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Dwarkadas Bhimji And Others Assessees v. The Commissioner Of Income-Tax (Central), Bombay
Factual and Procedural Background
The four assessees established certain properties under purported charitable trusts through a series of deeds dated January and March 1936 and March 1937. The trust deeds empowered trustees to apply net income to various charitable objects, but also included non-charitable objects, some benefiting the settlor's family. The Income-tax Department challenged the validity of the trusts for tax purposes, seeking to assess the trust income as the settlors' income. The settlors contended that despite the presence of non-charitable objects, the trusts were valid for other purposes and that the income received by trustees should not be treated as the settlors' income.
Legal Issues Presented
- Whether the trusts constituted valid charitable trusts or were void due to inclusion of non-charitable objects and uncertainty.
- Whether, if the trusts were invalid as charitable trusts, the income received by trustees should be assessed as the income of the settlors under the Income-tax Act.
- Whether the trusts could be treated as private family settlements valid under the rule of perpetuity and applicable provisions of the Transfer of Property Act.
Arguments of the Parties
Assessees' Arguments (Presented by Sir Jamshedji)
- The trusts, although containing non-charitable objects, were valid as private family settlements and did not violate the rule of perpetuity if the beneficiaries were those in existence at the date of the settlement.
- The income received by trustees did not become the income of the settlors despite the trusts being presented as charitable trusts.
- Relied on Section 15 of the Transfer of Property Act to argue that interests failing due to the rule of perpetuity would only fail in regard to certain persons, not the entire class.
- Relied on precedent (13 I.T.R 465) to support the view that the trust was a valid private settlement and that the settlor should not be assessed on the trust income.
Income-tax Department's Position
- The trusts were invalid as charitable trusts because some objects were non-charitable and the trustees could apply income wholly to non-charitable purposes.
- Since the trusts failed, a resulting trust arose in favor of the settlors, making the income taxable as the settlors' income under the Income-tax Act.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| 13 I.T.R 465 | Determination whether a trust was wholly for charitable purposes and the tax implications under Section 41(1) of the Income-tax Act. | The Court distinguished this precedent, noting it was decided on different assumptions and did not bind the current Court's conclusion that the trust was void as a charitable trust and that resulting trust principles applied. |
Court's Reasoning and Analysis
The Court found that the trust deeds included both charitable and non-charitable objects, with trustees having discretion to apply income entirely to non-charitable purposes, rendering the trust invalid as a charitable trust due to uncertainty and violation of the rule of perpetuity. The Court applied the principle that where a trust fails wholly, a resulting trust arises in favor of the settlor, making the income taxable as the settlor's income under Section 4 of the Income-tax Act. The Court distinguished the assessees' reliance on Section 15 of the Transfer of Property Act and the cited precedent, emphasizing that the present case involved a mixture of charitable and non-charitable objects and uncertainty that invalidated the trust. Consequently, the income received by trustees was held to be income received on behalf of the settlors. The Court affirmed the taxing authorities' right to assess the income as the settlors' income and dismissed the contention that the trusts were valid private family settlements exempt from such assessment.
Holding and Implications
Holding: The Court held that the trusts were not valid charitable trusts and that a resulting trust arose in favor of the settlors. Accordingly, the income received by the trustees was taxable as the income of the settlors.
Implications: The decision confirms that where trusts include non-charitable objects permitting trustees to apply income wholly to non-charitable purposes, such trusts fail as charitable trusts and result in a resulting trust in favor of the settlor. This allows the Income-tax authorities to tax the income as that of the settlor. No new precedent was established beyond affirming the application of existing principles regarding resulting trusts and taxation under the Income-tax Act.
Chagla, C.J:— The four assessees purported to settle certain properties on charitable objects by a trust deed dated 10th January, 1936, by a supplementary deed dated 10th March, 1937, and by a third deed dated 12th March, 1936. The trustees are given the power to utilize the net incomes on all or any of the charities which are enumerated in the trust deed, and it is clear that some of the objects on which the trustees can spend the trust income are clearly non charitable. Some of the objects are merely for the benefit and advancement of the family of the settlor, and as it is open to the trustees to apply: the whole of the trust income to a non-charitable object. It is clear that the trust is not a good and valid charitable trust. In view of this the Income-tax Department sought to assess the income of this trust as the income of the settlors and Sir Jamshedji's contention before us is that although the trust deeds may he had as charitable trusts, they are valid for other purposes and the income which the trustees received does not become the income of the settlors.
