Judgment:
1. Revenue is the appellant in all these appeals. The assessment years involved in these appeals are 1984-85 and 1985-86. The main appeals are ITA Nos. 856/Hyd/88 and 859/Hyd/88. The decision in these appeals decides the fate of the remaining three appeals. Since identical issues arise in all these appeals they have been heard together for disposal by a common order.
2. Let us first consider ITA No. 856/Hyd/88 relating to the assessment year 1985-86 and ITA No. 859/Hyd/88 relating to the assessment year 1984-85. 'The Trustees of the Wedding Gift Trust of HEH the Nizam's two grand daughters" in their representative capacity filed these appeals on behalf of the beneficiaries. The facts that led to the filing of these appeals are as follows.
3. HEH the Nizam of Hyderabad created a Trust called "Wedding Gifts Trust of HEH the Nizam's two grand daughters" under a trust deed dated 4-9-1951. The beneficiaries of the said trust are the settlor's grand daughters Fatima Fouzia and Ameena Marzia who are the daughters of Prince Mouzam Jah Bahadur, second son of the settlor. The Settlor transferred certain items of his jewellery to the said trust and the same have been described in the first and second schedules of the trust deed. The first schedule comprises of 32 items of ladies jewellery of the oriental type. Likewise, the second schedule of the trust-deed also comprises of 32 items of jewellery. The Settlor appointed four trustees including himself to manage the trust property. The jewellery described in the First and Second Schedules were handed over to the trustees. The trust deed, clause 6, directs the Trustees to keep the said jewellery in safe custody in some reputed bank preferably at Bombay. Accordingly the said jewellery was kept in the lockers of Mercantile Bank, Bombay in the names of the trustees. Under the terms of the trust-deed, Fatima Fouzia and Ameena Marzia were given the right or privilege of wearing the jewellery specified in the First Schedule and the Second Schedule respectively on special ceremonial occasions and festival occasions only. Sub-clause (c) of clause 3 of the trust-deed directs the trustees to give the jewellery specified in the First Schedule to Fatima Fouzia on the occasion of her marriage as wedding gift to her from the settlor. Further it directs that soon after the ceremonies and festivities in respect of the wedding of the said Fatima Fouzia are over, she shall return and hand over the articles of jewellery specified in the First Schedule to the trustees and thereafter the trustees shall hold the same upon trust by keeping them in safe custody in bank lockers. The relevant clause 3(c) relating to Fatima Fouzia in respect of the jewellery specified in the first schedule is as follows : On the marriage of the said Fatima Fouzia to give the articles of jewellery specified in the First Schedule hereunder written to the said Fatima Fouzia as wedding gift to her from the Settlor along with other jewellery which may be given to her on the occasion provided, however, that soon after the ceremonies and festivities in respect of the wedding of the said Fatima Fouzia shall be over, she shall return and hand over to the trustees all the said articles of jewellery specified in the First Schedule hereunder written and thereafter the trustees shall hold the same. Upon trust to allow the said Fatima Fouzia to wear and use the said articles of jewellery or such of them as may be required on and for the purpose of any special ceremonial or festive occasion and after any such ceremonial or festive occasion shall be over to take charge of such article from the said Fatima Fouzia. Provided always that the trustees shall not be liable or held responsible in any manner whatsoever by any person whomsoever for any loss or damage that may be caused to or in respect of any of the said articles for the purposes aforesaid or for any other consequences resulting from the action of the trustees in allowing the said articles or any of them to be worn or used as aforesaid.
Clause 3(d) of the trust deed states that on and after the death of Fatima Fouzia, the trustees shall hold the articles of jewellery specified in the first Schedule upon trust as mentioned in clause 4.
The trust deed contains similar clauses 3(e) and 3(f) in respect of the articles of jewellery specified in the second schedule relating to Ameena Marzia also. She was also given wearing right to wear the said jewellery mentioned in the Second Schedule on the occasion of her marriage and subsequently on special ceremonial occasions and festivities. Thereafter the trustees shall take over charge of the said items of jewellery and keep them in safe custody. Sub-clause (g) and (h) of clause 3 prohibit the alienation of the jewellery specified in the first and second schedules either by sale or otherwise during the life time of Fatima Fouzia and the life time of Ameena Marzia. Clauses 4 and 5 of the trust deed state as to what should happen to the articles of jewellery specified in the first schedule on the death of Fatima Fouzia and the jewellery specified in the second schedule on the death of Ameena Marzia. Clause 4 states that on the death of Fatima Fouzia, the trustees shall hold the articles of jewellery specified in the First Schedule (hereinafter called Fatima Fouzia's jewellery fund) upon trust to divide the same amongst her children and/or remote issues then living per stirpes in the proportion of two shares for every male child and one share for every female child. If the said Fatima Fouzia shall die without leaving any child or remoter issue the trustees shall hold Fatima Fouzia's jewellery fund upon trust for the Nizam of Hyderabad who may be suiviving at the date of the death of Fatima Fouzia. In case, there is no Nizam of Hyderabad existing at the date of the death of Fatima Fouzia then the trustees shall hand over the Fatima Fouzia's jewellery fund to the eldest male descendant in the direct male line of succession of the settlor according to law of primogeniture. Clause 5 contains identical conditions in respect of the articles of jewellery specified in the second schedule relating to Ameena Marzia also. Clause 7 of the trust deed states that on the death of Fatima Fouzia the trustees shall sell the jewellery specified in the First Schedule within a period of 3 years after the date of her death and invest the net sale proceeds of the articles in such manner as they think tit. In case the Settlor survives the said Fatima Fouzia and if he desires the postponement of the sale of the said articles beyond the said period of 3 years from the date of the death of Fatima Fouzia he shall be entitled to do so. Clause 8 of the trust deed contains similar terms and conditions in respect of jewellery mentioned in the Second Schedule relating to Ameena Marzia. Thus, the ultimate beneficiaries of the trust property are the children of Fatima Fouzia and Ameena Marzia.
