Sree Vardhana Trust Vs. Commissioner of Income-tax - Court Judgment

V.V. Kamat, J.

1. For the assessment year 1983-84, the assessee, Mr. Sathrughnan Pillai, a trustee of the trust named 'Sree Vardhana Trust', was assessed under the provisions of the Kerala Agricultural Income-tax Act, 1950, and in connection therewith, the following two questions expect our answer :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal has gone wrong in holding that the status of the assessee for assessment under the Agricultural Income-tax Act will depend on the decision of the issue as to whether the appellant trustee have held the property on behalf of the beneficiaries or for the benefit of the beneficiaries ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in its finding that the entire agricultural income has to be assessed as a single whole in the hands of the trustee of Sree Vardhan Trust under the provisions contained in Section 8(2)(a) of the Kerala Agricultural Income-tax Act, 1950 ?'

2. On hearing counsel for the parties, the question is whether the provisions of Section 8(1)(a) or Section 8(2)(a) of the Kerala Agricultural Income-tax Act, 1950, would govern the factual matrix.

3. It is necessary to see and examine the indenture of trust executed on March 8, 1977. It is at page 21. The trust is founded by one K.P. Pillai, appointing P. Sathrughnan Pillai and his wife, K. Vasantha, as the trustees thereunder.

4. The preamble thereto gives preliminaries stating that the founder constituted the trust by paying to the trustees a sum of Rs. 5,000 in the first instance in their capacity as nominees of the beneficiaries. The said beneficiaries are, viz., (i) V. Parvathy, aged 13 ; (ii) V. Ani, aged 8 ; (iii) S. Anu, aged 10 ; and (iv) S. Aniyan atias S. Kannan, aged 6. These transfers were made to the trustees as nominees of these beneficiaries and the two trustees came to be appointed in pursuance thereof. It is thereafter specified that beneficiaries of the trust would be the above children of Mr. P. Sathrughnan Pillai. In paragraph 5 of the document, beneficial interest of beneficiaries is clearly specified and the contents are as follows :

'The beneficiaries shall have the following beneficial interest in the net income or loss and corpus of the trust subject to the covenants herein : Miss V. Parvathy 1 (one)Miss V. Ani 1 (one)Master S. Anu 1 (one)Master S. Aniyan alias S. Kannan 1 (one)---------4 (four).'---------

5. Thereafter, in Clause (6) of the document, we get the purpose and powers. For the purpose of these proceedings, the purpose is of finding advantages for the welfare of the beneficiaries to create the trust. The trustees get powers to carry on business, to deal with the property, to enter into contracts, agreements and arrangements, to borrow or receive money, to receive deposits with or without interest and consequently to do all such things as are incidental or as the trust may think conducive or expedient to this attainment of the above objects.

6. As is customary, the document contains a clause relating to the vesting of the property in the trust. It is Clause (7), which is as follows :

'All funds of the property rights, claims, demands of every description belonging to or pertaining to the trust now or as may hereafter be acquired from time to time shall vest in the trustees for the time being.'

7. Usual powers that are available to the trustees are found to be mentioned in Clause (8) of the document. They need not be specifically pinpointed. Suffice it to say that under the said clause, the trustees get all powers in pursuance of the vesting of the property to deal in accordance with the purpose of the trust and in consonance with the trustees being put in charge as owners thereof. The entire document makes it abundantly clear that the trustees act for the benefit of the named beneficiaries and their shares are also precisely specified. The document also makes it abundantly clear that but for acting for the advantage and welfare of the beneficiaries and necessary powers in regard thereto, the trustees do not have any power with regard to the trust property.

