1. This reference relates to the assessment year 1971-72. The question with which we are concerned in this reference is, whether the proviso to Section 164(1) of the I.T. Act, 1961, which was introduced by the Finance Act of 1970, with effect from 1st April, 1971, would be applicable in assessing the present trust.
2. The assessee is a trust. The trust was created by a declaration made on the 9th of December, 1964, by the four sons of Keshrichand Khaitan (deceased) settling upon trust of Rs. 5,000 contributed by each of the four settlors with the object of the benefit and use of the heirs, successors and children of the settlors and for their and each of their education, training and vocational pursuits and for their general well being. The objects of the trust were, inter alia, according to the trust deed, as follows :
" (a) To meet and defray the costs and expenses of education of the male and female members of the family of the settlors descending in the male line from Seth Keshri Chand Khaitan since deceased including their male and female children already born on the date of these presents, and to be born hereinafter until the trust comes to an end as hereinafter provided.
(b) Education in the foregoing clause means and shall mean education of the male and female members of the family of the settlors as stated above in all spheres and of every kind and description, including inter alia, primary, secondary, higher secondary, undergraduate, post graduate, technical, medical, legal, engineering, accountancy, fine arts, pure arts or pure science and mixed arts and science and in the different branches thereof, and research works in any and every field and sphere of education.
(c) Without prejudice to the generality of the foregoing clauses, to meet and defray the costs and expenses for text and other necessary books and equipments, school and college tuition fees, tuition fees for private coaching at home or elsewhere, conveyance charges including costs and expenses for sending eligible candidates from amongst the beneficiaries to foreign countries for higher education.
(d) In addition to the foregoing objects and purposes the trustees will also be justified in expending the income of the said trust fund to meet and defray the maintenance, medical expenses and similar necessaries of any and every member of the family of the settlors male as well as female descending in the male as well as in the female line from the said Keshri Chand Khaitan.
Provided also that during the lifetime of the settlors in the application of the said income the trustees shall have regard to the wishes of the settlors who shall also be entitled to direct if they so desire that the income for the time being of the trust funds or any part thereof may be applied to such matter or objects of education or otherwise as the said settlors shall direct and in such case the trustees shall so apply the income. "
3. The Trust deed contains Clause 25 which provides as follows :
" Upon the attainment of majority of the last child to be born to any of the beneficiaries hereinbefore named being the descendant of the settlors in the male or female line alive on the date of these presents trust shall come to an end and the trust property then in existence shall vest absolutely in the male descendants of the settlors in the male line already born at that time in equal shares."
4. Prior to the assessment year 1971-72, the assessment on the income of the trust where the shares of the beneficiaries were indeterminate had to be made at the rate applicable to an association of persons. However, from the assessment year 1971-72, in view of the Finance Act, 1970, which came into effect from 1st of April, 1971, the scheme was changed and it provided that the assessment had to be made as if the relevant income were the total income of an association of persons or at the rate of 65% whichever course would be more beneficial to the Revenue. But this new provision giving the option to the Revenue to tax at the rate applicable to an association of persons or at 65% which is more beneficial to the Revenue was not made applicable in certain cases. For this purpose, it may be relevant to refer to Section 164 of the I.T. Act, 1961, as it stood after the amendment of the Finance Act, 1970, with effect from 1st of April, 1971. Sub-section (1) of Section 164 read as follows :
"(1) Subject to the provisions of Sub-sections (2) and (3), where any income in respect of which the persons mentioned in Clauses (iii) and (iv) of Sub-section (1) of Section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this Section referred to as ' relevant income', 'part of relevant income' and 'beneficiaries', respectively), tax shall be charged-
(i) as if the relevant income or part of relevant income were the total income of an association of persons, or
(ii) at the rate of sixty-five per cent.
