Commissioner of Wealth-tax, Gujarat Vs. Arundhati Balkrishna Trust and ors. - Court Judgment

Divan, C.J.

1. Since all these matters are interconnected and the questions arising in each of these matters are identical, we will dispose of these four references by this common judgment. These four references are pertaining to three trusts created by one Mahalaxmi Harivallabhdas Kalidas on the occasion of the marriage of each of her three sons. Her three sons were Jaykrishna, Balkrishna and Ramkrishna. Trust deeds in identical terms with difference only as regards the names of the individuals concerned and with the same scheme were executed settling certain properties for the benefit of the daughter-in-law who was getting married on that particular occasion and for the benefit of the male children of the son who was getting married. The questions which are referred to us in these four references relate to different assessment years, namely assessment years 1961-62 to 1964-65, in the case of Arundhati Balkrishna Trust, and also to assessment years 1959-60 and 1960-61. Reference No. 3 of 1973 is in respect of Arundhati Balkrishna Trust for the assessment years 1959-60 and 1960-61 and Wealth-tax Reference No. 5 of 1973, in respect of the same trust but for the four subsequent assessment years, assessment year 1961-62 to 1964 and 1964-65, and is in connection with Virmati Ramkrishna Trust, Ahmedabad. Wealth-tax Reference No. 6 of 1973 is in respect of the trust created for the third daughter-in-law of Mahalaxmi, namely, Padmavati Jaykrishna, and is for the assessment year 1963-64. As we have stated earlier, all these references raise identical questions and it would be convenient only to refer to the facts of only one out of these four references and for the sake of convenience, we will deal with the facts arising in Wealth-tax Reference No. 3 of 1973.

2. In this reference the assessment years are 1959-60 and 1960-61 and the trust deed was executed by Mrs. Mahalaxmi Harivallabhdas Kalidas on December 30,1945. By this trust deed an amount of Rs. 3,28,831 and shares and securities of the market value as on that date of Rs. 11,81,670 were settled upon trust for the benefit of Arundhati Balkrishna, daughter-in-law, who is the life-tenant under that trust deed. Under the terms of the said trust. Smt. Arundhati Balkrishna, the daughter-in-law, was entitled to the entire income of the trust during her lifetime and on her death the assets of the trust were required to be divided amongst the male children of Balkrishna Harivallabhdas Kalidas, husband of Arundhati Balkrishna and son of the settler. For the assessment year 1959-60, the total wealth of the trust was determined at Rs. 33,57,595 and for the assessment year 1960-61, the wealth of the trust was determined at Rs. 39,66,095. The capitalised value of the interest of the life-tenant Arundhati, was determined at Rs. 4,54,363 for the assessment year 1959-60 and at Rs. 3,52,593 for the assessment year 1960-61. In the individual wealth-tax assessment of Arundhati herself, the life-tenant, these amounts of the capitalised value of her interest as a life-tenant were assessed and, therefore, while assessing the trustees of the trust in their representative capacity under section 21, the balance of the amounts, namely, Rs. 29,01,332 for the assessment year 1959-60 and Rs. 36,13,502 for the assessment year 1960-61, were sought to be assessed in the hands of the trustees. The Wealth-tax Officer assessed the total wealth in the hands of the trustees at Rs. 29 lakhs and odd and Rs. 36 lakhs and odd for the two assessment years respectively. Against the order of the Wealth-tax Officer, the trustees went in appeal to the Appellate Assistant Commissioner and at that stage on behalf of the trustees it was contended that the whole of the balance of the value of the assets pot the trust should not be assessed in the hands of the trustees but only the present value of the interest of the beneficiaries namely, the remainder man, should be assessed in the hands of the trustees. The matter was then carried in further appeal before the Appellate Tribunal and against it was urged on behalf on the trustees that the present value of the interest of the remainder man should alone be brought to tax. It was contended on behalf of the assesses that the provision of law which applied to this case was section 21(1) of the Wealth-tax Act and not section 21(4) of the Wealth-tax Act and it was contended that in the light of the decision of this High Court in Padamavati Jaykrishna Trust v. Commissioner of Wealth-tax where one of the assesses in the present group of references was before the court, this High Court had held that the case of Padmavati Jaykrishna Trust, the assessee in Wealth-tax Reference No. 6 of 1973, fell under section 21(1) and not section 21(4) of the Act. It was contended that since dual assessment, wealth-tax could not be taxed again in the hands of the trustees. The Tribunal held that the trust could be assessed only to the extent of the value of the interest of the reversioners as arrived at by the values. The Tribunal had appointed two valuers as contemplated by the provisions of section 24(6) of the Wealth-tax Act as it stood till 1972, and in the light of the report of the valuers, the Tribunal directed that the trust could be assessed only to the extent of the present value of the interest of the reversioners or remainder man as arrived at by the valuers. The Tribunal held that in the case of this particular trust, apart from the life-tenant, namely, Arundhati Balkrishna, and the remainder man or reversioner, namely, her male child or children, there was no third group of beneficiaries and though the total of the value of the interest of the life-tenant and the remainder man as determined by the valuers might not total up to the present normally value of the wealth of the trust, the trust property itself was subject to certain restrictions and hindrances which would reduce the real value of the wealth of the trust. The Tribunal also held that even presuming without admitting that the real total wealth of the trust was more than the combined interests of the beneficiaries, the assessment had got to be limited to the interests of the beneficiaries and the Tribunal held that the difference between the nominal value of the trust and the totals of the value of the interest of the two beneficiaries as determined by the valuers, could not be brought to tax in the assessment of the trust. Thereafter, at the instance of revenue, the following fives questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstance of the case, the Tribunal was right in holding that the assessment should be under section 21(1) and not under section 21(4) of the Wealth-tax Act, 1957

