1 REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 2312 OF 2007 COMMISSIONER OF WEALTH TAX, RAJKOT Appellant (s) VERSUS ESTATE OF LATE HMM VIKRAMSINHJI OF Respondent(s) GONDAL WITH Civil Appeal No. 329 of 2009 Civil Appeal No. 204 of 2010 Civil Appeal No. 203 of 2010 Civil Appeal No. 202 of 2010 Civil Appeal No. 201 of 2010 Civil Appeal No. 200 of 2010 Civil Appeal No. 199 of 2010 Civil Appeal No. 198 of 2010 Civil Appeal No. 2158 of 2010 Civil Appeal No. 4561 of 2014 (arising out of S.L.P. (C) No. 3755 of 2007) Civil Appeal No. 4562 of 2014 (arising out of S.L.P. (C) No. 3756 of 2007) Civil Appeal No. 4564 of 2014 (arising out of S.L.P. (C) No. 3757 of 2007) Civil Appeal No. 4565 of 2014 (arising out of S.L.P. (C) No. 4623 of 2007) Civil Appeal No. 4566 of 2014 (arising out of S.L.P. (C) No. 8115 of 2007) Civil Appeal No. 4567 of 2014 (arising out of S.L.P. (C) No. 4980 of 2007) Civil Appeal No. 4568 of 2014 (arising out of S.L.P. (C) No. 2415 of 2007) Page 1 2 J U D G M E N T R.M. LODHA, J. : Leave granted in special leave petitions. 2. This is group of 17 Appeals 8 arising from Income Tax Act, 1961 and 9 arising from Wealth Tax Act, 1957. Of 9 Wealth Tax appeals, one appeal relates to 'protective assessment' for 18 assessment years, i.e, 1970-71 to 1976-77, 1978-79 to 1979-80, 1981-82 to 1989-90. remaining 8 Wealth Tax appeals relate to assessment years 1970-71, 1971-72, 1972-73, 1973-74, 1974-75, 1975-76, 1976-77 and 1978- 79. In so far as 8 appeals arising from assessment orders passed under Income Tax Act, 1961 are concerned, they relate to assessment years 1984-85, 1985-86, 1986-87, 1987-88, 1988-89, 1989-90, 1990-91 and 1991-92. 3. ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in United States of America on December 19, 1963 and two deeds in United Kingdom on January 1, 1964. three settlements executed in U.S. are in identical terms. Similarly, two settlements executed in U.K. are similar. Page 2 3 4. In course of arguments, it was conceded by learned counsel for Revenue that in view of decision of this Court in Commissioner of Income Tax, Gujarat, Ahmedabad Vs. Kamalini Khatau (Smt.)1, view taken by High Court in respect of U.S. trusts cannot be faulted and, to that extent, Revenue accepts judgment of High Court. 5. Thus dispute in these appeals Income Tax and so also, Wealth Tax remains about deeds of settlements executed in U.K. copies of deeds of settlements executed in U.K. are on record. Perusal thereof shows that one Mr. Robert Hampton Robertson McGill was designated as trustee, referred to in deeds as 'the Original Trustee'. These trusts were created for benefit of (a) Settlor, (b) children and remoter issue for time being in existence of Settlor and (c) any person for time being in existence who is wife or widow of Settlor or wife or widow or husband or widower of any of them, children and remoter issue of Settlor. trust deeds define expression Trustees to mean and include Original Trustee or other trustees for time being appointed in terms of deeds of settlement. 1. 1994 (4) SCC 308 Page 3 4 6. Clauses 3 and 4 of Trust Deeds are relevant. They read as under:- 3. Settlor hereby directs that Trustees shall and accordingly Trustees shall stand possessed of Trust Fund and income thereof upon trusts following that is to say :- (1) UPON TRUST to raise and pay out of capital thereof any further estate duty which may still be payable thereon in respect of death of Settlor's father His Late Highness Shri Bhojrajji Maharaja Saheb of Gondal who died on 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 ascertainment or payment of such duty and interest. (2) Subject as aforesaid UPON TRUST for all or such one or more exclusively of others or other of 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 discretion of Trustees or of any other person or persons as person who for time being is Maharaja or (if title is abolished) would have been Maharaja had title not been abolished shall at any time during specified period by any deed or deeds revocable or irrevocable appoint AND in default of any subject to any such appointment UPON trusts and with and subject to powers and provisions hereinafter declared and contained concerning same PROVIDED ALWAYS that foregoing power of appointment shall not be capable of being exercised:- (a) by anyone other than Settlor or Elder Son or Younger Son; or (b) in favour of person making appointment save with consent of Trustees (being at least two in Page 4 5 number or trust corporation) such consent to be testified by their being parties to deed of appointment and executing same. 4. SUBJECT as aforesaid Trustees shall stand possessed of Trust Fund and income thereof upon trusts following that is to say:- (1) income of Trust Fund accruing during life of Settlor shall belong and be paid to Settlor. (2) Subject as aforesaid income of Trust Fund accruing during life of Elder Son shall belong and be paid to Elder Son. (3) Subject as aforesaid Trust Fund shall be held in Trust for person who (being descendant of Elder Son) first during specified period (a) becomes Maharaja or would become Maharaja if his title had not been abolished and (b) attains age of eighteen years. (4) Subject as aforesaid income of Trust Fund accruing during life of Younger Son shall belong and be paid to Younger Son. (5) Subject as aforesaid Trust Fund shall be held in trust for person who (being descendant of Younger Son) first during specified period (a) becomes Maharaja or would become Maharaja if his title had not been abolished and (b) attains age of eighteen years. (6) Subject as aforesaid Trust Fund shall be held in trust for person who (being son of Settlor younger than Younger Son or being descendant of such Son of Settlor) first during specified period (a) becomes Maharaja or would become Maharaja if his title had not been abolished and (b) attains age of eighteen years. Page 5 6 7. It appears that during his life time, settlor, Shri Vikramsinhji, was including whole of income arising from these trusts in his returns of income. said income was also included in two returns filed by his son Jyotendrasinhiji for assessment year 1970-71. Thereafter, it appears that assessee Jyotendrasinhiji took stand that income from these trusts is not includible in his income. Jyotendrasinhiji also took stand that inclusion of said income in returns submitted by his father for assessment years 1964-65 to 1969- 70 and by himself for assessment year 1970-71 was under mistake. 8. Bereft of unnecessary details, suffice it to say that Jyotendrasinhiji approached Settlement Commission with application for settlement relating to income from U.K. trusts just as he made application for settlement relating to U.S. trusts. As regards U.K. trusts, Settlement Commission observed as follows:- So far as U.K. trusts are concerned, clause (3) did never come into operation inasmuch as no additional trustees were appointed as contemplated by it. If so, clause (4) sprang into operation whereunder entire income under settlements flowed to settlor during his lifetime and on his death, to his elder son, appellant herein. In other words, these settlements are in nature of specific trusts. In any event, entire income from these trusts was received by settlor during his lifetime and after Page 6 7 settlor s death, by appellant. Therefore, said income was rightly included in total income of settlor and assessee during respective assessment years. 9. Settlement Commission, accordingly, computed taxable income of Settlor under both sets of trusts U.S. and U.K. for assessment years 1964-65 to 1970-71 (up to date of death of Settlor) as also income of Jyotendrasinhiji for assessment years 1970-71 to 1982-83. 10. above order of Settlement Commission reached this Court in group of appeals. This Court, by its judgment dated April 2, 1993, Jyotendrasinhji Vs. S.I. Tripathi & Others2, with regard to U.K. trusts did not consider arguments advanced on behalf of assessee on merits. arguments advanced on behalf of assessee with regard to these trusts are recorded in para 37 of report which reads as under:- 37. first contention urged with respect to U.K. trusts is that Commission has wrongly construed clause (3) which we have extracted hereinbefore. Shri Desai argues that trust had already come into existence with appointment of sole trustee, Mr. McGill, and that coming into existence of trust did not depend upon appointment of additional trustees. Commission was wrong in holding that until and unless additional trustees are appointed, trust in clause (3) does not come into existence. Properly construed, says Shri Desai, clause 2. 