http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 23

PETITIONER:

JYOTENDRASINHJI

Vs.

RESPONDENT:

S.I. TRIPATHI AND ORS.

DATE OF JUDGMENT02/04/1993

BENCH:

JEEVAN REDDY, B.P. (J)

BENCH:

JEEVAN REDDY, B.P. (J)

VENKATACHALA N. (J)

CITATION:

1993 AIR 1991 1993 SCR (2) 938

1993 SCC Supl. (3) 389 JT 1993 (2) 664

1993 SCALE (2)408

ACT:

Constitution of India, 1950. Articles 136, 226 read with

provisions in Chapter XIX-A. Income Tax Act

1961--Settlement Commission's order--Interference or

judicial review under Article 226 or

136--Scope--Commission's interpretation of settlement

deeds--Effect of.

Income Tax Act, 1961: Sections 61, 63, 164(1), 166--U.S.

settlement deed/trust deed--Whether

discretionary--Revocability under section 63--Settlor's

power under U.S. deed--Extent of--Revenue's, option to tax

income from a discretionary trust in the hands of trustees

or beneficiaries.

Income Tax Act, 1961: Sections 5, 63, 164(1)--U.K.

settlement deed/trust deed--Income declared and shown in Tax

returns by settlor and after his death by his

son--Taxability of--Payment of taxes in UK or USA on Income

from settlement deeds--If proved, not taxable in India.

Interpretation of Document--U.S.A. or U.K settlement deeds

or trust deeds--Construction--'Transfer", "family members".

"descendants of the family members"--Meaning of--Income

derived from such trusts whether taxable in India.

HEADNOTE:

The appellant's father executed on 1.1.1964, three deeds of

settlements (trust deeds) in the United States of America.

The terms in them all were identical. The object of these

trusts was to provide for the education, maintenance and up-

keep of the members of the settlor's family and their

descendants. He also executed two settlements in U.K. with

the very same object.

The settlor (appellant's father) was riling returns of his

income in India including therein whole of the income

arising from the trusts. For the assessment years 1964-65

to 1969-70, he filed the returns. Since he died on 22-8-

1969, i.e. in the middle of the accounting year (relevant to

the assessment year 1970-71), two returns were filed, one up

to the date of his 938

939

death and the other from the date of his death to the end of

the accounting year, by his eldest son, the appellant,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 23

including the whole of the income from the trusts.

The appellant filed appeals against the assessment orders

pertaining to the assessment years 1965-66 and 1966-67

contending that the income from U.S. trusts was not taxable

in India either in the hands of settlor or in his hands and

that the inclusion of the said income in the returns by the

settlor and by the appellant was a mistake.

The appellant preferred revisions against other assessment

orders, where appeal was barred, taking the plea of non-

taxability with respect to the income from U.K. trusts and

from the U.S. trusts.

The Appellate Assistant Commissioner allowed the appeals.,

The Revenue's appeals to the Tribunal were allowed holding

that the A.A.C. acted contrary to Rule 46(2) of the Income

Tax Rules in admitting the additional grounds and in looking

into new material. The Tribunal remitted the appeals back

to A.A.C. At that stage the appellant approached the

settlement commission under Chapter XIX(A) of the Income Tax

Act, 1961.

The Settlement Commission went into all the aspects of the

matter and computed the taxable income of appellant's father

and his income for the assessment years 1964-65 to 1970-71

and 1970-71 to 1982-83. It directed the I.T.O. to compute

the total income for each of the said assessment years

accordingly and raise demand for the tax due.

The appellant preferred two sets or appeals before this

Court against the two orders of the Settlement Commission.

C.A.s. 4301-07 of 1991 related to the assessment years 1964-

65 to 1970- 71 and C.As.12881300 of 1991 related to the

assessment years 1970-71 to 1982-83.

The appellant contended that the settlement Commission erred

in law in holding that the U.S. trusts were revocable trusts

within the meaning of Section 63 of the Act; that for

attracting Section 63, the deed of transfer must give the

transferor a right to retransfer directly or indirectly

whole or any part of the income or assets to the transferor

or it must give him a right to reassume power directly or

indirectly over the whole or any part of income or assets;

that in the present case such power was not given to the

transferor; that U.S. trusts were discretionary trusts and

940

therefore the assessment could be made only upon the

trustees and not upon the beneficiaries-recipients; that the

revenue could not take advantage of the mistake of law on

the part of the settlor or the appellant; that with the

death of the settlor, the U.S. trusts ceased to be revocable

trusts and the appellant could not be taxed on the income

received by him from the said trust, because only the

trustee could be taxed; that the U.K. trusts were also

discretionary trusts and not specific trusts as held by the

Settlement Commission and the assessment could be made only

upon the trustees and not upon the beneficiaries-recipients;

that the Settlement Commission committed a legal error in

including the income from the U.K. trusts in the total

income of the settlor and the appellant even though it was

not paid out by the trustee nor received by the assessees in

India; that in the U.S.A and U.K, tax was levied upon the

respective trust incomes under the laws of those countries;

that levying tax over again in India on the very same income

amounted to double taxation and therefore the tax levied in

India was to be waived.

The Revenue submitted that even if any principles were

decided by the Settlement Commission, they did not bind the

Income Tax authorities in proceedings relating to subsequent

years; that the order of the Commission was relevant to and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 23

was confined I only to the assessment years to which it

related; that this Court under Article 136 of the

Constitution would not be able to go into the merits of the

order, that the Settlement Commission's interpretation on

the U.S. and U.K. trusts was perfectly in order and did not

call for any interference by this court; that during his

life-time, the settlor had declared that he had received

income from the U.K. and U.S. trusts and had included the

same in his returns of income for each of the assessment

years relevant herein; that the appellant too acted

similarly and therefore the argument of not receiving the

income from UK trusts was a mere after-thought and should

not he given any credence; that a trustee or the trustees

was/were expected to act reasonably and in furtherance of

the object of the trusts; that they were to apply the income

for the purposes specified, because they could not just

accumulate it; that applying the test of reasonableness, it

was to be held that ordinarily, the trustee ought to

distribute the income each year; and that it was to be held

that the income from the UK trusts had rightly been taken

into account by the Commission while passing its orders.

Dismissing the appeals, this Court,

941

HELD: 1.01. The finality clause contained in Section 245-1

does not and cannot bar the jurisdiction of the High Court

under Article 226 or the jurisdiction of this court under

Article 32 or under Article 136, as the case may be. But

that does not mean that the jurisdiction of this court in

the appeal preferred directly in this court is any different

than what it would be if the assessee had first approached

the High Court under Article 226 and then come up in appeal

to this court under Article 136. A party does not and

cannot pin any advantage by approaching this Court directly

under Article 136, instead of approaching the High Court

under Article 226. This is not a limitation inherent in

Article 136; it is a limitation which this court imposes on

itself having regard to the nature of the function performed

by the Commission and keeping In view the principles of

judicial review. [955 D-E]

1.02. The scope of enquiry, whether by High Court under

Article 226 or by this Court under Article 136 is also the

same whether the order of the Commission is contrary to any

of the provisions of the Act and if so, has it prejudiced

the petitioner/appellant-apart from ground of bias, fraud &

malice which, of course, constitute a separate and

independent category. [956-B]

1.03. The appellant power under Article 136 is similar to

power of judicial review, where the appeal is directed

against the orders of the Settlement Commission.

Sri Ram Durga Prasad v. Settlement Commission, 176 I.T.R.

