Appeal No 1287NT of 1982
From the Judgment and Order dated 222 1978 of the Madras in Tax Case No 24 of 1975
M Gaurishankar Murthy C Ramesh P Parmeswaran and Ms A Subhashini for the Appellant
Ms Janki Ramachandran for the Respondent
The following Order of the Court was delivered In this appeal preferred against the Judgment of the Madras High Court the words whose income chargeable under the head salaries  occurring in the second proviso to sub clause iii of clause c of section 40 fall for interpretation
The assessment year concerned is 1965 66
During the accounting year relevant to the said assessment year the assessee paid to its foreign technical director a total remuneration of Rs 66000 including a sum of Rs 28576 paid by way of perquisites
The Income tax Officer held that by virtue of section 40ciii perquisites exceeding one fifth amount of the salary cannot be allowed as a deduction
He held further the second Proviso to the said sub clause is not applicable inasmuch as the income chargeable under the head salaries was not Rs 7500 or less
Accordingly he allowed only a sum of Rs 13200 by way of perquisites
He disallowed the balance of Rs 15376
The Appellate Assistant Commissioner however allowed the assessee s appeal holding that inasmuch as the salary of the foreign technical director was exempt from tax under section 106vii the provision contained in section 40ciii was not applicable
The appeal filed by the 995 Revenue was allowed by the Tribunal
The Tribunal opined that merely because the salary is exempt under section 106vii the provision in section 40ciii does not cease to apply
Under the proviso to the said sub clause only an employee whose income chargeable under the head salaries was Rs 7500 or less is exempted
Inasmuch as the income chargeable under the head salaries in this case is more than Rs 7500 the exemption does not operate
Since the said foreign technical director was an employee of the assessee he was certainly governed by the provision section 40ciii said the Tribunal
At the request of the assessee it stated the following question for the opinion of the High Court Whether on the facts and circumstances of the case the Tribunal was justified in holding that the provisions of Section 40ciii were rightly invoked for the assessment year 1965 66 in relation to the remuneration of the Technical Director of the assessee company Section 40ciii as applicable to the assessment year 1965 66 read as follows 40
Notwithstanding anything to the contrary in Sections 30 to 39 the following amounts shall not be deducted in computing the income chargeable under the head profits and gains of business or profession
c in the case of any company iiiany expenditure incurred after the 29th day of February 1964 which results directly or indirectly in the provision of any benefit or amenity or perquisite whether convertible into money or not to an employee including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee to the extent such expenditure exceeds one fifth of the amount of salary payable to the employe e for any period of his employment after the aforesaid date Provided further that nothing in this sub clause shall 996 apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head Salaries  is seven thousand five hundred rupees or less  Under section 106vii of the Act the remuneration due to any technician who was not a resident in any of the four financial years immediately preceding the financial year in which he arrived in India chargeable under the head salaries  for Services rendered as a technician was exempt
In this case the salary paid to the foreign technical director was admittedly exempt under section 106vii
The contention of the assessee which has been accepted by the High Court runs thus the salary payable to the said director was exempt by virtue of Section 106vii
In other words it is nil for the purposes of the Act
If so the second proviso to the sub clause is attracted inasmuch as nil  income under the head salaries is less than Rupees seven thousand five hundred
By virtue of the said second proviso the main provision in sub clause iii goes out of picture
The High Court reasoned that if income of one rupee is less than Rs 7500 there is no reason for saying that nil  income is not an income less than Rs 7500
Since the income exempted under Section 10 is not liable to be included in the total income such exempted salary income should be treated as nil  income for the purposes of Section 40ciii opined the High Court
After hearing the counsel for the parties we are of the opinion that the view taken by the High Court is a reasonable one and does not call for any interference
The appeal accordingly fails and is dismissed
No costs
GN Appeal dismissed


Summary:
The appellant s father executed on 111964 three deeds of settlements trust deeds in the United States of America
The terms in them all were identical
The object of these trusts was to provide for the education maintenance and up keep of the members of the settlor s family and their descendants
He also executed two settlements in UK with the very same object
The settlor appellant s father was riling returns of his income in India including therein whole of the income arising from the trusts
For the assessment years 1964 65 to 1969 70 he filed the returns
Since he died on 22 8 1969 ie in the middle of the accounting year relevant to the assessment year 1970 71 two returns were filed one up to the date of his 938 939 death and the other from the date of his death to the end of the accounting year by his eldest son the appellant including the whole of the income from the trusts
The appellant filed appeals against the assessment orders pertaining to the assessment years 1965 66 and 1966 67 contending that the income from US trusts was not taxable in India either in the hands of settlor or in his hands and that the inclusion of the said income in the returns by the settlor and by the appellant was a mistake
The appellant preferred revisions against other assessment orders where appeal was barred taking the plea of non taxability with respect to the income from UK trusts and from the US trusts
The Appellate Assistant Commissioner allowed the appeals
 The Revenue s appeals to the Tribunal were allowed holding that the AAC acted contrary to Rule 462 of the Income Tax Rules in admitting the additional grounds and in looking into new material
The Tribunal remitted the appeals back to AAC