Clause 18 of the trust deed states that if any person that becomes entitled to the possession or receipt of any part of the corpus of the trust property is a minor the trustees shall pay a part of the income of any such part of the corpus of the trust property towards the maintenance and education of the minor. As and when the said person attains the age of majority. the trustees shall pay and hand over to him his share of the corpus of the trust property and his share in the accumulated income and investments.
4. This trust was created in the year 1951. In the year 1957, the Wealth-tax Act came into force w.e.f. 1 -4-1957, that is, from the assessment year 1957-58. Thereafter, the wealth-tax authorities started assessing the value of the jewellery in question to wealth-tax and started making huge demands right from the assessment year 1957-58 onwards. The trustees had no funds with them to meet the said arrear wealth-tax demands. The wealth-tax authorities were attempting to take coercive steps to recover the arrear demands. The settlor did not contemplate this contingency when he created the trust in 1951. He passed away in the year 1967. The arrear wealth-tax demand created a piquant situation to the trustees in the management of the trust property. The jewellery was lying idle as dead wealth in the lockers of a bank at Bombay. Therefore the trustees filed OP No. 210 of 1979 on the file of the Chief Judge, City Civil Court, Hyderabad under Section 34 of the Indian Trust Act seeking the Court's opinion regarding the management of the trust property and also as to how best the unforeseen liability should be met. The trustees would appear to have requested the Court for permission to sell one item of jewellery from the First Schedule and one item of jewellery from the Second Schedule for meeting the outstanding tax liability. Fatima Fouzia and Ameena Marzia who were respondents 1 and 2 respectively in OP No. 210 of 1979 opposed the sale of jewellery. The Chief Judge, City Civil Court by his order dated 21 -4-1980 permitted the trustees to sell as many items of jewellery as are necessary from the jewellery mentioned in Schedules 1 & 2 and meet the tax liability and deposit the balance sale proceeds and invest the balance sale proceeds in securities. Aggrieved by the said order of the City Civil Court, Ameena Marzia filed C.R.P. No. 4025 of 1980 on the file of the High Court of Andhra Pradesh contending, inter alia, that piece-meal sale of one or two items of jewellery for meeting the tax demands would not solve the problem, that similar sales of jewellery have to be made periodically for meeting the ever growing tax demands and that in case the jewellery is sold piece-meal in that fashion the corpus would dwindle down and ultimately there might be nothing left for the ultimate beneficiaries, that is, the children of Fatima Fouzia and Ameena Marzia. It would appear that Ameena Marzia suggested to the High Court that the entire jewellery mentioned in the First and Second Schedules may be sold and the sale proceeds may be invested in capital gains units and other securities and that out of the income arising on such investments the recurring tax demands of wealth-tax may be met.
Fatima Fouzia who was also one of the respondents to the CRP filed in the High Court agreed to the suggestion made by her sister. She filed a memo in the High Court stating that she has no objection for the sale of the entire jewellery. The High Court after considering the facts and circumstances of the case and the position of law on the subject made an order dated 25-3-1981 permitting the trustees to sell the entire jewellery specified in schedules 1 and 2 of the trust deed. The operative portion of the High Court's order dated 25-3-1981 is as follows : The trustees will be entitled to take proceedings for the sale of the jewellery in Schedules 1 and 2 of the trust deed as per the provisions of Sections 37 and 38 of the Indian Trusts Act in consultation with respondents 1 & 2, viz., Shahbzade Fatima' Fouzia and Shahbzade Ameena Marzia. It is however made clear that the sale of jewellery would be subject to confirmation by the Chief Judge, City Civil Court.
