PETITIONER:
COMMISSIONER OF WEALTH TAX, ANDHRAPRADESH,HYDERABAD
Vs.
RESPONDENT:
TRUSTEES OF H.E.H. NIZAM’S FAMILY(REMAINDER WEALTH TRUST),HY
DATE OF JUDGMENT03/05/1977
BENCH:
BHAGWATI, P.N.
UNTWALIA, N.L.
FAZALALI, SYED MURTAZA
CITATION:
1977 AIR 2103 1977 SCR (3) 735
1977 SCC (3) 362
ACT
Wealth Tax Act 1957--Ss. 3, 21(1) and 21(4)--Scope of.
HEADNOTE
Section 21(1) of the Wealth Tax Act provides that in
case of assets chargeable to tax under the Act which are
held by ........ any trustee appointed under a Trust,
wealth tax shall be levied upon and recoverable from the
trustee in the like manner and to the same extent as it
would be leviable upon and recoverable from the person on
whose behalf the assets are held. Sub-section (4) provides
that notwithstanding anything contained in this section,
where the shares of the persons on whose behalf or for whose
benefit any such assets are held are indeterminate or un-
known, wealth tax shall be levied upon and recovered from
the trustee as if the persons on whose behalf or for whose
benefit the assets are held were an individual for the
purposes of this Act.
The corpus of a family trust created by the Nizam of
Hyderabad was notionally divided into 175 equal units, out
of which 1611/2 units were allocated amongst relatives
mentioned in the Second Schedule to the Deed in the manner
specified therein. The essence of the Trust was that none
of the beneficiaries was entitled to the corpus of the units
allocated to him or her but was only entitled to be paid the
income from the units allocated to him or her. The trust
deed made detailed and elaborate provisions as to the dispo-
sition of the different units allocated to the various
beneficiaries and also provided for every other contingency
in such a manner that at any particular point of time one
could say, if the owner of the life interest were to die at
that point of time, who the beneficiaries entitled to the
corpus would be.
The Wealth Tax Officer assessed wealth tax on the value
of the respective units allocated to each of the several
beneficiaries.
In appeal the Appellate Assistant Commissioner upheld
the assessees’ contention that since each of them was enti-
tled only to a life interest in the corpus of the units
allocated, they could not be assessed in respect of the
entire value of the corpus. When assessments were made on
this basis, the value of the remainder wealth escaped tax.
The Wealth Tax Officer, therefore, assessed the remainder
wealth under s. 21(4) taking the view that the beneficiaries
in respect of the several remainder estates after the lives
of the immediate beneficiaries were unknown and their shares
were indeterminate.
On appeal the appellate Assistant Commissioner, without,
deciding the contention as to the applicability of s. 21(4),
annulled the assessments on the ground that though the trust
deed was one, it created several distinct and separate
trusts, one in favour of each beneficiary with its own
independent and complete provision in regard to devolution.
after the death of each beneficiary and the Wealth Tax
Officer was not justified in clubbing the entire remainder
wealth in a single assessment.
Before the Appellate Tribunal the. Revenue contended
that the assessees were liable to be assessed as an individ-
ual under s. 3 in respect of the entire corpus of the trust
fund and s. 21(4) being merely a machinery provision did not
have the effect of overriding the charge imposed under s. 3.
736
The Tribunal held (i) that 8. 3 was subject to s. 21
and the assessees could not be assessed to wealth tax under
that section in respect of the entire corpus ignoring the
provisions of s. 21; (ii) that s. 21(1) was not applicable
in this case and (iii) that s. 21(4) was applicable because
the beneficiaries in respect of the remainder estate were
unknown.
The following questions, among others, were referred
by the Tribunal the High Court:
1. Whether the trustees were liable to be
taxed under s. 3 in the status of an
"individual"?
2. Whether the Tribunal was right in hold-
ing that the provisions of s. 3 should be
considered as subject to the provisions of s.
21 ?
3. Whether the Tribunal was correct in
holding that under s. 21(4) the remainder
wealth could be assessed in respect of each of
the several units or groups of units allocated
in favour of the beneficiaries ?
4. Whether the Tribunal was right in holding
that the provisions of s. 21(4) are applica-
ble?
The High Court held that (i) since the terms "individu-
al" occurring in s. 3 is wide enough to include a group of
persons forming a unit, the trustees were liable to be
assessed under s. 3 but, s. 3 being subject to the provi-
sions of s. 21, it was not permissible to tax the trustees
under s 3 ignoring the provisions of s. 21; (ii) it was not
possible to say, on the valuation date, that the benefici-
aries of the remainder estate in respect of each unit were
unknown or their shares were indeterminate so as to attract
the applicability of s. 21(4); and (iii) s. 21(1) was ap-
plicable because it could be predicated with certainty and
definiteness on the relevant valuation date as to who would
succeed to the corpus of each set of unit and in what
shares, if the conditions for the vesting of the corpus who
fulfilled on that date.
Dismissing the appeals in part,
HELD: The trustees constituted an assessable unit and
were liable to be assessed to wealth tax as "individual"
under s. 3. [747 E]
(1)(a) Section 3 imposes the charge of wealth tax sub-
ject to other provisions of the Act and these other provi-
sions include s. 21. Section 3 is, therefore, made express-
ly subject to s. 21 and it must yield to that section in so
far as the latter makes special provision for assessment of
a trustee. [748 D-E]
(b) Section 21 is mandatory On a combined reading
of ss 3 and 21,it is clear that an assessment on a trustee
must be made in accordance with the provisions of s 21
Every case of assessment on a trustee must necessarily
fall under s. 21 and he cannot be assessed apart from and
without reference to that section. To hold otherwise would
be to refuse to give effect to the words "subject to the
other provisions of this Act" in s. 3 and to deny mandatory
force and effect to the provisions of s. 21. [749 E-G]
C.R. Nagappa v. Commissioner of Income-tax 73 I.T.R. 187,
Commissioner of Income Tax v. Nandial Agarwal 59 I.T.R. 756
at 762 and Commissioner of Wealth Tax, Bihar & Orissa v.
Kripashankar Dayashanker Worah 81 I.T.R. 763 followed.
Commissioner of Income-Tax, Ahmedabad v. Balwantrai Jetha-
lal Vaidya 34 I.T.R. 187 approved.
(c) The assessment which is contemplated to be made on
the trustee under s. 21(1) or s. 21(4) is assessment in a
representative capacity. It is really the beneficiaries who
are sought to be assessed in respect of their interest in
the trust properties through the trustee. Section 21(1) can
apply only where the trust properties are held by the trus-
tee for the benefit of a single beneficiary
737
or where there are more beneficiaries than one, the individ-
ual shares of the benenciaries in the trust properties are
determinate and known. Where such is the case wealth tax
can be levied on the trustee in respect of the interest of
any particular beneficiary in the trust properties in the
same manner and to the same extent as it would be leviable
upon the beneficiary and in respect of such interest in the
trust properties, the trustees would be assessed in a repre-
sentative capacity as representing the beneficiary. The
beneficiary would always be assessable in respect of his
interest in the trust properties since such interest belongs
to him and the right of the Revenue to make direct asesss-
ment on him in respect of such interest stands unimpaired by
the provisions enabling assessment to be made on the trus-
tees in a representative capacity.
[750 G-H, 751 A-B, C]
(d) The Revenue has thus two modes of assessment: (a) it
may either assess such interest in the hands of the trustee
in a representative capacity under sub s. (1); or (b)
assess it directly in the hands of the beneficiary by in-
cluding it in the net wealth of the beneficiary. In either
case what is taxed is the interest of the beneficiary in the
trust properties and not the corpus of the trust properties.
So also where beneficiaries are more than one and their
shares are indeterminate or unknown, the trustee would be
assessable in respect of their total beneficial interest in
the trust properties.
In the instant case it is the beneficial interest which
is assessed to wealth tax in the hands of the trustee and
not the corpus of the trust properties. Since under sub-ss.
(1) and (4) of s. 21 it is the beneficial interest which is
taxable in the hands of the trustee in a representative
capacity and the liability of the trustee cannot be greater
than the aggregate liability of the beneficiaries, no part
of the corpus of the trust properties can be assessed in the
hands of the trustee under s. 3 and any such assessment
would be contrary to the plain mandatory provisions of s.
