1. This appeal gives rise to an interesting question. Before we note the controversy, let us narrate the relevant facts : 2.1 One Late Smt. Shantaben Premchand Nayak executed a will on 9-12-1971, whereby she created a trust in respect of her residuary estate in favour of her son's children. The trust was named by her as 'Hiren Kiren Jagruti Hina Trust'. She named four persons as trustees, including, inter alia, her husband, her son, Kiritbhai, her daughter-in-law, i.e., Kirit's wife, and one Shri Mohan Singh Harisingh Jadeja. Clause 7 of the will described trust fund. Clause 8 mentioned the beneficiaries and contained the testatrix's directions to the trustees as to how to dispose of the income arising from the trust fund. As the controversy in the present appeal mostly turns on this clause, it may be reproduced herebelow [English free translation from Gujarati] as follows : Clause 8 : From the interest and other income arising from the trust fund every year, the taxes of every type, income-tax, wealth-tax or any other tax, as also expenses incidental to the maintenance and administration of the trust fund, if any, will be first paid. Out of the remainder the trustees, in their bona fide discretion may give during the period of eighteen years from the date of my death, known as distribution period such sum, as they deem appropriate, either the 'whole of it or part of it, at such time or times as they think appropriate, to the children of my son, Kiritbhai, namely, Hirers, Kirert, Jagruti and Hina, and also such children as may be alive at the time of distribution of the income, to any one of them, or to more of them, or to all of them as the trustees in their absolute discretion may think fit. If after such distribution any income remains over in any year, it will be added to the trust fund as accretion and that accretion will be treated as part of the trust fund.
After the period of eighteen years from the date of my death is over, i.e., at the end of the period of distribution, the above mentioned trust fund shall be distributed by the trustees amongst the sons of my son Kiritbhai, namely, Hiren and Kiren and his daughters, namely, Jagruti and Hina, and to my son Kiritbbai's any other son or sons and daughters whoever might be alive at the relevant time ; the fund may be distributed by the trustees to anyone of the above, or to more of them or to all of them as the trustees may think fit and in such manner as they may in their absolute discretion deem appropriate. The trustees in their discretion may distribute the entire trust fund to anyone of the surviving beneficiaries or amongst all of them either in equal shares or in unequal shares.
(i) that the subject-matter of distribution is the income of the trust fund arising each year, minus (1) the taxes, income-tax, wealth-tax and other taxes, and (2) the expenditure, if any, incurred for the maintenance and the administration of the trust fund. It is significant to note that the words 'if any' qualify not the taxes, but the expenses. It, therefore, appears that the testatrix's will was that the trustees should bear taxes themselves and should not pass on the burden to the beneficiaries. Only the left over, after the payment of taxes, etc., was to be distributed ; (ii) that the trustees have to hold the trust fund for a period of eighteen years from the date of death of the deceased and the income earned during this period has to be distributed ; (iii) that the beneficiaries are the children of Kiritbhai. Those who were alive at the time of the execution of the will were named by her in the will. But they were not the only beneficiaries. All the children to be born subsequently to Kiritbhai were also to be the beneficiaries, if they were alive on the date of the distribution of the income of each year by the trustees. The list of the beneficiaries had thus to be determined each year at the time of distribution of the income of the trust ; (iv) that the shares of the beneficiaries in the income were not determinate. It was left entirely to the discretion of the trustees to distribute the income amongst the beneficiaries in such manner and at such times as they may in their absolute discretion deem appropriate. They could distribute the whole of the net income or only part of it; they could give the whole income to any one or more of them or to all of them or to none of them. The trustees could give the income to the beneficiaries at one time or from time to time or as many times in the year as they deemed appropriate.
Whatever was not distributed by them amongst the beneficiaries was to be added to the trust fund and would become part of it; (v) that the discretion had to be exercised by the trustees with reference to the children of Shri Kiritbhai,, who would be alive, not before the beginning of the previous year, but on the date of distribution of income and if there be more dates than one for distribution of income amongst the beneficiaries, the list of the beneficiaries might be different from date to date depending on the children alive on the given distribution dates.