On oehalf of Ameena Marzia, a request was made to the High Court to direct the trustees to pay the interest that accrues on the sale proceeds to be deposited in securities to Fatima Fauzia and Ameena Marzia as they are being deprived of the right of wearing the jewellery. While negativing the said request the High Court observed as follows : It may be noted that they did not wear the jewellery even on a single occasion previously and there is no likelihood of wearing the jewellery in future. At any rate such questions cannot be decided in this petition. It is open for respondents 1 & 2 to raise such points as they desire with regard to payment of interest only after the sale of the jewellery by separate applications. Whether, in the interest of the beneficiaries interest is to be paid to respondents 1 & 2 or to be allowed to be accumulated to the corpus is a question to be decided as and when such applications are filed.
The High Court granted permission to the trustees to sell the entire jewellery mentioned in schedules 1 and 2. The said permission was not subject to any condition that the interest accrued on the investment of the said sale proceeds shall be paid to the beneficiaries.
5. In pursuance of the permission granted by the High Court, the trustees sold the articles of jewellery specified in the first schedule relating to Fatima Fouzia Jewellery Fund in the accounting year relevant for the assessment year 1984-85 for Rs. 32,25,421. The said sale resulted in capital gains. Likewise, the articles of jewellery specified in the second schedule relating to Ameena Marzia Jewellery Fund were sold by the trustees in the accounting year relevant for the assessment year 1985-86 for a sum of Rs. 33,21,000. It also resulted in capital gains. A substantial portion of the sale proceeds of these jewelleries was invested in capital gains units of UTI and other specified assets.
6. The trustees of the 'Wedding Gifts Trust of HEH the Nizam's two grand daughters", in the capacity of a representative-assessee filed a return of income representing Fatima Fouzia for the assessment year 1984-85 admitting an income of Rs. 3,03,240 which was the income on capital gains. Subsequently the trustees filed a revised return declaring 'nil' income on the ground that the capital gain was chargeable in the hands of the children of Fatima Fouzia as they being the real beneficiaries and not in the hands of the trustees as representing Fatima Fouzia since Fatima Fouzia had only a bare right to wear the jewellery on festive occasions and the said right also became extinct on the sale of the jewellery. The Assessing Officer rejected the said submissions of the trustees and assessed the entire capital gains income in the hands of the trustees representing Fatima Fouzia Jewellery Fund at maximum marginal rate accepting the original return filed by the trustees. Aggrieved by it, the trust which is the representative-assessee on behalf of Fatima Fouzia preferred an appeal.
The first appellate authority allowed the said appeal and cancelled the assessment observing as follows : The real beneficiaries in the corpus were the children of Fatima Fouzia and the children of Ameena Marzia who were the ultimate beneficiaries as per the trust deed. What they would have got on the demise of their respective mothers was accelerated by virtue of the Court's intervention and the grant of permission to sell the jewellery. In the circumstances the appellant's contention in this regard are accepted and the assessment to capital gains tax in the impugned assessment is held to be incorrect. Since no other issue is involved the assessment is cancelled.
7. As we have already stated the trustees in pursuance of the Court's directions sold the articles of jewellery specified in the second schedule of the trust-deed relating to Ameena Marzia in the accounting year relevant to assessment year 1985-86 for a sum of Rs. 33,21,000. It resulted in capital gains. The trustees in their capacity as representative-assessee filed a return of income for the assessment year 1985-86 representing Amina Marzia declaring 'nil' income. They did not admit capital gains in representative capacity on behalf of Ameena Marzia on the ground that the capital gain arising out of the sale of the jewellery can be assessed in the hands of the children of Ameena Marzia who are ultimate beneficiaries of the corpus. The Income-tax Officer rejected the said contention of the trustees and completed the assessment on the trust applying maximum marginal rate, following the same reasons on which the trustees were assessed in the case of Fatima Fouzia Jewellery Fund earlier. On the appeal preferred by the assessee, the learned Commissioner of Income-tax (A), Hyderabad cancelled the assessment accepting the contention of the trustees that the capital gain was exigible to tax in the hands of the children of Ameena Marzia.
Aggrieved by it, the revenue preferred appeal ITA No. 856/Hyd/88.
8. In these two appeals 856 and 859/Hyd/88, the revenue assails the action of the CIT(A) in cancelling the assessments. Though the grounds of appeal mentioned in these two appeals are somewhat vague and argumentative, the main contention of the revenue in these appeals is that the CIT(A) cancelled the assessments acting under the impression that the assessments were made under Section 161(1) on the representative-assessee as representing Fatima Fouzia in one case and Ameena Marzia in the other case, that in fact the assessments were made under Section 164(1) of the I.T. Act on the trustees as representing the Fatima Fouzia Jewellery Fund and Arneeua Marzia Jewellery Fund of the Wedding Gifts Trust as the shares of the beneficiaries were unknown and indeterminate, that the CIT(A) erred in holding that there was acceleration of devolution of the trust property on the children of Fatima Fouzia and Ameena Marzia on account of the sale of the jewellery at the intervention of the Court arid that the CIT(A) further erred in holding that the capital gains should be assessed only in the hands of the children of Fatima Fouzia and Ameena Marzia on the ground that their shares are known and determinate, that the children of the beneficiaries were only having some sort of contingent interest in the corpus of the trust and that till the time of the death of Fatima Fouzia and Ameena Marzia, their children can have no vested interest in the trust property and that the permission granted by the High Court for the sale of jewellery cannot alter the position and accelerate the devolution of the interest of the ultimate beneficiaries.
