N.M. Kasliwal, J. - (1.) BOTH the above reference applications are disposed of by one single order as common questions of law arise in both the cases except that the assessment years are different.
(2.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), by order dated August 5,1981, has referred the following questions of law for the opinion of this court : "(1) Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in holding that the Commissioner of Income-tax was justified in passing the order under Section 263 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the findings of the Commissioner of Income-tax that the trust was a discretionary trust ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the shares of beneficiaries were indeterminate or unknown and, as such, the provisions of Section 164 were applicable?" Brief facts of the case are that pursuant to a notice issued under Section 143(2) of the Income-tax Act, 1961 (No. XLIII of 1961) (for short "the Act"), by the Income-tax Officer, A-Ward, Kota, M/s. Moti Trust (hereinafter referred to as "the assessee ") filed a return of its income as Rs. 68,100 for the assessment year 1976-77 and Rs. 41,860 for the assessment year 1977-78. The assessee declared its status as association of persons. A note was put in the return of income that the assessee was a determinatory trust ; no tax was leviable on the trust; beneficiaries, according to their shares, shall be taxed. The Income-tax Officer completed the assessment of the assessee, i.e., Moti Trust, determining its status as association of persons. In the assessment order it was observed by tbe Income-tax Officer that the trust had been created by Sardar Mehtab Singh and Smt. Somawanti Sethi by settling a sum of Rs. .10,000. It was further observed by the Income-tax Officer that the trust property had been specified and the beneficiaries had also been mentioned along with their shares. As the shares had been determined, it was a specific trust. The trust became a partner in M/s. Ujagar Singh Sethi & Bros., Naya Pura, Kota, through its trustee, Shri Moti Singh. The Income-tax Officer determined the income of Moti Trust at Rs. 98,010 for the assessment year 1976-77 and at Rs. 41,860 for the assessment year 1977-78. The status in the assessment order was determined as association of persons. In the order, the Income-tax Officer further wrote "Assessed. Issue necessary forms. Profit among the beneficiaries would be distributed as per ratio prescribed in the trust deed." The Commissioner of Income-tax, Jaipur, took the view that the Income-tax Officer had completed the assessment of the assessee in the Status of association of persons and had completed the assessment under Section 164 of the Act. The assessee itself had also declared the status as association of persons but the Income-tax Officer in the assessment forms did not tax the trust as provided under Section 164. The order passed by the Income-tax Officer was considered to be erroneous and as there was loss of lawful revenue and prejudicial to the interest of Revenue, action was taken under Section 263 of the Act. The Commissioner issued a notice to the assessee under Section 263 of the Act. The assessee filed a written reply. The Commissioner then heard the arguments of both the parties and after taking into consideration the relevant clauses of the trust deed, held that it was not a specific trust as observed by the Income-tax Officer in the assessment order. It was also observed by the Commissioner that it was a discretionary trust with very wide powers given to the trustee either to distribute the income or not to distribute the income. The provisions of the trust deed gave discretion to the trustee to distribute the income or accumulation within 20 years or after 20 years. The trustee was also given further powers in his absolute discretion to distribute the trust fund or accumulation thereon after 20 years. The discretion was entirely on the trustee to distribute or not to distribute the income even after 20 years as the :period for distribution of the trust fund had not been specified. It was also observed by the Commissioner that the trustee was further empowered to distribute the trust fund either partly or completely or individually or severally in his absolute discretion. These facts, according to the Commissioner, showed that it was an out and out discretionary trust and not a specific trust, as had been held by the Income-tax Officer. The Commissioner, thus, by order dated October 19, 1979, set aside the order of the Income-tax Officer in respect of the assessment year 1977-78 and by order dated October 23, 1979, set aside the order of the Income-tax Officer in respect of the assessment year 1976-77. The Commissioner directed the Income-tax Officer to charge tax on the assessee-trust under Section 164 of the Act and to issue necessary consequential notice of demand and challan and take steps to collect the same as per the provisions of the Income-tax Act, 1961. The assessee, aggrieved against the orders of the Commissioner, filed two appeals before the Income-tax Appellate Tribunal. The learned Tribunal disposed of both the appeals by a common order dated November 24, 1980. The Tribunal agreed with the view taken by the Commissioner and dismissed both the appeals filed by the assessee. The Tribunal took into consideration Clauses 1, 2(i) and 3 of the trust deed. After taking into consideration the language used in the aforesaid clauses, the Tribunal held that the fund of the trust will be not only the initial contribution by the settlors at Rs. 10,000 and subsequent donations, but also the accumulations out of the income of these funds. After referring to the provisions contained in Clause (1) of the trust deed, the Tribunal observed as under : "In our opinion, the trust fund consists of the original fund of Rs. 10,000, donations, if any, and the interest income arising out of such funds. Viewed from this angle, all the accumulations out of the shares of the beneficiaries would form the corpus of the trust and not of the individual beneficiaries as urged by learned counsel for the assessee. Again, the trustee in Clause (2) has been given the discretion to accumulate the entire share or a part of the share or to accumulate no share at all in the case of different beneficiaries. This is evident from the fact that for the two assessment years he has accumulated the entire shares of all the beneficiaries even though there were expenses of the nature referred to in Clause (2) in respect of the beneficiaries. Had it been the case that he has necessarily to meet such expenses of the beneficiaries out of their shares, he would have definitely spent the same out of his share. It is because of the discretion vested in him that he has not spent anything on any of the beneficiaries. The discretion exercised by the trustee in these two years may not be detrimental to the interests of the beneficiaries, but this discretion can be exercised by the assessee at any time even to the detriment of the interest of any beneficiary, depending upon his sweet will. In this view of the matter, we are in agreement with the learned departmental representative that the trust is a discretionary one. We also agree with him that such discretion vested in the trustee would contribute to the fluctuation of future earnings of different beneficiaries. We are also in agreement with him that ultimately when the corpus is to be distributed, the shares of the beneficiaries will vary depending upon the variations in the accumulations. Beneficiaries in whose cases no accumulations were at all made will also share accumulated profits out of the corpus to the detriment of the beneficiaries who had accumulated such shares. Lastly, we are also in agreement with the learned departmental representative that by Clause 3, absolute discretion has been given to the trustee even to vary the sharing ratios of the various beneficiaries. It does not specifically say that the trustee shall not vary the sharing ratios of the beneficiaries while ultimately distributing the corpus. This also gives discretionary powers to the trustee and, therefore, makes the trust a discretionary one."