21. [751 D-E, G-H]
(e) The consequences that flow from the proposition laid
down in s. 21(1) that the trustee is assessable "in the like
manner and to the same extent" as the beneficiary, are: (i)
There would have to be as many assessments on the trustee as
there are beneficiaries with determinate and known shares,
though for the sake of convenience, there may be only one
assessment order specifying separately the tax due in re-
spect of the wealth of each beneficiary; (ii) The assessment
of the trustee would have to be made in the same status as
that of the beneficiary whose interest is sought to be taxed
in the hand of the trustee; and (iii) The amount of tax
payable by the trustee would be the same as that payable by
each beneficiary in respect of his beneficial interest, if
he were assessed directly. [752 B-D]
N.V. Shanmugham & Co., v. Commissioner of Income-Tax,
Madras, 81 I.T.R. 310, Padmavati Jaykrishna Trust v.
Commissioner of Wealth-Tax, Gujarat 61 I.T.R. 66, at 73-4,
Trustee of Putlibai R.F. Mulla Trust v. Commissioner of
Wealth-Tax 66 I.T.R. 653, at 657-8 and Chintamani Ghosh v.
Commissioner of Wealth-Tax 80 I.T.R. 331 at 341 referred to.
(f) Once it is established that a trustee can be assessed
only in accordance with the provisions of s. 21 and under
these provisions, it iS only the beneficial interests which
are taxed in the hands of the trustee, it must follow that
no part of the value of the corpus in excess of the aggre-
gate value of the beneficial interests can be brought to tax
in the assessment of the trustee. To do so would be con-
trary to the scheme and provisions of s. 21. It would be
deafly erroneous to assess the trustee t.o wealth tax on the
excess of the value the corpus over the actuarial valuations
of the life interest and the reversionary interest of the
beneficiaries. [753 C-D]
Commissioner of Wealth-Tax, Gujarat v. Smt.Arundhati
Balkrishna Trust 101 I.T.R. 626 approved.
(g) No part of the corpus of the trust funds could be
assessed in the hands of the trustees but the assessment
could be made on them only in respect of the beneficial
interests of the beneficiaries in the trust funds under ss.
21 (1) and (4). [754 A]
738
(2)(a) Even if the beneficiaries were indeterminate or
unknown, s. 21(4) would apply and the trustees would be
liable to be assessed in respect of the totality of the
beneficial interest in the remainder as if it belonged to
one single beneficiary. The expression ’where the shares of
the beneficiaries are indeterminate or unknown’ carries with
it by necessary implication a situation where the benefici-
aries themselves are indeterminate or unknown. [754 F-G]
(b) The correct interpretation of s. 21(4) must be that
even where the beneficiaries of the remainder are indetermi-
nate or unknown, the trustees can be assessed to wealth tax
in respect of the totality of the beneficial interest in the
remainder, treating the beneficiaries fictionally as an
individual. [755-B]
(c) The Wealth Tax Officer has to determine as to who
the beneficiaries are in respect of the remainder on the
relevant date and whether their shares are determinate and
known. So long as it is possible to say on the relevant
valuation date that the beneficiaries are known and their
shares are determinate, the possibility that ’the benefici-
aries may change by reason of subsequent events such as
birth or death would not take the case out of the ambit of
s. 21(1), [755 D-El
Khan Bahadur M. Habibur Rehman v. Commissioner of Income-
Tax, Bihar & Orissa 13 I.T.R. 189. Subashini Karuri v.
Wealth-Tax Officer, Calcutta 46 I.T.R. 527, Commissioner of
Wealth Tax, Bombay v. Trustees of Mrs. Hansabai Tribhu-
wandas Trust 69 I.T.R. 527 and Padmawati Jaykrishna Trust v.
Commissioner of Wealth-Tax, Gujarat 61 I.T.R. 66, at 73-4
approved.
(d) In order to determine the applicability of s. 21(1)
on the relevant valuation date, it has to be seen whether it
is possible to say with certainty and definiteness as to who
would be the beneficiaries and whether their shares would be
determinate and specific, if the event on the happening of
which the distribution is to take place occurred on that
date. If it is, s. 21(1) would apply, if not, the case will
be governed by s. 21(4).
In the instant case the trust deed provided for every
contingency and whenever a relative specified in Second
Schedule, who is the owner of the life interest in the set
of unit or units allocated to him or her dies, there would
always be beneficiaries capable of being easily ascertained
and identified who would be entitled to the corpus of such
unit or units in determinate and specific shares, either
immediately on the death of such life tenant or after anoth-
er life interest. The remainder in respect each set of
unit or units allocated to the respective relative specified
in the Second Schedule was, there fore, liable to be as-
sessed in the hands of the trustees under s. 21(1) "in the
same manner and to the same extent" as each beneficiary in
respect of his determinate and known share in such remain-
der. That excluded the applicability of s.21 (4) in the
assessment of the remainder. [756 ’D-E, F, H, 757 A-C]
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal NOS. 467-470 &
470A of 1971.
(Appeals by Special Leave from the Judgment and Order dated
3-3-1970 of the Andhra Pradesh High Court in case Ref. No. 8
of 1967.)
G.C. Sharma, P.L. Junels and R.N. Sachthey, for the appel-
lant in all the appeals.
N. A. Palkhivala, Y.V. Anjaneyulu, Mrs. A. K. Verma, A.
Subba Rao, Ravinder Narain, I. B. Dadachanji, and O.C. Math-
ur, for the respondents in all the appeals.
The Judgment of the Court was delivered by
BHAGWATI, J. These appeals by special leave are directed
against a judgment of the High Court of Andhra Pradesh
answering certain questions referred to it by the Tribunal
in favour of the assessee. The questions are of some impor-
tance and complexity and they turn on the true
739
interpretation of sections 3 and 21 of the Wealth Tax Act,
1957 but ,since they can be answered only by applying the
correct interpretation to the facts of the case, it is
necessary to briefly recapitulate the facts giving rise to
these appeals.
In the year 1950 the late Nawab Sir Mir Osman Ali Khan
Bahadur, The Nizam of Hyderabad and Berar created several
trusts out of which we are concerned in these appeals with
the trust known as the Family Trust. The Nizam, by a Deed of
Trust dated 16th May, 1950, created the Family Trust by
transferring a corpus of Rs. nine crores in Government
securities to the trustees constituted by him. The corpus
was notionally divided into 175 equal units, of out of which
five units constituted a Fund called the ’Reserve Fund’
31/2 units constituted a ’Family Trust Expenses Fund and
the remaining 166-1/2 units were allocated amongst the
relatives mentioned in the first column of the Second
Schedule in the manner specified in that Schedule, the
number of units allocated to each individual relative being
that mentioned in the second column. The Second Schedule
was divided into two parts. Part I specified the names of
the Nizam’s wife Laila Begum, her five sons and two daugh-
ters and his another wife Jani Begum and her minor son as
beneficiaries and in Part II were mentioned the names of
the other wives, sons, daughters, daughters-in-law,
sons-in-law, would-be sons-inlaw and certain other ladies of
the Palace. None of the beneficiaries mentioned in the
Second Schedule, whether in Part I or Part II, was to be
entitled to the corpus of the units allocated to him or her.
Each was entitled to be paid the income from the units
allocated to him or her and detailed provisions were made
for the manner in which the units were to devolve after his
or her death. Clause (4) of the Trust Deed provided that 30
out of 1661/2 units shall be allocated amongst the relatives
mentioned in Part I of the Second Schedule in such manner
that one unit each shall be allocated to Laila Begum and
Jani Begum, two units each shall be allocated to the daugh-
ters of Laila Begum and four units each shall be allocated
to the five sons of Laila Begum and the minor son of Jani
Begum. So far as one unit allocated to Laila Begum was
concerned, the trustees were directed by sub-clause (a) of
clause (4) to pay the income of this one unit to Laila Begum
during her life time and after her death, it was to be
divided into 12 equal parts and 2 equal parts each were to
be added to the four units allocated to each of her five
sons and one equal part each was to be added to the two
traits allocated to each of her two. daughters to be held
upon the same trusts as those declared in respect of the
original units allocated to each son or daughter as the case
may be. Each of the five sons of Laila Begum was allocated
four units and under sub-clause (b) of clause (4) it was
provided that the income from these four units, supplemented
by parts out of Laila Begum’s unit on her death, shall be
paid to the respective son during his life time and on and
after his death, the corpus of the four units allocated
to him together with the parts out of Laila Begum’s unit
added to it, shall be divided amongst his children or remot-
er issues per stirpes in the proportion of two shares for
every male child to one share for every female child stand-
ing in the same degree of relationship. If such son died
without leaving any child or remoter issue him surviving,
sub-clause (b) of clause (4) provided that the trustees
shall divide the four units allocated to him together with
the
8--707 SCI/77
740
subsequently added parts out of Laila Begum’s unit into such
sub-parts and in such manner that they shall allocate two
equal sub-parts each to each of the then surviving sons of
Laila Begum by the settlor and the issue then surviving of
any pre-deceased son and one equal sub-part each to each of
the then surviving daughters of Laila Begum by the settlor
and the issue then surviving of any pre-deceased daughter.