8. Before the Agricultural Income-tax Officer, Kottarakkara, it was pleaded that in the case of a trust, the provisions of Section 8(1)(a) of the Agricultural Income-tax Act, 1950, would govern the situation. This was in view of the fact that the income could be understood to be received by the trustee for and on behalf of the beneficiaries, although assessable at the hands of the trustee. It was submitted that the beneficiaries may not have title over the trust properties. But the trust has received the amount wholly for the benefit of the beneficiaries, virtually for and on behalf of the beneficiaries. It was further urged that in such a situation, the assessee-trustee could be liable for tax, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such agricultural income is receivable. In other words, with reference to the document, it was submitted that the trustee-assessee would have to be understood with reference to the amount of tax as if the amount is leviable upon and recoverable from the four beneficiaries on whose behalf such agricultural income is receivable. The submission, if further spelt out, would mean precisely that the assessee-trustee cannot be understood for levy of tax as a single individual because the agricultural income is receivable for and on behalf of four beneficiaries in proportion to their shares specified in the document.

9. It was submitted that under the law of trust, the trustees though legal owners by virtue of vesting of the property empowering them to deal with it in their capacity as trustees, the beneficiaries are equitable owners in view of the situation that trustees get empowered to act not on their own, but for the benefit of the beneficiaries in accordance with the idea of the trust. The Agricultural Income-tax Officer, although applied the provisions of Section 8(1)(a) of the Agricultural Income-tax Act, 1950, proceeded to assess the assessee-trustees as a single unit.

10. The first appellate authority--the Appellate Assistant Commissioner of Agricultural Income-tax Act and Sales Tax, Quilon--also considered the provisions of Section 8(1)(a) of the said Act as applicable to govern the situation. In fact, the first appellate authority has quoted the text of the provisions of Section 8(1)(a) of the Act in its judgment. However, in applying the said statutory provision, the first appellate authority ignored the statutory provision that in the case of a trustee, the tax shall be levied upon and recoverable from the said trustee, in the like manner and to the same amount as it would he leviable upon and recoverable from the person on whose behalf such agricultural income is receivable. In other words, application of the correct statutory provision resulting in ignoring the above underlined portion, led the first appellate authority to endorse the decision of the Agricultural Income-tax Officer in regard to assessment of the assessee-trustee as a single unit.

11. The Agricultural Income-tax Appellate Tribunal, Trivandrum, has, however, applied the statutory provision of Section 8(2)(a) of the Act.

12. In the process of reasoning, accepting the submission of the State representative, the Tribunal examined Clause (7) of the document in regard to the vesting of the property in the trustees to record a conclusion that there is no indication that ownership ever vested with the beneficiaries. In our judgment, this is contrary to the fundamentals of the idea of a trust. The trustees although legal owners and as a result the properties stand vested in them are under legal obligation to act for the beneficiaries who are equitable owners entitled to all the benefits in accordance with the document of the trust. The discussion in paragraph 7 of the judgment of the Tribunal is the result of this erroneous assumption in law that there is no indication that ownership ever vested with the beneficiaries. The Tribunal has further observed that the trustees were not in the position of guardians in relation to their status for the purpose of agricultural income-tax assessment. In our judgment, this is a product of the approach contrary to the idea of a trust. There is no dispute that the trustee is the owner of the trust property. The beneficiary is considered to be an equitable owner because the undisputed position is that the trustee holds the trust property wholly for the benefit of the beneficiaries in accordance with the provisions of the deed of trust.

13. It is in these circumstances that the questions are before us mainly with regard to the legal situation as to which of the two provisions-Section 8(1)(a) or Section 8(2)(a) of the Agricultural Income-tax Act, 1950, would govern the situation.

14. It would be necessary to reproduce the two statutory provisions separately. They are as follows :

'8. Liability of Court of Wards, Administrator-General, etc.--(1)(a) In the case of agricultural income taxable under this Act which the Court of Wards, Administrator-General or Official Trustee or any receiver, administrator, executor, trustee, guardian or manager appointed by or under any law or by an order of court or by written agreement is entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from the Court of Wards, Administrator-General, Official Trustee or from such receiver, administrator, executor, trustee, guardian or manager, as the case may be, in like manner, and to, the same amount as it would be leviable upon and recoverable from the person on whose behalf such agricultural income is receivable, and all the provisions of this Act shall apply accordingly.