169 and Chief Constable of the N. W. Police v. Evans,[1982]

1 W.L.R. 1155, referred to. [956-D]

1.04. The only ground upon which this Court can interfere in

these appeals is that the order of the Commission is

contrary to the provisions of the Act and that such

contravention has prejudiced the appellant. [956-E]

1.05. The main controversy in these appeals relates to the

interpretation of the settlement deeds though it is true,

some contentions of law are also raised. The commission has

interpreted the trust deeds in a particular manner. Even if

the interpretation placed by the commission on the said

deeds is not correct, it would not be a ground for

interference in these appeals, since a wrong interpretation

of a deed of trust cannot be said to be a violation of the

provisions of the Income Tax Act. [956-F]

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 23

942

1.06. The interpretation placed upon the said deeds by the

Commission does not bind the authorities under the Act in

proceedings relating to other assessment years. [956-G]

1.07. Though it is not necessary, strictly speaking, to go

into the correctness of the interpretation placed upon

the said deeds by the commission, and it is enough if

this court confines itself to the question whether the order

of the Commission is contrary to the provisions of the Act,

yet, for the sake of completeness, the Court examine whether

the order of Commission is vitiated by any such wrong

interpretation. [956-H, 957-A]

2.01. A discretionary trust is described as a trust where

the trustees have been vested with a discretion in the

matter of distribution of trust income among the specified

class of beneficiaries. In the case of such trusts, the

trustees have a discretion to pay whole or part of the

income to such member or members of the designated class as

they think fit and in such proportion as they deem

appropriate. [957 C-D]

Snell's Principles of Equity, 25th Edn. (1965) page 129,

referred to.

[957-E]

2.02. The US settlement deed empowers the trustee to hold,

manage, invest and reinvest the principal of the trust fund,

to collect and receive the income thereof and to pay or

apply so much of the net income as the trustee shall in his

absolute and uncontrolled discretion deem advisable to or to

the use of one of more members of the settlor's family, It

is thus a discretionary trust.

2.03. Para 1(2) of the U.S. Deed empowers the

settlor/transferor and the trustee, acting together to

direct the trustee, at any time, to pay over the entire

income and/or entire corpus or a part thereof to such member

of the settlor's family or their descendants as they may

direct. The said power cannot be exercised by the settlor

acting Alone. [958-B]

2.04. The power, properly construed, is given to the settlor

to, be exercised together with the trustee and not to the

trustee to be exercised together, with the settlor. The

trustee is anyhow vested with an absolute discretion to

distribute the income of or the principal of the trust to

such member of the family, as he thinks appropriate, under

the clause preceding and paras following para 1(2). If so,

there was no point in saying that

943

he can, together with the settlor, be empowered to pay over

part or whole of income/principal to "such one or more

members of a class composed of the family members living.'

It cannot also be forgotten that the trustee in this case is

a Bank one of the largest in the U.SA. and not an

individual acquaited with the affairs of the settlor's

family. [958-H, 959-A]

2.05. Section 63 does not say that the power of revocation

vesting in the transferor should be absolute or

unconditional. [959-B]

2.06. Section 63(1) also does not say that the deed of

transfer must confer or vest an unconditional or an

exclusive power in the transferor to give the

power/direction of the nature contemplated by it. Merely

because the concurrence of the trustee had to be obtained by

the transferor/settlor for giving the said direction it

cannot be said that the deed does not contain a provision

giving the transferor a right to reassume power directly or

indirectly over the whole or any part of income or assets

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 23

within the meaning of Section 63(a)(ii) of the Act. [960 B-

C]

2.07. During the lifetime of the settlor, the entire income

arising from the three U.S. trust deeds was bound to be and

was rightly included in the income of the settlor by virtue

of Section 63 read with Section 61. [961.B]

2.08. With the death of the settlor, Section 63 ceased to

apply even though the aforesaid clause empowers not only the

settlor but also the Maharaja for the time being to exercise

the said power. [961-C]

2.09. Section 63 is attracted only where such power is given

to the transferor and the appellant (the son of the

settlor) is not and cannot be called the transferor. It is

not denied that so far as the income from the U.S. trusts is

concerned, it was indeed received by the appellant. [961-D]

2.10. The trustees in the case of a trust declared by a duly

executed instrument in writing are treated as representative

assessees (Section 160(1)(iv)). It is equally true that in

the case of a discretionary trust, trustees are liable to be

taxed in respect of the income received by them at the rate

specified in Section 164(1). [961-F]

2.11. Section 166 states in unmistakable terms that nothing

contained in the preceding provisions in the chapter shall

preclude the Revenue from making a direct assessment upon

the beneficiary-and/or recovering the tax payable from such

person. [962-B]

944

2.12. By virtue of Section 166, the Revenue has an option in

the case of a discretionary trust either to make an

assessment upon the trustees or to make an assessment upon

the beneficiaries. Of course, both the trustee and the

beneficiary cannot be simultaneously taxed in respect of the

same income. The assessments made by the Commission on the

deceased-settlor and the appellant are thus unexceptionable.

[966-D]

Behramji Sorabji v. Commissioner of Income Tax, Bombay, 16

I.T.R. 301; Commissioner of Income Tax Bombay City v.

Ratilal Nathalal, 25 I.T.R. 426; Tarunendra Nath Tagore v.

Commr. of Income Tax, 33 I.T.R. 492 (Calcutta); K.

Subramania Pillai v. Agricultural Income Tar Officer,

7hukalay, 53 I.T.R. 764; Commissioner of Income Tar, Punjab

v. Raghubir Singh, 57 I.T.R. 408; Nagappa v. C.I.T, 73

I.T.R. 626 and Ram Swaroop Das v. The State of Bihar, 42

I.T.R. 770, referred to.

Sevantilal Maneklal v. C.I.T., 67 I.T.R. 1, distinguished.

C.I.T v. Kamalini Khatau, 112 I.T.R. 652 (Gujarat) (F.B.)

Agreed with the dissenting opinion.

3.01.Both the settlor and the appellant have been receiving

the income from the UK trusts during the several

assessment years concerned herein. The settlor had

voluntarily included the entire income from the U.K. trusts

in his income in the returns filed by him for the assessment

years 1964-65 to 1969-70. It is unlikely that he would have

so included unless he really received it The Commission

treated those declarations as proof of the settlor's real

intention. The Commission also relied upon certain other

circumstances including the manner in which the accounts of

these trusts were maintained in support of their opinion

that all concerned with the trusts, acted on the basis that

the trust income was flowing to the settlor, and after his

death to the appellant. The Commission also referred

specifically to similar declarations made by the appellant

in his returns. Even subsequent to the death of the

settlor, the Commission pointed out, the appellant has been

making similar declarations from time to time. [967 C-E]

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 23

3.02. The appellant did not say that he did not receive the

income from the U.K. trusts. All he said was, since it is a

discretionary trust, its income is not taxable in his hands.

If he had not received the income, he would have put forward

that fact in the forefront. But he did not. Section

945

5 of the Act is wide enough to bring all such income to tax.

In case appellant proves that any income has been taxed in

U.S. or U.K., the same income shall not be taxable over

again in India. [%7-H, 968-D]

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1301-07 of

1991

From the Judgment and Order dated 31-3-89 of the Income Tax

Settlement Commission Bombay in Settlement Application No.

10/5/41/78IT.

Ashok Desai, Debi Pal B.K. Mehta, N.K. Sahu, U.K. Sagar and

P.H. Parekh for the Appellant.