The parts of such surviving sons and daughter of Laila Begum
as are specified in the Second Schedule were to be added to
and amalgamated with the basic units, four or two as the
case may be, allocated to them and they were to be held on
the same trusts as those declared in respect of such basic
units. So far as concerns the sub-parts allocated to the
surviving sons and daughters of Laila Begum who were born
after the date of the Trust Deed, it was directed that such
sub-parts would be taken by them absolutely and so also the
sub-parts allocated to the issue of any pre-deceased son or
daughter of Laila Begum were to be divided between them
absolutely per stirpes in the proportion of two shares for’
every male child to one share for every female child stand-
ing in same degree of relationship. Sub-clause (c) of
clause (4) made similar provisions with regard to the two
units allocated to each of the two daughters of Laila Begum.
The income of the two units together with the subsequently
added parts out of Laila Begum’s unit was to be given to the
respective daughter for her life time and on her death, the
corpus was to be divided amongst her children and remoter
issue per stirpes in the proportion of two shares for every
male child to one share for every female child standing in
the same degree of relationship and if she died without
leaving any issue her surviving, the corpus was to be divid-
ed into such sub-parts and in such manner that one equal
sub-part was to go to each of the then surviving children of
Laila Begum by the settlor and the issue then surviving of
any pre-deceased son or daughter.. The other provisions in
regard to the interest taken by these beneficiaries in the
corpus were the same as in sub-clause (b) of clause (4).
Subclause (d) of clause (4) dealt with the unit allocated to
Jani Begum and provided that the income of this unit would
go to Jani Begum during her life time and on her death, the
corpus of this unit would be added to and amalgamated with
the four units allocated to her minor son Imdad Ali Khan to
be held upon the same trusts as those declared in respect of
those four units and if neither Imdad Ali Khan nor any child
or remoter issue of his was living at the date of the death
of Jani Begum, then this one unit of Jani Begum was to be
held upon the same trusts as the one unit allocated to Laila
Begum on her death. Similarly,. sub-clause (e) of clause (4)
provided that the income of the four units allocated to
Imdad Ali Khan shall be paid to him during his life time and
on his death, the corpus shall be divided amongst his chil-
dren and remoter issue per stirpes in the proportion of two
shares for every male child to one share for every female
child standing in the same degree of relationship and if he
does without leaving any child or remoter issue him surviv-
ing, the corpus shall be held on the same trusts as those
upon which the four units allocated to any of the five sons
of Laila Begum are held on the death of such son without
leaving any child or remoter issue him surviving. It will
thus be seen that detailed and elaborate provisions were
made in the Trust Deed regarding the disposition of the
different units allocated to the various beneficiaries
specified in Part
741
I of the Second Schedule and every contingency was taken
care of in laying down the mode of devolution, so that at
any particular point of time could always say who would be
the beneficiaries entitled to the corpus, if the owner of
the life interest were to die at that point of time.
The remaining 1361/2 units left after the allocation of
30 units as set out in clause (4) were dealt with in clause
(5) of the Trust Deed. These 1361/2 units were allocated
to the respective relatives of the settlor specified in Part
II of the Second Schedule in the respective proportions set
out.against their names. Sub-clause (a) of clause (5)
provided that the income of the respective unit or units or
fraction thereof allocated to the respective relative shall
be paid to them respectively for life. But so far as the 15
daughters of the settlor were concerned, to each of whom
three units were allocated, it was provided that out of the
income of such three units, each daughter was to be paid
only 2/3rd part of the income and the remaining 1/3rd part
was to be set apart by way of a reserve fund. Such reserve
fund was to be utilised for any special, unusual, unforeseen
or emergency expenses relating to the particular daughter
from whose income the reserve fund was created and on her
death, the,reserve fund or the unutilised portion thereof
was to. be amalgamated with the three units of the corpus
allocated to her, to be held on the same trusts as those
declared in respect of such three units. There was also a
special provision made regarding Nawab Rashid Nawaz Jung,
the son-in-law of the settlor, that, though allocated one
unit, he was not to receive the income of that unit so long
as he received the allowance as Amir of the Vikar-al-Mulk-
Paigah and till then, the income of this unit was to be
added to the five units allocated to the Reserve Fund creat-
ed under clause (6) to be held upon the same trusts as those
declared in respect of such Reserve Fund. The other son-
inlaw and the future husbands of the 13 other daughters of
the settlor were also allocated 1/2 unit each and it was
provided that until the marriage of each of these 13 daugh-
ters, the income of 1/2 unit allocated to her future husband
should be set apart as a reserve fund and utilised in the
same manner as the Reserve Fund of such daughter created out
or one-third part of the income of the three units allocated
to her and after her marriage, the income of such 1/2 unit
should be paid to her husband. So far as Fauzia Begum, the
daughter of the second son of the settlor was concerned, a
special provision was made that the income of two units
allocated to her should be set apart and credited in her
account called ’Fauzia Begum Reserve Fund’ and on the death
of the second son of the settlor during the minority of
Fauzia Begum, the income of these two units should be paid
to a committee of management for the maintenance, education,
welfare, advancement in life and benefit of Fauzia Begum
until she attained the age of majority and during the minor-
ity of Fauzia Begum, the trustees. were also authorised to
spend out of the Reserve Fund such sums as may be necessary
for any special. unusual, unforeseen or emergency expenses
for her benefit and on Fauzia Begum attaining the age of
majority, the trustees were to hand over the reserve fund or
the unutilised portion thereof to her absolutely and also to
pay to her the income of the two units during her life time.
Sub-clause (b) of clause (5) provided for the devolution of
the respective unit or units or fraction thereof allocated
742
to the respective relatives on their death. It was directed
that on the death of any of these relatives, the corpus of
the unit or units or fraction thereof allocated to him or
her should be divided’and distributed, subject to some
restrictions, amongst the children and remoter issue per
stirpes in the ratio of 2:1 as between male and female
children standing in the same degree of relationship. The
contingency of any of these relatives dying without leaving
any child or remoter issue him or her surviving. was dealt
with in sub-clause (c) of clause (5) which provided that in
the event the unit or units or the fraction thereof allocat-
ed to such relative should be divided amongst the other
relatives of the settlor but in accordance with certain
specified rules. Sub-clause (d) of clause (5) made a spe-
cial provision in regard to Dulhan Pasha Begum, namely, that
on her death, the five units allocated to her should be
added to and amalgamated with the four units allocated to
her daughter Shahzadi Begum, to be held upon thus be seen
that according to the scheme envisaged in clause (5), each
of the settlors specified in Part II of the Second Schedule
was given life interest in the unit or units or fraction
thereof allocated to him or her and on his or her death,
subject to certain special provisions in regard to some of
the relatives, the corpus of such unit or units or fraction
thereof was to be divided and distributed amongst the chil-
dren or remoter issue and if any of the relatives died
without leaving any child or remoter issue him or her sur-
viving, the corpus allocated to him or her was to go to the
other relatives in accordance with certain specified rules.
Clause (6) of the Trust Deed directed the trustees to
hold 5 units out of the corpus of the trust fund aS and by
way of a Reserve Fund, This Reserve Fund was primarily
intended to meet special, unusual, unforeseen or emergency
expenses of or for the benefit of the relatives of the
settlor specified in the Second Schedule and it was also
provided that if there was any deficit in the Family Trust
Expenses Account in meeting the charges of collection, the
remuneration of the trustees and the members of the commit-
tee of management and other costs, charges, expenses and
outgoing in connection with the trust, such deficit should
be made good out of the income or the corpus of the Reserve
Fund. There was also a provision made that on and after the
death of any of the relatives of the settlor specified in
the Second Schedule, a corresponding proportion of the
Reserve Fund should be added to and amalgamated with the
unit or units or fraction thereof allocated to such relative
and held on trusts similar to the original trust.
