Judgment:
In this assessees appeal we are called upon to decide a very interesting but knotty controversy, whether the assessee who is a beneficiary of private non-discretionary trust can be made liable for losses of the trusts business to the extent of his share and thereby entitled to set off the same against his other income as per the relevant provision of the IT Act, 1961.
2. The facts which have been called out by us are that one Shri Abdul Khadar created a private trust with an initial trust fund of Rs. 10,000 as per non-testamentary written instrument of trust executed on 4th Feb., 1982 (for short trust deed) styled as "Emjak Trust" for the benefit of various persons termed as "beneficiaries" listed therein each having a definite and determinate share in the trust fund.
3. M/s. Emjak Trustees P. Ltd., a company incorporated under the Companies Act, 1956, has been appointed by the settlor as "Trustees" to carry out and fulfil the purpose and object of the trust. The trustees have been empowered by the settlor to carry on business also. The assessee has definite and determinate share along with other beneficiaries in the income and corpus of the trust which is termed as trust fund. As per cl. 16 of the trust deed the trustees have right to be reimbursed and indemnified in respect of the expenses incurred by them for the accomplishment of the purposes of the trust.
4. The trustees by virtue of the power given to them under the trust deed carried on business which resulted in a loss for the period ending 31st March, 1983 relevant to asst. yr. 1983-84. This loss was apportioned amongst the beneficiaries by the trustees in the accounts of the trust in proportion to the share of each beneficiary in the trust fund and their respective accounts were debited with the quantum of loss falling to the share of each such beneficiary and the same was shown in the balance sheet of the trust as amount due and payable by them to the trust. A return of loss of the trust was also filed by the trustees before the Assessing Officer and the loss was accepted and apportioned by him (Assessing Officer) in the assessment order passed in the case of the trust.
5. The assessee filed his return of income declaring a taxable income of Rs. 14,482 which was computed after deducting the share of loss of Rs. 1,11,681 incurred by the trustees in the trusts business. There was other dispute before the Appellate Commissioner regarding computation of agricultural income, but we are not concerned with the same in this appeal as the assessee got relief in this regard in the first appeal.
The assessment order passed by the Assessing Officer in the case of the trust evidencing acceptance of loss and the apportionment thereof amongst the various beneficiaries was relied upon by the assessee to justify the claim for deduction of loss as a beneficiary of the said trust from other income declared. The Assessing Officer rejected and disallowed this claim of the assessee for set off of shares of loss in trusts business on the ground that a beneficiary under a trust cannot be saddled with losses and liabilities of the trusts business. The Appellate Commissioner before whom the appeal was filed, also agreed with the Assessing Officer that a beneficiary cannot be saddled with losses or liabilities of the trust in which he is a beneficiary. Having lost his case before the first appellate authority the present appeal now lies before us for adjudication.
6. Opening the case for the assessee Shri G. Sarangan submitted that incurring losses is also a concomitant of carrying on business and it is not essential always that every business should result in profit and gains only. When the trustees carry on business as per the wishes and direction of the settlor given in the trust deed then the beneficiary should not only be entitled to share the benefits and advantages arising from the profits of the trusts business but also automatically be and become liable to share and take upon themselves the detriment and disadvantages arising from the losses of trusts business. According to the assessees counsel though the settlor has created a trust for the benefit of the beneficiaries yet the word "benefit" should not be viewed or considered by us in a very narrow and restricted sense so as to say that the beneficiaries cannot and should not be made liable for the detriment or losses which the trustees may incur while carrying on the business as per the terms of the trust deed. After all, submits Shri Sarangan, the trustees carried on business for and on behalf of the beneficiaries and that being the case it is but logical that the beneficiaries shall have to share and be liable for the losses so incurred by the trustees in carrying on trusts business in accordance with the wishes and direction of the author of the trust. Elaborating his argument further the assessees counsel submitted that nowhere the settlor has stated in the trust deed that the beneficiaries will not be liable for losses incurred in any business being done and carried by the trustees as per the direction and wishes of the settlor. To support his case Shri Sarangan has drawn our attention to the provisions of S.32 of the Indian Trust Act, 1882, to emphasise the point that the trustees have right to be reimbursed for the expenses incurred and loss in commercial parlance is nothing but excess of expenditure over income and, therefore, the trustees have rightly divided and apportioned the business loss to the accounts of various beneficiaries including this assessee and debited their accounts in the books of the trust with proportionate shares of loss. To justify the claim and deduction of loss in trusts business from other income Shri Sarangan submitted that once the officer assessing the trust has determined the loss of the trusts business and apportioned it amongst the various beneficiaries then it is not open to the officer assessing the present assessee to reject and negative the claim for allowances and deduction of such share of loss of trusts business from his other income. In order to strengthen this argument Shri Sarangan submitted that in the case of firm when the Assessing Officer determines the loss of the firm and apportions the same amongst various partners of such firm then any partner-assessee has a right and in fact it is the duty of the officer assessing such partner to give set off and deduction of such determined share of loss in the firm for arriving at the true taxable income of such a partner. The learned counsel for the assessee, Shri Sarangan, has also placed reliance on the decision of the Chancery Division in the case of Upton vs. Brown (xerox copy of the decision filed) (26 Ch.
