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Trustees Of Chaturbhuj Raghavji Trust v. Commissioner Of Income-Tax, Bombay City Ii.
Structured Summary of the Opinion — V.S. Desai, J.
Factual and Procedural Background
In 1928 Chaturbhuj Raghavji (the settlor) created a trust settling property for the benefit of his wife, children and other family members. The trust deed provided that after the settlor's death the trustees would pay to his wife, Champavahoo (also called Bai Champavahoo), during her life such amount from the trust income as the trustees thought proper for her and her children until the youngest son attained 18 years. After the youngest son attained majority the trust property was to be held for the sons in equal shares, subject to adequate provision for Champavahoo and for the unmarried daughters.
The settlor died in 1946. The trustees thereafter paid Champavahoo an annual amount for her and her children's use; after 1950 this amount was Rs. 25,000 per year. In the four years preceding assessment year 1955-56 the Rs. 25,000 received by Champavahoo was included in her income and assessed directly in her hands, and that sum was excluded from the trustees' income.
For assessment year 1955-56, Champavahoo filed a return including Rs. 25,000 and was assessed on 31 May 1955 by the 10th Income-tax Officer, C-Ward, Section III, Bombay. The trustees filed their return on 29 October 1955 and were assessed on 28 February 1957. The trustees had excluded the Rs. 25,000 in their return, but the Income-tax Officer assessed the trustees on the entire income including Rs. 25,000 at the maximum rate under the first proviso to section 41(1). That assessment was confirmed on appeal by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal. The Tribunal under section 66(1) referred the question to the Court:
“Whether on the facts and in the circumstances of the case the sum of Rs. 25,000 payable to Bai Champavahoo was assessable in the hands of the assessee?”
Legal Issues Presented
- Whether the sum of Rs. 25,000 payable to Bai Champavahoo was assessable in the hands of the trustees (the assessee).
- Whether the Rs. 25,000 paid to Champavahoo constituted income diverted at the source by an overriding title such that it could not be treated as the income of the trust.
- Whether the Rs. 25,000 operated as a charge on trust property under section 9(1)(iv) (so as to be deductible from trust income).
- Whether the trustees' income including the Rs. 25,000 could be charged at the maximum rate under the first proviso to section 41(1), or whether tax on that sum, if assessable, must be levied under the main provision of section 41(1) at the rate applicable to the beneficiary.
- Whether, given that Champavahoo had been assessed directly under section 41(2), the tax authorities could also assess the trust on the same sum (i.e., whether double assessment was permissible).
Arguments of the Parties
Assessee's Arguments
- The Rs. 25,000 paid to Champavahoo was income diverted at the source by an overriding title and therefore was not income of the trust.
- The Rs. 25,000 represented a charge on part of the trust property and was therefore an admissible deduction under section 9(1)(iv).
- If assessable, the Rs. 25,000 should be taxed under the main provision of section 41(1) at the same rate applicable to Champavahoo (not at the maximum rate under the first proviso).
- Because the Rs. 25,000 had already been assessed and taxed in the hands of Champavahoo, it could not be taxed again in the hands of the trustees.
Revenue's Arguments
- The Rs. 25,000 could not be treated as diverted at source because the income came into the hands of the trustees (who held legal title) and only then was paid to Champavahoo; therefore it remained trust income.
- The Rs. 25,000 was not a charge on any part of the trust property under section 9(1)(iv) because no annual charge on specific buildings or lands was created and the payments were to be made out of the entire trust income by trustees' discretion.
- The main provision of section 41(1) did not apply so the Income-tax Officer was right to tax the entire income (including Rs. 25,000) at the maximum rate under the first proviso to section 41(1), because trustees were entitled to receive the entire income and no part was specifically receivable on behalf of any person; shares were indeterminable until the youngest son attained majority.
- Mr. Joshi for the revenue further argued that assessment under section 41(2) of the beneficiary did not preclude assessment of the trustees because the "option" was one for the Income-tax Officer assessing the trust — i.e., that officer could choose to assess trustees even though another officer had assessed the beneficiary.
- Mr. Joshi also contended that Champavahoo had no enforceable right to any part of the income because the trustees had a mere discretion to pay what they considered proper, and therefore the sum was not “receivable” on her behalf under section 41(2).
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court examined each contention in turn and applied statutory interpretation, the facts of administration of the trust, and principles governing taxation of trust income.
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On diversion at source / overriding title:
The Court rejected the claim that the Rs. 25,000 was income diverted at source. It reasoned that diversion at source requires the income to proceed in a different channel directly to a person other than the assessee. Here the income came into the hands of the trustees (who held legal title) and it was through the trustees that the income reached Champavahoo pursuant to the trust deed. Thus there was no overriding diversion removing the income from the trustees' hands at source.