8(2)(a). Save as provided in Sub-section (1), if a person holds land from which agricultural income is derived partly for his own benefit and partly for the benefit of others or wholly for the benefit of others, agricultural income-tax shall be assessed on the total agricultural income derived from such land at the rate which would be applicable if such person had held the land exclusively for his own benefit.'

15. The marginal note itself indicates that it is a provision in regard to the liability of Court of Wards, Administrator-General, Official Trustee, receiver, administrator, executor, trustee, guardian or manager in regard to the taxable agricultural income. Section 8(1)(a) specifically deals with taxable agricultural income in the case of a trustee appointed by or under any law or by an order of court or by written agreement who is entitled to receive on behalf of any person. Therefore, directly and succinctly, the provisions of Section 8(1)(a) of the above Act would govern the taxation liability under the Agricultural Income-tax Act, 1950, of the trustee in regard thereto. The next question is the manner in which such tax shall be levied and recovered consequently. The next part of the above statutory provision answers the situation with regard to levy and recovery of such tax. There is no doubt that such tax is to be recovered from the trustee, as would be available from the plain language appearing in the context. How the tax is to be levied and recovered from the trustee is also provided in the statutory provision under consideration by the portion thereof underlined by us hereinabove. The tax is to be levied and recovered in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such agricultural income is receivable. This expression does not leave any manner of doubt that the manner of levy and recovery of the agricultural income-tax from the trustee has a necessary relation to the beneficiary, undoubtedly because the trustee receives the agricultural income on behalf of the beneficiary as is available from the very position of the trustee under consideration. Apart therefrom, the document clearly specifies the share as well as the number of beneficiaries. In other words, the agricultural income taxable which the trustee is entitled to receive on behalf of the beneficiary is required to be understood as the receipt of the agricultural income in question which is receivable on behalf of the beneficiaries although by the trustees. If the beneficiary is one, the trustee can be considered as a single unit. If the beneficiaries are more than that, the trustee will have to be understood in proportion to the number of beneficiaries for and on whose behalf the agricultural income is receivable as far as the trustee is concerned.

16. In this context, the fact of vesting of the property in the trustees would not at all be relevant to determine the liability. The doctrine of vesting is not germane. The situation almost goes as the very fundamental to the creation of the trust that the property of the trust gets vested in the trustees. This vesting empowers them to manage the property in accordance with the provisions relating to their powers as trustees. This is more so because the trustees are in a different position and are to be considered on a separate pedestal as compared to receivers and managers. The deed of trust gives the trustees all rights almost coterminous with the rights of ownership except with a situation that these rights of ownership are to be exercised by the trustees in consonance with the ideas under the document of trust for the benefit of the beneficiaries. It is for this reason that the trustees are understood to be acting virtually in consonance with the idea of the trust. Although they have almost coterminous powers with the rights of ownership and title, the absolute character of this superior right of ownership gets qualified for being in consonance with the idea of the trust and as a result thereof rights to be recognised in favour of equitable owners--the beneficiaries. In this process, it cannot be forgotten that the common thread that passes through all of them is that they function legally or factually for others and never for themselves. Even if they manage the property, the management is for the benefit of others. Therefore, apart from the fact that the trustee is appointed under a trust deed, as a consequence, the trust property gets vested with them or in them. The position cannot in any way justify taxation as a single unit keeping the equitable owners and the relationship of the trustees with them altogether aside as if it is not relevant. It can never be ignored that there are categories of persons who will have to be understood as deeming to receive the income on behalf of another person or persons and the management and care of the property also will have to be understood for and on their behalf for their benefit. It will also have to be borne in mind that although the trustees are owners, they collect the income for the benefit of others and it is this aspect that floats on the surface of the language of Section 8(1)(a) of the Act.