1993 Supp. (3) SCC 389 Page 7 8 (3) creates discretionary trust. Inasmuch as sub-clause does not prescribe any time limit within which trustees must decide to distribute income among beneficiaries, says counsel, clause (4) has not and had never come into operation. In this case trustees never did decide not to exercise their discretion under clause (3). If so, no income ever arose or accrued to settlor or appellant under clause (4). If trustees fail to exercise their discretion under clause (3), only remedy for beneficiaries is to approach court to compel trustees to exercise their discretion one way or other, but they cannot say that trust income has accrued to them. Clause (4) comes into operation, says counsel, only where trustees decide not to distribute income among specified beneficiaries; only then does trust income belong to and has to be paid over to settlor and after death of settlor to his elder son, appellant. Accordingly, counsel says, Commission was wrong in law in treating these trusts as specific trusts. 11. This Court, however, observed that question urged on behalf of assessee was academic in facts and circumstances of case. In para 38 of Report, this Court stated:- 38. ... As matter of fact, both settlor and appellant have been receiving income from these trusts during several assessment years concerned herein. Shri Vikramsinhji had voluntarily included entire income from U.K. trusts in his income in returns filed by him for assessment years 1964-65 to 1969-70. It is unlikely that he would have so included unless he really received it. Commission treated those declarations as proof of settlor s real intention. Commission also relied upon certain other circumstances including manner in which accounts of these trusts were maintained in support of their opinion Page 8 9 that all concerned with trusts, acted on basis that trust income was flowing to settlor, and after his death to appellant. Commission also referred specifically to similar declarations made by appellant in his returns. It referred to his statements made in two returns filed for assessment year 1970-71, one relating to income received by his father till his death and other with respect to income received by him during accounting year after death of his father. Even subsequent to death of Shri Vikramsinhji, Commission pointed out, appellant has been making similar declarations from time to time. For instance, in letter dated March 3, 1975 written by appellant to I.T.O., A-Ward, Rajkot relating to A.Y. 1972-73, he had stated, "as per statement of U.K. sent herewith, trustees have arrived at income of 13,027 pounds for benefit of Shri Jyotendrasinhji. According to our opinion, this income is not taxable as U.K. trust is discretionary. However, as it has been taken last, income may be included in hands of Shri Jyotendrasinhji subject to our appeal". It is significant to notice ground of non-taxability put forward in said letter. appellant did not say that he did not receive income. All he said was, since it is discretionary trust, its income is not taxable in his hands. If he had not received income, he would have put forward that fact in forefront. But he did not. Similarly, in return relating to A.Y. 1973-74, note was appended by appellant to following effect: Late H.H. Maharaja Vikramsinhji of Gondal has created trusts in U.K. assessee has been informed that income falling in hands of assessee is 12,627 pounds. This is, therefore, shown as income in his return. (emphasis supplied). It is true that appellant had argued before Commission that settlor as well as himself had included said income in their returns out of ignorance and on basis of wrong legal advice but said explanation has not been accepted by Commission and we must go by findings of Commission. It is not brought to our notice that during any of years concerned herein, did appellant ever say that he did not receive income from these trusts. If so, question Page 9 10 of law urged is of mere academic interest and need not be dealt with by us. Section 5 of Act is wide enough to bring all such income to tax. 12. Insofar as these appeals are concerned, as observed above, 8 appeals relate to income tax assessment years 1984-85 to 1991-92. copies of returns and balance sheets relating to above assessment years have been placed on record. It transpires therefrom that there is endorsement at bottom of statement of funds ending on 31st March of each previous year, Net Income for year retained . 