Dr. V. Gaurishankar and S. Rajappa for the Respondents.

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. These appeals are preferred against

the orders of the Settlement Commission dated March 31, 1989

in pursuance of the offers of settlement made by the

appellant. Civil Appeals 1301-07 of 1991 relate to the

assessment years 1964-65 to 1970-71 while Civil Appeals

1288-1300 of 1991 relate to the assessment years 1970-71 to

1982-83. Under its orders, the Settlement Commission

computed the taxable income of the appellant's father (who

died on August 22, 1969) and of the appellant for the

aforesaid assessment years and gave certain directions,

applying which the I.T.O. was directed to compute the total

income for each of the said assessment years and raise

demand for the tax due. The main issue in all these matters

is the assessability of income from five foreign trusts

created by the appellant's father, Sri Vikramsinhji.

Sri Vikramsinhji, Ex-ruler of Gondal executed three deeds of

settlements (trusts deeds) in the United States of America

on December 19, 1963 and two deeds in the United Kingdom on

January 1, 1964. The three settlements executed in U.S. are

in identical terms. Similarly, the two settlements,

executed in U.K. are similar. The two sets of settlements,

however, differ from each other in certain particulars,

though both the sets are meant for the benefit of the

settlor and the members of his family. We may refer to the

relevant clauses in the settlements executed in U.S. in the

first instance.

946

Under the U.S. settlements, The National City Bank, New York

is constituted the sole trustee. The trust is created for

the benefit of the grantor/settlor, his wife and children

and their spouses (referred to as family members) and their

descendants. The trustee is empowered to collect the income

from the trust properties and to apply the same among the

family members and/or their descendants in such manner as he

thinks appropriate. He is also authorised to terminate the

trusts for any reason (including tax reasons) and to

transfer, convey and pay off the property held thereunder to

any person or persons then eligible to receive the income of

the trusts. On such termination, the entire assets in the

hands of the trustee are to be paid over to the then

Maharaja (Ruler) or to his living male descendants in equal

shares per stripes. The clause which is relevant herein,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 23

which according to the Revenue, makes the trusts revocable

ones we may refer to it as para 1(2) for the sake of

convenience reads thus:

"Anything hereinabove to the contrary

notwithstanding, at any time and from time to

time the Trustee shall transfer, convey and

pay over any portion of the income of the

trust fund and any portion or all of the

principal held in trust to or to the use of

such one or more members of a class composed

of the Grantor, the wife or widow of the Gran-

tor, the children of the Grantor living from

time to time, the spouse of any child of the

Grantor then living or deceased (hereinafter

referred to as the "Family Members"), and the

descendants of the Family Members living from

time to time, in such amounts, shares and

proportions, either absolutely or in trust,

and upon such terms and conditions (including

the grant of a further power to appoint) as

the Trustee and a Maharaja who shall have

attained the age of eighteen (18 years) shall

at any time and from time to time appoint and

direct in a written instrument which refers to

and specifically exercises this power and

which is duly executed by the Maharaja and by

the Trustee then acting here-under. The

foregoing power to appoint may be released in

whole, or in part by the Maharaja or by the

Trustee or by both at any time by one or more

written instruments duly executed by the

Maharaja or by the Trustee or by both and

delivered to

947

the Trustee then acting here-under, provided,

however, that if either the Maharaja or the

Trustee, but not both of them, shall release

such power, then the party not so releasing

shall continue to have the power to

appointment hereinbefore provided, acting

alone."

Clauses (2) and (3) of the deeds confer an absolute

discretion upon the trustee to pay over or apply in his

discretion, any part or whole of income or any part of or

whole of the principal to "any person then eligible to

receive the income of this trust" at such time and in such

manner, as he may decide in his absolute discretion. Clause

(3) says further that "the Trustee may omit eligible members

of the class from any and all such payments and

applications, and no such payment or application or

commission of a person from participation therein shall

cause a charge against or otherwise effect the future

interest or share of any person here under." Any

determination made by the trustee in good faith in

exercising the said discretion is held to be binding and

conclusive. It is not necessary to notice other clauses of

these settlements except to say that the object of these

trusts is to provide for the education, maintenance and up-

keep of the members of the settlor's family and their

descendants.

The settlor died on August 22, 1969. During his lifetime,

the settlor, Vikramsinhji was filing returns of his income

in India including therein whole of the income arising from

the U.S. trusts. The returns were filed by him for the

assessment years 1964-65 to 1969-70 (both years inclusive).

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 23

Since he died in the middle of the accounting year relevant

to the assessment year 1970-71, two returns were filed for

the said assessment year, one upto the date of the death of

the settlor and the other from the date of the death of

settlor to the end of the accounting year. These returns

were filed by his elder son, Jyotendrasinhji, appellant in

these appeals. In these returns too, the appellant included

whole of the income from the U.S. trusts in the respective

returns. At this stage, the appellant says. he was advised

that the income from U.S. trusts was not taxable in India

either in the hands of settlor or in his hands and that

inclusion of the said income in the returns by the settlor

and by the appellant was a mistake. Urging the said

contention, the appellant filed appeals against the

assessment orders pertaining to the A.Ys. 1965-66 and 1966-

67. Inasmuch as the appeals were barred with respect to

other assessment orders, he preferred revisions

948

before the Commissioner of Income Tax. (It may be mentioned

at this stage itself that the income from U.K. trusts was

included in the aforesaid returns just as the income from

U.S. trusts was included. Similarly, the plea of non-

taxability was urged with respect to the income from U.K.

trusts on the same basis as was urged with respect to the

income from the U.S. trusts)

The Appellate Assistant Commissioner, Rajkot admitted

additional grounds and allowed the aforesaid appeals by his

orders dated April 4, 1975 and August 20, 1975. The Revenue

went-up in appeal to Tribunal. The Tribunal allowed the

appeals holding that the A.A.C. acted contrary to Rule 46(2)

of the Income Tax Rules in admitting the additional grounds

and in looking into new material. Accordingly it set aside

his orders and remitted the appeals back to A.A.C. It is at

this stage that the appellant approached the settlement

commission under chapter XIX(A) of the Income Tax Act, 1961.

We may now notice the relevant clauses in the deeds of

settlements executed in U.K. Under these settlement deeds,

one Mr. Robert Hampton Robertson McGill was designated as

the trustee, referred to in the deeds as "the original

trustees". These trusts too were created for the benefit of

the settlor, the members of his family and their

descendants, referred to as 'beneficiaries'. The deeds

define 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. The

expression "the beneficiaries" was defined to mean and

include (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 clauses which are relevant for our

purposes read thus: (We have, for the sake of convenient

reference, numbered them as clauses (3) and (4)).

"3. THE Settlor hereby directs that the

Trustee shall and accordingly the Trustees

shall stand possessed of the Trust Fund and

the income thereof upon the trusts following

that it 1 to say :-

949

(1) UPON TRUST to raise and pay out of the

capital thereof any further estate duty which

may still be payable thereon in respect of the

death of the Settlor's father His Late

Highness Shri Bhojrajji Maharaja Saheb of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 23

Gondal who died on the Thirty first day of

July One Thousand nine hundred and fifty two

and any interest payable on such duty and any

costs incurred in connection with the

ascertainment or payment of such duty and

interest.