17. This approach is basic to the idea of a trust. The observations of the apex court in CIT v. Managing Trustees, Nagore Durgha : [1965]57ITR321(SC) , dealing with the position of a wakf--Durgha and its Muthavallis to the same effect that the income has to be understood for the benefit of others and has nothing to do with the fact of vesting afford us the necessary situation.

18. In fact, the statutory provision of Section 8 of the Agricultural Income-tax Act, 1950, in the matter of consideration of levy and recovery of agricultural income-tax was the subject of consideration of this court in Girigamma v. Agrl ITO [1963] KLT 266. This was in relation to an assessment taking into consideration the entire total income of the four shares owned by the minor beneficiaries treating them as a single unit for the purpose of making the assessment. This court also was dealing with the similar situation of the Agricultural Income-tax Officer making assessment in respect of the property of a minor on the guardian under Section 8 of the Act. It was observed that in the process, there is a mistake in proceeding on the basis of clubbing the income of the minors and proceeding to assess the guardian as a single unit. In a situation dealing with the position of the trustees, the position would be still more rigorous on account of its effect.

19. In fact, an identical situation came up before the Full Bench of the Karnataka High Court in State of Karnataka v. Chandrasekhar (C. P.) : [1979]116ITR84(KAR) under an identical statutory provision of Section 10(1)(a) of the Karnataka Agricultural Income-tax Act, 1957, dealing also with the position of a trustee. The Full Bench has also approached on the basis that if the case falls within Section 10(1)(a) of the Karnataka Act, it may not be necessary to examine whether Section 10(2)(a) of the Act applies. The Full Bench has ruled that a person who holds agricultural lands as a trustee and receives agricultural income partly for his own benefit and partly for the benefit of others can be assessed in accordance with Section 10(1)(a) of the Act and the question of invoking Section 10(2)(a) would not arise. We have examined the statutory provisions which are identical to the provisions of Sections 8(1)(a) and 8(2)(a) of the Agricultural Income-tax Act, 1950, of this State.

20. Even apart therefrom, it is plain and simple as daylight that when there is a specific provision with regard to the trustees as such along with similarly situated situations, it is not necessary to consider the other provision.

21. However, even if the statutory provisions of Section 8(2)(a) are taken up for consideration, it would appear that the said provision relates to a person holding land from which agricultural income is derived partly for his own benefit and partly for the benefit of others or wholly for the benefit of others. A bare perusal of the above statutory provision of Section 8(2)(a) would show that the said statutory provision would get attracted in the context of the relationship of the person with the land which is the source of agricultural income. If the person under consideration is the Court of Wards, Administrator-General, Official Trustee, receiver, administrator, executor, trustee, guardian or manager, the said category could be considered even in a situation of not holding the land from which agricultural income is derived. Therefore, even if we consider the statutory provision of Section 8(2)(a) of the Act, because the Tribunal had chosen to apply the same, it would not be possible to sustain the judgment of the Tribunal on that count. We are required to consider the statutory provisions of Section 8(2)(a) because the Tribunal has applied the same and also because question No. 2 gets directly concerned with the question of application of Section 8(2)(a) of the Act to the factual matrix. It is not possible to agree with the Tribunal that the decision of this court in Girigamma's case [1963] KLT 266 is not applicable. The Tribunal has sought to observe that the decisions of this court in G, Thankammal v. State of Kerala [1964] 52 ITR 634 and of the apex court in Holdsworth v. State of U. P. : [1958]33ITR472(SC) are relevant to the occasion. The Tribunal has observed so because the decisions defined the legal position of a trustee, vis-a-vis, a guardian in regard to the situation of holding land on behalf of another and holding land for the benefit of another. In the first instance, as we have emphasised earlier, the very language of the provision under consideration requires the person sought to be taxed having connection with the land, holding land from which agricultural income is derived. If the decision of this court in Thanhammal's case [1964] 52 ITR 634 was considered, it would show that therein the assessee executed a gift deed of certain agricultural lands in favour of her minor children assigning separate items of property to each of them as a result of which each child became the full owner of the items allotted to each child. This led this court to hold that the assessee could not be understood to be holding properties gifted to the children for the benefit of the children within the meaning of Section 8(2)(a) of the Act. Ultimately, this court has held that the rate applicable to the agricultural income of each of the minors was the rate applicable to the total income of each minor. The decision was cited on behalf of the Revenue and the Tribunal has accepted and acted upon the said decision. All that we can say is that we are perplexed when it is clear from the headnote itself that this court had held that the assessee did not hold the property within the meaning of Section 8(2)(a) of the Act.