13. Clause 3 of deeds of settlement executed in U.K. leaves at discretion of trustees to disburse benefits to beneficiaries. endorsement made in returns, as noted above, shows that income was retained by trustees and not disbursed. 14. Income Tax Appellate Tribunal (for short, 'Tribunal'), while considering clause 3(2) and Clause 4 of U.K. Trust Deeds referred to findings of Settlement Commission and observed that if trusts were really intended to be discretionary, trustees had duty cast on them to ascertain relative needs and personal circumstances of all beneficiaries and to allocate income of trusts, among them from time to time, according to objects of trusts, however, tell tale facts bring out intention of settlor to treat trust property as his own. Page 10 11 settlor and after his death his son have been showing income of foreign trusts in returns of income filed from time to time. Had trust deeds been really understood by trustees and beneficiaries as discretionary by virtue of operation of clause 3, one would have expected state of affairs to have been different. Consequently, Tribunal held that due to failure on part of Maharaja to appoint discretion exercisers as per clause 3(2), clause 4 has become operative and U.K. trusts have to be held to be specific trusts. 15. High court, however, did not agree with Tribunal's view on consideration of relevant clauses of U.K. Trust Deeds and various judgments of this Court as well as some High Courts and held that there were distinguishing features for assessment years under appeal and previous order of Settlement Commission and earlier judgment of this Court. 16. For assessment years under consideration in these appeals, High Court noted following distinguishing features, viz., (i) assessee has not admitted having received income, (ii) assessee has not received said income and (iii) assessee has not shown as taxable income in returns of all years under appeal. 17. Having observed above distinguishing features, High Court was also of view that on Page 11 12 interpretation of relevant clauses of deeds of settlement executed in U.K., character of trusts appears to be discretionary and not specific. 18. discretionary trust is one which gives beneficiary no right to any part of income of trust property, but vests in trustees discretionary power to pay him, or apply for his benefit, such part of income as they think fit. trustees must exercise their discretion as and when income becomes available, but if they fail to distribute in due time, power is not extinguished so that they can distribute later. They have no power to bind themselves for future. beneficiary thus has no more than hope that discretion will be exercised in his favour.3 19. Having regard to above legal position about discretionary trust which is also applied by by this Court in earlier judgment2 and fact that income has been retained and not disbursed to beneficiaries, view taken by High Court cannot be said to be legally flawed. Merely because Settlor and after his death, his son did not exercise their power to appoint discretion exercisers, character of subject trusts does not get altered. In view of facts noted above, in 3. Snell's Principles of Equity, 28th Edition, Page 138 2. 1993 Supp. (3) SCC 389 Page 12 13 our opinion, two U.K. trusts continued to be 'discretionary trust' for subject assessment years. 20. above position with regard to discretionary trust is equally applicable to controversy in appeals under Wealth Tax Act. High Court has taken correct view that value of assets cannot be assessed on estate of deceased Settlor. 21. 16 Civil Appeals arising from substantive assessment under Income Tax and Wealth Tax, accordingly, have no substance and are dismissed with no order as to costs. 22. Since Appeals arising from substantive assessments have no merit and have been dismissed, obviously nothing remains in Civil Appeal No. 2312 of 2007 under Wealth Tax Act arising from 'protective assessment' for 18 assessment years, i.e, 1970-71 to 1976-77, 1978-79 to 1979-80, 1981-82 to 1989-90 and it is dismissed as well. 23. All 17 Civil Appeals are, accordingly, dismissed with no order as to costs. .........................J. ( R.M. LODHA ) NEW DELHI; .........................J. APRIL 16, 2014 ( SHIVA KIRTI SINGH ) Page 13 Commissioner of Wealth-tax v. Estate of Late HMM Vikramsinhji of Gondal