(2) Subject as aforesaid UPON TRUST for all or

such one more and more exclusively of the

others or other of the Beneficiaries at such

age or time or respective ages or times if

more than one in such shares and with such

trusts for their respective benefit and such

provisions for their respective advancement

and maintenance and education at the

discretion of the Trustees or of any other

person or persons as the person who for the

time being is the Maharaja or (of the title is

abolished) would have been the Maharaja had

the title not been abolished shall at any time

during the specified period by any deed or

deeds revocable or irrevocable appoint AND in

default of and subject to any such appointment

upon he trusts and with and subject to the

powers and provisions hereinafter declared and

contained concerning the same PROVIDED ALWAYS

that the foregoing power of appointment shall

not be capable of being exercised:

(a) by anyone other than the Settlor or the

Elder son or the Younger Son; or

(b) in favour of the person making the

appointment save with the consent of the

Trustees (being at least two in number or a

trust Corporation) such consent to be

testified by their being parties to the deed

of appointment and executing the same.......

4. SUBJECT aforesaid the Trustees shall stand

possessed of the Trust Fund and the income

thereof upon the trusts

950

following that is to say :-

(1) The income of the Trust Fund accruing

during the life of the Settlor shall belong

and be paid to the Settlor

(2) Subject as aforesaid the income of the

Trust Fund accruing during the life of the

Elder Son shall belong and be paid to the

Elder Son........

(3) Subject as aforesaid the Trust Fund shall

be held in Trust for the person who (being a

descendant of the Elder Son) first during the

specified period :

(a) becomes the Maharaja or would become the

Maharaja if his title had not been abolished

and

(b) attains the age of eighteen years.........

It is not necessary to notice the other provisions/clauses

of these deeds.

During his lifetime, the settlor, Vikramsinhji, was

including the whole of the income from these trusts in his

returns of income just as he was doing in the case of U.S.

trusts. The said income was also included in the two

returns filed by his son for the A.Y.1970-71. Thereafter,

however, the appellant took the stand, as mentioned

hereinbefore, that the income from these trusts is not

includable in his income. He also took the stand that the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 23

inclusion of the said income in the returns submitted by his

father for the A.Ys.1964-65 to 1969-70 and by him in the

returns relating to A.Y.1970-71 was under a mistake. This

submission too was the subject matter of the appeals and the

revisions filed before the A.A.C. and the Commissioner of

Income Tax, referred to hereinbefore. When the appellant

approached the settlement commission with an application for

settlement, it related to the income from U.K. trusts as

well.

The Settlement Commission heard the arguments in extenso

spread over several days and disposed of the matter under

two elaborate orders. One order relates to A.Ys. 1964-65 to

1970-71 (Vikramsinhji) and the other to A.Ys.1970-71 to

1982-83 (Appellant). The findings of the Commission which

constitute the bases for its orders may briefly be stated as

the following :

951

(i)Though the U.S. settlements are in the nature of

discretionary trusts, they fall within the mischief of sub-

clause (ii) of Clause (a) of Section 63 of the Act. For

this reason, the whole of the income arising from the trust

properties was liable to be included and was rightly

included in the income of the settlor/transferor, Sri

Vikramsinhji.

(ii) On the death of the settlor, the U.S. settlement deeds

ceased to be revocable but inasmuch as the entire income

thereunder was received by the appellant, Sri

Jyotendrasinhji, it constitutes his- income and could be and

was lawfully. taxed in his hands.

(iii) 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 where under 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 settlor and the assessee during

the respective assessment years.

On the above bases, the Commission computed the taxable

income of the settlor under both the sets of trusts for

A.Ys.1964-65 to 1970-71 (upto the date of the death of the

settlor) as also the income of the appellant for the

A.Ys.1970-71 to 1982-83. The appellant then preferred these

two sets of appeals against the two orders.

At the stage of granting leave, this court ordered (vide the

order dated March 22, 1991) that the appellant shall not be

entitled to question the jurisdiction of the settlement

commission to decide the issues before it and that he will

"confine himself in appeal only to the questions relating to

correctness or otherwise of the Commissioner's order."

Sri Ashok Desai, learned counsel for the appellant urged the

following contentions':

(1)The settlement commission erred in law in holding that

the U.S. trusts are revocable trusts within the meaning of

Section 63 of the Act. For attracting Section 63, the deed

of transfer should give the transferor a right

952

to retransfer directly or indirectly whole or any part of

the income or assets to the transferor or it must give him a

right to re-assum power directly or indirectly over the

whole or any part of income or assets. In this case, the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 23

relevant clause does not give the,transferor such a power.

The power is given to the trustee to be exercised with the

concurrence of the transferor/settlor. Even if, for any

reason, the clause is construed as giving such a power to

the settlor/transferor, Section 63 is not attracted inasmuch

as the power is given: not to him a& such "but jointly to

him and the trustee. Such a power does not attract the

mischief of Section 63.

(2) The U.S. trusts are discretionary trusts. In such a

case, the assessment can be made only upon the trustees and

not upon the beneficiaries-recipients. The Revenue has no

option in such a situation. It must necessarily tax the

trustees and trustees alone. The Revenue cannot take

advantage of the mistake of law on the part of the settlor

or the appellant.

(3) At any rate, with the death of the settlor, the U.S.

trusts ceased to be revocable trusts, assuming that they

were so during his lifetime.. So " far as the appellant is

concerned, he cannot be taxed on the income received by him

from the said trust. Only the trustee can be taxed.

(4) So far as U.K trusts are concerned, the settlement

commission has committee an error of law in holding that

clause (3) could come into operation only if and when the

settlor appointed the additional trustees as contemplated by

it. In fact, the trust, had come into existence with the

sole trustee (McGill) ;and it did not depend upon the

appointment of additional trustees. Clause (3) prevails

over clause (4). If so, the U.K. trusts/settlements are

also discretionary trusts and not specific trusts as held by

the Settlement Commission. In such a case again the

assessment can be made only upon the trustees and not upon,

the beneficiaries recipients..

(5) So far as U.K. trusts are concerned no income was

received,by the settlor or the appellant either in U.K. or

in India. So long as the trustees decided not to exercise

the discretion to distribute the income, no income arose to

any of the beneficiaries. The deeds, do not prescribe, a

time-limit within which the trustees should exercise their

discretion to distribute income. Until the trustees take a

decision to distribute and distribute the income,the

beneficiaries have no right to income nor can it be said

that the income accrues to them. The Settlement

Commission committed a legal error in the income from the

U.K. trusts in the total income of

953

the settlor and the appellant even though it was not paid

out by the trustee ,nor received by the assessees. At any

rate, no income was received in India.

(6)In both the U.S. and U.K., tax has been levied upon the

respective trust incomes under the laws of those countries.

Levying tax over again in this country on the very same

'income amounts to double taxation. On this ground too, the

tax levied in India must be waived.

On the other hand, Dr. Gauri Shankar, the learned counsel

for the Revenue made the following submissions:

(i)The Settlement Commission is not a regular Tribunal.

Its function is different from other quasi-judicial

authorities created by the Income Tax Act. Where an offer

of settlement has been made, the commission either accepts

it or rejects it subject to such conditions and terms as it

thinks fit to impose in that behalf. As the name itself

suggests, it is a settlement a sort of composition. It

need not even give reasons for its order. Even if any

principles are decided by the Commission, they do not bind

the Income Tax authorities in proceedings relating to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 23

subsequent years. The order of the commission is relevant

to and is confined only to the assessment years to which it

relates. The jurisdiction of this court under Article 136

in an appeal against the orders of settlement commission

must be conditioned by above considerations. This court

would not be able to go into the merits of the order. The

commission's order cannot be dissected, inasmuch as it is a

package deal. Either it stands or falls as a whole.

