TAXAP/224/2002 1/69 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 224 of 2002 WITH TAX APPEAL No. 225 of 2002 TO TAX APPEAL No. 229 of 2002 WITH TAX APPEAL No. 1317 of 2005 WITH TAX APPEAL No. 1318 of 2005 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ HONOURABLE MR.JUSTICE BANKIM.N.MEHTA ==================================== 1. Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? YES 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO TAXAP/224/2002 2/69 JUDGMENT ==================================== H. H. MAHARAJA SHRI JYOTINDRASINHJI - Appellant Versus ASST. COMMISSIONER OF INCOME- TAX. - Opponent ==================================== Appearance : MR KC PATEL WITH MR RK PATEL for Appellant. MR MANISH R BHATT for Opponent. MR PRANAV G DESAI for Opponent. ==================================== CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 12/09/2008 COMMON CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) 1. The assessee / appellant has filed the above tax appeals under Section 260A of the Income-tax Act, 1961 (for short 'the Act') proposing to formulate the substantial questions of law for the determination and consideration of this Court. Tax Appeal Nos.224 to 228 of 2002 are pertaining to A.Y. 1984 – 85, 1985 – 86, 1986 – 87, 1988 – 89 & 1989 – 90. Tax Appeal No.229 of 2002 pertains to A.Y. 1987 – 88. Tax Appeal Nos. 1317 & 1318 of 2005 pertain to A.Y. 1990 – 91 & 1991 – 92. 2. Tax Appeal Nos.224 to 228 of 2002 were admitted by TAXAP/224/2002 3/69 JUDGMENT this Court on 24.07.2002 formulating the following substantial questions of law :- i. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has erred in law in its interpretation and/or application of clauses 3(2) and 4 of the U.K. Trusts in holding that the same are specific trusts and not discretionary Trusts ? ii. Whether on the facts and circumstances of the case, the Tribunal has erred in holding that even if U.K. settlements are to be treated as discretionary Trusts, assessee shall be liable to be taxed u/s.166 of the I.T. Act for the income not distributed or receivable on his behalf, entire income of the Trust having been retained by the trustees ? iii. Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in following the order of Settlement Commission as well as the Hon'ble Supreme Court for earlier assessment years in spite of the fact that the appellant has not received any income from any of the trusts for the year under appeals ? 3. Tax Appeal No.229 of 2002 was admitted by this Court on 24.07.2002 formulating the following substantial questions of law :- TAXAP/224/2002 4/69 JUDGMENT 1. Whether, on the facts and in the circumstances of the case, the Tribunal has erred in law in its interpretation and/or application of clause 3[2] and clause 4 of U.K. Trusts to hold that the same are specific trusts ? 2. Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in following the order of Settlement Commission as well as the Hon'ble Supreme Court for earlier assessment years inspite of the admitted fact that the appellant has not received any income from any of the trusts for the year under appeals ? 3. Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in confirming the addition of income from U.S. Trusts for the A.Y. 1987-88 though admittedly no distribution has been made by the trustees for the A.Y.1987-88 and no such income has been added in the earlier assessment years by the Assessing Officer himself on the ground that no distribution has been made by the trustees and that the appellant has not received any income from U.S.A. Trusts ? 4. Whether on the facts and circumstances of the case, the Tribunal has erred in law in holding that even if U.K. TAXAP/224/2002 5/69 JUDGMENT settlements are to be treated as discretionary Trusts, assessee shall be liable to be taxed under Section 166 of the I.T. Act for the income not distributed or receivable on his behalf, entire income of the Trust having been retained by trustees ? 4. Tax Appeal Nos. 1317 & 1318 of 2005 were admitted by this Court on 04.07.2006 formulating the following substantial questions of law :- (1)Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal has erred in law in its interpretation and/or application of clause 3(2) and 4 of the U.K. Trusts in holding that the same are specific trusts and not discretionary trusts ? (2)Whether on the facts and in the circumstance of the case, the Tribunal has erred in holding that even if U.K. Settlements are to be treated as discretionary trusts, assessee shall be liable to be taxed u/s. 166 of the I.T. Act for the income not distributed or receivable on his behalf, entire income of the Trust having been retained by the Trustees ? (3)Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in following the order TAXAP/224/2002 6/69 JUDGMENT of Settlement Commission as well as the Hon'ble Supreme Court for earlier assessment years inspite of the fact that the appellant has not received any income from any of the Trusts for the year under Appeals ? 