rejected by the income-tax officer and by the Appellant Assistant Commissioner. On further appeal, the Appellate Tribunal confirmed the decision of the department. Hence this reference.
The main contention urged by the learned advocate on behalf of the assessee was that the administration of the estate was completed, the residue was ascertained, the executors assented to the legacies and thereafter there were no further duties as executors to be discharged by them and, therefore, they became trustees for the beneficiaries; and the assessment should have been made under Section. 41 of the Act. This is the contention covered by the first of the questions referred to us.
(3.) AS Kekewich J. observed in Timmis In re, Nixon v. Smith, (1902) 1 Ch. D. 176 at p. 182; (71 L. J. Ch. 118) :
"There are few things more difficult than to determine when an executor ceases to have duties gua executor or virtue officii, or, as it is phrased in the Finance Act, 'as such'. There are few wills which come before the Court which do not contain directions to persons as executors and as trustees; and it is a common case that the same persons are executors and trustees."
This exactly describes the situation in the present case. The two persons were appointed as executors and trustees under the will and one of them is an executive trustee. Do the two persons still continue to be executors or have they become trustees? An" 'executor' is a person to whom execution of the last will of a deceased person is, by the testator's appointment, confided". (Vide Section 2(c), Succession Act). He is the legal representative of the deceased. It, therefore, follows that he represents the estate of the deceased in the right of the testator. So long as he continues as an executor he holds the estate as a representative of the deceased and not on behalf of the beneficiaries. A trustee is a person in whom the property is vested for the benefit of the beneficiaries. Until, therefore, the title of the deceased or the representative character of the executor comes to an end he does not clothe himself even it he is described as a trustee under the will with the legal character of a trustee. If he holds the title as a trustee for the beneficiaries it is then that he acquires the status of a trustee. The point therefore for consideration is when does the executor cease to function as such? In the present case, the testator bequeathed certain pecuniary legacies and his estate consisted of a business which he expressly directed that the executors should continue even after the sons attained majority. In the residuary estate a life interest is given to the sons who are to take it as tenants in common with a remainder over to the grandsons by the sons. The sons under the will are entitled to certain pecuniary legacies and also a life interest in the residuary. For the executors to become trustees of the residue the funds which they should hold in trust for the residuary legatees must be constituted and must emerge into existence. It is settled law that until the residuary estate is ascertained the residuary legatees acquire no interest in the property and no fund in their favour comes into existence This has been settled in Sudeley Baron v. Attorney General, 1897 A. C. 11 : (66 L.J.Q.B. 21). The position has never been so clearly enunciated as in the speech of Lord Halsbury L. C. in that case at pp. 15 and 16. The following observations at p. 15 of the speech are apposite:
"It is uncertain until the residuary estate has been ascertained of what it will consist. It may consist of many things--it may consist of only a sum of money--and until that has been ascertained the actual right capable of instant assertion does not exist; and whether the character is that of executor or of trustee seems to me to be immaterial because the legattee had no right to go and say 'I will have this or that part of the assets'. If a trustee is to be the character filled, the cestuigue trust has no right to apply to the trust fund until a trust fund has been constituted and by the hypothesis the trust fund is not constituted. In this-case the trustees and executors happen to be the same persons; but I think Mr. Channeli made the point clear by adopting the hypothesis that the executors and trustees had been different persons. Until the thing has been ascertained, until the trust fund has been constituted the thing of which the trustees are the trustees has not been ascertained. Whether you treat them, therefore, as trustees or executors, the name consideration arises.
Now if the only thing that the legatee is entitled to is the fourth share of an ascertained residuary estate, I gay that to my mind it is impossible to maintain that the character of any part of that estate can be ascertained so as to make it possess a specific locality until that has happened; it is a condition precedent to know what the residuary estate is and until that has been ascertained you cannot tell of what it will consist."
To the same effect is also the decision of the House of Lords in Barnado's Homes v. Iriland Revenue Commissioners, 1921 2 A. C. 1 : (90 L.J.K. B. 545). Referring to Lord Sudeley's case, (1897) A. C. 11: (66 L. J. Q. B. 21), Lord Atkinson at p. 11 of that case says this:
"The case of Sudeley v. Attorney-General, (1897) A. C. 11: (66 L. J. Q. B. 21) decided in this House conclusively established that until the claims against the testator's estate for debts, legacies, testamentary expenses etc., have been satisfied, the residue does not come into actual existence. It is a non-existent thing until that event has occurred. The probability that there will be a residue is not enough. It must be actually ascertained."
After the residue is ascertained and the executor assents to the legacy either expressly or impliedly the disposition in the will becomes operative and the beneficiaries have the property vested in them. The assent of the executor before the residue is ascertained would not perfect the title of the residuary legatee as the residue until then does not come into existence. It is in this light that the observations of Viscount Haldane L. G. in Atten-Borough v. Solomon, (1918) A. C. 76 at p. 85 : (82 L. J. Ch. 178) have to be understood. In that case it may be observed the residue was ascertained; all the debts and legacies were paid and there was also assent of the executor. It was therefore held that the dispositions by way of trust took effect and that the executors had no interest thereafter to pledge the property which formed part of the residuary estate. No doubt as pointed out by Viscount Haldane L. C. in that case at page 85:
'Executors they remained, but they were executors who had become divested, by their assent to the dispositions of the will, of the property which was theirs virtute officii; and their right in rem, their title of property, had been transformed into a right in personam, a right to get the property back by proper proceedings against those in whom the property should be vested if it turned out that they required it for payment of debts for which they had made no provision."