(3.) THE alternative argument made by learned counsel for the assessee that so far as the two assessments in appeal were concerned, the trustee had not exercised any such discretion and, therefore, the two assessment years were not affected, was also repelled by the Tribunal. In this regard, it was held by the Tribunal that they had to consider from the various clauses of the trust deed as a whole, whether or not the trust was a discretionary one and not that in a particular year the trustee did not exercise that discretion. The assessee then submitted an application under Section 256(1) of the Act for referring the questions of law for the opinion of this court. The Tribunal by order dated August 5, 1981, has thus referred the above-mentioned three legal questions for the opinion of this court. In order to appreciate the arguments advanced by Dr. Dastoor, learned counsel for the assessee, and Mr. Surolia, appearing on behalf of the Department, it would be necessary to reproduce such clauses of the trust deed which would have a bearing for deciding the legal questions raised in these references : "1. That the trustee shall invest the said sum of Rs. 10,000 (Rupees ten thousand) only in any one or more of the investments hereinafter authorised and collect the interest and income of the investments representing the said sum as well as of any other amounts which may be received by him to be held upon the trusts hereinafter contained as hereinafter provided (hereinafter referred to as the trust fund) as well as the share in profits in any business which may be carried on by him pursuant to the powers granted to him as hereinafter contained and pay therefrom all costs, charges and expenses, of collection of such interest and income as well as cost of management of the trust as well as and incidental to the appointment of new or additional trustee and/or trustees. 2. (i) The trustee shall divide the said interest, income and/or profits (hereinafter referred to as the ' net income') in the proportions as mentioned hereinafter and apply 12 per cent. for the maintenance, education (including education in foreign countries) and marriages and other social functions and customs among the community of settlors, as also for payment of life insurance premium on the life of the said S. Satjit Singh Sethi as well as for any other expenses which may have to be incurred for the said S. Satjit Singh Scthi, with powers to the trustee to accumulate the whole of the said income or such part thereof as may not be applied for such maintenance, education, marriage; and such other expenses as are hereinabove referred to and invest the same in one or more of the investments hereinafter authorised arid the resulting income of the investments so that all accumulations so made and the investments for the time being representing the same shall for all purposes be treated as corpus or capital and upon the expiration of the said period of 20 years or the period which the trustee may decide hereinafter, the trustee shall hand over and transfer or pay 12 per cent. of the trust fund as well as the whole of the accumulations of income, if any, to the said Sardar Satjit Singh Sethi absolutely and if he is not alive at the date of distribution, then the said 12 per cent. of the trust fund and the whole of the said accumulations of income shall be distributed equally amongst the persons who would have received the same as heirs of the said Sardar Satjit Singh if he had died intestate and possessed of the said whole of the trust fund but excluding the settlors if they happen to be one of such heirs, so that no part of the trust fund or the income thereof shall revert to the settlors. 3. Notwithstanding anything contained in Clause 2 hereof the trustee/trustees shall have absolute discretion to distribute the trust fund including the accumulated income thereon before the expiry of 20 years from the date hereof and in the event of the trustee/trustees so deciding the distribution shall be so effected individually, severally or completely which in the judgment of the trustee/trustees would be in the best interest in carrying out or in furtherance of the objects of the trust. 5. Without affecting the generality of the powers, provisions and authorities vested in the trustee/trustees under these presents the trustee/ trustees shall have in addition thereto and not in substitution thereof and shall be entitled to execute all acts, documents, and things necessary, ancillary or incidental thereto, that is to say : (j) The trustee/trustees shall be entitled to determine whether any money or property shall for the purpose of this trust be considered as capital or income and whether expenses, outgoings or loans ought to be paid or borne out of the corpus or income and any and every such determination of the trustee/trustees shall be conclusive." ;