D. 588) to support the case of the assessee. In the end, it was strongly urged by the assessees counsel that the impugned order of the Appellate Commissioner be reversed and the appeal be allowed.
7. On the other hand, senior authorised representative of the Revenue Shri P. K. Mondal, while opposing the appeal relied and supported the orders of the lower authorities and did not advance such arguments.
Shri Vasantha Kumar, junior authorised representative of the Department, who assisted the senior authorised representative submitted that none of the submissions advanced by the assessees counsel deserve consideration for allowing the appeal. The order of the Assessing Officer in the case of the trust determining and apportioning the losses amongst the various beneficiaries is invalid and nonest in law and the assessee cannot derive any support from that order because there was no statutory obligation on the trustees to file any return under the provision of S. 139(1) of the IT Act, 1961 as there was a loss in trusts business. Loss return can be filed by other persons for the benefit of set off and carry forward of losses as laid down under the various relevant provisions of the IT Act, 1961. The trust is not a juristic person in law, submitted Shri V. Kumar, and the assessment has to be made on the trustees in respect of the income of the trust derived by them in a representative capacity as per the provisions contained in S. 161/164 of the IT Act, 1961. As per the provisions of S. 161/164 no assessment can be made on the trustees though in a representative capacity in the event of loss to the trust incurred through the medium of the trustees. To support the orders of the lower authorities, the junior Departmental Representative has drawn out attention to cls. 9(d) and 10(h) of the trust deed to convince us that in the event of losses the same has to be met from the trust fund or trust income and the beneficiaries cannot be saddled in respect thereof. That being the situation the beneficiaries are not entitled to claim for allowance of their share of loss in trusts business. It was further contended by Shri Vasantha Kumar that the trust has been created by the settlor to give and confer benefits and advantages on those persons (beneficiaries) chose by him. The settlor did not create the trust to make the beneficiaries liable for losses, detriments and disadvantages owing to the acts of the trustees in carrying on business of the trust or in respect of any loss which may be incurred by the trustees from the other trust fund or investments in their hands. It was finally submitted by Shri Vasantha Kumar that the Assessing Officer did not commit any error in disallowing the claim of the assessee for deduction of share of loss in trusts business form other income and the Appellate Commissioner was equally right in agreeing with the Assessing Officer and as such no interference is called for.
8. In reply, Shri Sarangan submitted that it is not correct to say that the assessment on the trustees in a representative capacity can be made only when there is a positive income because according to the Supreme Court in the case of CIT vs. J. H. Gotla (1985) 156 ITR 323 (SC) income includes loss also. The order passed in the case of the trust by the Assessing Officer determining the loss and apportioning it amongst the beneficiaries is also an assessment under S. 161 of the IT Act, 1961.
9. We have given our anxious consideration to the submissions made before us by both the parties and perused the evidence on record. The representatives of both the parties have not been able to elaborate much in the light of the provisions of the Indian Trust Act nor they were able to lay before us judgment or order of any Court or Tribunal to support their respective stand. We had, therefore, to look on our own and examine the facts of the case in the light of various provisions of the Indian Trust Act, 1882 and IT Act, 1961, and drawing assistance and guidance from some decided case law and books written by eminent authors on the subject of trusts.