2.3 Clause 11 of the will gave authority to the trustees to use even the trust fund for the benefit of the beneficiaries, for their bringing up, for their education, their medical and for their marriages, for their life and educational insurance, for setting them up in profession, etc.
2.4 Clause 9 of the will provided for the situation where the trust may become difficult or impossible of operation. In that eventuality, the corpus of the trust was to be disbursed equally amongst the children of Kiritbhai who were alive on that day and in case none of the children aforesaid were alive, amongst his grandchildren, alive on the day.
Clause 10 enabled the trustees to wind up the trust even before the period of eighteen years, referred to in Clause 8 of the will, had expired and gave them discretion in such a situation to distribute the corpus amongst the children of Kiritbhai alive on the day in the manner indicated in Clause 8.
2.5 It appears that sometime after the aforesaid will had been executed, Shri Kiritbhai was blessed with one more son, namely, Satyen Kumar, so that as on 9-11-1977, i.e., two days before the previous year, corresponding to the assessment year 1979-80, began, the children of Kiritbhai who were alive and who were eligible to be the beneficiaries of the trust were the following : On the aforesaid date, the trustees of the assessee-trust passed a resolution whereby it was resolved that 'out of the next income of this trust of the accounting year, Samvat year 2034, Hiren K. Nayak shall be paid Rs. 1,000 and remaining beneficiaries, namely, Kiren Kumar K.Nayak, Satyem Kumar Nayak, Jagrutiben K. Nayak and Hinaben K. Nayak, remaining four persons shall be paid equally the remaining income, which means each shall be paid one-fourth share'. The resolution clarified that 'only for Samvat year 2034 the shares of the abovesaid beneficiaries are determined', and 'this resolution cannot be cancelled and shall be irrevocable', and that 'the income of Samvat year 2034 shall be received by the trustees of this trust for and on behalf of and for the benefit of the said beneficiaries and the beneficiaries shall be entitled, accordingly'. The copy of the above resolution was sent to the respective beneficiaries and/or their guardian.
3. On these facts, the assessee-trust claimed before the ITO that for the year in question, i.e., for the assessment year 1979-80, the trust was not a discretionary trust, that the beneficiaries were determinate as also their shares and so the assessment should be made on the trust under Section 161 of the Income-tax Act, 1961 ('the Act') and not under Section 164 of the Act, The above plea of the assessee was not accepted by the ITO. He pointed out, inter alia, that the nature of the trust, whether discretionary or specific, is to be judged by the provisions contained in the trust deed or will, as the case may be, and not on the specific regulations made by the trustees for distributing the income amongst the beneficiaries.
4. The assessee carried the matter in appeal to the AAC and reiterated before him the plea raised before the ITO and in support placed reliance on the following decisions : Trustees of Putlibai R.F. Mulla Trust v. CWT [1967] 66 ITR 653 (Bom.), Suhashini Karuri v. WTO [1962] 46 ITR 953 (Cal.) and CWT v. Trustees of H.E.H. Nizam's Family Remainder Wealth Trust [1977] 108 ITR 455 (SC).
5. The learned AAC accepted the assessee's plea and observed, inter alia, as follows : ... it is clear that on the relevant date of assessment, the beneficiaries as well as their shares were known and determinate in the case of the appellant-trust. The fact that a discretion is being given to the trustees in the matter of selection of beneficiaries or their shares would not vitiate the fact that the trust was a specific trust as on the date of the accounting period relevant to the assessment year. He, therefore, directed the ITO to make the assessment of the trust under Section 161 rather than under Section 6. The revenue is in appeal against the above order of the learned AAC.The submissions of the learned departmental representative are that the will makes the trust a discretionary one, that the trustees have been given any right under the will to change the character of the trust, that by the exercise of the discretion, the discretionary trust does not become a specific one, that the avowed object of the manoeuvre done by the trustees by passing the resolution dated 9-11-1977 was to defeat the object of the Act, as contained under Section 164 and, therefore, the action in question of the trustees was void ab initio in terms of Section 4 of the Indian Trusts Act, 1882, being opposed to public policy and, therefore, the order of the learned AAC was not sustainable in law and so the same deserved to be reversed and may, accordingly, be reversed.