9. The learned counsel for the assessee contends that the immediate beneficiaries Fatima Fouzia and Ameena Marzia had only a bare right to wear the jewellery in question and that too on ceremonial and festive occasions, that the said right was held to be not property by the Tribunal in the assessee's own case - Trustees of the Wedding Gift Trust of H.E.H the Nizam's two grand daughters v. WTO [1989] 30 ITD 490 (Hyd.) arising out of the wealth-tax assessment, that in that case the Tribunal held that the value of the jewellery cannot be assessed for wealth-tax in the hands of the trustees as representing Fatima Fouzia or Ameena Marzia, that the ultimate beneficiaries are the children of Fatima Fouzia and Ameena Marzia whose shares are known and determinate as per the terms of the trust-deed, that though as per the terms of the trust-deed, the children should receive their respective shares in the corpus only after the death of their respective mothers, devolution of their beneficial interest in the trust property got accelerated by the sale of the jewellery under Court orders, that vesting of interest on the ultimate beneficiaries took place on the sale of the jewellery which sale was preponed and held even during the life-time of the immediate life-time beneficiaries, that in that view of the matter, the assessment cannot be made under Section 164(1) as the shares of the beneficiaries are known arid determinate and that the impugned orders of the CIT(A) cancelling the assessments are unassailable.
10. Facts being identical to both the appeals it would be enough if we refer to the facts of the appeal relating to Fatima Fouzia, Le., ITA No. 859/Hyd / 88. Let us first consider as to who are the beneficiaries under the trust deed in relation to the jewelleries specified in the first schedule by the date of its sale and also the nature and extent of their beneficial interest and then decide as to in whose hands the capital gains that arose on the sale of the jewellery should be assessed whether under Section 161 or under Section 164 of the IT Act.
11. HEH the Nizam of Hyderabad was the author of this trust which duly came into existence under a written instrument of trust dated 5-9 1951 by which date the immediate beneficiary Fatima Fouzia was an unmarried girl. The corpus of the trust comprised of 32 items of jewellery specified in the First Schedule of the trust deed. Clause 3(c) of the trust deed conferred a right on Fatima Fouzia to wear the jewellery specified in. the First Schedule or any part of it on special ceremonial occasions and festivities only. On each occasion after the purpose was over the trustees shall take back possession of the jewellery from the beneficiary Fatima Fouzia and keep it in safe custody in their names in the lockers of a bank at Bombay. The beneficiary is entitled to enjoy the said privilege of using or wearing the jewels on special ceremonial occasions and festivities during her life-time. Clause 3(g) of the trust deed prohibits the sale of the said jewellery during the life-time of Fatima Fouzia. It says that the said jewellery shall not be sold or otherwise disposed of during the life-time of the beneficiary. Fatima Fouzia cannot force the trustees to sell the Jewellery during her life-time much less claim any share in the sale proceeds. Thus, what all little interest or right she had in the jewellery was only to wear it on ceremonial occasions and nothing more. Clause 4 of the trust deed indicates the line of devolution of the trust property on the death of Fatima Fouzia. It runs as follows : On the death of the said Fatima Fouzia, the trustees shall hold the said articles of jewellery specified in the First Schedule hereunder written (hereinafter called 'Fatima Fouzia's Jewellery Fund') UPON TRUST to divide the same amongst her children and/or remoter issue then living per stirpes in the proportion of the two shares for every male child or remoter issue of hers and one share for every female child or remoter issue of hers standing in the same degree of relationship and so that no person shall take whose parent entitled to a share under this clause shall be living and further so that persons standing in the same degree of relationship shall take between themselves in the same proportion as above the share which their parent would have taken if then living Provided, however, that if the said Fatima Fouzia shall die without leaving any child or remoter issue her surviving then the Trustees shall hold Fatima Fouzia's Jewellery Fund UPON TRUST for the Nizam of Hyderabad who may be surviving at the date of the death of the said Fatima Fouzia in order to enable him to meet the essential expenditure for the management of the Sarf-e-Khas for which he will be responsible as the Head of the Family of the settlor but if the dynasty of the settlor shall come to an end for any reason whatsoever and there shall be no Nizam of Hyderabad existing at the date of the death of the said Fatima Fouzia then the Trustees shall in the event aforesaid hand over and transfer Fatima Fouzia's Jewellery Fund to the eldest male descendant in the direct male line of succession of the Settlor according to the law of primogeniture then living in order to enable him as the Head of the Family of the Settlor to maintain the dignity of the House of Asaf Jah to which the Settlor belongs and the status and position of the various members of his family.