10. The trust, Emjak Trust is a private non-discretionary trust with definite and determinate shares of various beneficiaries and is, therefore subject, to the provisions of the Indian Trust Act, 1882.
11. "A trust" says S. 3 of the Trust Act "is an obligation annexed to the ownership of property, and arising out a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner : author of the trust, trustee, beneficiary, trust property, beneficial interest.
the person who reposes or declares the confidence is called the author of the trust : the person who accepts the confidence is called the trustee : the person for whose benefit the acceptance is accepted is called the beneficiary : the subject matter of the trust is called trust property or trust money : the beneficial interest or interest of the beneficiary is his right against the trustee as owner of the trust property;" 12. The characteristics that are noticeable in the definition or description of "trust" under the Act are : (i) a trust is an obligation annexed to the ownership of property; (ii) it arises out of confidence reposed in or accepted by the owner, or declared and accepted by the owner, (iii) it is for the benefit of another or of another and the owner.
"It is an equitable obligation binding a person (who is called a trustee) to deal with property over which he has control) which is called the trust property) for the benefit of persons (who are called beneficiaries or cestui que trust) of whom he may himself be one and anyone of them may enforce the obligation." 14. In the words of Lords Salmand, a trust is more than an obligation to use ones property for the benefit of another in which it is already concurrently vested." Therefore, the settlor has created the trust reposing confidence in the trustees with the intention and object of giving benefit to the various persons (who are not his relatives) from out of income derived through the utilisation of trust fund. This is manifest from the recital as contained in the trust deed, a copy of which has been filed before us.
It is, thus made incumbent by the settlor upon the trustees to give "benefit" to the beneficiaries. The meaning to the word "benefit" as per New Websters Dictionary, Delux Encyclopedic Edition p. 90, 3rd Edition is as under : "good done or received a kindness or favour, anything that is for the good of person or thing, advantage or profit, a theatrical performances or other public entertainment given to raise money for a particular cause." 15. The meaning of the word "detriment" at p. 273 of the New Websters Dictionary of the above-mentioned Edition is loss, damage or injury.
16. It is thus evident from the terms of the trust deed as well as from the provisions of S. 3 of the Trust Act that the trusts are created for conferring or giving benefits to various persons who are called beneficiaries from trust property or trust moneys.
17. The question now is who is the owner of the trust property The answer to this has been provided by the Privy Council as for back as in the year 1931 while deciding the case of Chattra Kumari Devi vs. Mohan Bikram Shah AIR 1931 PC 196. The Privy Council held : "The Indian Law does not recognise legal and equitable estates, therefore, there can be, but one owner and where the property is vested in a trustee, the owner must be the trustee. The trustee is the owner of the trust property, the right of the beneficiary being in a proper case to call upon the trustee to convey it to him." This principle of law has also been reiterated by the Supreme Court in the case of W. O. Holdsworth & Ors. vs. State of Uttar Pradesh (1958) 33 ITR 472 (SC).
18. Therefore, it follows that it is an essential condition of a trust that the property must vest in trustee. The mere fact that a person is holding property on behalf of another will not constitute a trustee, unless ownership of the property is also vested in him. There is no doubt that business constitutes a property and, therefore, a trustee can hold business as a trust property and when it is so the property thus vests in the trustee.
19. When the trustee is the legal owner of the trust property the question to be answered is whether he holds such property "for the benefit of" or "on behalf of" the beneficiaries. The Honble Supreme Court while deciding the case of W. O. Holdsworth (supra) at p. 480 laid down as under : "..... the trustee is the owner of the trust property and the beneficiary only has a right against the trustee as owner of the trust property. The trustee is thus the legal owner of the trust property and the property vests in him as such. He no doubt holds the trust property for the benefit of the beneficiaries but he does not hold it on their behalf. The expression for the benefit of and on behalf of are not synonymous with each other. They convey different meanings. The former connotes a benefit which is enjoyed by another thus bringing in a relationship as between a trustee and a beneficiary or cestui que trust, the latter connotes an agency which brings about a relationship as between principal and agent between the parties, one of whom is acting on behalf of another." 20. When we look into the other provisions of the Trust Act we find that as per S. 8, the subject matter of the trust must be property transferable to the beneficiaries and that must not be merely beneficial interest in a subsisting trust.
