BRINDA BENEFICIARY TRUST Vs. WEALTH TAX OFFICER
LAWS(IT)-1989-6-1
INCOME TAX APPELLATE TRIBUNAL
Decided on June 05,1989

Appellant
VERSUS
Respondents

JUDGEMENT

K.R. Dixit, Judicial Member - (1.)THESE cross appeals are in relation to the valuation of certain properties held by the assessee-trust. 2. By a deed of trust dated 27th December, 1978 certain equity shares in a limited company were settled for the benefit of one Brinda and her children or Anand and his children. However, the manner in which the benefit was to accrue is not very simple and there are various conditions and periods in relation thereto, as will appear from the clauses in the trust deed, which has led to this litigation. The important clauses may be paraphrased as follows:-
(i) For the first eight years the income is to be accumulated,

(ii) For the next 10 years the income is to be paid to Brinda and if Brinda is not alive to be paid to Anand. If none of them is alive income is to be accumulated.

(iii) At the end of this further period of 10 years the trust fund with all accumulations thereof to be distributed among Brinda and her children in such proportion as the trustees in their sole discretion think fit and if only one of them is alive to pay and deliver it to such one person. If Brinda or her children are not alive it has to be paid and delivered to Anand and his children in such proportion as the trustees in their sole discretion may decide and if there is only one such beneficiary then the whole of it to be given to that person.

(iv) Regarding the said distribution of the trust fund and its income mentioned in (ii) & (iii) above there is a proviso that the amount which fairly represents the accumulation of income should be distributed to such of the beneficiaries who are in existence at the date of the settlement of the trust.

(v) If on the date of distribution i.e. 1st January, 1977 neither Brinda, Anand nor any of their children be alive then the trust fund and its accumulation of income is to be given to a public charitable institution as the trustees may decide.

(vi) Notwithstanding any of the above conditions, the trustees may until the date of distribution at their discretion from time to time spend or apply any part of the trust fund for the benefit of Brinda or any of her children. The word benefit would include maintenance, education, medical relief and advancement of any object or purpose which the trustees consider likely to give or offer relief or help to the person.

3. The Wealth-tax Officer first of all held that on a combined reading of the aforesaid clauses the shares of the beneficiaries were indetermined and therefore assessment was to be made under Section 21(4). The assessee's claim to deduction of a sum of Rs. 15,000 as the life interest of Brinda was rejected on the ground that at the time of distribution the portion which represented accumulation of income was to be given to a beneficiary which was alive at the date of settlement which was Brinda and that distribution was to be done at the discretion of the trustees. He rejected the assessee's claim of exemption under Section 5(1A) on the ground that this was a discretionary trust and the Explanation to Section 21(4) prohibited such an exemption. He also held that since the number of remaindermen was indeterminate and their shares unknown the value of the assets were to be taxed in the hands of the trust.

4. The A.A.C., applying the decision of the Supreme Court in the case of CWT v. Trustees of H.E.M. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555, from which he quoted, allowed the assessee's claim of deduction of Rs. 15,000 aforesaid. He, however, upheld the WTO's order that the assessee was not entitled to the exemption under Section 21(4). In view of this partial relief given by the A.A.C., both the assessee and the department are in appeal before us. As can be expected the assessee is in appeal in respect of the claim to exemption under Section 5(1A). The assessee has also submitted that the assessment can be only under Section 21(1). The department is in appeal on the ground that the deduction of Rs. 15,000 has been wrongly allowed.

5. Before us, the assessee representative Mr. Talati first of all submitted that although the income was to be accumulated upto 31st December, 1986 ultimately it was Brinda who was to benefit under the trust deed and so this was not a discretionary trust so far as income was concerned. Regarding corpus the benefit was to go first to Brinda and so this was not a discretionary trust. Although it is true that Brinda was to benefit after 1986, he submitted that we had to presume that she will be alive at that time. According to him the valuation of her interest from 1st January, 1987 was to be made on the presumption that she would be alive. On the other hand, the learned departmental representative pointed out that the trustees had discretion regarding the distribution of the trust fund and the accumulations of income. And further, the overriding effect of clause 10 as indicated in (vi) above made the trust discretionary.

6. We are of the view that the trust is discretionary. In order that a trust may be discretionary it is sufficient if distribution of either the income or the corpus is at the discretion of the trustees. This is clear from the language of Section 21(4) which provides that the shares of the beneficiaries are indeterminate or unknown. THESE shares may be either in income or in the corpus or in both. We, however, do not accept the contention of the learned departmental representative that because of the overriding effect of clause 10 summarised at point (vi) above the trust is discretionary. Because, that clause does not deal with the share of the beneficiary but only with ad hoc payments out of corpus on account of special circumstances.

7. An alternative argument of Mr. Talati was based on the decision of the Madras High Court in the case of Haresh Anitha Trust v. CWT [1988] 173 ITR 103/38 Taxman 117. It was laid down in that case that the question of applicability of higher rate under Section 21(4) would arise only in case the assessee is taxable. He submitted that in this case first of all the interest of Brinda in the income for 10 years from 1987 would have to be valued. The remaindermen's interest also had to be valued. According to him the total of these two values would be so low that it would not be taxable. He further submitted that the balance after deducting the sum of the above two interests would not be taxable according to the Supreme Court decision in Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust's case (supra). Therefore, Section 21(4) would have no application here. The learned departmental representative pointed out that under that section Schedule I, Part I was mentioned for determining the rate and the basic exemption was a part of that Schedule. That being so the rate of 3% was to be applied as provided in Clause (b). He submitted that the expression "more beneficial to the revenue" meant anything more than zero. He submitted that since this aspect was not considered in the judgment of the Madras High Court that decision was not applicable. Shri Talati replied that the words' 'more beneficial to the revenue" presupposes that tax was leviable and did not contemplate a situation where it was not leviable at all. According to him since tax was not leviable at all the revenue would get no entry in the first place.

8. We are inclined to accept Mr. Talati's contention because otherwise a trust not liable to tax would be liable to pay tax and that too at the rate of 3% Only because it is a discretionary trust We fail to understand the logic of the resulting differential treatment to a trust which could be taxed at the rate of 3% even if its wealth is not taxable otherwise just because it is a discretionary trust. However, the question remains whether the total value of the two interests i.e. interest in the income for 10 years and remaindermen's interest would exceed the basic exemption or not. This will have to be ascertained. The matter is, therefore, restored to the WTO to do so and if it does not so exceed Section 21(1) has to be applied. Otherwise Section 21(4) would have to be applied.

9. The learned departmental representative submitted that since the trust was discretionary the exemption under Section 5(1A) was not available. Since we have held that the trust is discretionary, we accept this contention.

10. Regarding the department's appeal, we are of the view that the deduction of Rs. 15,000 given by the A.A.C. is not justified. That part of the decision is also based on the aforesaid Supreme Court decision but we fail to understand how that decision would support this conclusion. The quotation from that judgment does not say that the actuarial valuation of the life interest is to be deducted from the value of the corpus. What it says is that valuation is to be of the life interest and the remaindermen's interest and not of the corpus.

11. In the result, the assessee's appeal is treated as allowed for statistical purpose and the department's appeal is allowed.



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