whichever course would be more beneficial to the Revenue :
Provided that in a case where-
(i) none of the beneficiaries has any other income chargeable under this Act; or
(ii) the relevant income or part of relevant income is receivable under a trust declared by will ; or
(iii) the relevant income or part of relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the Income-tax Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance; or
(iv) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession,
tax shall be charged as if the relevant income or part of relevant income were the total income of an association of persons. "
5. There is no doubt that in this case the income was received by the trust on behalf of the beneficiaries whose shares were indeterminate and unknown. In this case it also appears that there is no dispute that Clause (i) of the proviso would not be applicable. In this case though it appears that one such contention was made before the AAC, such contention was not pursued thereafter and we are not concerned in this reference with that aspect of the matter. Clause (iii) of the proviso enjoined that the relevant income should be receivable under a trust created before the 1st of March, 1970, by a non-testamentary instrument. This condition is also indisputably fulfilled in this case. It further enjoined the ITO to be satisfied " having regard to all the circumstances existing at the relevant time that the trust was created bona fide exclusively for the benefit of the relatives of the settlor ". Therefore, in order to come within Clause (iii) of the proviso to Sub-section (1) of Section 164 it had to be an instrument of trust created before 1st of March, 1970, by a non-testamentary instrument and, secondly, the ITO had to be satisfied " having regard to all the circumstances existing at the relevant time that the trust was created bona fide exclusively or the benefit of the relatives of the settlors ". Therefore, there is not much dispute, at least the Tribunal has not proceeded on that basis, that the trust was not created exclusively for the benefit of the relatives of the settlors.
6. The only question is, whether it was created bona fide and for determining that question the ITO was enjoined to consider all the circumstances existing at the relevant time. The ITO in the instant case noted that the income of the trust or any part of the income was not specifically receivable on behalf or for the benefit of any one person and the individual shares of the beneficiaries were indeterminate and unknown. He further observed that it did not appear from the copies of accounts so far filed that the income of the trust or any part of it had ever been spent since its inception for the declared objects of the trust. Hence, he was not satisfied that the trust was created bona fide exclusively for the benefit of the relatives of the settlors. He, therefore, computed the total income which was Rs. 5,548 being the income from interest on investment and applied 65% as the rate of tax.
7. The assessee went up in appeal before the AAC and the AAC observed that it was argued before him on behalf of the assessee that the beneficiaries of the trust were minor sons and daughters of the settlors and that none of the beneficiaries had any independent income as they were dependent on the settlors. This would have attracted Clause (i) of the proviso to Sub-section (1) of Section 164, but as we have mentioned before, this point was not pursued later on. The AAC further held that it was urged before him that the trust was covered by Sub-clause (iii) of the proviso, to Sub-section (1) of Section 164. The AAC was satisfied that it was so covered inasmuch as the trust was created prior to 1st March, 1970, and as the trust was for the benefit of the relatives of the settlors, he directed the ITO not to levy taxes at the rate of 65% but at the normal rate applicable to an association of persons. Being aggrieved by the said order of the AAC, the Revenue went up in appeal. After setting out the relevant facts and rival contentions, the Tribunal observed in its order, inter alia, as follows :
" We have considered the rival submissions. It will be necessary to point out that all the conditions laid down by Clause (iii) of the proviso to Sub-section (1) of Section 164 have to be met and it is not enough if some of the conditions have been satisfied. One of the conditions laid down by this clause is that the Income-tax Officer is satisfied that the trust was created bona fide exclusively for the benefit of the relatives of the settlors having regard to all the circumstances existing at the relevant time. For this purpose it will be necessary to find out whether the income of the trust was applied for the purposes and objects of the trust. It is not under dispute before us that no part of the income of the trust since its inception has so far been spent for any of the purposes or objects of the trust. The Income-tax Officer, therefore, in our opinion, in these circumstances, was not unjustified in coming to the view that the trust was not created bona fide exclusively for the benefit of the settlors. It is, therefore, not necessary for us to consider whether the trustees, who were also the settlors, had the discretion in spending or not anything out of the income of the trust for the purposes or objects of the trust. It will be necessary here to point out that we are of the view that the words that 'having regard to all the circumstances existing at the relevant time' should not be given the restricted meaning of the circumstances existing only at the time of creation of the trust and not the circumstances existing subsequently including the previous year to which the assessment relates. Taking all these facts into consideration we are of the view that the Income-tax Officer was correct in holding that the trust was not created bona fide for the benefit of the relatives of the settlors and since one of the conditions laid down under Clause (iii) of the proviso to Sub-section (1) of Section 164 was not met, the assessee-trust was liable to tax at the maximum rate of 65%. The Appellate Assistant Commissioner, therefore, in our view wrongly held that the assessee trust should be assessed not at the rate of 65% but at the rate applicable to an association of persons. On this point, therefore, the order of the Appellate Assistant Commissioner is reversed while that of the Income-tax Officer is restored."