(2) Whether, on the facts and in the circumstances of the case, the trustees are liable to be taxed on the total wealth of the trust minus the interest therein of Smt. Arundhati Balkrishna, the same having been taxed in her hands

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that even presuming without admitting that the real total wealth of the trust is more than the combined interest of the beneficiaries, the assessment has got to be limited to the interest of the beneficiaries under sub-section (1) of section 21 of the Act

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the trust should be assessed only to the extent of the value of the interest of the reversioners arrived at by the valuers

(5) Whether, on the facts and in the circumstances of the case, the interest of life-tenant and the remainder man having been taxed separately in the hands of the life-tenant and the trust respectively and by so doing the total of the value of the two interests having fallen short of the net wealth of the trust, the balance is liable to be taxed to wealth-tax in the hands of the trust under section 21(4) of the Wealth-tax Act, 1957 ?'

3. Before proceeding to discuss the law points involved in this case, it is better to refer to the precise terms of the trust deed in so far as it is material for the purposes of this case. The trust deed directs that the trustees shall stand possessed of the different assets of the trust upon the trusts following, that is to say :

'(a) In Trust to pay the income thereof unto Arundhati, wife of Balkrishna Harivallabhdas, during her lifetime for her sole and separate use;

(b) After the death of the said Arundhati, wife of Balkrishna Harivallabhdas, in trust for the male child or children of the said Balkrishna Harivallabhdas for their own use and benefit absolutely in equal shares to the intent and effect that the share of each such male child so that the representative of the male child dying before the said Arundhati, wife of Balkrishna Harivallabhdas, shall take the share which such male child would have taken had he been alive to be divided, paid and transferred to them when and as soon as the youngest of the said male children attains the age of majority.'

4. Clause (c) provides for a situation where there are no male child or children of Balkrishna Harivallabhdas and by clause (c) power of appointment is given to Balkrishna Harivallabhdas to appoint such person or persons as he might by his will or codicil appoint, and in default of such appointment for any reason whatsoever, the corpus shall be held in trust for Balkrishna Harivallabhdas, his heirs, executors, administrators and assigns.

5. As we have stated earlier, similar provisions with change of names of the son and the daughter-in-law concerned are to be found in the case of Virmati Ramkrishna Trust and Padmavati Jaykrishna Trust. It is common ground between the department and the assessee before us that each of the three daughters-in-law has at the relevant valuation dates which are material for the purposes of these four references. Thus, in none of the cases the question of resorting to clause (c), namely, the power of appointment to the son, or clause (d), namely, passing of the property to the estate of the son concerned, is likely to arise.

6. Under section 3 of the Wealth-tax Act, which is the charging section, there shall be charged for every assessment year commencing on and from the first day of April, 1957, a tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule. Section 2(m) defines the 'net wealth' to mean the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets, wherever located, belonging to the assessee on the calculation date, including assets required to be included in the net wealth as on that date under the Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date. We are not concerned with the other details of section 2(m). Under section 2(e), 'assets' are defined to mean property of every description, movable or immovable. Under section 7, the value of any asset other than cash, for the purposes of the Act, shall be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. Thus, section 7 emphasises the concept of the present value as fixed on the basis of the hypothetical market value of any asset which is to be included in the total wealth of an assessee. Section 24 deals with appeals to the Appellate Tribunal from orders of the Appellate Assistant Commissioner. Prior to the deletion of sub-section (6) by the Taxation Laws Amendment Act, 1972, sub-section (6) of section 24 was in these terms :

'(6) Whether the appellant objects to the valuation of any property, the Appellate Tribunal may, and if the appellant so requires shall, refer the question of the disputed value to the arbitration of two valuers, one of whom shall be nominated by the appellant and the other by the respondent, and the Tribunal shall, so far as that question is concerned, pass its orders under sub-section (5) conformably to the decision of the valuers :

Provided that if there is a difference of opinion between the two valuers, the matter shall be referred to a third valuer nominated by agreement, or failing agreement, by the Appellate Tribunal, and the decision of the valuer on the question of valuation shall be final.'