The remaining 31/2 units were allocated under clause (7)
of the Trust Deed to a fund called ’The Family Trust Ex-
penses Account’. This fund was intended to meet all the
charges for the collection of the income of the trust fund
and the remuneration of the trustees and the members of the
committee of management and all the costs, charges and
expenses and outgoings relating to the trust and its admin-
istration. It was also directed that after all the afore-
said trusts relating to the 30 units, 136-1/2 units and 5
units out of the corpus of the trust fund had been fully
administered and carried out and the corpus of all such
units had been handed over and transferred absolutely to the
ultimate beneficiaries, the
743
trustees should transfer and hand over 31/2 units comprising
this fund to the then successor-in-title of the settlor or
to the eldest male descendant in the direct male line of
succession of the settlor according to the rule of primoge-
nature.
During the course of assessment of the trustees (herein-
after referred to as the assessees) to wealth tax for the
assessment year 1957-58, a question arose as to how the
assessment to wealth tax should be made. The Wealth Tax
Officer assessed the assessees to wealth tax on the value of
131/2 units of the trust fund comprising 5 units allocated
to the Reserve Fund, 31/2 units allocated to the Family
Trust Expenses Account and 5 units representing the units
allocated to the future husbands of the then unmarried
daughters of the settlor. The wealth corresponding to the
remaining 1611/2 units was assessed in the hands of the
several beneficiaries specified in the Second Schedule, who
were assessed to wealth tax on the value of the respective
units allocated to them under the Trust Deed. Similar
assessments were also made for the assessment year 1958-59
with this difference that by the time these assessments came
to be made, one other daughter was also married and the
Wealth Tax Officer, therefore, assessed the assessees to
wealth tax only in respect of the value of 13 units of the
Trust Fund and the values of the other units were assessed
in the hands of the respective beneficiaries to whom they
were allocated as specified in the Second Schedule.
There were appeals to the Appellate Assistant Commis-
sioner against the assessments for the assessment years
1957-58 and 1958-59 and in these appeals, the Appellate
Assistant Commissioner held that the inclusion’ of 5 units
constituting the Reserve Fund, 31/2 units constituting the
Family Trust Expenses Account and the units allocated to the
future husbands of the unmarried daughters in one single
assessment was unjustified, since the clauses constituting
the Reserve Fund and the Family Trust Expenses Account and
creating a trust in favour of the future sons-in-law consti-
tuted three distinct trusts and hence separate assessments
must be made in respect of the several units forming the
subject matter of these clauses. The Wealth Tax Officer
accordingly made separate assessments on the assessees in
respect of 5 units constituting the Research Fund and 31/2
units constituting the Family Trust Expenses Account for the
assessment years 1957-58 and 1958-59 and similar assess-
ments were also made on the assessees in respect of the
assessment years 1960-61 and 1961-62. We are not concerned
in these appeals with the assessments made on the assessees
in respect of 5 units constituting the Reserve Fund and 31/2
units constituting the Family Trust Expenses Account since
these assessments have become final.
The several beneficiaries specified in the Second
Schedule also appealed against their assessments to wealth
tax on the ground that each of them was entitled only to a
life interest in the corpus of the units allocated to him or
her and he or she could not, therefore, be assessed in
respect of the entire value of the corpus. This contention
was accepted by the Appellate Assistant Commissioner who
held that inasmuch as each beneficiary was entitled only to
the income of the Units allocated to him or her during his
or her life time, he or she could be assessed to wealth tax
only on the value of his or her life interest
744
the respective units and not on the value of the corpus
and in this view, the Appellate Assistant Commissioner set
aside the assessments made on the beneficiaries and directed
the Wealth Tax Officer to make fresh assessments by includ-
ing only the value of the life interest of each of the
beneficiaries in his or her assessment. The Wealth Tax
Officer accordingly valued the life interest of each of the
beneficiaries in the respective unit or units allocated to
him or her and made assessment to wealth tax by including
the value of such life interest. But the result of making
assessments on this basis on the several beneficiaries was
that the value of the ’remainder wealth’ in respect of
1661/2 units esCaped tax. The Wealth Tax Officer was of the
view that the beneficiaries in respect of the several re-
mainder estates after the lives of the immediate benefici-
aries mentioned in the Second Schedule were unknown and
their shares undeterminate and the assessees were, there-
fore, liable to be assessed in respect of the remainder
wealth under section 21, subsection (4) of the Wealth Tax
Act. The Wealth Tax Officer accordingly reopened the assess-
ments made on the assessees for the assessment years 1957-58
to 1960-61 and made fresh assessments on the assessees in
respect of the ’remainder wealth’ by applying the provisions
of section 21, sub-section (4). He arrived at the value of
the remainder wealth by taking the value of the entire
original corpus and deducting therefrom the value of 5 units
allocated to the Reserve Fund, the value of 3-1/2 units
allocated to the Family Trust Expenses Account and the
aggregate of the values of the life interests assessed in
the hands of the several beneficiaries. Similar assessment
was also made on the assessees in respect of the remainder
wealth for the assessment year 1961-62.
The assessees appealed to the Appellate Assistant Com-
missioner against the assessments made on them in respect
of the remainder wealth and in the appeals, they contended
that the Trust Deed created distinct and separate trusts for
the benefit of the several beneficiaries mentioned in the
Second Schedule and the Wealth Tax Officer was, therefore,
not justified in clubbing the entire remainder wealth relat-
ing to these distinct and separate trusts in a single as-
sessment on the assessees and a further contention was also
urged by them that, in any event, the assessments were bad
in law inasmuch as the provisions of section 21, sub-section
(4) were not applicable to the facts and circumstances of
the case. The Appellate Assistant Commissioner agreed with
the first contention of the assessees and held that though
there was only one single Deed of Trust, it created several
distinct and separate trusts. one in favour of each benefi-
ciary mentioned in the Second Schedule with its own inde-
pendent and complete provision in regard to devolution after
the death of such beneficiary and on this view, the Appel-
late Assistant Commissioner annulled the assessments made on
the assessees in respect of the remainder wealth, leaving it
open to the Wealth Tax Officer "to take such steps as he may
consider necessary to assess the remainder wealth pertaining
to each distinct trust separately". This view taken by the
Appellate Assistant Commissioner rendered it unnecessary to
decide the second contention as to the applicability of
section 21, sub-section (4).
The Revenue being aggrieved by the order passed by the
Appellate Assistant Commissioner preferred appeals before
the Tribunal on the
745
main ground that there was only one single trust created by
the Trust Deed and not several distinct and separate trusts.
Two further contentions were also sought to be urged on
behalf of the Revenue at the hearing of the appeals and one
of them was, and that is the only contention material for
our purpose, that the Appellate Assistant Commissioner
should have "given a definite finding regarding the applica-
bility of section 21, sub-section (4) or section 3 to the
facts of the case". The argument of the Revenue in regard to
this contention was that the assessees were liable to be
assessed as an ’individual’ under section 3 in respect of
the entire corpus of the trust fund and section 21, sub-
section (4) being merely a machinery section did not have
the effect of overriding the charge imposed on the assessees
under section 3. The Tribunal allowed the Revenue to raise
this new contention, but made it clear that it would be only
"for the purpose of supporting the assessments already made
and not for the purpose of enhancing the assessments". The
answer given by the assessees to this contention was that
section 3 had no application at all, because the assessees
as trustees would be an "association of persons’ and under
the Wealth Tax Act an ’association of persons’ is not an
assessable entity and they went on further tO say that they
could not be assessed even under sub-section (1) or subsec-
tion (4) of section 21, since in respect of the remainder
estate after the death of each relative, the beneficiaries
were unknown. The asses.sees also contended that, in any
event, even if section 3 were applicable, the assessment on
the assessee could be made only in accordance with the
provisions of section 21, since section 3 was subject to the
other provisions of the Act including section 21. It was
also urged on behalf of the assessees that the Trust Deed
created distinct and separate trusts ’in respect of the
several units allocated to the beneficiaries mentioned in
the Second Schedule and in any event, even if the trust was
a single indivisible trust, the remainder estate in respect
of the several units was required to be assessed separately
in the hands of the assessees and to the assessment of such
remainder, it was sub,section (1 ) of section 21 which
applied and not sub-section (4) of section 21. The Tribu-
nal, on a proper construction of section 3 ,and 21, came to
the Conclusion that these two sections have to be read
together and so read it was clear that section 3 was subject
to section 21 and the assessees could not, therefore, be
assessed to wealth tax under section 3 in respect of the
entire corpus, ignoring the provisions of section 21. Sub-
section (1) of section 21 was, in the view of the Tribunal,
not applicable and the only question, therefore, was whether
assessment could be made on the assessees under sub,sec-
tion (4) of section 21. The Tribunal held that it was not
correct to say that sub-section (4) of section 21 was not
applicable in the present case on the ground that the bene-
ficiaries in respect of the remainder estate were unknown
and proceeded to apply the provisions of section 21, sub-
section (4) in the assessment of the assessees. The Tribu-
nal accepted the contention of the Revenue that there was
only one single trust created by the Trust Deed and not as
many trust as there were beneficiaries, but all the same it
held, on the application of section 21, sub-section (4) that
"even if the Trust Deed be viewed as a single trust, sepa-
rate assessments should be made on the trustees in respect
of the several units allocated to the groups of the several
beneficiaries mentioned in the Second Schedule". The result
was that the appeals filed by the Revenue were dismissed.