5. During the course of hearing of these appeals, Mr. K. C. Patel, learned advocate appearing for the appellant in all these appeals has proposed to formulate one more question of law for all these years which is as under :- Whether on the facts and circumstances of the case, the Tribunal has erred in law in ignoring that the income in question having been taxed in U.K., the same income could not have been taxed again in India resulting in double taxation ? 6. From the perusal of the above, it is clear that 8 appeals are preferred by the appellant and in all the 8 appeals, three substantial questions of law are formulated by this Court, while in Tax Appeal No.229 of 2002 for A.Y. 1987 – 88, one more question is raised in relation to inclusion of income from U.S. Trusts along with income from U.K. Trusts. TAXAP/224/2002 7/69 JUDGMENT 7. The brief facts giving rise to these appeals are that the appellant is the eldest son of late Shri Vikramsinhji, Ex. Ruler of Gondal State. Shri Vikramsinhji executed three Trust Deeds in United States of America and two Trust Deeds in United Kingdom. The Trust Deeds executed on 19.12.1963 in United States of America, are identical in terms and the Trust Deeds executed on 01.01.1964 in United Kingdom are also identical in terms. However, Trusts of the Trust Deeds executed in U.S.A. & U.K. differ from each other in certain particulars, though both the sets are meant for the benefit of the settlor and the members of his family. In U.K. Trusts, one Mr. Robert Hampton Robertson McGill was designated as the Trustee and he was referred to in the Deeds as the original Trustees. These Trusts were created for the benefit of the settlor, the members of his family and their descendants, referred to as 'beneficiaries'. The Trust Deeds define the expression 'the Trustees' to mean and to include the original Trustee or the other Trustees for the time being appointed in terms of the Deeds of TAXAP/224/2002 8/69 JUDGMENT Settlement. The relevant clause of the Trust Deeds are Clause 3 & 4. 8. The settlor of these two Trusts, namely, Shri Vikramsinhji, Ex. Ruler of Gondal, died on 22.08.1969. During his life time, returns were filed showing his income in India including therein the whole of the income arising from the U.S. Trusts and U.K. Trusts for the assessment years 1964 – 65 to 1970 – 71. Thereafter, the appellant filed the returns of income including the whole of the income from the above Trusts in respective returns for A.Y. 1970 – 71. The appellant thereafter was advised that the income from U.S. Trusts and U.K. Trusts was not taxable in India either in the hands of the settlor or in his hands and that inclusion of the said income in the returns by the settlor and by the appellant was a mistake. 9. The appellant therefore preferred appeals being aggrieved by the assessment orders. By admitting additional grounds, the appeals were allowed by the orders dated 04.04.1975 & 20.08.1975. The appellant TAXAP/224/2002 9/69 JUDGMENT also filed appeals against the assessment order pertaining to A.Y. 1965 – 66 & 1966 – 67. However, as the appeals were barred by limitation with respect to other assessment orders, Revision Applications before the Commissioner of Income Tax were preferred. 10.The revenue went in appeal to the Tribunal and the Tribunal allowed the appeals of the revenue and set aside the orders of the Appellate Assistant Commissioner and remanded the appeals back. 11.The appellant, thereafter, approached the Settlement Commission under Chapter XIX-A of the Income-tax Act, 1961. The Settlement Commission passed two orders one relating to A.Y. 1964 – 65 to 1970 – 71 (in case of Vikramsinhji) and the other for the A.Y. 1970 – 71 to 1982 – 83 (in case of the appellant). 12.The appellant being aggrieved by the aforesaid findings preferred two appeals before the Hon'ble Supreme Court. After hearing both the parties, the Hon'ble Supreme Court vide order dated 02.04.1993 TAXAP/224/2002 10/69 JUDGMENT which is reported in 201 ITR 611 confirmed the orders of the Settlement Commission holding that U.S. Trusts are discretionary Trusts whereas the findings of the Settlement Commission that the U.K. Trusts are specific trusts was not disturbed being academic as the income arising from U.K. Trusts was shown in the return of income upto the A.Y. 1970 – 71. 