(ii) The interpretation placed by the commission on both

U.S. and U.K. trusts is perfectly in order and does not call

for any interference by this court. Indeed, under the

impugned orders, several benefits have been conferred upon

the settlor and the appellant like waiving of penalties,

interest and other liabilities attaching to the assessees

under the Act. While accepting the same, the appellant

cannot be allowed to disown those features of the order

which go against him.

(iii) The argument,of not receiving the income from U.K.

trusts is a mere after-thought and should not be given any

credence. During his lifetime, the settlor had declared

that he had received income from both the U.K. and U.S.

trusts and had included the same in his returns of income

for each of the assessment years relevant heroin. The

appellant too acted similarly.

954

(iv) A trustee or the trustees, as the case may be are

expected to act reasonably and in furtherance of the object

of the trusts. They must apply the income for the purposes

specified. They cannot just accumulate it. Applying the

test of reasonableness it must be held that ordinarily, the

trustee ought to distribute the income each year. As a

matter of fact, it was so distributed If so, it must be held

that the income from these U.K. trusts has rightly been

taken into account by the commission while passing its

orders.

The first question we have to answer is the scope of these

appeals preferred under Article 136 of the Constitution

against the orders of the Settlement Commission. The

question is whether all the questions of fact and law as may

have been decided by the commission are open to review in

this appeal. For answering this question one has to have

regard to the scheme of Chapter XIX-A. The said chapter was

inserted by the Taxation Laws (Amendment) Act, 1975 with

effect from April 1, 1976. A somewhat similar provision was

contained sub-sections (1A) to (1D) of Section 34 of the

Income Tax Act, 1922 introduced in the year 1954. The

provisions of Chapter XIX-A are, however, qualitatively

different and more elaborate than the said provisions in the

1922 Act. The proceedings under this chapter commence by an

application made by the assessee as contemplated by Section

245-C. Section 245-D prescribes the procedure to be

followed by the commission on receipt of an application

under Section 245-C. Sub-section (4) says: 'after

examination of the records and the report of the

commissioner received under sub-section (1), and the report,

if any, of the commissioner received under sub-section (3),

and after giving an opportunity to the applicant and to the

commissioner to be heard, either in person or through a

representative duly authorised.in this behalf, and after

examining such further evidence as may be placed before it

or obtained by it, the settlement commission may,, in

accordance with the provisions of this Act, pass such order

as it thinks fit on the matters covered by the application

and any other matter relating to the case not covered by the

application, but referred to in the report of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 23

commissioner under sub-section (1) or sub-section (3)."

Section 245-E empowers the Commission to reopen the

completed proceedings in appropriate cases, while Section

245-F confers all the powers of an Income Tax authority upon

the Commission.Section 245-H empowers the Commission to

grant immunity from penalty and prosecution, with or without

conditions, in cases where it is satisfied that the assessee

has made a full disclosure of his income and

955

its sources. Under- Section 245-HA, the Commission can send

back, the matter to assessing. officer, where it finds that

the applicant is not cooperating with it. Section 245-1

declares that every order of settlement passed under sub-

section (4) of, Section 245(D) shall be conclusive as to the

matters stated therein and no matter covered by such order

shall, save as otherwise provided in, Chapter XIX-A, be re-

opened in any proceeding under the Act or under any other

law for the time being in force. Section 245-L declares

that any proceedings under chapter XIX-A before the

settlement commission shall be deemed to be a judicial

proceeding within the meaning of Sections 193 and 228 and

for the purposes of Section 196 of the Indian Penal Code.

It is true that the finality clause contained in Section

245-I does not and cannot bar the jurisdiction of the High

Court under Article 226 or the jurisdiction of this court

under Article 32 or under Article 136, as the case may be.

But that does not mean that the jurisdiction of this Court

in the appeal preferred directly in this court is any

different than what it would be if the assessee had first

approached the High Court under Article 226 and then come up

in appeal to this court under Article 136. A party does not

and cannot gain any advantage by approaching this Court

directly under Article 136, instead of approaching the High

Court under Article 226. This is not a limitation inherent

in Article 136; it is a limitation which this court imposes

on itself having regard to the nature of the function

performed by the Commission and keeping in view the

principles of judicial review. May be, there is also some

force in what Dr. Gauri Shankar says viz., that the order of

commission is in the nature of a package deal and that it

may not be possible, ordinarily speaking, to dissect its

order and that the assessee should not be permitted to

accept what is favourable to him and reject what is not.

According to learned counsel, the Commission is not even

required or obligated to pass a reasoned order. Be that as

it may, the fact remains that it is open to the Commission

to accept an amount of tax by way of settlement and to

prescribe the manner in which the said amount shall be paid.

It may condone the defaults and lapses on the part of the

assessee and may waive interest, penalties or prosecution,

where it thinks appropriate. Indeed, it would be difficult

to predicate the reasons and considerations which induce the

commission to make a particular order, unless of course the

commission itself chooses to, give reasons for its order.

Even if it gives reasons in a given case, the scope of

enquiry in the appeal remains the same as indicated above

viz., whether it is,contrary

956

to any of the provisions of the Act. In this context, it is

relevant to note that the principle of natural justice (and

alteram partem) has been incorporated in Section 245-D

itself. The sole overall limitation upon tire Commission

thus appears, to be that it should act in accordance with

the provisions of the Act. The scope of enquiry, whether by

High Court under Article 226 or by this Court under Article

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 23

136 is also the same whether the order of the Commission is

contrary to any of the provisions of the Act and if so, has

it prejudiced the petitioner/appellant apart from ground of

bias, fraud & malice which, of course, constitute a separate

and independent category. Reference in this behalf may be

had to the decision of this Court in Sri Ram Durga Prasad v.

Settlement Commission 176 I.T.R. 169, which too was an

appeal against the orders of the Settlement Commission.

Sabyasachi Mukharji J., speaking for the Bench comprising

himself and S.R. Pandian, J. observed that in such a case

this Court is " concerned with the legality of procedure

followed and not with the validity of the order.' The

learned Judge added 'judicial review is concerned not with

the decision but with the decision-making process." Reliance

was placed upon the decision of the House of Lords in Chief

Constable of the N.W. Police v. Evans, [1982] 1 W.L.R.1155.

Thus, the appellate power under Article 136 was equated to

power of judicial review, where the appeal is directed

against the orders' of the Settlement Commission. For all

the above reasons, we are of the opinion that the only

ground upon which this Court can interfere in these appeals

is that order of the Commission is contrary to the

provisions of the Act and that such contravention has

prejudiced the appellant The main controversy in these

appeals relates to the interpretation of the settlement

deeds though it is true, some contentions of law are also

raised. The commission has interpreted the trust deeds in a

particular manner, Even if the interpretation placed by the

commission the said deeds is not correct, it would not be a

ground for interference in these appeals, since a wrong

interpretation of a deed of trust cannot be said to be a

violation of the provisions of the Income Tax Act. it is

equally clear that the interpretation placed upon the said

deeds by the Commission does not bind the authorities under

the Act in proceedings relating to other assessment years.

In view of the above, though it is not necessary, strictly

speaking, to go into the correctness of the interpretation

placed upon the said deeds by the commission, and it is

enough if we confine ourselves to the question whether the

order of the Commission is contrary to the provisions of the

957

Act, we propose to, for the sake of completeness, examine

also whether the order of Commission is vitiated by any such

wrong interpretation?