21. This analysis, therefore, manifestly brings out that the trustee shall hold the trust property or trust fund for the benefit of the beneficiaries and not for and on behalf of the beneficiaries, in accordance with wishes and directions of the settlor as contained in the instrument of trust.
22. In order to find out the wish, direction and intention of the settlor from the trust deed in relation to the treatment of losses, if any resulting from the business which may be carried on by the trustees, we scanned the various clauses in the trust deed and came across cl. 9(d) wherein it is stated by the settlor as under : "The trustees may pay out of the Trust Fund and the income of the Trust such losses, damages, costs, charges and expenses as they may incur, sustain or be liable in such business or other activity or otherwise, as the Trustees may think fit. Further, the trustees shall not be personally liable for any losses or deficit that may arise from such business activity or other activities or otherwise but the same shall be divided between and borne by the beneficiaries." While in the first part of the said clause the settlor says that the trustees may pay out of the trust fund and the income of the trust such losses, damages, cost, charges and expenses as they may incur, sustain or be liable in such business or other activity or otherwise, as the trustees may think fit. But in the later and continuing part of the same clause it is stated by him (settlor) that the trustees shall not be personally liable for any losses or deficit that may arise from such business activity or other activities or otherwise, but the same shall be divided between and borne by the beneficiaries. This is very nebulous inasmuch as the settlor has blown hot and cold in the same breadth. The first part militates with the later part.
23. A reference to cl. 8 of the trust deed tells us that the trust fund and the income thereof shall be possessed and enjoyed by the person or persons beneficially entitled thereto by virtue of these presents to the entire exclusion of the settlor and of any benefit to him by contract or otherwise and no part of the trust fund or the income thereof shall be paid to or be paid for the benefit of the settlor in any circumstances whatsoever. On going a little further in the trust deed we find in cl. 10 the powers of the trustee. The later part of sub-cl. (h) of cl. 10 of the Trust deed speaks as under : "... The Trustee may nominate any one of them to be a partner in such partnership for and on behalf of the Trust though ostensibly such nominee may appear in such partnership as a partner in his individual name and the trustees shall as the trustees of the Trust Fund be bound to indemnify such nominee against all losses, damages, expenses and all liabilities such nominee may incur or sustain as a partner in such partnership and such nominee shall have recourse to the Trust Fund for full indemnification." When we read cls. 4 and 5 of the trust deed we noticed that the settlor has directed the trustees to divide the income of the trust fund in the proportion to the various beneficiaries. There is no mention of the manner of division of losses or deficit of the trusts business to various beneficiaries of the trust. So, according to cl. 10(h) of the trust deed the trustees shall indemnify any nominee of the trust against all losses, damages, expenses and all liabilities such nominee may incur or sustain as a partner in such partnership and further such nominee shall have recourse to the trust fund for full indemnification.
24. Famous authors, David, B. Parker and Anthony R. Mcllows observed at p. 287 in their book "Modern Law of Trust" 4th Edition as under : "Thus, in Benett vs. Wyndham (1862) 4 De. G. F. & J 259, a trust of an estate directed Woodcutters employed on the estate to fell some trees.
The Woodcutters were negligent and allowed a bough to fall on a passer-by who was injured. The trust as a legal owner of the estate, was sued and he was allowed to reimburse himself the damages out of the trust fund." 25. Shri J. M. Bagchi, the author of the book "Trust in Taxation and Planning" Vol. I, 3rd Edition at p. 217 says : "When the trust incurs losses, the trustees cannot pass it on to the beneficiaries, they will have to take the loss. But their liabilities as trustee are not unlimited. They cannot be personally held liable.
