Income-tax---

----Representative assessee---Trustee---Assessment at maximum rate---Trust for benefit of minor granddaughter---Beneficiary entitled to income from trust only on attaining majority---Distribution of income of trust left to absolute discretion of trustees---Share of beneficiary unknown and indeterminate---Trustee assessable at maximum rate-Indian Income Tax Act, 1961, S.164.

The assessee-trust was created under a settlement deed, dated March 25, 1973, by C in favour of his granddaughter A, born on August 11, 1968, with effect from the date when she attained majority and any and every daughter thereafter born to his son, M, and daughter-in-law, D. The settlement deed stated that the beneficiaries had no right to receive any payment or benefit under the trust until after they had respectively attained majority and the trustees had no power to pay any money or transfer any of the assets or confer any benefit on any of the beneficiaries while she was still a minor. The payment of income from the trust was left to the absolute discretion of the trustees and the beneficiaries could not exercise such power. For the assessment year 1974-75, the Income-tax Officer assessed the income of the trust at the maximum rate applicable and this was upheld by the Tribunal. On a reference:

Held, that during the accounting year relevant to the assessment year under consideration, A was a minor. Therefore, it could not be claimed that she was a beneficiary under the settlement deed. In the matter of distribution of income from the trust, no shares were determined for the beneficiaries. Payment of income from the trust was left to the absolute discretion of the trustees. Hence, the shares were also not determinate. The Tribunal was right in law in holding that the assessee was liable to income-tax at the maximum rate under the provisions of section 164(1) of the Income Tax Act, 1961, for the assessment year 1974-75, when the share of the beneficiary during the previous year, relevant to the assessment year 1974-75 was unknown and indeterminate.

CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (1977) 1.08 ITR 555 (SC) ref.

P.P.S. Janarthana Raja for the Assessee

C.V. Rajah for the Commissioner

JUDGMENT

K. A. THANIKKACHALAM, J.---At the instance of the assessee, the Tribunal referred the following three questions, for the opinion of this Court, under section 256(1) of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the assessee's case, the Income-tax Appellate Tribunal was right in law in holding that the assessee was liable to income-tax at the maximum rate under the provisions of section 164(1) of the Income Tax Act, 1961, .in respect of its assessment to income-tax for 1974-75?

(2) Whether, on the facts and in the circumstances of the assessee's case, the Income-tax Appellate Tribunal was right in law in holding that the share of the beneficiary during the previous year relevant to the assessment year 1974-75 was unknown and indeterminate? and

(3) Whether, on the facts and in the circumstances of the assessee's case, the Income-tax Appellate Tribunal was right in law in omitting to apply the principles laid down by the decision of the Supreme Court in CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust (1977) 108 ITR 555, and in omitting to consider whether, during the previous year, relevant to the assessment for 1974-75, the share of the beneficiary was unknown or indeterminate?"

The assessee is assessed in a representative capacity as trustee of Abirami Trust. The trust was created under a deed of settlement, dated March 25, 1973, by the grandfather, Sri M. A. Chidambaram, in favour of his granddaughters, represented by their parents Sri A. C. Muthiah, and his wife, Smt. Devaki Muthiah. For the assessment year 1974-75, the assessee claimed that the trust was assessable to tax at the normal rate. Turing the assessment year under consideration, there was only one beneficiary. Therefore, the beneficiary is known and the shares of the beneficiary are determinate. Hence, tax at the normal rate was required to be levied. The Income-tax Officer considering the settlement deed dated March 25, 1973, held that the beneficiary is not known and the share of the beneficiary is indeterminate and accordingly he applied the provisions of section 164(1) of the Income Tax Act, 1961, and the trust income was taxed at the maximum rate applicable. Aggrieved, the assessee filed an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the order passed by the Income-tax Officer. Aggrieved, the assessee filed a second appeal before the Appellate Tribunal. Relying upon the decision of the Supreme Court in CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust (1977) 108 ITR 555, contended that on the basis of the principle laid down in the above said decision, the beneficiary is known and the shares of the beneficiaries are determinate, sand therefore the Department was not correct in levying tax at the maximum rate. The Tribunal, after going through the clauses contained in the settlement deed, held that the beneficiary is not known and the share is also indeterminate, and, therefore, the Tribunal held that the authorities below were correct in applying the maximum rate of tax.

Before us, learned counsel appearing for the assessee submitted that during the accounting year relevant to the assessment year under consideration, there was only one beneficiary. Therefore, it cannot be said that the beneficiary is not known in the present case. According to learned counsel, if there is only one beneficiary, then the entire income of the trust should go to that beneficiary. Inasmuch as there is a clause in the settlement deed stating that when the minor attained majority, the trustees are directed to distribute the share income, it cannot be said, according to learned counsel, that the shares are indeterminate in the present case. Learned counsel also placed reliance upon the decision of the Supreme Court in CWT v. Trustees of H. E. H. Nizam's Family Trust (1977) 108 ITR 555, in order to support his above argument. On the other hand, learned standing counsel appearing for the Department submitted that in the trust deed income was directed to be paid only after the minor beneficiary attained majority. Till the minor beneficiary attained majority, the minor beneficiary was not recognised as a beneficiary as per the terms of the settlement deed. Therefore, according to learned standing counsel, there is no beneficiary at all available in the assessment year under consideration for payment of interest from the trust. It was further submitted that the trustees were given absolute discretion to pay the income from the trust to the beneficiaries who attained majority, according to their discretion. Therefore, the shares are also not determinate in character. Hence, learned standing counsel submitted that the assessee satisfied both the conditions prescribed under section 164(1) of the Income Tax Act, 1961. Therefore, the maximum rate of tax is leviable in, the case of the assessee.