7. It is under this provision of section 24, sub-section (6), which was on the statute book and which was substantially in these terms throughout the relevant period that the Appellate Tribunal appointed two valuers and accepted as final the valuation of the interest of the remainder man in each of the cases before us.

8. Section 21 deals with cases where assets are held by some person other that the person who is really entitled to the same. It may be an administrator-general or a court of wards or an official trustees in insolvency or any receiver, manager or any other person, by whatever name called, appointed under any order of a court to manage property on behalf of another, or, as in the case before us, a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise. Section 21 thus provides for what is called, under the scheme of the Income-tax Act, 'representative assessee'. Under sub-section (1), in the case of assets chargeable to tax being held by a trustee under a trust deed, wealth-tax has to be levied upon recovered from the trustee, in like manner and to the same extent, as it would be livable upon and recoverable from the person on whose behalf or for whose benefit the assets are held, and the provisions of the Act or to apply accordingly. Under sub-section (2) of section 21, nothing contained in sub-section (1) is to present either the direct assessment of the person on whose behalf or for whose benefit the assets are held, or the recovery form such person of the tax payable in respect of such assets. Sub-section (4) of section 21 is in these terms;

'(4) Notwithstanding anything contained in this section, where the shares of the persons on whose behalf or for whose benefit any such assets are held are indeterminate or unknown, the wealth-tax shall be levied upon and recovered from the court of wards, administrator-general, official trustee, receiver, manager or other person aforesaid as if the persons on whose behalf or for whose benefit the assets are held were an individual who is a citizen of India and resident in Indian for the purposes of this Act.'

9. In Padmavati Jaykrishna Trust v. Commissioner of Wealth-tax a Division Bench of this court consisting of J. M. Shelat C.J. and Bhagwati J., as they then were, dealt with the provisions of the trust deed which were in identical terms as the trust deed in Wealth-tax Reference Nos. 3/73, 4/73 and 5/73 is and the very trust deed in Wealth-tax Reference No. 6 of 1973 is before us. On an interpretation of the terms of the trust deed and in the light of the scheme of the provisions of section 21, the Division Bench held that the number of beneficiaries was definite and their shares were also known. There was no question of their shares being indeterminate or unknown and, consequently, the provisions of sub-section (1) and not of sub-section (4) of section 21 would apply. The Division Bench explained the scheme of section 21 in this manner :

'The crucial point of time for determining the net wealth of an assessee is, therefore, the relevant valuation date.'

10. and under section 7, the value has to be estimated to be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. The Division Bench observed 1 :

'The object of sub-section (1) is thus to enable the Wealth-tax Officer to levy and recover the tax from a trustee not as a taxable unit or as an individual but in the like manner and to the same extend as the person on whose behalf he holds the assets. Though the tax is assessed on a trustee, the provisions of the Act are to be applied in an assessment upon him as they would apply in an assessment upon an individual beneficiary...... As the revenue is entitled to assessee only the share or benefit which a beneficiary is entitled to, the assessment would be on the value of such share or benefit on the relevant valuation date. Therefore, during the assessment proceedings, the Wealth-tax Officer has to determine : (1) as to who is or are the person or persons holding the assets; (2) the beneficiary or beneficiaries on whose behalf such person or persons hold the assets; and (3) what are the shares of such beneficiaries in the assets held by the trustee or trustees, as the case may be. The Wealth-tax Officer obviously cannot determine the last question if the shares of the beneficiaries are not known or are not determinate and if that cannot be done, it would not be possible for him to assess the trustee in the like manner and to the extent that each of the beneficiaries would be liable to be assessed.'

11. According to the Division Bench sub-section (4) of section 21 is enacted to meet a contingency where the shares of the beneficiaries are indeterminate or unknown. Under sub-section (4) the tax can be levied on a trustee or trustees as if the beneficiaries on whose behalf the assets are held were an individual for the purposes of the Act. If the shares under the instrument of trust are not determinate or known, it means that the settler has not determined or specified the shares and hence the Wealth-tax Officer cannot determine the share of each individual beneficiary and the trustees cannot be assessed in the like manner and to the extent that such individual beneficiary would be liable to be assessed. Then at page 75 the Division Bench observed.