8. In those circumstances, the assessee sought the following question to be referred to this court :
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Clause (iii) of the proviso to Sub-section (1) of Section 164 of the I.T. Act did not apply to the case and that the trust is to be charged tax at the rate of 65 per cent. ?"
9. But the Tribunal has referred, under Section 256(1) of the I.T. Act, 1961, the following question to this court :
" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that since the trust was not created bona fide for the benefit of the relatives of the settlors and one of the conditions laid down under Clause (iii) of the proviso to Sub-section (1) of Section 164 was not met, the assessee trust was liable to be assessed at the prescribed rate of 65% and not at the rate applicable to the total income of an association of persons ?"
10. The ground upon which the Tribunal has proceeded, as we have set out hereinbefore, is that having regard to the fact that there was non-application of the fund for educational purpose of the trust since its inception up to the date of relevant assessment year, the settlement or trust was not created bona fide and that the ITO was justified in coming to his finding. The question is, whether the Tribunal had applied the correct test in coming to that conclusion. We have noticed the Section. It required, as we have noticed, that the trust should be created by a non-testamentary instrument and the ITO was required to be satisfied having regard to all the circumstances existing that the trust was "created bona fide". Therefore, what was required to be satisfied was whether the trust was created bona fide and for that all the circumstances existing at the relevant time should be considered. The trust, in terms, did not enjoin that any income should be applied particularly in a particular year for the education or for any specific object. It gave complete discretion to the trustees to apply it in such manner for the benefit of the relatives of the dependant members of the family as they considered best. Education is one of them, medical assistance may be another. The question is, whether the mode and method of application or the manner of its application are circumstances which are germane in deciding whether the trust was created bona fide or not. Now, in our opinion, on a proper reading of the Section, it is clear that the creation of the trust must be made bona fide and, therefore, the ITO must be satisfied by all the relevant circumstances existing at the relevant time, that is to say, at the time when the trust was created that it was done bona fide. It is true that in some cases subsequent conduct of the parties might throw light as to the intention of the parties at the time of the creation of the instrument or a document. But the trust is, as we have noticed, for the benefit of the members of the settlors' family. The manner or the mode or the method of such benefit is not particularly described but it is indicated as by way of education, marriage, medical expense, maintenance, to be applied for the benefit. There is no conduct here which indicated that the trustees had applied the fund for any benefit to themselves or in derogation of the trust but there was only the non-application of the fund for the year in question. Now, that may or may not be for very many good reasons. That may be because the minor dependants or the relatives-dependants did not require the use of the fund for educational purpose or the trustees may or may not have thought that larger accumulation of fund would be a better way of helping for any future use when lump sum money would be required for any of the objectives stipulated in the trust. But, there is no evidence that any trust fund was misutilised by the trustees or by the settlors during all these years. If that is so, merely by the fact that there was no application of the trust fund for the objects of the trust since its creation by itself would not be the decisive factor to determine that at the relevant time, that is to say, at the time of the creation of the trust, it was not made bona fide. In that view of the matter, it appears to us that the Tribunal applied an incorrect test in coming to the conclusion as it did.
11.