13.For the A.Y. 1984 – 85 to 1989 – 90, the appellant has not shown the income of U.S. Trusts and U.K. Trusts. The statement of income for the A.Y. 1984 – 85, 1985 – 86, 1986 – 87, 1987 – 88, 1988 – 89 & 1989 – 90 are produced before the Tribunal. On perusal of the statement of income, it can be noticed that a note was put to the effect that U.S. Trusts & U.K. Trusts being discretionary trusts, the income of the said Trust is not included in the total income. A separate note to the effect that no remittance was received from U.S.A. and U.K. was also put below the statement of income. The appellant has also produced the statement of funds and income account of the two U.K. Trusts signed by the Trustees received from U.K. wherein it is TAXAP/224/2002 11/69 JUDGMENT specifically stated that the net income for the year is retained. The Assessing Officer took the same amount as stated in the statement of funds equivalent to Indian Rupees as income of the appellant. The Assessing Officer made addition of income from U.K. Trusts in the hands of the appellant for the aforesaid assessment years adopting the same figures as stated by the appellant. 14.Being aggrieved by the order of the Assessing Officer, the assessee preferred appeals before CIT (Appeals) who has confirmed the additions made by the Assessing Officer and dismissed the appeals. The appellant, being aggrieved by the order of the learned CIT (Appeals), preferred second appeals before the Income Tax Appellate Tribunal and the appeals were also dismissed by the Tribunal. 15.In the above referred background, appeals were filed before this Court under Section 260A of the Act and the above referred questions were formulated as substantial questions of law. TAXAP/224/2002 12/69 JUDGMENT 16.Mr. K. C. Patel, learned advocate appearing for the appellant has raised two major issues for determination and consideration of all these appeals :- I. Whether, on the true construction and effect of the settlements made in U.K., the real nature and character of the Trusts created thereunder is a discretionary, or they are specific Trusts ? II. Whether the order of the Settlement Commission dated 31.03.1979 will estop the assessee from contending, inter alia, that the Trusts created by the settlements in U.K. are discretionary in nature ? 17.So far as the first issue, namely, whether the Trusts are discretionary or specific Trusts is concerned, Mr. Patel has contended that there are various reasons for establishing that the U.K. Trusts are discretionary Trusts rather than specific Trusts. Apart from the tax planning, the settlor may be actuated to establish discretionary Trust with a view to protect the beneficiary against Creditors, or to continue to exercise control over, improvident beneficiaries or to TAXAP/224/2002 13/69 JUDGMENT react to changes in the circumstances. It is often considered unwise to put large sums of money at the disposal of beneficiaries, if they are young or extravagant. The common experience is that a rich young beneficiary may become idle and indulge in overspending and wasting the inheritance. Under the discretionary Trust, each member of the class of beneficiary is entitled only to that amount of money which the Trustees think fit to allocate him in exercise of their discretion. 18.Mr. Patel has further submitted that some of the purposes the Grantor has in mind in the establishment of this Trust are the education of the family members and their descendants in any country outside India, the medical treatment of the family members and their descendants, travelling expenses of the family members and their descendants, ceremonial expenses of the family members and their descendants for performing ceremonies as per the traditions of the house of Gondal, and the maintenance and welfare of the family members and their descendants. These TAXAP/224/2002 14/69 JUDGMENT purposes are meant to be merely illustrative and not restrictive of the Trustee hereunder in any way. This is clear from Clause 1 of the Trust Deed which says that the Trust in consideration of natural love and affection of the settlor for members of his family....................... and Clause 3 (2) for advancement, maintenance and education of beneficiaries defined in Clause 2 of the Trust Deed. 19.Mr. Patel has invited our attention to the relevant Clauses of the Trust Deed of U.K. Trusts executed by late Shri Vikramsinhji on 01.01.1964. These Trusts are executed by and between late Shri Vikramsinhji who happened to be the ruling Prince of the erstwhile State of Gondal and one R.H.R. McGill who happened to be the Company Director in London and appointed as original Trustee under the Deed of Settlement. 