It is clear from clause 4 that such of those children of Fatima Fouzia who would be living by the date of the death of Fatima Fouzia alone would become entitled to the corpus. Clause 4 says that after the death of Fatima Fouzia, the corpus should be divided among the children/or remoter issue in the ratio of two shares to male child and one share to female child. However, the fact remains that succession opens only on the death of Fatima Fouzia the life-time beneficiary. Clause 7 of the trust-deed empowers the trustees to sell the jewellery within 3 years after the death of Fatima Fouzia obviously for its distribution among the children living by the date of the death of Fatima Fouzia. The corpus was dead or dormant wealth incapable of producing income. Due to non-availability of funds the trustees were unable to meet the unexpected huge wealth-tax demands year-after-year. Hence, they were constrained to approach the Civil Court under Section 34 of the Indian Trusts Act for directions particularly on the aspect as to how best the arrear wealth-tax demands should be met. The Chief Judge, City Civil Court by his order dated 21 -4-1980 made in OP 210 of 1979 authorised the trustees to sell as many items of jewellery as necessary for meeting the wealth-tax demand. Aggrieved by the said order, Ameena Marzia filed CRP No. 4021 of 1980 on the file of the High Court. The High Court by its order dt. 25-3-1981 in exercise of its powers under Section 34 of the Trust Act, authorised the trustees to sell the entire jewellery. Both the beneficiaries Fatima Fouzia and Ameena Marzia agreed for the sale of the entire jewellery before the High Court.
Subsequently, the jewellery was sold which resulted in capital gains.
12. Capital gain is a notional or deemed income under Section 45 of the I.T. Act for the purposes of taxation. It is not income in the real sense like commercial profit. By sale the corpus was converted from one specie into another specie, Le., from kind to cash. Capital gain, if any, got merged with the corpus and formed part of the corpus. Neither under the terms of the trust-deed nor under the order of the High Court made in CRP No. 4025 of 1980 Fatima Fouzia was entitled to any share in the corpus or in the sale proceeds. What all interest she had was only a bare right to wear the jewellery and the said right came to an end by the sale of the jewellery.
13. The question whether the interest held by Fatima Fouzia in the jewellery can be treated as property/asset for the purposes of assessing the value of the said jewellery for wealth-tax on the representative-assessee as representing Fatima Fouzia came up for consideration before the Tribunal in the case of Trustees of Wedding Gifts Trust of HEH the Nizam's Two Grand Daughters (supra). The case related to assessment years 1976-77 to 1978-79, i.e., to the period prior to the sale of the jewellery. The Tribunal following the decision dated 5-11 -1971 of the High Court rendered in RC 67 of 1969 and distinguishing the decision of the High Court in CWT v. Trustees of HEH the Nizam's Sahebzadi Anwar Begum Trust [1981] 129 ITR 796 (AP) held as follows : Firstly, we hold that the decision in Nizam's Sahabzade's case supra cannot be applied to the facts of this case. We further hold that the decision rendered by the AP High Court in RC No. 67 of 1969 dated 5-11-1970 is the direct decision on the point. According to said decision, the right to wear jewellery either on the occasion of the marriage or on festive and ceremonial occasions throughout their lives of Fatima Fouzia and Ameena Marzia does not confer any asset on them in the jewellery mentioned in Schedule No. 1 or Schedule No. 2 of the trust deed titled, the Wedding Gifts Trust of the HEH the Nizam's two grand daughters.
Further, the Tribunal held that Fatima Fouzia and Ameena Marzia cannot be termed as beneficiaries as their right two wear jewellery cannot be considered to be property however widely that expression may be interpreted. In CWT v. Prince Muffakkam Jah Bahadur [1990] 186 ITR 421, the AP High Court held that mere right to live in a house was not an asset for purposes of Wealth-tax Act.
14. In the case on hand, the life beneficiary Fatima Fouzia had nothing more than a bare right to wear the jewellery on ceremonial and festive occasions. She had no right to force the trustees to sell the jewellery much less to claim a share in the sale proceeds. Likewise, she has no right under the trust deed to claim any share in the income arising out of the investment of the sale proceeds. Hence, it cannot be said that the trustees received the income for and on behalf of Fatima Fouzia. We have to take into consideration the position that existed as on the date of the sale of the jewellery or at least as on the last date of the relevant accounting year. By then there was no order of the Court directing the trustees to pay any amount out of the income arising on the investment of the sale proceeds either to Fatima Fouzia or to her children. The order granting some allowance to them came to be passed subsequently. In that view of the matter capital gain that arose on account of the sale of the jewellery cannot be assessed either in the hands of the life-time beneficiary Fatima Fouzia or on the representative-trustee as representing Fatima Fouzia. In that regard we agree with the finding of the first appellate authority that assessment cannot be made on the representative-assessee as representing Fatima Fouzia in respect of the capital gain that arose on the sale of the jewellery.