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On charge under section 9(1)(iv):
The Court found this contention equally futile. No annual charge on any specified part of the trust property (for example, “the buildings and lands appurtenant thereto”) was created by the deed. The payments were to be made from the entire income of the whole trust property under directions in the deed; the trustees' discretion as to quantum did not convert the payments into a charge on specific trust property.
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On application of section 41(1) and its first proviso (maximum rate):
The Court observed the revenue's argument that the main provision of section 41(1) did not apply and that the Income-tax Officer correctly applied the first proviso to tax at the maximum rate, because no part of the income was specifically receivable on behalf of any person and the beneficiaries' shares were indeterminate until the youngest son attained majority. The Court declined to enter into a detailed discussion or to express a definite opinion on this contention because it found resolution on another ground.
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On double assessment and section 41(2):
The Court accepted the assessee's last contention: the Rs. 25,000 had already been assessed and taxed in the hands of Champavahoo for that assessment year (and for the preceding four years) and thus could not be taxed again in the hands of the trustees. The Court analysed section 41 as providing two alternative methods of assessment — either in the hands of the trustees or directly in the hands of the person on whose behalf the income is receivable (section 41(2)). Having exercised the route of directly assessing Champavahoo, the department could not then avail itself of the alternative and assess the trustees on the same income.
The Court rejected the revenue submission that the “option” belonged exclusively to the Income-tax Officer assessing the trustees. It held that nothing in section 41 indicates that the choice between alternatives must be made only at the time of the assessment of the trustees or that the choice can be exercised only by the officer who assesses the trust. If the officer assessing the beneficiary thought the income should be assessed in the trustees' hands, he could have taken steps or awaited completion of the trust assessment. The fact remained that Champavahoo had disclosed and been assessed on the income under section 41(2), and tax had been recovered from her.
Addressing the argument that Champavahoo had no enforceable right because trustees had a discretionary power to determine quantum, the Court held that the settlor had clearly intended a reasonable and proper annual amount to be paid to her. The trustees' discretion related only to determining the quantum; they were required to act reasonably and could be compelled by court if they failed to act. Thus some income was receivable on her behalf; in the present case the quantum had been determined and paid. Accordingly, the assessment in her hands under section 41(2) was valid.
Holding and Implications
Holding: The Court answered the referred question in the negative — the sum of Rs. 25,000 payable to Bai Champavahoo was not assessable in the hands of the trustees for the assessment year in question.
Implications:
- Direct effect on the parties: The Rs. 25,000 was to be excluded from the trustees' assessment because it had already been assessed and taxed in the hands of Champavahoo. The assessee (trustees) was awarded costs against the Commissioner.
- Broader legal consequence: The decision rests on construction of section 41 as providing two alternative mechanisms of assessment and on the factual finding that the beneficiary had been validly assessed under section 41(2). The opinion did not rely on or cite prior case law in the text provided, and it did not announce a novel general rule beyond its application of section 41 to the facts before the Court. Accordingly, no new precedent beyond this application is expressly stated in the opinion.
Costs: The assessee will receive their costs from the Commissioner, as directed by the Court.
V.S Desai, J.:— One Chaturbhuj Raghavji created a trust on February 15, 1928, settling certain properties for the benefit of his wife, children and other members of his family. It was provided in the trust deed that after the death of the settlor, the trust property and the income therefrom shall be held by the trustees upon trust to pay to Champavahoo, the wife of the settlor, if she should survive the settlor, during the term of her natural life, such amount out of the income of the trust as the trustees may think proper for the use and benefit of herself and her children until the youngest son of the settlor shall attain the age of 18 years. It was further provided that after the death of the settlor and on the youngest son attaining the age of majority, the property shall be held under trust for the absolute use and benefit of the sons of the settlor and the trustees shall divide it among the sons in equal shares subject to adequate provision being made for the maintenance of Champavahoo and maintenance until marriage and marriage expenses of the unmarried daughters of the settlor. The settlor died in the year 1946, and the trustees in pursuance of the directions contained in the trust deed went on paying to Champavahoo an annual amount for the use and benefit of herself and her children. This amount after 1950 was Rs. 25,000 per year. It appears that in the four years preceding the assessment year 1955-56, the amount of Rs. 25,000 received by Champavahoo was included in her total income, and assessed to tax directly in her hands, and was excluded from the income of the trust in the hands of the trustees. In the assessment year 1955-56, Champavahoo submitted a return including the amount of Rs. 25,000, received by her from the trustees, in her total income, and on that return, she was assessed on 31st May, 1955, by the 10th Income-tax Officer, C-Ward, Section III, Bombay. For the said assessment year 1955-56, the trustees also filed a return on 29th October, 1955, and an assessment order was made on the said return on the 28th February, 1957. In the return which they had filed, the trustees had excluded the amount of Rs. 25,000 which was paid to Champavahoo, and which was already taxed directly in her hands. The Income-tax Officer, however, assessed the trustees on the entire income, including the sum of Rs. 25,000, at the maximum rate under the first proviso to section 41(1). The order of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner and also by the Income-tax Appellate Tribunal.