U. S. TRUSTS.

The sole trustee under this settlement deed is the First

National City Bank, New York. The deed empowers the trustee

to hold, manage, invest and reinvest the principal of the

trust fund, to collect and receive the income thereof and to

pay or apply so much of the net income as the trustee shall

in his absolute and uncontrolled discretion deem advisable

to or to the use of one or more members of the settlor's

family. It is thus a discretionary trust. A discretionary

trust is described as a trust where the trustees have been

vested with a discretion in the matter of distribution of

trust income among the specified class of beneficiaries. In

the case of such trusts, the trustees have a discretion to

pay whole or part of the income to such member or members of

the designated class as they think fit and it such

proportion as they deem appropriate. Section 164(1) sets

out the same idea in the following words:

"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............

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 23

In Snell's Principles of Equity, 25th Edn. (1965), P.129, a

discretionary trust is defined in the following words:

"A discretionary trust is one which gives the

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 beneficiary thus

has no more than a hope that the discretion

will be exercised in his favour."

That these trusts are discretionary trusts is not in

controversy. The main question is whether Para 1(2), quoted

hereinbefore, makes it a revocable trust within the meaning

of Section 63? The said clause begins with a non-obstante

clause, "anything hereinabove to the contrary. not

withstanding' thereby giving it an overriding effect over

what has been said in the earlier-recitals. It then says

that "at any time and from time to time, the trustee shall

transfer, convey and pay over any portion or of the income

958

of the trust fund and any portion or of all the principal

held in trust', to such member of the settlor's family 'as

the trustee and a maharaja who shall have attained the age

of 18 years shall at any time and from time to time appoint

and direct in a written instrument which refers to and

specifically exercise this power and which is duly executed

by the Maharaja and the trustee then acting here-under.' In

other words, the said clause empowers-the settlor/transferor

and the trustee, acting together to direct the trustee, at

any time, to pay over the entire income and/or entire

corpus. or a pan thereof to such member of the settlor's

family or their descendants as they may direct. The said

power cannot be exercised by the settlor acting alone. The

question is whether the said clause attracts Section 63?

Section 63 defines the expressions 'transfer' and 'revocable

transfer'. It says that for the purposes of Sections 60, 61

and 62, 'a transfer shall be deemed to be revocable if (i)

it contains any provisions for the retransfer directly or

indirectly of the whole or any part of the, income or assets

to the transferor or (ii) it in any way gives the transferor

a right to reassume power directly or indirectly over the

whole or any part of the income or assets.' The expression

"transfer" is defined to include any settlement, trust,

covenant, agreement or arrangement. The expression 'family

members' occurring in the aforesaid clause in the trust

deeds is defined in the deeds to mean "the children of the

grantor living from time to time, the wife or widow of the

grantor, the spouse of any child of the grantor then living

or deceased.' The "descendants of the family members' which

expression also occurs in the aforesaid clause is defined

'in the deeds to mean "the descendants of the family members

living from time to time during the trust term.'

The contention of Sri Ashok Desai the learned counsel for

the appellant is that Section 63 will be attracted 'only

where the transferor is vested with the exclusive and/or

absolute power to give direction of the nature contemplated

therein and not where such a power has to be exercised by

the transferor jointly with another person or with the

concurrence or consent of another person. Indeed, he argues

that the said power is really given to the trustee to be

exercised in concert with the Settlor. We find it difficult

to agree with the learned counsel. Firstly, the power,

properly construed, is given to the settlor to be exercised

together with the trustee and not to the trustee to be

exercised together with the settlor. The trustee is anyhow

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 23

vested with an absolute discretion to distribute the income

of or the principal of the trust to such member of the

family, as he

959

thinks appropriate, under the clause preceding and paras

following para 1(2). If so, there was no point in saving

that he can, together with the settlor, be empowered to pay

over part or whole, of income/principal to "such one or more

members of a class composed of the family members living".It

cannot also be forgotten that the trustee in this case is a

Bank one of the largest in the U.S.A. and not an individual

acquainted with the affairs of the settlor's family. Now

coming to Section 63, it is equally not possible to agree

with the learned counsel. Section 63 does not say that the

power of revocation vesting in the transferor should be

absolute or unconditional. As pointed out by Chagla, CJ. in

Behramji Sorubji v. Commissioner of Income Tar, Bombay, (16

I.T.R. 301), "the only question that has got to be asked is

whether the transfer is capable of being revoked by the

assessee or not..... it may be that before the power is

exercised, the consent of two beneficiaries might have to be

taken but even so, although the revocation may be contingent

or conditional, still the deed remains a revocable deed of

trust." The same idea was reiterated by Tendulkar, J. in the

said judgment, in the following words:

"It is urged by Sir Jamshedji on behalf of the

assessee that the words "revocable transfer"

in this section require that the transfer

should be revocable absolutely and uncondi-

tional and that by reason of the fact that the

transfer in this case could not be revoked

under clause 10 of the trust deed without the

consent of the wife and the children or any

two-of-them, it is not a revocable transfer

within the meaning of Section 16(1)(c). Apart

from any authority, and reading the section by

itself, I am unable to agree with this

contention. It would involve my reading into

the section words which are not there, and the

Court is not entitled to do so unless it

appears that giving effect to the section as

it stands would lead to an obvious absurdity

or inconvenience which could not have been

contemplated by the legislature. No such

position arises in this case."

We find ourselves in agreement with the said opinions.

Section 63 of the present Act corresponds to the proviso

appended to Section 16(1)(c) of the 1922 Act. The first

proviso read thus: "provided that for the purposes of this

clause the- settlement, disposition or a transfer shall be

deemed to be revocable if it contains any provision for the

retransfer directly or

960

indirectly of the income or assets to the settlor, disponer

or transferor or in any way gives settlor, disponer or

transferor a right to. reassume power directly or indirectly

over the income or assets.' Section 63(1) also does not say

that the deed of transfer must confer or vest an conditional

or an exclusive-power in the transferor to give the

power/direction of the nature contemplated by it.,

Accordingly, we hold that merely because the concurrence of

the trustee had to be obtained by the transferor/settlor for

giving the said direction, it cannot be said that the deed

does not contain a; provision giving the transferor a; right

to reassume power directly or indirectly over the whole or

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 23

any part of income or assets within the meaning of Section

63(a)(ii)of the Act

In this view of the matter, it is not necessary for us to

refer to other decisions cited, before us in any detail.

The decision of this Court in commissioner,of Income Tax,

Bombay City v. Ratilal Nathalal 25 I.T.R. 426-

emphasises,that the power of revocation must be given to the

settlor as settlor and not in any other capacity. In the

deeds before us, the power is indisputably conferred upon

the Settlor in the very same capacity and not in any

different capacity. The other decision of this court in

Sevantilal Maneklal v. C.I.T. 67 I.T.R. 1 is distinguishable

for the, reason that the power of the settlor therein was

merely to choose among the several objects of the trust and,

therefore, it was held that it does not attract Section 63.

On the other hand, Tarunendra Nath Tagore v. Commr. of

Income Tax 33 I.T.R. 492 Calcutta was a case where the

trust deed empowered the settlor to cause a re-transfer of

the trust assets, in certain specified contingencies. The

question was whether such a provision makes the transfer a

revocable one within the meaning of the first proviso to

Section 16(1)(c) of the 1922 Act. It was held that it does,

notwithstanding the fact that the power had to be exercised

only in certain specified contingencies. The decision of

the Madras High Court in K Subramania Pillai v. Agricultural

Income For Officer, Thukalay 53 I.T.R. 764 was also a case

where the power of revocation was to be exercised in certain

specified contingencies alone. Even so, it was held that it

was a revocable settlement.