'The scheme of section 21 is thus fairly clear, namely, that, as a general rule, the tax has to be levied and recovered on the footing of sub-section (1) and that it is only when assessment under that sub-section (4) and treat all the beneficiaries as an individual. Whether it is sub-section (1) or sub-section (4) which applies to a particular case has thus to be determined from the question whether the shares of the persons on whose behalf the trust assets are held during the assessment year are determinate or known. If they are, the Wealth-tax Officer has to apply the provisions of sub-section (1) and assessee accordingly.'

12. As we have already observed earlier, on construing the provisions of the trust deed, the Division Bench in Padmavati Jaykrishna Trust's case held that as, on the relevant date, the number of beneficiaries was defined and their shares were equal, there was no question of their shares being indeterminate or unknown and, consequently, the provisions of sub-section (1) and not sub-section (4) of section 21 would apply.

13. It is clear, therefore, that in each of these four cases before us, the Tribunal was right in the light of this decision in Padmavati Jaykrishna Trust's case that each of the four cases was governed by section 21(1) of the Act and not section 21(4). The result would, therefore, be that the interest of the remainder man being determinant and known, would have to be assessed in the hands of the trustees under section 21 on the basis off the valuation arrived at after following the procedure for valuation laid down in the Act and the valuation would be on the basis of the present market value as arrived at by the valuers as on the relevant date of the assets of the remainder man, namely, his right to receive the entire corpus on the death of Arundhati, Virmati, or Padmavati, as the case might be, in each of the four cases. Thus, in the light of this decision, so far as the question of assessing the assets in the hands of the trustees was concerned, following the scheme of section 21(1) by bringing to tax both the value of the interest of life-tenant and the value of the interest of the remainder man, all the interests in the trust estate were being assessed and nothing was left out so far as the trust estate was concerned.

14. The scheme of section 21 of the Wealth-tax Act, was again considered by a Division Bench of this court consisting of Bhagwati C.J. and T. U. Mehta J. in Commissioner of Wealth-tax v. Kum Manna G. Sarabhai. It is clear from the provisions of section 21 that the assessment which is contemplated to be made on the trustees under sub-sections (1) and (4) is assessment in a representative capacity. It is really the beneficiaries who are sought to be assessed in respect of their interest in the trust properties through the trustees. And it was observed :

'The beneficiary would always be assessable in respect of his interest in the trust properties since such interest in the trust properties 'belongs to' him and the right of the revenue to make a direct assessment on him in respect of such interest in the trust properties stands unimpaired by the provision enabling assessment to be made on the trustees in a representative capacity. Sub-section (2) makes this clear by providing that nothing contained in sub-section (1) shall prevent either the direct assessment of the beneficiary of the wealth-tax in respect of his interest in the trust properties which is assessed in the hands of the trustees. The revenue has thus two modes of assessment available for assessing the interest of a beneficiary in the trust properties, were there is either a single beneficiary or there are more beneficiaries then one but there shares in the trust properties are determinate and known. The revenue may either assess the interest of the beneficiary in the trust properties in the hands of the trustees in a representative capacity under sub-section (1) or assess it directly in the hands of the beneficiary by including it in the net wealth of the beneficiary. These two modes of assessment are clearly alternative to each other.'

15. It was pointed out that the revenue can adopt either one course or the other but not both, because whether the assessment is made on the trustees or on the beneficiary, it is the same asset which is assessed to wealth-tax, namely, the interest of the beneficiary in trust properties and the revenue cannot seek to assess the same asset twice. It was pointed out by the Division Bench that the answer to the question as to what is to happen where there are more beneficiaries than one, and their individual shares are indeterminate or unknown, is provided by sub-section (4) of section 21. It was pointed out.

'Since the interest of the beneficiaries in the trust properties in such a case would be indeterminate or unknown, it would not be possible to make direct assessment on any beneficiary in respect of his interest in the trust properties nor would it be possible to levy wealth-tax on the trustees in respect of the interest of any beneficiary in trust properties 'in the like manner and to the same extent as it would be leviable upon' such beneficiary, under sub-section (1). The legislature, therefore, provides that, in a case of this kind, wealth-tax may be assessed on the trustees as if the beneficiaries were an individual, so that, for the purpose of assessment, a fiction would be created as if the trustees hold the trust properties for the benefit of a single beneficiary and assessment would be made on the trustees on such fictional basis under sub-section (1). When assessment is made on the trustees on the fictional basis as if the beneficiaries were one individual, it is assessment on the trustees in a representative capacity and what is assessed to wealth-tax is the totality of the interest of the beneficiaries in the trust properties.'