746
The Revenue thereupon applied to the Tribunal for refer-
ring to the High Court certain questions of law said to
arise out of the order of the Tribunal and on the applica-
tion of the Revenue, the Tribunal referred the following
questions for the decision of the High Court:
"(i) Whether the Trustees are liable to
be assessed under section 3 of the Wealth-tax
Act in the status of an individual’ ?
(ii) Whether, on the acts and in the
circumstances of the case, the Appellate
Tribunal was right in holding that the provi-
sions of section 3 of the Wealth Tax Act
should not be considered as subject to the
provisions of section 21 of the above Act ’?
(iii) Whether, on the facts and in the
circumstances of the case, the Appellate
Tribunal was correct in refusing to admit the
additional ground filed on behalf of the De-
partment (in W.T.A. No. 690 to 694 of 1963-64)
except to the extent of supporting the assess-
ment as made ?
(iv) Whether, on a proper construction
of the trust deed in question, the Tribunal
was correct in holding that the settlor had
created only one trust in favour of several
beneficiaries and not separate and independent
trust in favour of several beneficiaries or
groups of beneficiaries ?
(v) Whether, having held that a single
trust was created by the trust deeds, the
Tribunal was correct in law in holding that
under section 21 (4) of the Act the remainder
wealth could be assessed in respect of each of
the several units or groups of units allocated
in favour of the beneficiaries specified under
the relevant trust deeds ?
(vi) Whether, on the facts and in the
circumstances of the case and on a proper
construction of the provisions of section 21
of the Act, the Tribunal was right in holding
that the provisions of section 21 (4) are
applicable in the circumstances of this case
?"
So far as the first question is concerned, the High Court
answered it in favour of the Revenue by holding that the
trustees are liable to be assessed as an ’individual’
under section 3, because the word ’individual" in section 3
is wide enough to include a group of persons forming a unit.
But section 3 being subject to the provisions of section 21,
the High Court held, in answer to the second question, that
it was not permissible to the Revenue to tax the trustees
under section 3 ignoring the provisions of section 21. The
High Court held that the assessment on the trustees could be
made only in accordance with the provisions of section 2’1.
The question then was as to which sub-section of section 21
applied in the present case: sub-section (1) or sub-section
(4). The High Court took the view that on the relevant
valuation date,’ it: was not possible to say that the bene-
ficiaries of the remainder estate in respect of each set of
unit or units allocated to the respective relatives
747
Specified in the Second Schedule were unknown or their
shares were indeterminate so as to attract the applicability
of sub-section (4) of section 21. The High Court.observed
that it could be predicated with certainty and definiteness
on the relevant valuation date as to who would succeed to
the corpus of each set of unit or units and in what shares,
if the conditions for the vesting of the corpus were ful-
filled on that date. The High Court accordingly held that
sub-section (1) of section 21 was applicable to the facts of
the case and the assessment on the assessees was liable to
be made in conformity with that provision. The High Court
then addressed itself to the fourth question and held that
the Tribunal was not right in holding that the Trust Deed
created one single indivisible trust but there were really
several distinct and separate trusts created by the Trust
Deed in favour of each of the relatives mentioned in the
Second Schedule. This view taken by the High Court neces-
sarily resulted in questions Nos. (v) and (vi) being an-
swered in favour of the assessees. That left the third
question, but so far as that is concerned, the High Court
took the view that it was not necessary to consider it in
view of the answers given to the other questions. It is
this decision of the High Court on the various questions
referred by the Tribunal which is impugned in the present
appeals preferred by special leave.
Before we take up the questions of law that arise for
consideration in these appeals, we may clear the ground at
the outset by pointing out that though before the High
Court, it was contended on behalf of the assessees that they
were not liable to be assessed to wealth under section 3
since unlike the charging section in the Income-tax Act 3
did not provide for levy of wealth tax on association of
persons his contention was not pressed before us and it was
conceded, and in our opinion rightly, that the assessees
constituted an assessable unit and opinion liable to be
assessed to wealth tax as ’individual’ under section 3. This
position indeed could not be disputed after the decision of
this Court in Trustees of Gordhandas Govindram Family Chari-
ty Trust v. Commissioner of Income-Tax, Bombay. (1) But the
question is whether assessment could be made on the asses-
sees under section 3 apart from and without reference to
section 21. That depends on the true meaning and effect of
sections 3 and 21 and the inter-relation between these two
sections. SectiOn 3 is the charging section and it levies
the charge of Wealth tax on the net wealth of the assessee
on the relevant valuation date. ’Net wealth’ is defined in
section 2 (m) to mean "the amount by which the aggregate
value computed in accordance with the provisions of this Act
of all the assets, wherever located, belonging to the asses-
see on the valuation date------is in excess of the.aggregate
value of all the debts owed by the assessee on the valuation
date------". It is clear from this definition that any
property, wherever located, ’belonging to’ the assessee on
the relevant valuation date would be includible in the net
wealth of the assessee assessable to wealth tax. One argu-
ment based on semantics advanced on behalf of the assessees
was that assets held by a trustee in trust for others cannot
be said to be assets belonging to the, trustee so as to be
includible in his net wealth. The assets so held "are not
trustee’s property in any real sense": they are
(1) 88 I.T.R. 47
748
the property of the beneficiaries and, to use the words of
Lord Mac Naughton in Heritable Reversionary Co. Ltd. v.
Millar, (1) the beneficiaries are the true owners all along.
The trustee of a trust cannot, therefore, be assessed to
wealth tax in respect of the trust properties under section
3. It was for this reason, contended the assessees, that
special provision had to be made in section 21 for assessing
the trustee and hence assessment on the trustee could be
made only in accordance With such special provision. This
was precisely the argument which found favour with the
Gujarat High Court in Commissioner of Wealth-Tax, Gujarat v.
Kum. Manna G. Sarabhai(2) which was a case decided by a
Division Bench presided over by one of us (Bhagwati, J. as
the Chief Justice). On this argument, the trustee of a
trust would not be liable to be assessed to wealth tax in
respect of the trust properties under section 3. It is
only by reason of section 21 that he would be assessable and
hence assessment cannot be made on him except in accordance
with the provisions of section 21. Prima facie, there seems
to be force in this argument, but we do not think it neces-
sary to express any final opinion upon it, since there is an
alternative argument advanced on behalf of the assessees
which is quite substantial and leave no room for judicial
doubt or hesitation.
Let us assume that the trustee of a trust would be
assessable in respect of the trust properties under section
3, even in the absence of section 21. But section 3 imposes
the charge of wealth tax ’subject to the other provisions’
of the Act and these other provisions include section 21.