That loss has to be adjusted against corpus of the trust by reason of their right to reimbursement against losses. Technically, however, they take the burden of the losses. So it will be their inherent right to have the losses carried forward and set off against the future income of the trust. Beneficiaries cannot, however, get the carry forward since they do not share loss." 26. In law a trust is not a urristic person and, therefore, not an assessable unit or entity even for the purpose of assessment under the provisions of the IT Act, 1961 as well as under the provisions of WT Act, 1957. There are the trustees who are assessed in respect of the income of the trust under S. 161 or under S. 164 (as the case may be) of the IT Act, 1961 in a representative capacity. The representative assessment is made on the trustees in respect of income received by or accruing to or in favour of him beneficially. Even the provisions of S.161 do not speak or lay down of assessment being made on the trustees in a representative capacity in respect of loss of the trust. The argument of the assessees counsel that "income" also includes "loss" by drawing support from the decision of the Supreme Court in the case of CIT vs. J. H. Gotla (supra) is not at all relevant for the purpose of S. 161 of the IT Act, 1961. The said decision of the Supreme Court was rendered while interpreting the scope of provision of S. 64 of the IT Act, 1961 where losses are incurred by the minors. This decision, in our opinion, cannot come to the rescue of the assessee for the purpose of resolving the controversy involved in this appeal or for that matter as an aid to interpret the provisions of S. 161 of the IT Act, 1961.
27. The assessee also cannot support his case by saying that the Assessing Officer of the trust has determined and apportioned the loss of the trusts business and, therefore, it was incumbent upon the officer assessing the assessee to blindly follow the assessment order of the trust and allow set off of the share of loss in the trusts business on the same lines and analogy as is being done in the case of assessment of partners of the firm. The reasons are very obvious.
Return under S. 139 of the Act is to be filed by those persons whose income is chargeable to tax under the provisions of the IT Act, 1961.
Trust, as said by us earlier, not being a juristic person is not a person as defined in S. 2(31) of the IT Act, 1961 and, therefore, in the event of loss being occasioned to the trustee there is no obligation on him to file any return in a representative capacity under S. 139(1) of the Act. Returns of losses by individuals, firms, companies, AOP and other specified categories of persons as laid down under S. 2(31) of the Act can be filed under S. 139(3) of the Act for the purpose of determination of loss under S. 80 and for set off and carry forward benefit as per the provisions contained in Ss. 70 to 79 of the Act.
28. A trustee is to be assessed under S. 161 or under S. 164 (as the case may be) in a representative capacity only in respect of income (positive figure) derived for the benefit of the various beneficiaries whether known or unknown or with or without determinate shares. And loss, we reiterate, does not mean and include for the purpose of S. 161 or S. 164 of the Act. Further, a partnership is a contract between or amongst the various persons and they may or may not agree to share loss arising to the firm. In the event of losses arising to a firm contractually, therefore, such loss in the partnership firm must and shall have to be determined by the firms Assessing Officer and apportion it between or amongst the various persons in the firms assessment order.
The Assessing Officer assessing the individual partner has then necessarily to adopt the share of loss as determined by the officer assessing the firm. But even in the case of partnership firm loss arising to a firm cannot be fastened to minors though there is a contract to such an effect because in law a minor is a doli in capax and, therefore, he or his estate cannot be made to suffer due to loss incurred by the major partners of the firm. Therefore, in our view the return filed by the trust and the consequent order of assessment passed by the Assessing Officer of the trust and non est and invalid in law and the assessee cannot stand to benefit from such an order though it may contain determination of the loss of the trusts business and its apportionment amongst the various beneficiaries.
29. Under S. 9 of the Indian Trust Act every person capable of holding property may be a beneficiary and no consent is required to be obtained by the settlor from such a person for giving benefit from the trusts fund or trusts income. If a person does not intend to remain as a beneficiary under a trust he has a right under S. 9 of the Trust Act to renounce his interest by disclaimer addressed to the trustee or by alienating his interest in favour of any person as laid down under S.59 of the Indian Trust Act. Now the question arises whether a person who has been made a beneficiary of a trust without his consent and will be saddled with liabilities of the trust or losses of trusts business carried on by the trustees particularly when the beneficiaries are not to be consulted by the trustees for carrying on a particular business or for that matter have any say in the management or day-to-day affairs of the trusts business carried on by the trustees The answer obviously and emphatically shall be No and only No.. Or if the answer is in the affirmative then the result will be disastrous and ruinous because the beneficiaries and their estates will ultimately get eaten up and deplete if the liabilities and losses of the trust are to be fastened on them. They (beneficiaries) cannot be made to suffer for being made a beneficiary in a trust without their will and consent.