7. The above submissions were opposed by the learned counsel for the assessee who pleaded that as per settled law, one had to ascertain whether during the previous year in question the beneficiaries were determinate and whether their shares were determinate and, if so, the assessment had to be made under Section 161, that it was not necessary that the beneficiaries and their shares must be made determinate by the trust deed or will [even the trustees, by the exercise of their discretion could do so]; and that, in the present case the beneficiaries and their respective shares had been made determinate by the trustees for Samvat year 2034 and so, for this year, the assessment had to be made under Section 161. In support of the above contention the assessee's learned counsel drew our attention to the amendment made to Section 164 by the Finance (No. 2) Act, 1980, with effect from 1-4-1980 by inserting Clause (ii) to Explanation 1. which clarified that-- (ii) the individual shares of the persons on whose behalf or for whose benefit such income ... is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed.
It was the contention of the learned counsel that, before the aforesaid amendment, it was possible in law to determine the beneficiaries and their shares by the act of the trustees and that it was not necessary that the trust deed, etc., should determine the beneficiaries and their shares. He also drew our attention to the notes on clauses, explaining the above amendment in the Act, to point out the mischief that was sought to be removed by the aforementioned amendment and submitted that inasmuch as the said amendment was not applicable to the assessment year 1979-80, the act of the trustees was beyond the reach of the amended law. He also contested the reasoning of the learned departmental representative based on Section 4 of the Indian Trusts Act and said that the trust was valid and to avoid taxation was not an act opposed to public policy. Every person, according to him could arrange his affairs in such a manner as to minimise tax burden. As to the power of the trustees to make the discretionary trust specific in a given year, it was according to the learned counsel, inherent in the wide powers given to them vide Clause 8 of the will extracted above. The trustees could determine the beneficiaries in a given year and also their shares. No extra powers in this regard were needed.
8. We have given careful consideration to the facts of the case and the rival submissions. That the present trust was constituted by the testatrix to be an out and out discretionary trust both as regards the income during the distribution period and the corpus after the distribution period, is not in doubt nor is it disputed by either sides. As per the trust deed, it has been left to the absolute discretion of the trustees to determine as to who, out of the given class, will be the beneficiary or beneficiaries and how much of the trust income, if at all, will be given to such beneficiary/ beneficiaries and at what point or points of time such distribution shall be made by the trustees. Thus, as per trust deed, though the class of beneficiaries is known, but beneficiaries are not determinate nor their shares. Provisions of Sub-section (1) of Section 164 clearly apply to such a case, in the normal course as will be clear from the relevant provisions of the said section, which we reproduce herebelow for the sake of ready reference : (1) Subject to the provisions of Sub-sections (2) and (3), where any income in respect of which the persons mentioned in clauses (iii) and (IV) of Sub-section (1) of Section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown ... tax shall be charged on the relevant income ... at the maximum marginal rate :" A bare reading of the above sub-section of Section 164 will indicate that it requires the assessing officer to ask himself the following questions : 1. Was the income of the trust receivable by the trustees specifically for the benefit, or on behalf, of any one person 2. If the above enquiry reveals that, though the persons on whose behalf or for whose benefit, the income was receivable by the trustees were known, but further a question has to be asked, viz., if the individual shares of the beneficiaries were 'undeterminate or unknown' The point of time at which the above enquiries are to be made is when the trustees receive the income. Is the income, so received by them 'receivable' by them on behalf of any particular beneficiary or beneficiaries or whether the individual shares of the beneficiaries in the income so receivable by them are unknown to them (sic) They can be known to them, if the trust deed makes them explicit. But if the trust deed leaves it to be determined by the trustees (1) as to who are the beneficiaries, and (2) what will be their shares, if at all, then at the point of time when income is received by them, it is not receivable by them for the benefit of any one beneficiary, nor the individual shares of the beneficiaries are known to them (sic). After receiving the income, they themselves have to determine by the exercise of the discretion vested in them as to who the beneficiary will be and what their individual shares will be. This action of the trustees will be posterior in point of time to the receipt of income and as such it will not be correct to say that the income in question was receivable by them for any one beneficiary or their individual shares were determinate or known.