Commissioner of Income Tax, Punjab v. Raghabir Singh 57

I.T.R. 408 was case where the trust deed provided, for the

application of, the trust income, for satisfying the debts

which the- settlor was under an obligation to discharge.

The question was whether the provision makes the deed a

961

revocable one. It was held that it did not, inasmuch as

there was no provision for re-transfer of the income or the

assets to the settlor, It was observed that the mere fact

that the settlor's debts had to be discharged from the trust

income did not bring it within the four corners of the first

proviso to Section 16(1)(c).

In the light of the above discussion it must be held that

during the lifetime of the settlor, the, entire income

arising from the three U.S. trust deeds was bound to be and

was rightly included in the income of the settlor by virtue

of Section 63 read with Section 61. The commission was

right in holding so.

With the death of the settlor Section 63 ceased to apply

even though the aforesaid clause empowers not only the

settlor but also the Maharaja for the time being to-

exercise the said ;power. Section 63 is attracted only

where such power is given to the transferor and the

appellant (the son of the settlor) is not and cannot be

called the transferor. It is not denied that so far as the

income from the U.S. trusts is concerned, it was indeed

received by the appellant. The only argument is that

inasmuch these trusts are discretionary trusts, the, income

therefrom must necessarily be taxed and can only be taxed in

the hands of the trustees and not in the hands of the

beneficiary. It is argued that the Revenue has no choice to

tax either the trustees or the beneficiaries in such a case.

We are unable to agree The trustees in the case of a trust

declared by a. duly executed instrument in writing are

treated as representative assessees (Section 160(1)(iv)).

It is equally true that in the case of a discretionary

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 23

trust, trustees are liable to be taxed in respect of the

income received by them at the rate specified in Section

164(1). (Section 164(1) has undergone several changes since

1962 The sub-section as introduced by the Finance Act, 1970

with effect from April 1, 1970 provided that in such case

"tax shall be charged (i) as if the relevant income or part

of relevant income were the total income of the association

of persons, or (ii) @65%, Whichever course would be more

beneficial to the Revenue." For the purpose of this case, it

is not necessary to notice the provisos appended to sub-

section (1) or the subsequent amendments to the sub-

section).

At the same time, Section 166 expressly declares that

"nothing in the foregoing sections in this chapter shall

prevent either the direct assessment

962

of the person, on whose behalf or for whose benefit income

therein referred is receivable or the recovery from such

person of the tax payable in respect of such income."

Language of this section is clear. The, opening words

"nothing in the foregoing sections in this chapter" which

means chapter XV, wherein Sections 159 to 165 among other

sections occur give it an over-riding affect over the

preceding provisions in the chapter. The Section states in

unmistakable terms that nothing contained in the preceding

provisions in the chapter shall preclude the Revenue from

making a direct assessment upon the beneficiary and/or from

recovering the tax payable from such person. The Revenue

has thus been given an option to tax the income from a

discretionary trust either in the hands of the trustees or

in the hands of the beneficiaries. This Court in Nagappa v.

C.I T., 73 I.T.R. 626 and the majority of High Courts have

understood this Section in this manner. In Nagappa, the

appellant had executed seven separate trusts setting

specific properties for the benefit of his minor children.

He appointed himself, his wife and his married daughter as

the trustees. Under each deed, a portion of the income was

to be utilised immediately for the benefit of the

beneficiary and the balance accumulated for his or her

benefit and handed over to the beneficiary on the specified

date. The entire income of the trusts (including the income

accumulated) was included in the income of the appellant

(Nagappa) which was questioned by him. His contention was

that the "I.T.O. was bound to assess the income under each

deed of trust separately in the hands of 'the trustees as

"representative trustees and was incompetent in view of the

express enactment of sub-section (2) of Section 161 to

assess the income in the hands of Nagappa or of the

beneficiaries" The contention was rejected with reference to

Section 161(1) and Section 166 by Shah, J. (speaking foe the

Bench comprising Shah, Ramaswami and Grover, JJ.) in the

following words:

"It is implicit in the terms. of sub-section

(1) that the Income-tax Officer may assess a

representative assessee, but he is not bound

to do so. He may assess either the

representative assessee or the person

represented by him. That is expressly so

enacted in section 166 which states:

"Nothing in the foregoing sections in this

Chapter shall prevent either the direct

assessment of the person on whose behalf or

for whose benefit income therein referred

963

to is receivable, or the recovery from such

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 23

person of the tax payable in respect of 'such

income.'

The Income-tax Officer may, therefore, assess

the person represented in respect of the

income of the trust property and the

appropriate provisions of the income-tax Act

relating to the computation of the total

income and the manner in which the income is

to be computed will apply to that assessment.

The Income-tax Officer may in appropriate

cases assess the representative assessee in

respect of that income and limited, to that

extent, and tax may be levied and recovered

from him to the same extent as may, be

leviable and recoverable from the person rep-

resented by him.

The contention, raised by counsel, for Nagappa

that, since the trustees were assessable in

respect of the income of the beneficiaries

under Section 161(1), that income could not by

virtue of sub-section (2) of Section 161 be

assessed in the hands of the beneficiary is

contrary to the plain terms of Section 166.

Sub-section (2) of Section 161 does not

purport to deny the, Income-tax Officer the

option to assess the income in the hands of

the person represented by the representative

assessee;: it merely enacts that when a

representative assessee is assessed to tax in

exercise of the option of the revenue, he

shall be assessed tinder Chapter XV and shall

not 'in respect of that income be assessed

under any other provision of the Act. We will

presently state the reasons why the rule was

so enacted by Parliament. But on the plain

words used by Parliament the plea raised by

counsel: that the. representative assessee

alone may be assessed as regards income in

respect of which he is. a representative

assessee cannot be accepted.

The learned Judge then went to explain the reasons for which

section 166 among other provisions was enacted.

In another case arising under the Bihar Agricultural Income

Tax Act, 1948, a Bench of this Court comprising J.L. Kapur,

M. Hidayatullah and

964

J.C. Shah, JJ. took a similar view in Ram Swaroop Das v. The

State of Bihar 42 I.T.R. 770, even though that Act and did

not contain a provision similar to Section 166. Section 13

of the Bihar Act provided:

"Where any person holds land, from which

agricultural income is derived as a common

manager appointed under any law. from the time

being in force, or under any agreement or as

receiver, administrator or the like on behalf

of persons jointly interested 'in such land or

in the agricultural income derived therefrom

the aggregate of the sums payable as

agricultural income-tax by each person on the

agricultural income derived from such land and

received by him shall be assessed on such

common manager, receiver, administrator or the

like, and he shall be deemed to be the

assessee in respect of the agricultural

income,tax so payable by each such person and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 23

shall be liable to pay the same."

It was urged that because of Section 13, the Receiver alone

can be assessed in respect of the income of the estate under

his charge and that no assessment can be made upon the

person who actually received such income from the receiver.