20.Mr. Patel has further submitted that the Settlement Commission has in effect held that having regard to Sub-clause (2) of Clause 3, even the Trustees have to be appointed as discretion exercisers and they could TAXAP/224/2002 15/69 JUDGMENT not come on the scene and start functioning unless there is a formal appointment in their favour in writing by the Maharaja and since admittedly, neither the original settlor nor his son Jyotindrasinhji ever exercised this power of appointment and, therefore, the Trustees were not entitled to exercise the discretion under the Trust Deed. The Settlement Commission further held that for all intents and purposes, there was default of appointment by the Maharaja and, therefore, Clause 4 came into operation. The Commission was of the opinion that it was not the default of appointment of property by the Trustees but default in appointment of discretion exerciser by the Maharaja that Clause 4 comes into operation. The Commission alternatively considered on an assumption that Trustees had the power to act as discretion exercisers and hence, it cannot be said that there was no default of appointment of income or property by the Trustee. The Commission held in the facts and circumstances before it that any delay in appointment of the discretion exerciser beyond one year should be normally treated as a default unless TAXAP/224/2002 16/69 JUDGMENT otherwise explained. The Commission held that having regard to the language of Clause 3 (2) of the U.K. Trust Deed, there was no scope for contending that Clause 4 can came into operation only if the power to make appointment under the said Clause has been abdicated, renounced or in any manner disowned. The Commission, therefore, concluded that total inaction on the part of the Trustees and the beneficiaries during the last 25 years is more in keeping with the understanding of the provisions of the Trust Deeds by the Trustees and beneficiaries as specific rather than discretionary. Shri Vikramsinhji during his life time and Shri Jyotindrasinhji after the former's death had ample resources and so asked for no funds from the Trustees. The other beneficiaries knew that they were entitled to nothing so far as Clause 4 operated and the Trustees had no occasion to allocate any income because they knew that as per Clause 4 which operated the entire income belonged to Shri Vikramsinhji and after his death to Shri Jyotindrasinhji. Hence, unless these two beneficiaries asked for any payment, no action was called for except to go on TAXAP/224/2002 17/69 JUDGMENT accumulating that income. It appears, therefore, more reasonable to infer that all the persons concerned, namely, the Maharaja, the Trustees and the beneficiaries themselves understood and interpreted the Trust Deed so creating specific trust by virtue of operation of Clause 4. 21.Mr. Patel has submitted that reading Sub-clause (2) of Clause 3 closely, the view of the Commission that unless the Trustees are appointed by the Maharaja as discretion exerciser, they would not be competent to act as Trustees, is misconceived for the simple reason that Trustees have been defined to mean and include the original Trustee or other Trustees or Trustee for the time being of the Settlement. He has further submitted that Mr. R. H. R. McGill was constituted and described as the original Trustee in the Settlement Deed. If it is to be interpreted otherwise, as has been done by the Commission, the intention of the settlor while executing the deed of settlement in constituting and describing R. H. R. McGill as the original Trustee for the purpose of execution of the deed would be TAXAP/224/2002 18/69 JUDGMENT completely frustrated for the obvious reason that in view of the commission since the Maharaja has not appointed the Trustees, they would not be competent to act. It would be interpreting the document contrary to the well accepted and well recognized principles of interpretation of documents for one cannot interpret the document so as to frustrate the entire scheme envisaged under the document. On the interpretation of the Commission, one would reach an absurd situation where, assuming that interpretation to be valid, there would be no Trustees for execution of the Trust contemplated as per Clause 4. 