Section 3 is, therefore, made expressly subject to section
21 and it must yield to that section in so far as the latter
makes special provision for assessment of a trustee of a
trust. Section 21 is mandatory in its terms and as it stood
at the material time it provided as follows:
"21(1) In the case of assets chargeable
to tax under this Act which are held by a
court of wards or an administrator-general or
an official trustee or any receiver or manager
or any other person, by whatever name called,
appointed under any order of a court to manage
property on behalf of another, or any trustee
appointed under a trust declared by a duly
executed instrument in writing, whether testa-
mentary or otherwise (including-a trustee
under a valid deed of wakf), the wealth-tax
shall be levied upon and recoverable from the
court of wards, administrator-general,
official trustee, receiver, manager or trus-
tee, as the case may be, in the like manner
and to the same extent as it would be leviable
upon and recoverable from the person on whose
behalf the assets are held, and the provisions
of the Act shall apply accordingly.
(2) Nothing contained in sub-section (1)
shall prevent either the direct assessment of
the person on whose behalf the assets above
referred to are held, or the recovery from
such person of the tax payable in respect of
such assets.
(1) (1892) A.C. 598.
(2) 86 I.T.R. 153
749
(3) Where the guardian or trustee of any
person being a minor, lunatic or idiot (all of
which persons are hereinafter in this sub-
section included in the term "beneficiary")
holds any assets on behalf of such benefici-
ary, the tax under this Act shall be levied
upon and recoverable from such guardian or
trustee, as the case may be, in the
like manner and to the same extent as it would
be leviable upon and recoverable from any such
beneficiary if of full age or sound mind and
in direct ownership of-such assets.
(4) Notwithstanding anything contained
in this section, where the shares of the
persons on whose behalf or for whose benefit
any such assets are held are indeterminate or
unknown, the wealth-tax shall be levied upon
and recovered from the court of wards,
administrator-general, official trustee,
receiver, manager, or other person aforesaid
as if the persons on whose behalf or for
whose benefit the assets are held were an
individual for the purposes of this Act."
Sub-section (5) was not a part of section 21
at the material time since it was introduced
only with effect from 1st April, 1965 but it
throws some light on the interpretation of the
other sub-sections of section 21 and hence it
may be reproduced here:
"21(5) Any person who pays any sum by
virtue of the provisions of this section in
respect of the net wealth of any beneficiary,
shall be entitled to recover the sum so paid
from such beneficiary, and may hold on behalf
or for the benefit of such beneficiary, an
amount equal to the sum so paid."
It would, therefore, be clear on a combined
reading of sections 3 and 21 that whenever
assessment is made on a trustee, it must be
made in accordance with the provisions of
section 21. Every case of assessment on a
trustee must necessarily fall under section 21
and he cannot be assessed apart from and
without reference to the provisions of that
section. To take a contrary view giving
option to the Revenue ’to assess the trustee
under section 3 without following the provi-
sions of section 21 would be to refuse to give
effect to the words "subject to the other
provisions of this Act’ in section 3, to
ignore the maxim genralia specialibus non
derogent and to deny mandatory force and
effect to the provisions enacted in section
2|. It may be noted that, while interpreting
the corresponding provisions in section 41 of
the Indian Income-Tax Act, 1922 and section
161 of the Income-Tax Act, 1961-, this Court
in C.R. Nagappa v. Commissioner of
IncomeTax(1) approved the following observa-
tions made by Chagla, C.J. in regard to the
scheme of section 41 of the Indian Income Tax
Act, 19v22 in Commissioner of Income-tax,
Ahmedabad v. Balwantrai Jethalal Vaidya(2):
"If the assessment is upon a trustee,
the tax as to be levied and recovered in the
manner provided in section 41.
(1) 73 I.T.R. 187.
(2) 34 I.T.R. 187.
750
The only option that the Legislature gives is
the option embodied in sub-section (2) of
section 41, and that option is that the de-
partment may assess, the beneficiaries instead
of the trustees, or having assessed the trus-
tees it may proceed to recover the tax from
the beneficiaries. But on principle the
contention of the department cannot be accept-
ed that, when a trustee is being assessed to
tax, his burden which will ultimately fall
upon the beneficiaries should be increased and
whether that burden should be increased or not
should be left to the option of the depart-
ment. The basic idea underlying section 41,
and which is in conformity with principle, is
that the liability of the trustees should be
co-extensive with that of the beneficiaries
and in no sense a wider or a larger liability.
Therefore, it is clear that every case of an
asessment against a trustee must fall under
section 41, and it is equally clear that, even
though a trustee is being assessed, the as-
sessment must proceed in the manner laid down
in Chapter III. Section 41 only comes into
play after the income has been computed in
accordance with Chapter III. Then the ques-
tion of payment of tax arises and it is at
that stage that section 41 issues a mandate to
the taxing department that, when they are
dealing with the income of a trustee, they
must levy the tax and recover it in the manner
laid down in section 41." (Emphasis supplied
by us).
This Court also observed that "the some considerations must
apply in the interpretation of section 161 (2) of the Income
Tax Act, 1961". The same view, it may be pointed out, was
taken by this Court in an earlier decision in Commissioner
of Income Tax v. Nandial Agarwal.(1) These decisions given
under the Income Tax law must apply equally in the interpre-
tation of section 21, since the relevant provisions of both
the statutes are almost identical. That was pointed out by
this Court in Commissioner of Wealth Tax, Bihar & Orissa
v. Kripashankar Dayashanker Worah(2) where it was said:
"Section 21(1) of the Act is analogous to section 41 of the
Income-Tax Act, 1922. The only difference between the two
sections is that whereas the former deals with assets, the
latter deals with income. Subject to this difference, the
two provisions are identically worded. Hence, the decisions
rendered under section 41 (1) of the Indian Income-tax Act,
1922, have a bearing on the question arising for decision in
this case". It must therefore, be held to be incontroverti-
ble that whenever a trustee is sought to be assessed, the
assessment must be made in accordance with the provisions of
section 21.
It must also be noted that the assessment which is contem-
plated to be made on the trustee under sub-section (1) or
sub-section (4) of section 21 is assessment in a representa-
tive capacity. It is really the beneficiaries who are
sought to be assessed in respect of their interest in the
trust properties through the trustee. Sub-section (1)
provides that in respect of trust properties held by a
trustee, wealth tax
(1) 59 I.T.R. 756 at 762.
(2) 81 I.T.R. 763.
751
shall be levied upon him ’in the like manner and to the same
extent’ as it would be leviable on the beneficiary for whose
benefit the trust properties are held. This provision
obviously can apply only where the trust properties are held
by the trustee for the benefit of a single beneficiary or.
where there are more beneficiaries than one, the individual
shares of the beneficiaries in the trust properties are
determinate and known. Where such is the case, wealth tax
can be levied on the trustee in respect of the interest of
any particular beneficiary in the trust properties ’in the
same manner and to the same extent’ as it would be leviable
upon the beneficiary and in respect of such interest in the
trust properties, the trustee would be assessed in a repre-
sentative capacity as representing the beneficiary. This,
of course, does not mean that the Revenue cannot proceed to
make direct assessment on the beneficiary. in respect of the
interest in the trust properties which ’belongs to’ him.
The beneficiary would always be assessable in respect of his
interest in the trust properties, since such interest
’belongs to’ him and the right of the Revenue to make direct
assessment on him in respect of such interest stands unim-
paired by the provision enabling assessment to be made on
the trustee in a representative capacity. Sub-section (2)
makes this clear provided that nothing contained in sub-
section (1) shall prevent either the direct assessment of
the beneficiary for whose benefit the trust properties are
held or the recovery from the beneficiary of the wealth
tax in respect of his interest in the trust properties which
is assessed in the hands of the trustee. The Revenue has
thus two modes of assessment available for assessing the
interest of a beneficiary in the trust properties: it may
either assess such interest in the hands of the trustee
in a representative capacity under sub-section (1) or
assess it directly in the hands of the beneficiary by in-
cluding it in the net wealth of the beneficiary. What is
important to note is that in either case what is taxed is
the interest of the beneficiary in the trust properties and
not the corpus of the trust properties. So also where
beneficiaries are more than one, and their shares are inde-
terminates or unknown, the trustees would be assessable in
respect of their total beneficial interest in the trust
properties. Obviously in such a case. it is not possible to
make direct assessment on the beneficiaries respect of their
interest in the trust properties, because their shares are
indeterminate or unknown and that is why it is provided that
the assessment may be made on the trustee as if the benefi-
ciaries for whose benefit the trust properties are held were
on individual. The beneficial interest is treated as if it
belonged to one individual beneficiary and assessment is
made on the trustees in the same manner and to the same
extent as it would be on such fictional beneficiary. It
will therefore, be seen that in this case too, it is the
beneficial interest which is assessed to wealth tax in the
hands of the trustee and not the corpus of the trust proper-
ties. This position becomes abundantly clear if we look at
sub-section (5) which clearly postulates that where a trus-
tee is’ assessed under sub-section (1) or sub-section (4),
the assessment is made on him ’in respect of the net wealth’
of the beneficiary, that is, the beneficial interest belong-
ing to him. Now wherever there is a trust, it is obvious
there must be beneficiaries under the trust because the very
concept of a trust connotes that though the legal title
vests in the trustee, he does not own or hold the trust pro-
752
perties for his personal benefit but he holds the same for
the benefit of others, whether individuals or purposes. It
must follow inevitably from this premise, that since under
sub-section (1) and (4) of section 21 it is the beneficial
interests which are taxable in the hands of the trustee in a
representative capacity and the liability of the trustee
cannot be greater than the aggregate liability of the bene-
ficiaries no part of the corpus of the trust properties can
be assessed in the hands of the trustee under section 3 and
any such assessment would be contrary to the plain mandatory
provisions of section 21.