The basic difference, thus, between a trust, which is 'ministerial' or specific, and the one which is discretionary, is that whereas in the former, the knowledge of the beneficiaries and of their individual shares is available with the trustees by virtue of the provisions in the trust deed itself, anterior to the point of time when income is received by them, so that it can verily be said that the income is 'receivable' by the trustees for the benefit of particular beneficiaries and their individual shares are also known to them, in a discretionary trust, such knowledge is not available to them and the income is first received by them for the benefit of general class of the beneficiaries and they have themselves to decide by the use of their discretion as to who the beneficiary or beneficiaries is/are, and what, are their individual shares. This posterior use of discretion does not make the income received by the trustees as 'receivable' by them for the benefit of any one beneficiary, etc. There is, thus, a basic distinction between a 'ministerial' trust (or specific trust) and a discretionary trust (see page 118 of O.P. Agarwal's book of Indian Trusts Act, 1882, Seventh edition, 1974) and to determine as to what type of trust it is, one has to look at the trust deed itself and nothing else. Thus looked, the present trust is without doubt a discretionary trust.
9. Whether or not a discretionary trust can be converted into a ministerial trust will depend on the authority given to the trustees by the author of the trust in the trust deed. If such power is given, the trustees may convert a discretionary trust into a ministerial trust, otherwise not. The trust deed is their charter and they must abide by it. Any transgression by them of the trust deed will not be legal. Let us, therefore, examine whether the testatrix, in the present case, gave to the trustees any such power as will enable them to convert the discretionary trust, either forever or from year to year. We have noted above the various provisions of the will, which created the trust. In none of them, the trustees have been given the power to convert the discretionary trust into the ministerial trust. The testatrix has directed, vide Clause 8 of the will, that the children of Kiritbhai, as alive on the date of distribution of income each year, will be eligible for consideration by the trustees as to who amongst them, or all of them, or none of them, would be the beneficiary. The question of distribution of income would arise, exhypothesi after it has been ascertained in the manner indicated in Clause 8 of the will. It is at this point that the discretion has to be exercised and not earlier. A decision in advance, even before the previous year has begun and the income has started accruing, to distribute the income in a given manner amongst the children of Kiritbhai, alive on the date of the resolution, prior to the commencement of the previous year, does not amount to distribution. It may be a decision to distribute the income, but not the distribution itself. The income itself accrued to the trust towards the end of the previous year Samvat year 2034, when 50 per cent share of profit from Scientific Chemicals amounting to Rs. 57,799 and interest amounting to Rs. 7,689 was ascertained and communicated to the assessee-trust. Similar is the position regarding interest of Rs. 2,265 received from Scientific Soap Works. It was credited to the trust's account by the said firm at the end of Samvat year 2034. The aforesaid income aggregating to Rs. 67,753 was distributed amongst the named beneficiaries as on the last day of Samvat year 2034, and not 9-11-1977, when the previous year had not yet begun and the income had not started even accruing. Clause 8 of the will enjoins on the trustees to choose the beneficiary/beneficiaries out of the class indicated by the testatrix, on the date when the income is distributed and not on any other date. Every member of the class, alive on the date of distribution of the income, is entitled to be considered, by the trustees. Whether or not his claim will be ultimately accepted by the trustees is a different matter. They may reject his claim but they are duty bound to consider his claim. They cannot foreclose his claim by deciding in advance that the income will be distributed only amongst those beneficiaries who were alive two days prior to the beginning of the previous year. That is not the list the trustees have been ordained to consider. They must consider the list as obtained on the date of distribution of the income, i.e., on Samvat year 2034. That the class of the beneficiaries as on 9-11-1977 was the same as on the last day of Samvat year 2034, when the income was distributed, was a different matter. It might have been the same, it might as well have been different. The process of deaths and births might alter the list of eligible beneficiaries, as indeed it did when Satyen was born. At the time of the execution of the will, Satyen was not there, only the other four children were there, and so the testatrix mentioned their names but significantly added that they were not the only beneficiaries, all the children of Kiritbhai alive on the date of distribution of income of each year will be eligible beneficiaries. That is how, in course of time, Satyen came to be added to the list of eligible beneficiaries.