22.Mr. Patel has further submitted that the interpretation which has commended to the Commission also does not appear to be well founded, for the obvious reason that it would decide the role of the Trustees and their rights and powers and would render the definition of Trustee as virtually redundant, because the definition is exhaustive since the term Trustee has been defined as meaning and including the original Trustee or other Trustee or Trustee for the time being of the TAXAP/224/2002 19/69 JUDGMENT Settlement. The power granted to the Maharaja under Sub-clause (2) of Clause 3 for appointment of discretion exerciser is for appointment of discretion exercisers. 23.Mr. Patel has further submitted that the definition clause contained in Clause 2 defines “Trustees” to mean and include the original Trustee also. If, therefore, the interpretation, which has commended to the Commission, is accepted to be correct, there would be clear frustration of the Trust which on recognized principles of interpretation of documents, should be avoided. 24.Mr. Patel has further submitted that the conclusion of the Commission is in contradiction of its terms. On one hand, it holds that in view of the admitted position that the power of appointment was not exercised by the Maharaja, there were neither competent Trustees nor any discretion exercisers and on the other hand, it holds that in that view of the matter, the Trust was a specific Trust. TAXAP/224/2002 20/69 JUDGMENT 25.Mr. Patel has further submitted that if the property was settled upon the original Trustee, as provided in the opening part of the Deed of Settlement, it would be fair and reasonable to take the view that the question of appointment of Trustees was kept open till the Maharaja exercised the power. The only reasonable view on principle of harmonious interpretation of such clauses in a document is that this power invested into the Maharaja did not relate to the power of appointment of the original Trustee but related to the power of appointing discretion exerciser. In that view of the matter, Mr. Patel has submitted that U.K. Trusts is the discretionary Trust and not a specific Trust. 26.So far as the second issue regarding estoppel is concerned, Mr. Patel has submitted that the order of the Commission so far as the income-tax liability of the appellant is concerned, will not estop the appellant from canvassing the view that U.K. Trusts are discretionary Trusts and the income from the said Trusts is liable to be subjected to tax in the hands of TAXAP/224/2002 21/69 JUDGMENT the Trustees only and not in the hands of the beneficiaries. Firstly, there cannot be any estoppel on the question of law, and secondly, there cannot be any bar of res judicata of such decision which is final and binding to the Income-tax Officer who is an original statutory authority for the purposes of assessing an assessee before him. It is well recognized that assessments of one year never operate as res judicata for assessment of subsequent years. 27.Mr. Patel has further submitted that so far as Commission is concerned, its function is different from those of other quasi judicial authorities created by the Income-tax Act. As the name itself suggests, it is a settlement – a sort of composition. Even if any principles are decided by the Commission, they do not bind the income-tax authorities as well as assessee in proceedings relating to subsequent years. In these Tax Appeals filed under Section 260A of the Act arising out of the judgment and order passed by the Tribunal, this Court has jurisdiction to examine whether the interpretation put up by the Tribunal based on decision TAXAP/224/2002 22/69 JUDGMENT of Commission is correct or not and whether the same is in consonance with law and the same cannot be said to be a violation of the provisions of the Income-tax Act. All these substantial questions of law raised and formulated by this Court are, therefore, required to be decided irrespective of the order of the Settlement Commission. 28.Apart from the above issues, Mr. Patel raised following issues in support of prayers made in these appeals :- a) The order of the Settlement Commission passed under Section 245D of the Act is not bonding in regular proceedings of Income-Tax Act with special reference to assessment order, appeals to CIT (A) and appeal preferred by the assessee under Section 260A of the Act raising substantial questions of law. The Settlement Commission is not a regular Tribunal. Its function is different from those of other quasi judicial authorities created by the Income-tax Act. As the name itself suggests, it is a settlement – a sort of composition. The order of the Commission is relevant to and is confined only to the assessment years to which it relates. It is a package deal for those years only. TAXAP/224/2002 23/69 JUDGMENT b) The Tribunal in its order having considered irrelevant facts and ignored relevant facts and materials