CIT vs. Estate of Late HMM Vikramsinhji of Gondal (Civil) Appeal No.2312 of 2007 dated 16-4-2014.
The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the United States of America on 19th December, 1963 and two deeds in the United Kingdom on 1st January, 1964.
Perusal of the deeds of settlements executed in the U.K. showed that one Mr. Robert Hampton Robertson McGill was designated as the trustee, referred to in the deeds as ‘the Original Trustee’. These trusts were created for the benefit of (a) the Settlor, (b) the children and remoter issue for the time being in existence of the Settlor and (c) any person for the time being in existence who is the wife or widow of the Settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the Settlor. The trust deeds defined the expression “the Trustees” to mean and include the Original Trustee or the other trustees for the time being appointed in terms of the deeds of settlement.
During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income. The said income was also included in the two returns filed by his son Jyotendrasinhiji for the assessment year 1970-71. Thereafter, it appears that the assessee – Jyotendrasinhiji took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the assessment years 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake.
Jyotendrasinhiji approached the Settlement Commission with an application for settlement relating to income from the U.K. and U.S. trusts. As regards to the U.K. trusts, the Settlement Commission observed as follows:-
“So far as the U.K. trusts are concerned, clause (3) did never come into operation inasmuch as no additional trustees were appointed as contemplated by it. If so, clause (4) sprang into operation whereunder the entire income under the settlements flowed to the settlor during his lifetime and on his death, to his elder son, the appellant herein. In other words, these settlements are in the nature of specific trusts. In any event, the entire income from these trusts was received by the settlor during his lifetime and after the settlor’s death, by the appellant. Therefore, the said income was rightly included in the total income of the settler and the assessee during the respective assessment years.”
The Settlement Commission, accordingly, computed the taxable income of the Settlor under both the sets of trusts – U.S. and U.K. – for the assessment years 1964-65 to 1970-71 (up to the date of the death of the Settlor) as also the income of Jyotendrasinhiji for the assessment years 1970-71 to 1982-83.
The above order of the Settlement Commission reached the Supreme Court in a group of appeals. The Supreme Court, by its judgment dated 2nd April, 1993, Jyotendrasinhji vs. S.I. Tripathi & Others, (1933) Supp. (3) SCC 389, with regard to U.K. trusts did not consider the arguments advanced on behalf of the assessee on merits. The Supreme Court, however, observed that the question urged on behalf of the assessee was academic in the facts and circumstances of the case.
Before the Supreme Court, a group of 17 Appeals came up for hearing, 8 arising from the Income-tax Act, 1961 and 9 arising from the Wealth Tax Act, 1957. Of the 9 Wealth Tax appeals, one appeal related to ‘protective assessment’ for 18 assessment years, i.e, 1970-71 to 1976-77, 1978-79 to1979-80, 1981-82 to 1989-90. The remaining 8 Wealth Tax appeals related to assessment years 1970-71, 1971-72, 1972-73, 1973-74, 1974-75, 1975-76, 1976-77 and 1978-79. In so far as 8 appeals arising from the assessment orders passed under the Income-tax Act, 1961 were concerned, they related to assessment years 1984-85, 1985-86, 1986-87, 1987-88, 1988-89, 1989-90, 1990-91and 1991-92.
From the copies of the returns and balance sheets relating to assessment years 1984-85 to 1991-92, the Supreme Court noted there from that there was an endorsement at the bottom of the statement of funds ending on 31st March of each previous year, ‘Net Income for the year retained.’
The Supreme Court observed that Clause 3 of the deeds of settlement executed in the U.K. left at the discretion of the trustees to disburse benefits to the beneficiaries. The endorsement made in the returns, as noted above, showed that income was retained by the trustees and not disbursed.
The Supreme Court noted that the Income-tax Appellate Tribunal, while considering Clause 3(2) and Clause 4 of the U.K. Trust Deeds referred to the findings of the Settlement Commission and observed that if the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts, among them from time to time, according to the objects of the trusts, however, the tell tale facts bring out the intention of the settlor to treat the trust property as his own. The settlor and after his death his son have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of Clause 3, one would have expected the state of affairs to have been different. Consequently, the Tribunal held that due to failure on the part of the Maharaja to appoint discretion exercisers as per clause 3(2), Clause 4 has become operative and the U.K. trusts have to be held to be specific trusts.
The Supreme Court further noted that the High court, however, did not agree with the Tribunal’s view on consideration of the relevant clauses of the U.K. Trust Deeds and various judgments of the Supreme Court as well as some High Courts and held that there were distinguishing features for assessment years under appeal and the previous order of the Settlement Commission and the earlier judgment of this Court. The High Court noted the following distinguishing features, viz., (i) the assessee has not admitted having received the income, (ii) the assessee has not received the said income and (iii) the assessee has not shown as taxable income in the returns of all the years under appeal. Having observed the above distinguishing features, the High Court was also of the view that on interpretation of the relevant clauses of the deeds of settlement executed in the U.K., character of the trusts appears to be discretionary and not specific.
The Supreme Court held that a discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour.
The Supreme Court having regard to the above legal position about the discretionary trust and the fact that the income has been retained and not disbursed to the beneficiaries, held that the view taken by the High Court could not be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts did not get altered.
In the opinion of Supreme Court the two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years.
The Supreme Court further held that the above position with regard to the discretionary trust was equally applicable to the controversy in appeals under the Wealth Tax Act. The High Court had taken a correct view that the value of the assets could not be assessed on the estate of the deceased Settlor.
The Supreme Court dismissed the appeals with no order as to costs.