15. However, we are unable to agree with the view taken by the first appellate authority that the capital gain should be assessed in the hands of the children of Fatima Fouzia on the ground that their interest got accelerated by virtue of the sale of the jewellery at the intervention of the court. In that connection the first appellate authority held as follows : The real beneficiaries in the corpus were the children of Fatima Fouzia and the children of Ameena Marzia who were the ultimate beneficiaries as per the trust deed. What they would have got on the demise of their respective mothers was accelerated by virtue of Court's intervention and the grant of permission to sell the jewellery. In the circumstances, the" appellant's contention in this regard are accepted and the assessment to capital gains in the impugned assessment is held to be incorrect.
16. Clause 4 of the trust deed specifies the line of succession on the death of the beneficiary Fatima Fouzia. It clearly states that it is only on the death of Fatima Fouzia the trustees shall divide. the Fatima Fund amongst her children and/or her remoter issue then living per stirpes in the proportion of two shares for every male child or remoter issue others standing in the same degree of relationship and one share to every female child. The Settlor of the Trust did not contemplate the contingency of the sale of jewellery during the life time of his grand daugher Fatima Fouzia. As a matter of fact the Settlor specifically prohibited the sale of jewellery before the death of Fatima Fouzia as seen from clause 3(g) of the trust deed. His intention was that the jewellery should be used by Fatima Fouzia on ceremonial occasions till her life-time and on her death only it should go to the children of Fatima Fouzia living by that date. Sale of jewellery is only a machinery or mode to facilitate distribution of the corpus among the ultimate beneficiaries of the children of Fatima Fouzia. Succession opens on the death of Fatima Fouzia only and not prior to it as seen from the trust deed. 'Vesting' event is the death of Fatima Fouzia and not the sale of jewellery. Simply because sale was held by the order of the Court even during the life-time of Fatima Fouzia it cannot be said that succession opened on the date of sale. By the said sale the corpus was converted from one specie into another specie. It is still governed by clause 4 of the trust deed which empowers the trustees to distribute the corpus among the children of Fatima Fouzia only after the death of Fatima Fouzia. The view of the first appellate authority that devolution of beneficial interest of the children got accelerated on account of sale is not correct.
17. Though Section 9 of the Indian Trust Act provides for beneficiary renouncing her interest under a private trust by disclaiming, the Act does not contain any provision relating to acceleration of subsequent interest on the failure or premature determination of a prior interest.
However, some times Courts by invoking the principles of equity and good conscience apply the English Doctrine of Acceleration which is subject to two conditions. The conditions are that the Settlor had not expressed a contrary intention in the trust deed and that the subsequent interest is a vested interest and not a contingent one. In the case on hand we can easily understand the intention of the Settlor from their terms of the trust deed that the ultimate beneficiaries should get the corpus only after the death of Fatima Fouzia and not before it. That intention is clear from the fact that the Settlor desired that only such of those children that will be living on the date of death of Fatima Fouzia alone shall be entitled to succeed to the corpus with absolute rights. In that view of the matter the interest which the children of Fatima Fouzia got under the trust deed is only a contingent interest which is contingent upon their surviving their mother. It gets converted into a vested interest or right only on the death of Fatima Fouzia. No doubt, the parties may be entitled to get the terms of the trust deed altered by obtaining necessary directions of the Court Under Section 34 of the Trust Act in view of the changed situation and circumstances and get the corpus distributed among the beneficiaries even before the death of Fatma Fouzia. However, such a proposal to dissolve the trust by distribution of the corpus should be approved by the Court Under Section 34 of the Trust Act. Till then, clause 4 of the trust deed continues to be in force according to which devolution of interest on the ultimate beneficiaries will take place only on the death of Fatima Fouzia. Though Fatima Fouzia was having 4 children by the date of the sale of the jewellery the interest in favour of those children was only contingent interest by the date of the sale of the jewellery. Further, the children of Fatima Fouzia are only corpus beneficiaries and not income beneficiaries. By the date of sale of the jewellery or by the end of the accounting year their shares in the income arising on the sale proceeds were indeterminate and unknown. By no stretch of imagination it can be said that the trustees received the capital gain income or the sale proceeds of the jewellery for and on behalf of the children of Fatima Fouzia. In that view of the matter no portion of the capital gains can be assessed in the hands of the children of Fatima Fouzia or on the representative-assessee (trustees) as representing each child of Fatima Fouzia. Hence, the view taken by the first appellate authority that the capital gain should be assessed in the hands of the children of Fatima Fouzia does not appear to be correct. Likewise it cannot be assessed Under Section 161(1) on the representative-assessee as representing each child of Fatima Fouzia. In our opinion the shares of the beneficiaries are unknown and indeterminate and hence the assessment should be made Under Section 164(1) on the trust. If any authority is required in support of this view, we find it in the decision of the jurisdictional High Court in the case of CIT v. Trustees of H.E.H. the Nizam's Wedding Gifts Trusts [1985] 154 ITR 573 (AP). The facts of that case are almost similar to the facts on hand except for certain minor variations. That was also a trust created by the Nizam of Hyderabad under trust deed dt. 5-9-1951 for the benefit of his two grand sons Prince Mufakham Jah and Mufram Jah. In our case the trust was created under a trust deed for the benefit of the two grand daughters. Both the trusts were created on the same day. As per the terms of the trust deed concerned in that case, the jewellery specified in Schedule-1 should be worn by the Nizam's grand son at the time of his marriage and also subsequently on certain ceremonial occasions and festivities. After the purpose is over, the beneficiaries (grand sons) should hand over the jewellery to the trustees for safe custody. However, in that case, the trustees in their discretion were permitted to sell the jewellery specified in the First Schedule of the said trust deed after the marriage of the Nizam's grand son and invest the sale proceeds in Government securities and pay the interest derived thereon to the grand son of the Nizam till his death.