It is also necessary to notice the consequences that
seem to flow from the preposition laid down in section 21,
sub-section (1) that the trustee is assessable ’in the like
manner and to the same extent’ as the beneficiary. The
consequences are three fold. In the first place it follows
inevitably from this proposition that there would have to be
as many assessments on the trustee as there are benefici-
aries with determinate and known shares, though for the
sake of convenience, there may be only one assessment order
specifying separately the tax due in respect of the wealth
of each beneficiary. Secondly, the assessment of the trustee
would have to be made in the same status as that of the
beneficiary whose interest is sought to be taxed in the
hands of the trustee. This was recognised and laid down by
this Court in N.V. Shanmugham & Co. v. Commissioner of
Income-Tax Madras (1) And lastly, the amount of tax payable
by the trustee would be the same as that payable by each
beneficiary in respect of his beneficial interest, if he
were assessed directly. Vide Padmavati Jayakrishna Trust v.
CommiSsioner of Wealth-Tax, Gujarat(2) Trustees of
Putlibai R.F. Mulla Trust v. Commissioner of Wealth-Tax.(3)
and Chintamani Ghosh v. Commissioner of Wealth-Tax.(4) Let
us, by way of illustration, take a case where property of
the value of Rs. ten lacs is held in trust under which the
income of the property is given to A for life and on his
death, the property is to be divided equally between B and
C. The beneficiaries in this case are clearly A, B and C,
A having life interest in the trust property and B and C
having equal shares in the remainder. The Revenue has option
to assess the beneficial interests of A, B and C in the
trust property in the hands of the trustee or to make direct
assessment on each of the three beneficiaries. If the
trustee is assessed under sub-section (1) of section 21,
three separate assessments would have to be made on him, one
in respect of the acturial valuation of the life interest of
A, which’ may be, to take an ad hoc figure, say, Rs. 5 lacs
and the other two in respect of the acturial valuations of
the remaindermen’s interests of B and C, which may be, to
take again an ad hoc figure, say, Rs. 2 lacs each. But,
as pointed out above, the Revenue may, instead of assessing
the trustee, proceed to make direct assessment on each of
the three beneficiaries A, B and C and in that case, Rs. 5
lacs, Rs. 2 lacs and Rs. 2 lacs would be included in the net
wealth of A,
(1) 81 I.T.R. 310
(2) 61 I.T.R. 66; at 73-4.
(3) 66 I.T.R. 653, at 657-8
(4) 80 I.T.R. 331 at 341.
753
B and C respectively. The result would be that though the
value of the corpus of the trust property is Rs. 10 lacs,
the assessments, whether made on the trustee or on each of
the three beneficiaries, Would be only in respect of Rs. 5
lacs, Rs. 2 lacs and Rs. 2 lacs and the balance of Rs. 1 lac
would not be subject to taxation. In fact in most cases, if
not all, the aggregate of the values of the life interest
and the remaindermen’s interest would be less than the value
of the total corpus of the trust property, since the value
of the remaindermen’s interest would be the present value of
his right to receive the corpus of the trust property at an
uncertain future date and this would almost invariably be
less than the value of the corpus of the trust property
after deducting the value of the preceding life interest.
The balance of the value of the corpus of the trust proper-
ty would not, in the result, be subjected to assessment to
wealth tax. But that is the logical and inevitable effect
of the schemes of section 21. Once it is established that a
trustee of a trust can be assessed only in accordance with
the provisions of section 21 and under these provisions, it
is only the beneficial interests which are taxed in the
hands of the trustee, it must follow as a necessary corol-
lary that no part of the value of the corpus in excess of
the aggregate value of the beneficial interests can be
brought to tax in the assessment of the trustee. To do so
would be contrary to the scheme and provisions of section
21. It would be clearly erroneous to assess the trustee to
wealth tax on the excess of the value of the corpus over the
acturial valuations of the life interest and the reversion-
ary interest of the beneficiaries. We find that the same
view has been taken by the Gujarat High Court in Commission-
er of Wealth Tax, Gujarat v. Smt. Arundhati Balkrishna
Trust(1) and this view, in our opinion, represents the
correct law on the subject.
We have given in the preceding paragraph illustration
of a case falling within section 21, sub-section (1), but
the illustration can be slightly modified by taking a case
where property is held in trust for giving income for life
to A and on his death, to such of the children of A as the
trustee might think fit. Section 21, sub-section (4) would
be clearly attracted in such a case so far as the reversion-
ary interest is concerned, because, on the relevant valua-
tion date, the remaindermen and their shares would be inde-
terminate and unknown. But here also two assessments would
have to be made on the trustee: one in respect of the actu-
rial valuation of the life interest of A under sub-section
(1) of section 21 and the other in respect of the acturial
valuation of the totality of the beneficial interest in the
remainder as if it belonged to one individual under sub-
section (4) of section 21. The difference between the value
of the corpus of the trust property and the aggregate of the
acturial valuations of the life interest of A and the re-
maindermen’s interest would not be assessable in the hands
of the trustee because, as pointed out above, the trustee
can be taxed only in respect of the beneficial interests and
there being no other beneficiary apart from A and such of
the children of A as the trustee might think fit, the bal-
ance of the value of the corpus cannot
(1) 101 I.T.R. 626
754
be brought to tax in the hands of the trustee under sub-
section (1) or (4) of section 21.
It is, therefore, obvious that no part of the corpus of
the trust funds could be assessed in the hands of the asses-
sees, but the assessment could be made on the assessees only
in respect of the beneficial interests of the beneficiaries
in the trust funds under sub-section (1) and (4) of section
21. Now so far as the beneficiaries specified in the Second
Schedule are concerned, each of them had a life interest in
the unit or units allocated to him or her and the assessees.
were liable under sub-section (1) of section 21 to. be
assessed in respect of such life interest ’in the same
manner and to the same extent’ as the respective benefici-
aries. But the question is as to how the beneficial inter-
est in the remainder in respect of each set of unit or units
was liable to be taxed in the hands of the assessees. The
argument of the Revenue wag that it could not be said on the
relevant valuation date as to who would be the beneficiaries
entitled to the remainder on the death of the concerned
relative and hence the beneficiaries were indeterminate and
unknown on the relevant valuation date and in the circum-
stances, sub-section (1) of section 21 had no application.
Sub-section (4) of section 21 was also not attracted, said
the Revenue, because that sub-section could apply only where
the shares of the beneficiaries were indeterminate or un-
known and not where the beneficiaries themselves were inde-
terminate and unknown. The Revenue contended, on the basis
of this argument, that since the beneficial interest in the
remainder in respect of each set of unit or units was not
taxable either under sub-section (1) or sub-section (4) or
section 21, the assessees were liable to be assessed in
respect of the value of the corpus of such unit or units
minus the valuation of the life interest under section 3.