To the same effect ig also the view of Kekewich J., in Timmis, In re; Nixon v. Smith, (1902) 1 Ch. D. 176 : (71 L. J. Ch. 118) where the learned Judge pointed out the ordinary duty of executors to pay the debts, funeral and testamentary expenses and when that is done he has done all that was necessary and though he still remains executor he has done his duty and is functus officio. In that case there were no legacies in the ordinary sense but if there were legacies the executor must pay them after the debts, funeral charges and testamentary expenses. After such payment as (sic) the residue may be ascertained and paid off to the residuary legatee. The fact that there was an outstanding mortgage on the property would not prevent the ascertainment of the residue. In Inland Revenue Commissioners v. Smith, 1930 1 K. B. 713:(99 L.J.K B. 361) Lord Hansworth M. R. referred to the decisions of the House of Lorda already referred to and applied the principles of those decisions to the case before him.
The learned Advocate General drew our attention to three other decisions of the Courts in England which also throw light on the point now under consideration, In In re Moore; Mc Alpine v. Moore, 1882 21 Ch. D. 778 : (30 W. R. 839), which arose under the Trustee Act, 1850, Kay J. observed that, "although the Court cannot remove an executor it can appoint a trustee or trustees to perform the duties of an executor, which in this ease means to pay the legacies when they became payable."
This observation evoked comment in later case as it seemed to imply that a trustee could also perform the duties of an executor such as payment of legacies which is inconsistent with the functions of the office of a trustee who holds the property for the benefit of the beneficiaries. Kay J. thought in that case that the definition of the words "trust" and "trustee" in the Trustee Act, 1850, as extending to and including the duties incident to the office of personal representatives of a deceased person, justified the course indicated by the learned Judge in that judgment. The Court of appeal had occasion to consider this case in In re J. R Willey, (1890) Eng. Weekly Notes 1, where the Court adjourned the petition to ascertain whether the debts and funeral and testamentary expenses had been paid or not before taking action under the Trustee Act, 1850 by appointing a trustee. Cotton L. J. is reported to have intimated an inclination of opinion that In re Moore, (1882) 21 Ch. D. 778 : (30 W. R. 839) went too far, and that a Court acting under the Trustee Act, 1860, could not appoint a person as trustee to discharge the duties which legitimately belonged only to the office of an executor and not to that of trustee. Kekewich J. pointed out in a later case in Eaton v. Daines, 1894 Eng. Weekly Notes 32, that there was some misapprehension regarding the decision of Kay J. in In re Moore; Mc Alpine v. Moore, 1882 21 Ch. D. 778 ; (30 W. R. 839) as the case before Kay J. must have bean a case where there was no existing trustee of the trust property remaining in the possession of the executor after it has passed from the office of executor to that of trustee which, implies that the administration of the estate by the executor was completed by payment of debts, legacies, funeral and testamentary expenses. Of course, Kekewich J. in that case agreed with Cotton L. J. that without payment of debts, legacies, funeral and testamentary expenses, the Court had no jurisdiction either under the Act or otherwise to appoint trustees. The executor represents the testator and is his legal representative. He has duties laid down by the will and by the statute which he alone should perform and could not be taken away out of his hand. These decisions in my opinion do not at all conflict with What was decided by the House of Lords in the cases already examined. On the other hand, they clearly draw the line of demarcation when the property legally passes from the possession of the executor to that of the trustee. The administration by the executor must be completed and the statutory duties must be discharged before the estate could pass to the trustee. These decisions in my opinion give clear guidance to determine the difficult question when the office of executor terminates and that of the office of the trustee commences.
Under the Succession Act the position is the same. The powers and duties of an executor are enumerated in Chap. 7 of the Act beginning with Section 316. The funeral charges have precedence over the debts and the debts have precedence over the legacies. The effect of assent of the executor or administrator is stated in Chap. 7 Under Section 332 the assent of the executor or administrator is necessary to complete a legatee's title to his legacy. It may be noted that the assent is required only to complete the title and not for the acquisition of the title. The title of the legatee is the title under the will and the assent is only to perfect the title and to complete it. Before such assent, however, the legatee's right is only an inchoate one which is transmissible to his personal representatives. Section 333 states that when there is assent of the executor, then the executor is divested of his interest and the assent transfers the subject of the bequest to the legatee. Of course, the assent when once it is given operates retrospectively to the date of the death of the testator. But there is one distinction between a specific legacy and a residuary bequest. The doctrine of relation back does not apply to the bequest of residue, as residue only comes into existence when the administration is completed. This follows on the principles relating to the residuary legacies which have been enunciated by the House of Lords in Lord Sudeley's case, (1897) A. c. 11 : (66 L. J. Q. B. 21) and Barnardo's Homes v. Special Income-tax Commissioners, 1921 2 A. C. 1 : (90 L. j. K. B. 545). This distinction between specific legacies and residuary legacies was adverted to by Viscount Finlay in Barnardo's Homes Case, (1921) 2 A. c. 1 at p. 8 : (90 L. J. K. B. 545) where it is observed :
"The doctrine of relation, however, which applies to specific legacies, is not applicable to the bequest of a residue as the residue only comes into existence when the administration is completed."
Section 342, Succession Act enjoins that the executor, when there is a general legacy to be paid at a future time should invest sum sufficient to meet it in securities of the kind mentioned in Section 341; and the intermediate interest forms part of the residue of the testator's estate. Under Section 318 where an annuity is given and no fund is charged with its payment or appropriated by the will to answer it, a Government annuity of the specified amount shall be purchased, or if no such annuity can be obtained, then a sum sufficient to produce the annuity shall be invested for that purpose in securities of the kind mentioned in Section 341. It is after all this that S 366 of the Act provides that the surplus or residue of the deceased's property, after payment of debts and legacies, shall be paid to the residuary legatee when any has been appointed under the will. It would be seen from this summary of the relevant sections of the Indian Succession Act that the principles embodied in the Act are not at variance with the principles which have been enunciated and applied in England.