In the assessment year 1974-75, the assessee filed a return stating that the beneficiary is known and the shares are determinate arid, therefore, the ordinary rate of tax should be levied, and the maximum rate of tax is not leviable. The assessee-trust was created under the settlement deed, dated March 25, 1973. The grandfather M. A. Chidambaram, created the trust in favour of the daughters of A C. Muthiah and Devaki Muthiah. Anusuya Muthanna and R. Muthu are appointed as trustees. A. C. Muthiah and Smt. Devaki Muthiah are the parents of the minor child. During the assessment year under consideration; the trust had an income of Rs.28,411. If the beneficiary is known and the shares are determinate, then tax should be levied at the ordinary rate If the beneficiaries are not known and the shares are indeterminate, then under section 164(1) of the Income Tax Act, 1961, the maximum rate of tax is leviable. According to the assessee, since the beneficiary is known in the present case and the beneficiary is entitled to the entire share income in the assessment year under consideration, the maximum rate of tax under section 164(1) of the Act is not leviable in the case of the assessee.

According to clause 5 of the settlement deed, the terms "beneficiary" or "beneficiaries" shall mean (i) Kumari Abirame, daughter of A. C. Muthiah and Srimathi Deveki Muthiah, born on August 11, 1968, with effect from the date when she attains majority, and (ii) any and every daughter hereafter born to Sri A. C. Muthiah with effect from the date they attain majority. Therefore, according to learned standing counsel for the Department, in the assessment year under consideration Kumari Abirami was not a major but only a minor. Hence, she cannot be recognised as a beneficiary under the settlement deed. .

Clause 6 of the settlement deed states that nothing in this indenture shall be deemed or construed to confer any right on any of the beneficiaries to receive any payment or benefit under the trust until after they have respectively attained majority and the trustees shall have no power to pay any money or transfer any of the assets or confer any benefit on any of the beneficiaries while she is still a minor. "Should none of the beneficiaries attain majority, the trustees may in their absolute discretion distribute the entire trust assets to any of my lineal descendants." Under clause 7(c) in exercising the above said powers, the trustees shall take into account the relative position, financial or otherwise, and the requirements of the respective beneficiaries and make the distribution in such manner as they think most appropriate and fitting in the circumstances. Under clause 8(b) the trustees shall continue to hold the trust assets in their hands and the beneficiaries shall not be entitled to make any claim for possession or for payment or otherwise o-f the whole or any portion of the trust assets except to receive the payment that the trustees may, at their discretion, decide to snake or any property which the trustees may transfer to the respective beneficiaries in accordance with the provisions of clause 7(a) and (b). Clause 9 states that no portion of the trust assets shall vest or be deemed to be vested in any of the beneficiaries until and unless such assets are transferred under sub?-clauses (a) and (b) of clause 7 above. Therefore, according to learned standing counsel for the Department, the shares of the beneficiaries are not determinate. The payment of income from the trust is left to the absolute discretion of the trustees and the beneficiaries cannot question the exercise of power by the trustees under the settlement deed. In view of the said clauses contained in the settlement deed, learned standing counsel pointed out that in the present case, the beneficiary is not known and the shares are indeterminate. and, therefore, the tax is leviable at the maximum rate as contemplated under section 164(1) of the Income Tax Act, 1961. Learned counsel appearing for the assessee in order to support his contention, relied upon the derision of the Supreme Court in CWT v.. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust (1977) 108 ITR 555. In the said decision, it was held (pages 598, 599) that "so long as it is possible to say on the relevant valuation date that the beneficiaries are known and their shares are determinate, the possibility that the beneficiaries may change by reason of subsequent events such as birth or death would trot take the case out of the ambit of subsection (1) of section 21. It is no answer to the applicability of subsection (1) of section 21 to say that the beneficiaries are indeterminate and unknown, because it cannot be predicated who would be the beneficiaries in respect of the remainder on the death of the owner of the life interest. But the facts are entirely different in the present case. Even according to the settlement deed, the said Abirami who is the only one minor child mentioned in the settlement deed, has not attained majority as on the last date of the accounting year, According to the settlement deed, the term "beneficiary" or "beneficiaries" shall mean Kumari Abirami, born on August 11, 1968, who would be entitled to the income from the trust with effect from the date when she attains majority. Therefore, during the accounting year, relevant to the assessment year under consideration, Kumad Abirami was a minor. Therefore, she cannot claim to be a beneficiary under the abovesaid settlement deed. In the matter of distribution of income from the trust, no shares are determined for the beneficiaries. Payment of income from the trust is left to the absolute discretion of the trustees. Therefore, the shares are also not determinate in the present case. Under such circumstances, the above said decision would not render any assistance to learned counsel appearing for the assessee to put forward his case. Since both the conditions prescribed under section 164(1) of the Act are satisfied in the present case, the Tribunal was correct in holding that the maximum rate of tax under section 164(1) of the Act is leviable. In the reference application, the assessee suggested three questions, which were referred by the Tribunal for our opinion. For the sake of convenience, we are consolidating all the three questions into one in the following manner:

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the assessee was liable to income-tax at the maximum rate under the provisions of section 164(1) of the Income Tax Act, 1961, for the assessment year 1974-75, when the share of the beneficiary during the previous year, relevant to the assessment year 1974-75 was unknown and indeterminate, in view of the decision of the Supreme Court in CWT v. Trustees of H. E. H. Nizarn's Family (Remainder Wealth) Trust (1977) 108 ITR 555?"

Accordingly, we answer the question referred to us in the affirmative and against the assessee. No costs.

M.B.A./3253/FC ??????????????????????????????????????????????????????????????????????????????? Reference answered.