This can neither be the intention or wish of the settlor nor even that of the Legislature in enacting the Trusts Act.
30. Reliance by assessees counsel on the provisions of S. 32 of the Indian Trust Act is, according to us, is misplaced and as a matter of fact goes against his case in this appeal. It is common knowledge that loss after all is nothing but excess of expenditure over income or gain. And this loss has to be met either from the corpus or capital.
And if capital is not sufficient to meet such loss then borrowals or loans have to be obtained. In the instant case, there has been loss and, therefore, the trustees have either to meet this loss (excess of expenditure over income) either from the corpus of the trust or borrow moneys from any source and meet it. If the loss has been met from borrowals then the same shall be liability of the trust or against the trust fund or trust property and not that of the beneficiaries. If the trustee has met such loss or to say in simple words incurred more expenses than the income accruing to the trust, from out of his own pocket or source then he has under S. 32 of the Indian Trust Act every right of reimbursement, but in our view, he (trustee) cannot fall upon the beneficiary personally or upon his private estate.
31. A very significant point which is worth to be noted is that as per S. 55 of the Indian Trust Act the beneficiary has a right to the rents and profits of the trust property. There is no mention in this provision that the beneficiary shall be liable for loss or expenses of the trust.
32. Assessees counsel, Sri Sarangan, persuaded us to allow the assessees appeal taking guidance and assistance from the judgment of the Chancery Division in the case of Upton vs. Brown (supra). We find it hard to do so because full facts of that case are not known nor the terms of the trust and the provision of the trust law under which the said decision was rendered. Moreover, we are also reminded and cautioned in this regard by the observations of their Lordships of the Supreme Courts, Honble Justice Subba Rao in the case of Laxman Balwant Bhopatkar vs. Charity Commissioner AIR 1962 SC 1589. They are as under : "English decisions are conflicting, there is no common thread passing through variety of decisions, starting from the preamble to the statute of Elizabeth and apparently relying upon four fold classifications of Lord Macnaghten. English Courts from time to time decided cases which could not be sustained either on the illustration in the preamble to the statute of Elizabeth or the analogies drawn from them or the classification of Lord Macnaghten. The decisions conflict with one another, and it is not possible or even adviseable to seek to get any guidance from the said decisions to construe the clear provisions of the Indian statutes or document executed in India under circumstances totally different from those obtaining in India." To the same effect are the observations of Honble Justice Bhagwati of the Supreme Court in the case of CIT vs. Vazir Sultan & Sons (1959) 56 ITR 175, 179 (SC).
33. We have taken note of the fact submitted before us by the assessees counsel Sri Sarangan on a query from us that the business loss of the trust for the year under appeal has been deducted and set off from the business profit of the trust for the asst. yr. 1985-86 and the trust has filed the return for the balance for asst. yr. 1985-86. This conduct of the trustees also goes to demonstrate that the trustees themselves were of the opinion that the loss in trust business cannot be saddled or fastened to the beneficiaries.
34. The sole ground on which the right of the trustees to carry on business as holders of the property upon trust can be controverted rests on the fact that in a business loss is as much an essential incident as profit. When business of the trust incurs losses that cannot be passed on to the beneficiaries because they are only entitled to enjoy the benefits and advantages out of the trusts income or trusts property. Beneficiaries, in our view, cannot be fastened or burdened with detriment. In the event of loss or the continuous losses in a business the entire corpus or the trust fund may be eaten up or wiped off and no trust property will ultimately pass on or be transferable or vest in the beneficiaries.
35. In view of the foregoing discussions we have least doubt to hold that the assessee being a beneficiary of the private trust is not liable for the loss of the trusts business carried on by the trustees and, therefore, has no right to set off such loss against any of his other income. We hold accordingly and affirm the order of the Appellate Commissioner but for different reasons elaborately discussed by us above.