Subsequently, the jewellery relating to Nizam's grand son was sold on 4-6-1971. It resulted in capital gain. The trustees filed return of income claiming exemption from capital gain. They claimed benefit Under Section 2(14)(ii) of the I.T. Act on the ground that the jewellery sold was the one used by the beneficiary for the ordinary personal use. That claim was rejected since the jewellery sold was one which was intended to be worn by the beneficiary on special ceremonial occasions and festivities and not on ordinary days. However, the Tribunal held that the jewellery held by the trustees for the benefit of the beneficiaries was exempt Under Section 2(14)(ii) of the I.T.Act. Thereafter at the instance of the Revenue the matter came up before the High Court. The High Court held that the jewellery in question which is intended to be used by the beneficiary on the wedding day and other ceremonial occasions as a mark of status and pride and which requires to be returned to the trustees for safe custody after the ceremonies are over does not come under personal effects Under Section 2(14)(ii) of the I.T. Act and that the sale proceeds obtained on the sale of the jewellery still come under capital gains and consequently it is exigible to tax Under Section 45 of the I.T. Act. The High Court having come to that conclusion considered the further question whether the trustees should be assessed Under Section 161 or Under Section 164 of the I.T. Act in respect of that capital gain. The High Court observed that difference between Sections 161 and 164 is very clear, that where it is found that the corpus is not received on behalf or for the benefit of the beneficiaries Section 164 applies and that where the income is specifically receivable on behalf or for the benefit of the beneficiaries, Section 161 applies. Ultimately, the High Court after considering the terms of the trust deed held that the trustees are liable to be assessed Under Section 164 and not Under Section 161 of the IT Act in respect of the capital gain that arose on the sale of the jewellery. In that connection, the High Court observed as follows : As per the terms of the trust deed, the immediate beneficiaries are not entitled to the sale proceeds which is the corpus realised from the sale of the jewellery. They are entitled only to the interest out of it during their life time. Thus, it is clear that the trustees did not receive the sale proceeds of the jewellery which is the corpus on behalf or for the benefit of the beneficiaries and hence the trustees are liable to be assessed Under Section 164 but not Under Section 161 of the I.T. Act.
Having regard to the above discussion, our answer to the third question is that the capital gains realised on the sale of the jewellery is exigible to tax and that assessment should be made Under Section 164 of the IT Act.
The difference between the present case and the case mentioned supra is the jewellery was sold in the present case under Court orders whereas the jewellery was sold in the other case at the instance of the trustees as per the terms of the trust deed during the life-time of the beneficiary. In both the cases the ultimate beneficiaries were entitled to the corpus after the death of the life-time beneficiaries. On a consideration of the facts available on record and also taking into consideration the position of law on the subject we have no hesitation to hold that the capital gain that arose on the sale of the jewellery should be assessed on the trustees Under Section 164 of the I.T. Act and not Under Section 161.
18. The assessment made by the Assessing Officer was not one made Under Section 161(1) of the I.T. Act. In fact the Assessing Officer very correctly assessed the entire capital gain that arose on the sale of the jewellery specified in the First Schedule of the trust deed in the hands of the trust, obviously Under Section 164 as seen from the assessment order, the relevant portion of which is as follows : In the absence of any specific decision from the competent court the shares of beneficiaries in respect of the capital gain or any income arising out of the investment is not ascertainable and indeterminable. In other words, the shares are indeterminate and unknown till the decision of the competent court is available. It is also accepted position that unless there is a decision of the competent court in the matters of doubt the position obtaining in the absence of court's decision has to be considered. Therefore, I am of the firmly of the view that even If any decision is obtained by the trustees at a later date that will have prospective operation but not retrospective operation. It is for this very reason the Trustees have been well advised to file the return on 29th August, 1984 admitting the entire capital gain assessable in the hands of the Trustees directly by admitting total income at Rs. 3,03,240. The subsequent action of the Trustees is therefore without any legal sanction. In the light of the above discussion the income of the Trust is recomputed as under.
Thus, in fact, the Assessing Officer assessed the entire capital gain in the hands of the trust. For the reasons mentioned supra, we hereby set aside the impugned order of the first appellate authority and restore the assessment made by the Assessing Officer against the trust.
Accordingly, ITA No. 859/Hyd/88 filed by the Revenue is allowed.