Learned advocate for the assessee drew our attention to certain observations of the Calcutta High Court in the case of CIT v. Sardar Bahadur Sardar Indra Singh Trust [1956] 29 ITR 781. The observations in that case were made, however, entirely in a different context. There, a trust for charitable purposes was involved and the question was whether the discretion of the trustees to choose charitable purpose and to determine when the fund should be applied affected the validity of the trust or not. But, it may incidentally be pointed out that Chief Justice Chakravartti referred to a decision in the case of Dick v. Audsley [1908] AC 347 (HL), and the Chief Justice further observed that that case was a clear authority for the proposition that a trust for charitable purpose did not become invalid if the choice of the specific objects to be benefited was left to the trustee nor was it to be deemed as invalid or illusory if by the language of the deed the trustees were given an absolute discretion to apply the fund at such time as they might think fit or retain it so long as they choose. Learned advocate for the Revenue was right that that was an application in the case of a charitable trust and the courts were normally in favour of upholding the validity of charitable trusts and that principle would not be attracted here. But this principle, in our opinion, is an illustration of the proposition, that merely because a discretion has been given to the trustees and the trustees in the exercise of their discretion, in the absence of anything else, have not spent any money in some years, does not ipso facto make the creation of the trust none the less bona fide. Our attention was also drawn to certain observations of the Bombay High Court in the case of CIT v. Walchand Diamond Jubilee Trust [1958] 34 ITR 228. That was a case also in respect of a charitable trust and the observations were made in a different context. We do not think much assistance could be obtained from the said decision except to illustrate the principle that accretion of fund for a number of years would not by itself make the creation of the trust not bona fide.
12. Learned advocate for the Revenue stressed a point that in this case, the question referred to this court by the Tribunal assumed that the trust was not created bona fide and he further urged that whether the instrument was bona fide or not was a matter of intention and the intention was a finding of fact and, as such, there being no question challenging that finding of fact as perverse or based on no evidence, the assessee was not entitled to agitate this question. We are, however, unable to accept this position. There is no dispute as to the facts in this case. The fact that there was no application of fund for any of the years, since its inception, is not disputed. That what was the object of the trust is also not disputed. It was also not disputed that the trust was created at the relevant date, that is, before 1st March, 1970. The trust has not been held to be a sham or a colourable document. Therefore, there was hardly any scope for challenging any finding of facts merely because the Tribunal had arrived at a conclusion that in order to prove bona fide it was required to consider the subsequent conduct and also the application of the fund and, on that principle had rested its conclusion. Therefore, it appears to us that such a finding of fact could not be said to be a finding of fact.
13. A conclusion about the intention, arrived at on undisputed basic facts, by applying a certain test, would be a question of law. The question would be whether the test applied was the appropriate test under the Section.
14. In this connection, reference may be made to the observations of the Supreme Court in the case of CIT v. S.P. Jain , and the observations of this court in the case of Juggilal Kamlapat v. CIT [1964] 53 ITR 351 at p. 361. On the other hand, on behalf of the Revenue, our attention was drawn to the observations of the Supreme Court in the case of India Cements Ltd. v. Commissioner Of Income Tax, Madras. , where the question of fact was specifically challenged, as well as to the observations of the Supreme Court in the case of Aluminium Corporation of India Ltd. v. CIT but the way we have to look at it is, it is not a question of challenging a finding, if on an application of a wrong legal test any conclusion as to the bona fide is arrived at, then, in our opinion, it is a question of law and it comes within the ambit of the question referred. We may incidentally point out that the question, as referred to this court, does not make any sense because the question answers itself. The question proceeds on the basis that the trust was not created bona fide and, therefore, one of the conditions laid down under Clause (iii) of the proviso to Sub-section (1) of Section 164 had not been fulfilled. If that is so, the conclusion is irresistible because on the plain terms of Sub-clause (iii) of the proviso to Sub-section (1) of Section 164 the asses-see would be liable to be taxed at 65 per cent, at the prescribed rate. It appears that the Tribunal fell into an error by putting the word " since " in the question after the word " holding " and before the expression " the trust". We reframe the question, as follows, to give it a meaning, what in our opinion/the Tribunal really meant to refer :
" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the trust was not created bona fide for the benefit of the relatives of the settlors and as such one of the conditions laid down under Clause (iii) of the proviso to Sub-section (1) of Section 164 was not fulfilled and the assessee-trust was liable to be assessed at the prescribed rate of 65 per cent, and not at the rate applicable to the total income of an association of persons ?"
15. We reframe the question in the manner aforesaid accordingly and we answer the reframed question in the negative and in favour of the assessee.
16. In the facts and circumstances of the case, the parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.
17. I agree.