But this contention is plainly erroneous, because, on the
view we have taken as regards the interpretation of section
3 and 21, a trustee can be assessed to wealth tax only in
respect of the beneficial interests of the beneficiaries
and no assessment can be made on him in respect of any part
of the corpus of the trust funds apart from and without
reference to section 21. We shall presently show that under
the Trust Deed on each relevant valuation date the shares of
the beneficiaries in the remainder in respect of each set of
unit or units were determinate and known and the case was,
therefore, governed by sub-section (1) of section 21, but we
may point out that even if the beneficiaries were indetermi-
nate or unknown, sub-section (4) of section 21 would apply
and the assessee would be liable to the assessed in respect
of the totality of the beneficial interest in the remainder
as if it belonged to one single beneficiary. When the
beneficiaries are indeterminate or unknown, then obviously
their shares would also be indeterminate and unknown. We
cannot conceive of a case where the shares would be determi-
nate or known while the beneficiaries are indeterminate and
unknown. The expression ’where the shares of the benefici-
aries are indeterminate or unknown’ carried with it by
necessary implication, a situation where the beneficiaries
themselves are indeterminate or unknown. Such, for example,
would be the case in the modified illustration given above.
There. the beneficiaries are such of the children of A as
the trustee might think fit
755
and the beneficiaries themselves would, therefore, be inde-
terminate and unknown and yet sub-section (4) of section 21
would apply to their case. To take any other view would be
to deny full meaning and effect to the words "where the
shares of the beneficiaries are indeterminate or unknown"
and to create a lacuna where, even though the beneficial
interest in the remainder is disposed of under the Trust
Deed, such beneficial interest would escape assessment. The
correct interpretation of sub-section (4) of section 21
must, therefore, be that even where the beneficiaries of
the remainder are indeterminate or unknown, the trustee can
be assessed to wealth tax in respect of the totality of the
beneficial interest in the remainder, treating the benefici-
aries fictionally as an individual.
This immediately takes us to the question as to which of
the two sub-sections, (1) or (4) of section 21 applies for
the purpose of assessing the assessees to wealth tax in
respect of the beneficial interest in the remainder qua each
set of unit or units allocated to the relatives specified in
the Second Schedule. Now it is clear from the language of
section 3 that the charge of wealth tax is in respect of the
net wealth on the relevant valuation date, and, therefore,
the question in regard to the applicability of sub-sec-
tion (1) or (4) of section 21 has to be determined with
reference to the relevant valuation date. The Wealth Tax
Officer has to determine who are the beneficiaries in re-
spect of the remainder on the relevant date and whether
their shares are indeterminate or unknown. It is not at all
relevant whether the beneficiaries may change in subsequent
years before the date of distribution, depending upon con-
tingencies which may come to pass in future. So long as
it is possible to say on the relevant valuation date that
the beneficiaries are known and their shares are determi-
nate,the possibility that the beneficiaries may change by
reason of subsequent events such as birth or death would not
take the case out of the ambit of sub-section (1) of sec-
tion. 21. It is no answer to the applicability of sub-
section (1) of section 21 to say that the beneficiaries are
indeterminate; and unknown because it cannot be predicated
who would be the beneficiaries in respect of the remainder
on the death of the owner of the life interest. The posi-
tion has to be seen on the relevant valuation date as if the
preceding life interest had come to an end on that date and
if, on that hypothesis, it is possible to determine who
precisely would be the beneficiaries and on what determinate
shares, sub-section (1) of section 21 must apply and it
would be a matter of no consequence that the number of
beneficiaries may vary in the future either by reason of
some beneficiaries ceasing to exist or some new benefici-
aries coming into being. Not only does this appear to us
to be the correct approach in the application of subsection
(1) of section 21, but we find that this has also been the
general concensus of judicial opinion in this country in
various High Courts during the last about thirty years.
The first decision in which this view was taken was rendered
as far back as 1945 by the Patna High Court in Khan Bahadur
M. Habibur Rahman v. Commissioner of Income-Tax, Bihar &
Orissa(1) and since then, this view has been followed by
the Calcutta High Court in Subhashini Karuri v. Wealth
(1) 13 I.T.R. 189. 9--707SCI/77
756
Tax Officer Calcutta(1) the Bombay High Court in Trustees
of Putlibai R.F. Mulla Trust v. Commissioner of Wealth-Tax
(supra) and Commissioner of Wealth Tax, Bombay v. Trustees
of Mrs. Hansabai. Tribhuwandas Trust(2) and the Gujarat High
Court in Padmavati Jaykrishna Trust v. Commissioner of
Income Tax, Gujarat (supra). The Calcutta High Court point-
ed out in Subhashini Karuri’s case: "The share of a benefi-
ciary can be said to be indeterminate if at the relevant
time the share cannot be determined but merely because the
number of beneficiaries vary from time to time, one cannot
say that it is ideterminate". The same proposition was
formulated in slightly different language by the Bombay High
Court in Trustees of Putlibai R.F. Mulla Trust’s case: "The
question whether the shares of the beneficiaries are deter-
minate or known has to be judged as on the relevant date in
each respective year of taxation. Therefore, whatever may
be the position as to any future date, so far as the rele-
vant date in each year is concerned, it is upon ’the terms
of the trust deed always possible to determine who are the
shares and what their shares respectively are." The
Gujarat High Court also observed in Padmavati Jaykrishna
Trust’s case: " ...... in order to ascertain whether the
shares of beneficiaries and their numbers were determinate
or not, the Wealth-Tax Officer has to ascertain the facts as
they prevailed on the relevant date and therefore any varia-
tion in the number of beneficiaries in future would not
matter and would not make sub-section (4) of section 21
applicable." These observations represent correct state-
ment of the law and we have no doubt that in order to deter-
mine the applicability of sub-section (1) of section 21,
what has to be seen is whether on the relevant valuation
date, it is possible to say with certainty and definiteness
as to who would be the beneficiaries and whether their
shares would be determinate and specific, if the event on
the happening of which the distribution is to take place
occurred on that date. If it is, sub-section (1) of sec-
tion 21 would apply: if not, the case will be governed by
sub-section (4) of section 21.
Now in the resent case it is clear from the provisions
of the Trust Deed that, in the case of each set of unit or
units, it is possible to say with certainty and definiteness
on each relevant valuation date as to who would be the
beneficiaries and in ’what specific shares, if the respec-
tive relative mentioned in the Second Schedule to whom such
set of unit or units is allocated under the Trust Deed were
to die on that date. That is the view taken ,by the
High Court in the judgment impugned in these appeals and
we think it is a correct view on the interpretation of the
provisions of the Trust Deed. We may point out in fairness
to the learned counsel appearing on behalf of the Revenue
that he did not seriously contest this position. There is
not a single contingency unprovided for in the Trust Deed
and whenever a relative specified in the Second Schedule,
who is the owner of life interest in the set of unit or
units allocated to him or her dies, there would always be
beneficiaries capable of being easily ascertained and
identified who would be entitled to the corpus of such unit
or units in determinate and specific shares, either immedi-
ately on the
(1) 46 I.T.R. 527
(2) 69 I.T.R. 527.
757
death of such life tenant or after another life interest.
The remainder in respect of each set of unit or units allo-
cated to the respective relative specified in the Second
Schedule was, therefore, liable to be assessed in the
hands of the assessees under section 21, sub-section (1) in
the same manner and to the same extent’ as each beneficiary
in respect of his determinate and known share in such re-
mainder. That plainly excluded the applicability of sub-
section (4) of section 21 in the assessment of the remain-
der. The High Court also examined the question whether the
Trust Deed created one single indivisible trust or several
distinct and separate trusts and, disagreeing with the view
taken by the Tribunal, came to the conclusion that "the Deed
of Trust created several trusts in favour of the relatives
specified in the Second Schedule and their issues." But.on
the view taken by us that it is sub-section (1) of section
21 and not sub-section (4) of that section which applies in
the assessment of the remainder in respect of each set of
unit or units in the hands of the assessees, it is unneces-
sary to pursue this question and decide whether the Trust
Deed created one single indivisible trust or as many trusts
as the number of beneficiaries specified in the Second
Schedule.
We accordingly agree with the High Court that question
No. (i) should be answered in favour of the Revenue and
Question Nos. (ii), (v) and (vi) should be answered in
favour of the assessees. We do not propose to answer Ques-
tions Nos. (iii) and (iv), since in view of the answers
given by us to the other questions, it is unnecessary to
decide them. The appeals are accordingly dismissed. The
Commissioner will pay the costs of these appeals to the
assessees in one set.
P.B.R. Appeals
dismissed.
758