22. Before the Tribunal, the Revenue also relied upon the decision of the apex court in W. O. Holdsworth's case [19581 33 ITR 472, under the Uttar Pradesh Agricultural Income-tax Act, 1948, relating to the situation of the trustee holding land for the benefit of beneficiaries. In the headnote itself, the statutory provision of Section 11(1) of the Uttar Pradesh Agricultural Income-tax Act, 1948, is found to have been considered to prescribe a mode of assessing the common manager, receiver, administrator or the like and he is deemed to be the assessee in respect of agricultural income-tax so payable by each such person and is liable to pay the same. It is observed that in so far as such assessee holds the land from which agricultural income is derived as such common manager, receiver, administrator or the like on behalf of the persons jointly interested in such land or in the agricultural income derived therefrom, the agricultural income tax is levied not on the computation of the whole agricultural income which has come to his hands but is limited to the aggregate of the sums payable as agricultural income-tax by each of the persons jointly interested in such land or in the agricultural income derived therefrom and received by him. In fact, reading the decision actually the expressions 'on behalf of' and 'for the benefit of' are synonymous in regard to their meaning. What has been observed is that Section 11(1) can only come into operation where the land from which agricultural income is derived is held by such common manager, receiver, administrator or the like on behalf of, in other words, as agent or representative of persons, jointly interested in such land or in the agricultural income derived therefrom. In the course of reasoning in regard to the trust property, it is observed that the trustee holds the property for the benefit of the beneficiaries, but it cannot be understood that he holds it on their behalf. In fact, thereafter, the apex court in CWT v. Kripashankar Dayashanker Worah : [1971]81ITR763(SC) had an occasion to appreciate in consonance with the law relating to the idea of trust that the conception with reference to Section 21(1) of the Wealth-tax Act, 1957, that the trustee is holding the trust property on behalf of others though may not be in conformity with the legal position as contemplated by the Trusts Act and observed that the Legislature is competent to give its own meaning to the words used by it in a statute and that it would be so because the Legislature is competent in the absence of any restriction placed on it by the Constitution. It is observed that Parliament, while enacting the section, proceeded on the basis that for the purposes of that Act, the trustee is holding the property on behalf of the beneficiaries and, therefore, the mere fact that this conception does not accord with the provisions of the Trusts Act does not invalidate Section 21(1). In fact, all this is really not necessary for answering the question. However, we have dealt with the authorities as they are relied upon by the contesting parties before the Tribunal.

23. The net result of the above discussion is that the situation is governed by the statutory provisions of Section 8(1)(a) of the Agricultural Income-tax Act, 1950, and in the process, the assessee cannot be taxed as a single unit, but with reference to four minors mentioned in paragraph 5 of the trust deed quoted hereinbefore during the judgment. The assessing authority would proceed to act in accordance with the statutory provisions of Section 8(1)(a) of the Act taking into consideration the underlined portion thereof in the above judgment out of Section 8(1)(a) of the Act reproduced hereinbefore.

24. For the above reason, we answer both the questions in the negative, in favour of the assessee and against the Revenue.

25. A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Agricultural Income-tax and Sales Tax Appellate Tribunal, Thiruvananthapuram, as required by law.