The list of beneficiaries, as on the last day of Samvat year 2034, could, therefore, have been different from what it was on 9-11-1977, i.e., a year and two days before the appointed date, the variation having been caused due to the death or birth in the family of Kiritbhai, So, the consideration of the list of the beneficiary by the trust as on 9-11-1977 was an act opposed to Clause 8 of the will and has, therefore, to be ignored. The mention in the resolution dated 9-11-1977 that its terms were irrevocable and the communication of the resolution to the beneficiaries does not, in our opinion, make any difference to the legal situation. Anyone alive on 9-11-1977 but not alive as on the date of distribution of income, i.e., last date of Samvat year 2034, would not form part of the class of beneficiaries out of which alone the trustees could make their choice. Any award of percentage of the future income of the trust by the resolution dated 9-11-1977 to such an ineligible person would have no legal effect. One, who is not eligible for the award of the income on the appointed day, can be given nothing, even if the trustees might have resolved so, for the trustees can do nothing in excess of the authority given to them by the testatrix. The submission of the learned counsel that, in case of death, the designated share of the deceased will go to his/her legal heirs does not appear to us tenable. If, as per Clause 8 of the will, nothing could have been given to him, he not being part of eligible class, any previous resolution of the trustees cannot give him/her anything. The resolution of 9-11-1977, therefore, appears to us nothing but an advance declaration of the intention of the trustees to act in the indicated manner, if the list of beneficiaries continued to remain unchanged on the date of distribution of income. The decision of 9-11-1977 has, therefore, to be releated to the date of distribution of income. It assumes meaning only on that day provided the named beneficiaries continued and no one else was born in the meanwhile. Date 9-11-1977 is totally irrelevant for the purpose of deciding as to whether the beneficiaries were known and as to whether their shares were indeterminate. The distribution made on the last day of Samvat year 2034 amongst the various beneficiaries is alone relevant. That it is in accordance with the resolution dated 9-11-1977 is because that was the discretion of the trustees declared in advance on the hypothesis that the general class of the beneficiaries, out of which they had to make the selection, would remain unchanged on the appointed date, i.e., the date of distribution.
10. The question, therefore, that we have now to ask is whether by giving specific and determinate shares out of the income of the trust to the beneficiaries, the trust has become a 'ministerial' or non-discretionary trust and whether it can be said that the income of the trust, when received by the trustees, was 'receivable' by them specifically on behalf of or for the benefit of any one beneficiary or whether, if receivable on behalf of or for the benefit of more than one beneficiary, their individual shares in the income were determinate.
Our answer to this question is in the negative. The act of giving specified shares to the beneficiaries is one of exercise of discretion by the trustees given to them vide Clause 8 of the trust deed. The beneficiaries were indeterminate to begin with and their shares were also indeterminate at the point of time when income was received by the trustees. They had, thereafter, to determine the net income in terms of Clause 8, which alone could be the subject-matter of distribution, if at all. On the date of distribution, the trustees had first to determine the beneficiaries and then their respective shares. The income received by them was, therefore, receivable on behalf of or for the benefit of an indeterminate beneficiary/beneficiaries, with indeterminate individual shares. The posterior determination of the beneficiaries and their individual shares by the exercise of discretion by the trustees will not take the case out of the provisions of Sub-section (1) of Section 164.