2. It is well established that when the objects of a trust wholly fail, a resulting trust comes into existence in favour of the settlor, and in this case, as the trust is bad as offending against the rule of perpetuity and also bad for uncertainty, the trustees hold these properties by reason of a resulting trust in favour of the settlors. The scheme of the Income-tax Act is that it is always open to the Income-tax authorities to assess a beneficiary direct. It is only under S. 41 in the cases enumerated in that section that it is competent to the taxing authority, instead of taxing the beneficiary, to tax the trustees. Section 4 itself makes it clear that the total income of any person includes all income, profits and gains from whatever source derived which are received or are deemed to be received in British India in such year by or on behalf of such person. Therefore, whether the income is received direct by the assessee or is received on his behalf, he is liable to be taxed under Section 4 of the Act, and, in my opinion, there can be no doubt that if there is a resulting trust in favour of the settlor, the income which the trustees receives is an income received on behalf of his beneficiary, viz. the settlor.
3. It is contended by Sir Jamshedji that although some of the objects may he had as non-charitable objects, still they would be good as a private family settlement and would not offend against the rule of perpetuity so long as the beneficiaries to be benefited were those who were in existence at the date of the settlement, and Sir Jamshedji for this purpose relies on Section 15 of the Transfer of Property Act. Section 15, which is a provision radically different from the one to be found in English law, provides that if an interest is created for the benefit of a class of persons with regard to some of whom such interest fails because it offends against the rule of perpetuity, such interest fails in regard to those persons only and not in regard to the whole class. Therefore, it is only when a whole class is sought to be benefited, that some of the members of that class may take notwithstanding the fact that other members of the class may be incapacitated by reason of the rule of perpetuity. But in this case we have not any provision with regard to the benefit of a class. The trust deed attempts to benefit charitable and non-charitable objects, and inasmuch as the Court cannot compel the trustee to spend the whole of the trust income on charitable objects and the Court becomes incapable of administering the trust that the Court says that the trust is void on the ground of uncertainty.
4. Sir Jamshedji has relied on a decision of this Court reported in 13 I.T.R 4651. In that case two questions were raised, whether the income of a certain trust was held under trust or other legal obligation wholly for charitable purposes within the meaning of S. 4(3)(i), and the other question was whether the income of the trust was taxable at the maximum rate under the first proviso to Section 41(1) of the Act, and the Court held that the trust was not a good charitable trust and that the income was taxable at the maximum rate under the first proviso to S. 41(1). In delivering his judgment Kania J.;at p. 480 said that Section 14 of the Transfer of Property Act, did not invalidate the settlement as a private settlement for the life of the beneficiaries in existence at the date of the transfer, and he went on to say that those beneficiaries were determined, but having regard to the words used in cl. (12) of the scheme it could not be said that the beneficiaries had any specified interest. In that case it was no one's contention that the trust having become void the settlor should be assessed in respect of the income of the trust estate.
5. Nor was it contended by either side that the trust ms wholly void. The only contention was whether it was a charitable trust or not, and the second question that arose was whether, if it was not a charitable trust, the income should be Charged at the highest rate or whether sub-cl. (1) of S. 41, did not apply. Therefore, the whole argument proceeded on the assumption that, notwithstanding the failure of the charitable trust, the trustees continued in possession to administer the trust as a private family settlement, and, therefore, with very great respect, any observation made by Kania J. cannot be binding on us when we consider the question from an entirely different aspect and an entirely different angle of view. In my opinion, there-fore, the trust is bad as a charitable trust. There as a resulting trust in favour of the settlors, and the income which is received by the trustees is received on behalf of the settlors, and the taxing authorities were right in assessing that income as part of the income of the settlors.
6. Question 1 has not been pressed by Sir Jamshedji and the answer to question 1 would be in the negative and question 2 in the affirmative. The assessees must pay the costs.
7. Answers accordingly.
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