16. In the light of these two decisions with which we are in respectable agreement, it is clear :

(1) that none of the present four cases falls under section and each of the four cases falls under section 21(1);

(2) in the light of the valuations arrived at in accordance with the provisions of section 24(6), the value of the interest of the remainder man in each of the three trusts has to be brought to tax in the hands of the trustees if the revenue so desires; and

(3) it is equally clear since the case does not fall under section 21(4), that all of the beneficiaries, namely, the life-tenant and the remainder man, are brought to tax by following the procedure which 21(4)the Tribunal has followed in this case.

17. It is at first sight surprising that the sum total of the valuations of the interests of the life-tenant and remainder man should fall much below the totality of the value of the trust properties in each case. For example, in the case of Arundhati Balkrishna trust the valuation on the interest of the remainder man in 1959-60 comes to Rs. 1,90,889 and in assessment year 1960-61 it comes to Rs. 2,28,352 and thus it seems to be surprising that nearly Rs. 27 lakhs in assessment year 1959-60 and nearly Rs. 34 lakhs in assessment year 1960-61 worth of assets held by the trustees cannot be brought to tax at all. However, it is to be borne in mind that what is to be taxed so far as the remainder man is concerned is the present value of his right to receive the corpus of the trust fund at an uncertain future date, namely, as and when Arundhati dies. It is on the basis of actuarial calculations by well-settled principles that this amount of the present value of the remainder man's interest was determined by the valuers, and it is to be borne in mind that under section 21(1) the trustees can be assessed to the same extent and in same manner as the beneficiaries and not on any other footing. If the remainder man were sought to be assessed in his own assessment to wealth- tax, he would be assessed not on the basis of Rs. 27 lakhs and odd and Rs. 36 lakhs and odd as the Wealth-tax Officer sought to do in Wealth-tax Reference No. 3 of 1973, but he could be assessed only on the footing of Rs. 1,90,889 and Rs. 2,28,352 for the relevant assessment years because what is to be brought to tax is the present value of the asset of the beneficiary, namely, so far as the remainder man is concerned, the present value of his right to receive the corpus on the death of Arundhati.

18. Under these circumstances the conclusion of the Tribunal : (i) that apart from the life-tenant and the remainder man there was no other beneficiary; and (ii) the consequential conclusion that once the present value of the interest of the life-tenant and the remainder man were brought to tax under the provisions of the Wealth-tax Act, there was no other property or asset in the hands of the trustees which could be brought to tax, were correct. Once we hold that these two conclusions of the Tribunal were correct, it necessarily follows that the balance of the total value of the assets held by the trustees after deducting the value of the interest of the life-tenant and the value of the interest of the remainder man could not be taxed in the hands of the trustees under section 21(1) of the Act. The apparent discrepancy or anomaly can be resolved when one takes into consideration the fact that what is valued of the interest of the life-tenant, but what is to be taxed so far as the remainder man is concerned is the present value on actuarial valuation of that interest and that value must of necessity fall far short of the total value of the corpus which he is entitled to receive at an uncertain future date. Under the circumstances it is obvious that the contention of the revenue that the contention of the revenue that the balance of the value of the assets after deducting therefrom the value of the interest be brought to tax in the hands of the trustees under section 21(4) cannot be accepted. Apart from the life-tenant and the remainder man there is no other beneficiary under the trust and it is obvious in the light of the decision in Padmavati Jaykrishna Trust's case that the case falls fairly and squarely under section 21(1). Apart from these two interest, there is no other interest remaining outstanding and there is no other beneficiary whose shares are indeterminate or unknown. It cannot be said that even if the life-tenant or the remainder man interest remains outstanding and unaccounted for, the totality of the interest of the life-tenant and the totality of the interest of the remainder man have not been valued in the proper manner and it is that value which can be included in the total wealth of the life-tenant or the remainder man, as the case may be, and by virtue of section 21(1) so far as the trustees are concerned, at the option of the revenue either in the assessment of the trust or in the assessment of the individual beneficiary, the amount of the value of the interest in question can be brought to tax.

19. In the light of the above discussion, we answer the questions in each of the four references as follows :

Question No. (1) : In the affirmative.

Question No. (2) : In the negative.

Question No. (3) : In the affirmative.

Question No. (4) : In the affirmative.

Question No. (5) : In the negative.

20. The Commissioner will pay the costs of the reference in each of the four references to the assessee.