2. Now, it was contended by the assessee before the income-tax authorities that the amount of Rs. 25,000 which was paid by the trustees to Bai Champavahoo was an income which was diverted at the source by an overriding title, and, therefore, could not be treated as the income of the trust at all. The alternative contention was that there was a charge on the property of the trust in respect of the amount which was payable to Champavahoo, and it was therefore an admissible deduction under section 9(1)(iv). The further contention raised by the assessee was that, at any rate, the said amount of Rs. 25,000 could not be charged at the maximum rate, but it could be charged only at the rate applicable to the said income of Rs. 25,000 under section 41(1). Lastly, it was contended that since the said income had been already brought to tax in the hands of Champavahoo directly, it could not be brought to tax again in the hands of the trustees. All these contentions were negatived by the income-tax authorities and the Tribunal. Thereafter, on an application made by the assessee under section 66(1), a statement of the case has been drawn up by the Tribunal referring the following question to this court:
“Whether on the facts and in the circumstances of the case the sum of Rs. 25,000 payable to Bai Champavahoo was assessable in the hands of the assessee?”
3. We are not much impressed by the assessee's contentions that the amount paid by the trustees to Champavahoo every year was income diverted by an overriding title and therefore could not be treated as income from the assessee's trust. The income to be diverted at the source must proceed in a different channel to a person other than the assessee. In the present case, the income of the trust property came into the hands of the trustees in whom the legal title in respect of the trust property vested, and it was through the trustees that it went to Champavahoo, who, under the trust, was entitled to receive it. There was, therefore, in the present case, no diversion of the income by an overriding title, so that the income could not be said to have been the income in the hands of the trustees from the trust property.
4. The next contention of the assessee that the amount paid to Champavahoo could be regarded as a charge under section 9(1)(iv) of the Income-tax Act is equally futile. No annual charge was created on any part of “the buildings and lands appurtenant thereto” comprised in the trust property, nor was any such part of the trust property made subject to a charge for the amount which the trustees were directed under the trust deed to pay to Champavahoo for the use and benefit of herself and her children. The amount paid to her was in accordance with the directions contained in the trust deed out of the entire income of the entire trust property which was held by the trustees for the uses, intents and purposes as specified in the deed which included the making of such payment and the discretion left to the trustees to determine the quantum of the payment did not have the effect of making it a charge on any part of the trust property.
5. The next contention of the assessee was that in respect of the said amount of Rs. 25,000, tax had to be levied under the main provision of section 41(1) in the like manner and to the same amount as it would be leviable upon and recoverable from Champavahoo on whose behalf that part of the income was receivable by the trustees. According to the assessee, therefore, the Income-tax Officer was not entitled to levy tax on the said amount of Rs. 25,000 at the maximum rate under the first proviso to section 41(1).
6. Learned counsel for the revenue argued that the main provision of sub-section (1) of section 41 would not be applicable to the present case in respect of even the amount of Rs. 25,000 and the entire income was properly charged to tax at the maximum rate under the first proviso to section 41(1). His argument is that the amount of Rs. 25,000 cannot be regarded as an amount which the trustees were entitled to receive on behalf of Champavahoo. The trustees were entitled to receive the entire income of the trust property, but no part thereof could be said to be specifically receivable on behalf of any person and also the shares of the persons for whose ultimate benefit the trust property and income thereof were to be held by the trustees were indeterminable and unknown until the youngest son of the settlor had attained the age of 18 years. According to learned counsel, therefore, the Income-tax Officer was right in applying the first proviso to section 41(1). We do not propose to enter into a detailed discussion of the arguments advanced before us with regard to this contention, nor do we find it necessary to express a definite opinion with regard to the same, because, in our opinion, the last contention which has been urged on behalf of the assessee is entitled to succeed, namely, that the amount of Rs. 25,000, having been already brought to tax in the hands of Champavahoo, could not be brought to tax again in the hands of the assessee-trustees, and, therefore, will have to be excluded from their assessment.