The said contention was rejected by Shah, J. speaking for

the Bench in the following words:

"In our view, there is no substance in the

contention raised by the appellant. The

liability to pay tax is charged on the

agricultural income of every person. The

income though collected by the Receiver was

the income of the appellant. By S.13, in

addition to the owner, the Receiver is to be

deemed to be an assessee. But the fact that

the Receiver may, because he held the property

from which income was derived in the year of

account, be deemed to be an' assessee and

liable to pay tax, does not absolve the appel-

lant, on whose behalf the income was received

from the obligation to pay agricultural

income-tax. Section 13 merely provides a

machinery for recovery of tax, and is not a

charging section. When property is in the

possession of the Receiver, common manager or

administrator,, the taxing authorities may,

but are not bound, to treat such

965

persons as assessee and recover tax. The

taxing authorities may always proceed against

the owner of the income and assess the tax

against him. The definition in the connota-

tion of 'person' undoubtedly include a

Receiver, trustee, common manager,

administrator or executor, and by such

inclusion, it is open to the taxing

authorities to assess tax against any such

persons; but on that account the income in the

hands of the owner is not exempt from

liability to assessment of tax."

The principle of this decision does support our view,

notwithstanding certain variance between the provision

concerned in the said decision and those concerned herein.

Sri Ashok Desai, however, placed strong reliance upon a Full

Bench decision of the Gujarat High Court in CL T. v.

Kamalini Khatau, 112 I.T.R. 652 where the majority (Divan,

CJ. and B.K. Mehta, J. with P.D. Desai, J. dissenting)

appears to take a contrary view. Before we deal with the

decision, it would be interesting to note that the counsel

for the appellant Sri N.A. Palkhivala who appeared for the

appellant before the Settlement Commission had himself

repudiated this argument, though, another counsel, who

appeared for the appellant at a later stage, did not agree

with the view expressed by Sri Palkhivala. The Commission

has recorded the submission of Sri Palkhivala in the

following words:

"We may mention here that when Shri N.A.

Palkhivala appeared before us on behalf of the

applicant he had stated that although

according to the Gujarat High Court's decision

in the case of Smt. Kamalini Aatau, 112 ITR

652 the income of a discretionary trust is

assessable only in the hands of a

representative assessed and not in the hands

of the beneficiaries, he would not object to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 23

assessment of the amounts received by: the

beneficiaries in their hands in the present

case, for two reasons. Firstly, according t

o

Shri N.A. Palkhivala, the Gujarat High

Court's decision in question was erroneous and

it was dissently judgment in that case to the

contrary, which was correct. Secondly, in the

case, before us, the representative assessees,

namely, the trusts, being situated outside

India, could

966

not be taxed in India and in such cases it

would not be proper not to assess the

beneficiaries, for that will lead to the

entire income escaping the Indian 'income-tax

in the case of both the representative

assessees and the beneficiaries."

Be that as it may, we have been taken though both the

opinions in the Full Bench decision in extensor We are told

that an appeal is pending against the said decision in this

Court. In the circumstances, we are not inclined to deal

with the said opinions in any detail except to say that we

are inclined to agree with the dissenting. opinion of P.D.

Desai, J. and are not concerned with the reasoning of the

majority.

For the above reasons, we cannot agree with Mr. Ashok Desai.

We hold that by virtue of Section 166, the Revenue has an

option in the case of a discretionary trust either to make

an assessment upon the trustees or to make an assessment

upon the beneficiaries. Of course, both the trustee and the

beneficiary cannot be simultaneously taxed in respect of the

same income. The assessments made by the Commission on the

deceased-settlor and the appellant are thus unexceptionable.

U.K TRUSTS:

The first contention urged with respect to U.K. trusts is

that the commission has wrongly construed clause (3) which

we have extracted hereinbefore. Sri Desai argues that the

trust had already come into existence with the appointment

of the sole trustee, Mr. McGill, and that the coming into

existence of the trust did not depend upon the appointment

of additional trustees. The commission was wrong in holding

that until and unless the additional trustees are appointed,

the trust in clause (3) does not come into existence.

Properly construed, says Sri 'Desai, clause (3) creates a

discretionary trust. Inasmuch as the sub-clause does not

prescribe any time limit within which the trustees must

decide to distribute the income among the beneficiaries,

says the counsel, clause (4) has, not and had never come

into operation. In this case the trustees never did decide

not to exercise their discretion under clause (3). If so,

no income ever arose or accrued to the Settlor or the

appellant under clause (4). If the trustees fail to

exercise their discretion under clause (3), the only remedy

for the beneficiaries is to approach the court to compel the

trustees to exercise their discretion one way or the other,

but they cannot say that the trust

967

income has accrued to them. Clause (4) comes into

operation, says the counsel, only where the trustees decide

not to distribute the income among the specified

beneficiaries; only then does the trust income belongs to

and has to be paid over to the settlor and after the death

of the settlor to his elder son, the appellant.

Accordingly, the counsel says, the Commission was wrong in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 23

law in treating these trusts as specific trusts.

in our opinion, however, the question urged is academic in

the facts and circumstances of the case. As a matter of

fact, both the settlor and the appellant have been receiving

the income from these trusts during the several assessment

years concerned herein. Sri Vikramsinhji had voluntarily

included the entire income from the U.K. trusts in his

income in the returns filed by him for the assessment years

1964-65 to 1969-70. It is unlikely that he would have so

included unless he really received it. The Commission

treated those declarations as proof of the settlor's real

intention. The Commission also relied upon certain other

circumstances including the manner in which the accounts of

these trusts were maintained in support of their opinion

that all concerned with the trusts, acted on the basis that

the trust income was flowing to the settlor, and after his

death to the appellant. The Commission also referred

specifically to similar declarations made by the appellant

in his returns. It referred to his statements made in the

two returns filed for the assessment year 1970-71, one

relating to the income received by his father till his death

and the other with respect to the income received by him

during the accounting year after the death of his father.

Even subsequent to the death of Sri Vikramsinhji, the

Commission pointed out, the appellant has been making

similar declarations from time to time. For instance, in

the letter dated March 3, 1975 written by the appellant to

the I.T.O., A-Ward, Rajkot relating to the A.Y. 1972-73, he

had stated, "as per statement of U.K. sent herewith, the

trustees have arrived at income of 13,027 pounds for the

benefit of Sri Jyotendrasinhji. According to our opinion,

this income is not taxable as U.K. trust is discretionary.

However, as it has been taken last, the income may be

included in the hands of Sri Jyotendrasinhji subject to our

appeal". It is significant to notice the ground of non-

taxability put forward in the said letter. The appellant

did not say that he did not receive the income. All he said

was, since it is a discretionary trust, its income is not

taxable in his hands. If he had not received the income, he

would have put forward that fact in the forefront. But he

did not. Similarly, in the return relating to the A.Y.

1973-74, a note was appended by the appellant to the

following effect:

968

"Late H.H. Maharaja Vikramsinhji of Gondal has created

trusts in UK. The assessee has been informed that income

falling in the hands of the assessee is 12,627 pounds. This

is, therefore, shows as income in his return.' (emphasis

added). It is true that the appellant had argued before the

commission that the settlor as well as himself had included

the said income in their returns out of ignorance and on the

basis of wrong legal advice but the said explanation has not

been accepted by the commission and we must go by the

findings of the commission. It is not brought to out notice

that during any of the years concerned herein, did the

appellant ever say that he did not receive the income from

these trusts. If so, the question of law urged is of mere

academic interest and need not be dealt with by us. Section

5 of the Act is wide enough to bring all such income to tax.

So far as the plea of double taxation is concerned, the

observation made by the Commission in that behalf is quite

adequate. It has stated that in case appellant proves that

any income has been taxed in U.S. or U.K., the same income

shall not be taxable over again in India.

For the above reasons, the appeals fail and are dismissed.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 23 of 23

No costs.

V.P.R.

Appeals dismissed.

969