At that stage the appellant approached the settlement commission under Chapter XIXA of the Income Tax Act 1961
The Settlement Commission went into all the aspects of the matter and computed the taxable income of appellant s father and his income for the assessment years 1964 65 to 1970 71 and 1970 71 to 1982 83
It directed the ITO to compute the total income for each of the said assessment years accordingly and raise demand for the tax due
The appellant preferred two sets or appeals before this Court against the two orders of the Settlement Commission
CAs 4301 07 of 1991 related to the assessment years 1964 65 to 1970 71 and CAs12881300 of 1991 related to the assessment years 1970 71 to 1982 83
The appellant contended that the settlement Commission erred in law in holding that the US trusts were revocable trusts within the meaning of Section 63 of the Act that for attracting Section 63 the deed of transfer must give the transferor a right to retransfer directly or indirectly whole or any part of the income or assets to the transferor or it must give him a right to reassume power directly or indirectly over the whole or any part of income or assets that in the present case such power was not given to the transferor that US trusts were discretionary trusts and 940 therefore the assessment could be made only upon the trustees and not upon the beneficiaries recipients that the revenue could not take advantage of the mistake of law on the part of the settlor or the appellant that with the death of the settlor the US trusts ceased to be revocable trusts and the appellant could not be taxed on the income received by him from the said trust because only the trustee could be taxed that the UK trusts were also discretionary trusts and not specific trusts as held by the Settlement Commission and the assessment could be made only upon the trustees and not upon the beneficiaries recipients that the Settlement Commission committed a legal error in including the income from the UK trusts in the total income of the settlor and the appellant even though it was not paid out by the trustee nor received by the assessees in India that in the USA and UK tax was levied upon the respective trust incomes under the laws of those countries that levying tax over again in India on the very same income amounted to double taxation and therefore the tax levied in India was to be waived
The Revenue submitted that even if any principles were decided by the Settlement Commission they did not bind the Income Tax authorities in proceedings relating to subsequent years that the order of the Commission was relevant to and was confined I only to the assessment years to which it related that this Court under Article 136 of the Constitution would not be able to go into the merits of the order that the Settlement Commission s interpretation on the US and UK trusts was perfectly in order and did not call for any interference by this court that during his life time the settlor had declared that he had received income from the UK and US trusts and had included the same in his returns of income for each of the assessment years relevant herein that the appellant too acted similarly and therefore the argument of not receiving the income from UK trusts was a mere after thought and should not he given any credence that a trustee or the trustees waswere expected to act reasonably and in furtherance of the object of the trusts that they were to apply the income for the purposes specified because they could not just accumulate it that applying the test of reasonableness it was to be held that ordinarily the trustee ought to distribute the income each year and that it was to be held that the income from the UK trusts had rightly been taken into account by the Commission while passing its orders
Dismissing the appeals this Court 941 HELD 101
The finality clause contained in Section 245 1 does not and cannot bar the jurisdiction of the High Court under Article 226 or the jurisdiction of this court under Article 32 or under Article 136 as the case may be
But that does not mean that the jurisdiction of this court in the appeal preferred directly in this court is any different than what it would be if the assessee had first approached the High Court under Article 226 and then come up in appeal to this court under Article 136
A party does not and cannot pin any advantage by approaching this Court directly under Article 136 instead of approaching the High Court under Article 226
This is not a limitation inherent in Article 136 it is a limitation which this court imposes on itself having regard to the nature of the function performed by the Commission and keeping In view the principles of judicial review
955 D E 102
The scope of enquiry whether by High Court under Article 226 or by this Court under Article 136 is also the same whether the order of the Commission is contrary to any of the provisions of the Act and if so has it prejudiced the petitionerappellant apart from ground of bias fraud  malice which of course constitute a separate and independent category
956 B 103
The appellant power under Article 136 is similar to power of judicial review where the appeal is directed against the orders of the Settlement Commission
Sri Ram Durga Prasad vs Settlement Commission 176 ITR 169 and Chief Constable of the N W Police vs Evans1982 1 WLR 1155 referred to
956 D 104
The only ground upon which this Court can interfere in these appeals is that the order of the Commission is contrary to the provisions of the Act and that such contravention has prejudiced the appellant
956 E 105
The main controversy in these appeals relates to the interpretation of the settlement deeds though it is true some contentions of law are also raised
The commission has interpreted the trust deeds in a particular manner
Even if the interpretation placed by the commission on the said deeds is not correct it would not be a ground for interference in these appeals since a wrong interpretation of a deed of trust cannot be said to be a violation of the provisions of the Income Tax Act
956 F 942 106
The interpretation placed upon the said deeds by the Commission does not bind the authorities under the Act in proceedings relating to other assessment years
956 G 107
Though it is not necessary strictly speaking to go into the correctness of the interpretation placed upon the said deeds by the commission and it is enough if this court confines itself to the question whether the order of the Commission is contrary to the provisions of the Act yet for the sake of completeness the Court examine whether the order of Commission is vitiated by any such wrong interpretation