7. As we have already mentioned, while stating the facts in the four years preceding the assessment year 1955-56, the amount of Rs. 25,000 which Champavahoo received annually from the trustees was taxed directly in her hands, and was excluded from the assessment of the trustees. In the assessment year 1955-56 again, Champavahoo filed her return as she had done in the previous four years, including therein the amount of Rs. 25,000 which she had received from the trust. She was assessed on her income including the said amount, and it appears that the tax assessed has also been paid by her. Under sub-section (2) of section 41, it is permissible for the income-tax authorities to make direct assessment on the person on Whose behalf income, profits and gains from a trust are receivable. The assessment of Champavahoo, therefore, for the assessment year 1955-56 was a perfectly good and valid assessment under section 41(2). Section 41 having provided for two alternative methods, namely, either to tax the income in the hands of the trustees or directly in the hands of the person on whose behalf the income was receivable under the trust, and one of them having been availed of by the income-tax department in directly assessing Champavahoo in respect of the income, the other was no longer available to the department. Mr. Joshi for the revenue wanted to contend that the option was of the Income-tax Officer who was assessing the trust to decide whether he would assess the income in the hands of the trustees or directly in the hands of the beneficiary. The Income-tax Officer who had assessed Champavahoo directly was not the Income-tax Officer who was assessing the trust for the assessment year 1955-56, and, consequently, the assessment made by the Income-tax Officer of Champavahoo did not preclude the Income-tax Officer who was dealing with the assessment of the trustees to assess the entire income in the hands of the trustees. We do not agree with Mr. Joshi in the submission which he has made. Section 41 was a special enabling provision which permitted the assessment in the hands of the trustees but did not preclude the direct assessment in the hands of the beneficiaries. Champavahoo had disclosed in her return that the amount was obtained by her as a beneficiary under the trust. If the Income-tax Officer who was assessing Champavahoo was of the opinion that the income should be taxed in the hands of the trustees, he could have taken appropriate steps in that connection or could at any rate have waited until the assessment of the trust was completed. There is nothing in section 41 which would indicate that the choice between the alternative methods provided therein has to be made only at the time of the assessment of the trustees or that the choice only belongs to the Income-tax Officer who is assessing the trust.
8. Mr. Joshi has then argued that the amount of Rs. 25,000 was not capable of being directly assessed in the hands of Champavahoo under section 41(2), because the amount paid to her could not be said to have been receivable on her behalf within the meaning of the said sub-section. He has argued that, under the trust, Champavahoo had no right to any part of the income of the trust property; the trustees had been vested with a discretionary power to pay Champavahoo what they considered a proper allowance for herself and her children. Champavahoo, therefore, had no more than a hope that the discretion would be used in her favour. In these circumstances, no part of the income of the trust property could be said to be receivable on her behalf. It is no doubt true that a specific or definite sum out of the income or a specific part of the income of the trust property was not directed to be paid over to Champavahoo. But that, in our opinion, does not mean that she had no right to receive anything under the trust or that no part of the trust income was receivable on her behalf. There is no doubt, whatsoever, that the settlor intended that a reasonable and proper annual amount out of the trust income should be paid over to Champavahoo for the use and benefit of herself and her children. What was left to the discretion of the trustees was to determine as to what that proper or reasonable amount should be, no doubt, having regard to the needs of Champavahoo and her children from time to time. The trustees under the directions had to act reasonably, and if they failed to do so, Champavahoo could certainly get her claim determined and compel the trustees to pay the amount to her through a court of law. Provision thus having been made by the settlor for the payment to Champavahoo and the discretion given to the trustees being only to decide the quantum, it cannot be said that no income from the trust property was receivable on behalf of Champavahoo. It may at the most be argued that until the quantum was decided upon by the trustees no specific amount could be said to be payable to Champavahoo. But in the present case not only the quantum was deter-mined but the payment was also made to Champavahoo. In our opinion, therefore, the assessment in the hands of Champavahoo was not invalid. It must also be remembered that the income-tax department even in the year of assessment, as in the earlier four years, regarded it as properly assessable in the hands of Champavahoo, and actually levied assessments and recovered the same from her. Champavahoo also has not objected to the said assessments in her hands, and the said amount, therefore, has already been taxed. According to us, therefore, the income-tax authorities were not entitled to bring the amount to tax again in the hands of the assessee.
9. In the result, therefore, our answer to the question referred to us is in the negative. The assessee will get their costs from the Commissioner.
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