11. Somewhat similar problem came to be considered by their Lordships of the Bombay High Court in the case of CIT v. Lady Ratanbai Mathuradas [1968] 67 ITR 504. The trust was admittedly a discretionary one vis a vis the four children of the son of the author of the trust. During the period of distribution the income of the trust properties was to be accumulated or applied for the education or maintenance of any one or more of the four children at the trustees' absolute discretion. At the end of the distribution period, the corpus was to be divided in certain shares. The trustees credited the net income of the trust to the accounts of the four children in accordance with the shares to which they would be entitled to the corpus at the end of the distribution period. On these facts, the question for determination was "whether the shares of the four children are indeterminate and unknown for the purposes of application of the first proviso to Section 41 ?" [analogous to Section 164(1)] of the present Act. While considering the above question, their Lordships pointed out, inter alia, as follows : ... it has to be noticed that the words of the proviso to Section 41 are 'where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown'. The word 'receivable' indicates that we have to see whether upon the provisions of the trust deed, such as they are, the shares are indeterminate or unknown or otherwise and from this point of view it seems to us that the action which the trustees may have taken is notionally separating the shares would be wholly irrelevant. We must look to what is provided by the deed and not. to what the trustees may choose to do in the implementation of its terms." ... We do not think that the provisions of the proviso to Section 41 can be so interpreted as to imply that we have to see what is the manner in which the trust deed is implemented, in order to find out whether the shares are determinate or known. On the other hand, it seems to us that what we have to look to, is the provisions of the trust deed which give rise to the trust. ...
It appears to us, if we may say so respectfully, that the above is the correct position in law, and the approach adopted by us above, is in consonance with the above principles.
12. The case law relied on by the learned counsel for the assessee appears to us to be wholly irrelevant to the issue involved in the present appeal. In the case of Padmavati Jaykrishna Trust v. CWT [1966] 61 ITR 66 (Guj.), under the terms of a trust deed, the income from the trust properties was made payable to the daughter-in-law of the settlor for her life and thereafter the corpus was to be divided and distributed in equal shares amongst the male child or children of the settlor's son. The trust was, thus, clearly a 'ministerial' one and no discretion whatsoever was given to the trustees either as to the disposal of the corpus. The revenue had urged in the said case that the interest of the beneficiaries in the corpus of the trust were indeterminate as nobody could foresee as to how many children will be there to the son of the settlor at the time of death of the wife of the son who had life interest in the income of the trust. This contention of the revenue was negatived by their Lordships by pointing out that the number of beneficiaries entitled to a share in the trust property was known on each valuation date and since their interest was specifically provided for, there was no question of their shares being indeterminate or unknown. The possibility of a variation in the constitution of the family in future was immaterial. The facts of the-present case have no similarity with the facts of the above case.
In our case, as we have seen above, the trust deed did not specify the beneficiaries, it specified a class out of which the trustees were to choose the beneficiary/beneficiaries. The deed also did not specify the shares of the beneficiaries. Even they had to be determined by the trustees, who were, thus required to exercise two fold discretions : first to determine the trustees and then to determine the shares. The facts of Padmavati Jaykrishna Trust's case (supra) bear absolutely no affinity to the facts of the present case. Similar is the position of all other cases relied on by the assessee's counsel. In all of them, the beneficiaries were determinate and also their shares. There was possibility in all of them that there may be variation in the list of the beneficiaries in future. Such a possibility was held to be immaterial.
13. Reference to the notes on clauses to the Finance (No. 2) Bill, 1980, and the Clause (ii) to Explanation 1 to Section 164(1), also does not advance the assessee's case further. We are not laying down in the present case any general proposition to the effect that a discretionary trust could never be made into a non-discretionary one by the act of the trustees or the author of the trust or by the exercise of a specific power given to the trustees by the trust deed. We have confined our observations to the facts of the present case and held on their basis that the present trust was a discretionary trust to begin with and no power has been given to the trustees to make it a non-discretionary one and to determine the beneficiaries and their shares in violation of Clause 8 of the will. The trust, therefore, in our opinion, continues to be governed by the provisions of Section 164(1) and the most charitable view that we can take of the resolution dated 9-11-1977 is to relate it to the date of distribution, i.e., the last date of Samvat year 2034, as ordained by Clause 8 of the will.
14. In view of what we have stated above, we reverse the order of the learned AAC, restore that of the ITO and allow the departmental appeal.
15. Before we close, we may point out that the contentions of the learned departmental representative based on Section 4 of the Indian Trusts Act are, according to us, wholly misconceived. That section concerns itself with the validity of a trust and not with the validity of the section of the trustees. The latter has to be examined, not in the light of Section 4 of the Indian Trusts Act but the provisions of the trust deed.