19. The discussion in ITA No. 859/Hyd/88 holds good for ITA No. 856/ Hyd/88 also. For the reasons given supra, for upholding the assessment of the capital gain in the hands of the trust Under Section 164(1) in respect of Fatima Fouzia Jewellery Fund, we hereby allow ITA No.856/Hyd/88 and set aside the order of the first appellate authority and restore the assessment order made by the Assessing Officer assessing the entire capital gain that arose out of the sale of the jewellery specified in the Second Schedule on the trust representing Ameena Marzia Jewellery Fund.
20. Now let us consider ITA Nos. 855 and 857/Hyd/88. Though the trustees initially filed the return of income on behalf of Fatima Fouzia admitting the entire capital gain, they subsequently took the stand that the capital gain should be considered only in the hands of the children of Fatima Fouzia. Thereafter the trustees filed returns in the representative capacity on behalf of the sons of Fatima Fouzia, viz., Mir Sharfatali Khan and Himayatali Khan admitting their respective shares in the capital gain for the assessment year 1984-85.
Since the Assessing Officer assessed the entire capital gain in the hands of the trustees Under Section 164, he made protective assessments against Fatima Fouzia's sons represented by the trustees accepting their returns by way of abundant caution only. The first appellate authority cancelled the substantive assessment made against the trust and directed that the protective assessments made against the children of Fatima Fouzia should be treated as substantive assessments. As against those orders the Revenue filed ITA Nos. 855 and 857/Hyd/88.
Since we have already upheld the substantive assessments made against the trust, we hereby allow ITA Nos. 855 and 857/Hyd/88 and set aside the orders of the first appellate authority and further cancel the protective assessments mentioned supra.
21. Let us now consider ITA No. 858/Hyd/88 relating to the asst. year 1985-86. As we have already stated the jewellery specified in the First Schedule of the trust-deed relating to Fatima Fouzia was sold in the previous year corresponding to the assessment year 1984-85 as per the orders of the High Court and the sale proceeds were invested in specified securities. The said investment yielded interest income of Rs. 1,90,063 for assessment year 1985-86. The trustees filed 'nil' return on behalf of Fatima Fouzia on the ground that the interest income was not received by them on behalf of Fatima Fouzia and that it should be considered in the hands of Fatima Fouzia's children in equal shares. The Assessing Officer assessed the entire interest income on the trustees treating them as representative-assessee representing Fatima Fouzia. On the appeals filed by the trustees (representative assessee) the first appellate authority held that the interest income of Rs. 1,90,063 cannot be assessed in the hands of the representative assessee (trustees) as representing Fatima Fouzia. Accordingly he deleted it. Hence the Revenue filed appeal ITA No. 858/Hyd/88 contending that the entire interest income should be assessed in the hands of the trustees as representing Fatima Fouzia.
22. We have duly heard both sides on the issue arising out of this appeal. We have to see as to what was the position by the end of the previous year Le. 31-3-1985. It is seen from the order of the first appellate authority that on 23-3-1985 the Chief Judge, City Civil Court, Hyderabad made an order Under Section 34 of the Trust Act to the effect that Fatima Fouzia shall be paid I/5th share in the interest Account derived from the deposits under National Rural Development Bonds. It is seen from the Revenue's grounds of appeal in ITA No.859/Hyd/88 that subsequently on 19-8-1987 the Civil Court passed another order wherein the trustees were directed to pay Rs. 5,000 per month to Fatima Fouzia till her life time and at Rs. 2,000 per month to each child of Fatima Fouzia till they attain the age of majority from out of the interest income. Thus, the subsequent order dt. 19-8-1987 of the Court superseded the earlier order dt. 23-3-1985 of the Court. By virtue of the orders of the Civil Court made Under Section 34 of the Trust Act Fatima Fouzia and her children became legally entitled to certain amounts each year from the interest income. Considering those orders of the Civil Court we hold that Rs. 60,000 (Rs. 5,000 x 12) out of the Interest income should be considered in the hands of the trustees in their capacity as representative assessee as representing Fatima Fouzia. Likewise an amount of Rs. 24,000 out of interest income should be considered in the hands of each child of Fatima Fouzia either directly or as represented by the representative assessee, the trustees. Thus, the income to be considered in the hands of the 4 children of Fatima Fouzia comes to Rs. 96,000. After deducting this amount of Rs. 96,000 arid the amount of Rs. 60,000 which is to be considered in the hands of Fatima Fouzia the balance interest income relating to Fatima Fouzia Jewellery Fund shall be assessed in the hands of the trustees Under Section 164(1) for assessment year 1985-86.
Accordingly we hereby set aside the order of the first appellate authority and modify the assessment order by Including interest Income of Rs. 60,000 only instead of Rs. 1,90,063 in the assessment made against the representative assessee as representing Fatima Fouzia for the assessment year 1985-86 and deleting the balance amount.
23. In the result ITA Nos. 855, 856,857 and 859/Hyd/88 are allowed and ITA No. 858/Hyd/88 is partly allowed.