956 H 957 A 201
A discretionary trust is described as a trust where the trustees have been vested with a discretion in the matter of distribution of trust income among the specified class of beneficiaries
In the case of such trusts the trustees have a discretion to pay whole or part of the income to such member or members of the designated class as they think fit and in such proportion as they deem appropriate
957 C D Snell s Principles of Equity 25th Edn
1965 page 129 referred to
957 E 202
The US settlement deed empowers the trustee to hold manage invest and reinvest the principal of the trust fund to collect and receive the income thereof and to pay or apply so much of the net income as the trustee shall in his absolute and uncontrolled discretion deem advisable to or to the use of one of more members of the settlor s family It is thus a discretionary trust
Para 12 of the US Deed empowers the settlortransferor and the trustee acting together to direct the trustee at any time to pay over the entire income andor entire corpus or a part thereof to such member of the settlor s family or their descendants as they may direct
The said power cannot be exercised by the settlor acting Alone
958 B 204
The power properly construed is given to the settlor to be exercised together with the trustee and not to the trustee to be exercised together with the settlor
The trustee is anyhow vested with an absolute discretion to distribute the income of or the principal of the trust to such member of the family as he thinks appropriate under the clause preceding and paras following para 12
If so there was no point in saying that 943 he can together with the settlor be empowered to pay over part or whole of incomeprincipal to such one or more members of a class composed of the family members living  It cannot also be forgotten that the trustee in this case is a Bank one of the largest in the USA
and not an individual acquaited with the affairs of the settlor s family
958 H 959 A 205
Section 63 does not say that the power of revocation vesting in the transferor should be absolute or unconditional
959 B 206
Section 631 also does not say that the deed of transfer must confer or vest an unconditional or an exclusive power in the transferor to give the powerdirection of the nature contemplated by it
Merely because the concurrence of the trustee had to be obtained by the transferorsettlor for giving the said direction it cannot be said that the deed does not contain a provision giving the transferor a right to reassume power directly or indirectly over the whole or any part of income or assets within the meaning of Section 63aii of the Act
960 B C 207
During the lifetime of the settlor the entire income arising from the three US trust deeds was bound to be and was rightly included in the income of the settlor by virtue of Section 63 read with Section 61
961B 208
With the death of the settlor Section 63 ceased to apply even though the aforesaid clause empowers not only the settlor but also the Maharaja for the time being to exercise the said power
961 C 209
Section 63 is attracted only where such power is given to the transferor and the appellant the son of the settlor is not and cannot be called the transferor
It is not denied that so far as the income from the US trusts is concerned it was indeed received by the appellant
961 D 210
The trustees in the case of a trust declared by a duly executed instrument in writing are treated as representative assessees Section 1601iv
It is equally true that in the case of a discretionary trust trustees are liable to be taxed in respect of the income received by them at the rate specified in Section 1641
961 F 211
Section 166 states in unmistakable terms that nothing contained in the preceding provisions in the chapter shall preclude the Revenue from making a direct assessment upon the beneficiary andor recovering the tax payable from such person
962 B 944 212
By virtue of Section 166 the Revenue has an option in the case of a discretionary trust either to make an assessment upon the trustees or to make an assessment upon the beneficiaries
Of course both the trustee and the beneficiary cannot be simultaneously taxed in respect of the same income
The assessments made by the Commission on the deceased settlor and the appellant are thus unexceptionable
966 D Behramji Sorabji vs Commissioner of Income Tax Bombay  Commissioner of Income Tax Bombay City vs Ratilal Nathalal  Tarunendra Nath Tagore vs Commr
of Income Tax  K Subramania Pillai vs Agricultural Income Tar Officer 7hukalay  Commissioner of Income Tar Punjab vs Raghubir Singh  Nagappa vs CIT and Ram Swaroop Das vs The State of Bihar  referred to
Sevantilal Maneklal vs CIT  distinguished
CIT vs Kamalini Khatau FB Agreed with the dissenting opinion
301Both the settlor and the appellant have been receiving the income from the UK trusts during the several assessment years concerned herein
The settlor had voluntarily included the entire income from the UK trusts in his income in the returns filed by him for the assessment years 1964 65 to 1969 70
It is unlikely that he would have so included unless he really received it The Commission treated those declarations as proof of the settlor s real intention
The Commission also relied upon certain other circumstances including the manner in which the accounts of these trusts were maintained in support of their opinion that all concerned with the trusts acted on the basis that the trust income was flowing to the settlor and after his death to the appellant
The Commission also referred specifically to similar declarations made by the appellant in his returns
Even subsequent to the death of the settlor the Commission pointed out the appellant has been making similar declarations from time to time
967 C E 302
The appellant did not say that he did not receive the income from the UK trusts
All he said was since it is a discretionary trust its income is not taxable in his hands
If he had not received the income he would have put forward that fact in the forefront
But he did not
Section 945 5 of the Act is wide enough to bring all such income to tax
In case appellant proves that any income has been taxed in US or UK the same income shall not be taxable over again in India
7 H 968 D