Case: Commissioner Of Income-Tax, Gujarat Vs. Jayantilal Amratlal, Ahmedabad

1. These four appeals by special leave are directed against the judgment of the Gujarat High Court in Income-tax Reference No. 19 of 1962, whereby the High Court answered the questions referred to it by the Income-tax Appellate Tribunal against the Commissioner of Income-tax, who is the appellant before us. The reference was in respect of assessment years 1955-56 and 1956-57 in the case of Shri Jayantilal Amratlal (Individual) and in respect of assessments years 1958-59 and 1959-60 in the case of Jayantilal Amratlal Charitable Trust, Ahmedabad. The questions referred are:(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of Jayantilal Amratlal Charitable Trust was not assessable in the hands of the settlor Jayantilal Amratlal under the first proviso to Section 16 (1) (c) of the Income-tax Act for the assessment years 1955-56 and 1956-57 ?(2) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the Trust should be considered the assessment of the trustees and that they were entitled to the benefits of the refunds attached to the dividends from the Trust properties for the assessment years 1958 59 and 1959-60?2. The answer to these questions depends on the true interpretation of S. 16 (1) (c) of the Indian Income-tax Act, 1922, and the interpretation of the Trust Deed dated June 19, 1947, and to appreciate the points fully it is necessary to give a few facts which are stated in the statement of the case3. Jayantilal Amratlal, individual, herein after referred to as the settlor, executed a trust deed whereby he settled 80 ordinary shares of M/s. Jayantilal Amratal Ltd., on trust and created a trust known as "Jayantilal Amratlal Charitable Trust" to carry out the following various objects set out in the Trust Deed :"For the relief of poor, for education, or medical relief, for advancement of religion, knowledge, commerce, health, safety or any other objects beneficial to mankind."This Trust Deed was registered with the Charity Commissioner under the Bombay Public Trust Act, 1950. The Department accepted this trust as a valid charitable trust and gave the necessary relief to the trustees in respect of the income of the Trust, till the assessment year 1957-584. The Income-tax Officer, while dealing with the assessment of Jayantilal Amratlal Charitable Trust for the year 1958-59 wrote a letter to the Trust to show cause why the income of the Trust should not be included in that of the settlor and why the case of the Trust should not be decided accordingly. The Managing Trustee submitted his reply. The Income-tax Officer wrote a lengthy order holding that on the facts the case was covered by the first proviso to S. 16(1) (c). He was impressed both by the vide powers given to the settlor and the way in which the settlor had been utilising his powers under the various clauses of the Trust Deed. He held :"It is not necessary that there should be diversion of income or assets from charitable purposes to non-charitable purposes to constitute "retransfer of assets to or reassumption of power over" the income or assets of the settlor. It is not even necessary for the purpose of 1st proviso to section 16 (1) (c), especially its later part i.e. "give the settlor a right toreassume power directly or indirectly over the income or" that income or assets should be used for personal ends. For diversion of such assets or income from one charitable purpose to another in accordance with the wishes of the settlor and the utlisation of income and investment of income or assets not in full conformity with the desires of the trustees would be enough to drag the Trust property in the ambit of Section 16 (1) (c). In the instant case, the settlor is all in all, he is the managing trustee and in the event of a conflict of opinion amongst the trustees the settler would exercise predominating influence both as managing trustee as also in his capacity of an arbitrator and his decision wood be binding on all. The most important point which needs consideration is that all the inherent powers and discretion for the income and corpus of the Trust property remain with the settlor, in his capacity as settlor and not by way of his capacity of a trustee."The Income-tax Officer accordingly held that the income of the Trust would not be computed in the hands of the trustees but would be computed in the hands of the settlor under S. 16(1) (c). For the assessment year. 1959-1960 he passed a similar order on the same date5. On the same day he also dealt with the assessments of Jayantilal Akmratlal individual, for the years1955-56 and 1956-57. Following his reasoning he included the relevant income of the Trust in the hands of Jayantilal Amratlal6. Four appeals were taken to the Appellate Assistant Commissioner who, by his two orders dated November 8, 1960, dismissed the appeals. Before him Settlor relied on S. 35 of the Bombay Public Trust Act, 1950, but the appellate late Assistant Commissioner held that this did not assist the settlor because the Income-tax law did take into consideration income derived directly or indirectly by illegal means. He felt that the settlor "could not be precluded from utilising funds of the trust directly or indirectly to his benefit since he had a right under the settlement to do so and the Bombay Public Trust .Act did not hold any fear for him as the penalties leviable were not of a deterrent nature, compared to the advantages that he could gain directly or indirectly by re-assuming control over the investments or its income7. On appeal, the Income-tax Appellate Tribunal, however, reversed these orders and held that the income from the Trust was not hit by the first proviso to S. 16(1)(c). The Tribunal ignored the factual position relied on by the Income-tax Officer and the Appellate Assistant Commissioner and confined itself only to the Trust Deed. Regarding the offending clauses (4), (10) and (2) of the Trust Deed which we will presently refer to, the Appellate Tribunal held :"We see nothing in these clauses which confer on the assessee the right to retransfer to the assessee directly or indirectly the income to the assets or to re-assume power over them. He has always to exercise these powers within the framework of the Trust. There is no doubt power in clause (10) to invest in any manner and thereby in the assessees own companies, but this is overridden by clause 35 of the Bombay Trust Act under which it is registered. If the Charity Commissioner has chosen not to take action, it may also be that he has considered the matter and approved the action. It is purely his responsibility. The fact that the investment itself has not been made illegal under the Trust Act and that the assessee can offend the provisions with impunity as the penalty is light are all matters extraneous to this consideration which has to be confined only to the provisions in the deed"8. At the instance of the Commissioner of Income-tax the Appellate Tribunal stated the case and referred the questions which we have already reproduced above. The High Court held :"When a statute talks about a right to re-assume, it must mean a lawful right which can be lawfully exercised.........a right to re-assume must be given to the settlor independently of any third party and dependent upon his own volition. It is true that the Charity Commissioner may grant leave to the settlor, but he may or may not grant it. A right to re-assume cannot rest dependent upon whether the Charity Commissioner may or may not grant sanction."Shelat, C. J. observed :"Surely it must be presumed that the Charity Commissioner would not grant his sanction to an investment which is bound to result in a conflict of duty and interest on the part of the settlor who is also a trustee. Therefore, such a right, if it can be called a right, is not one of any substance and cannot, therefore, be construed as a right to reassume power over the trust assets or the income thereof, as contemplated by proviso I to section 16(1)(c).""A loan, by the very nature of it, cannot be said to amount to an exercise of dominion or control over its subject matter. It is repayable and is given on conditions as to the time of repayment and interest, if any. By taking a loan a settlor does not exercise over its subject matter power or dominion which, but for the trust or the settlement, he would have been able to exercise.

Court's reasoning:
14. Coming to the various clauses of the Trust Deed there is no doubt that the settlor has retained power to see that his wishes are carried out while he is alive. But he can only direct the carrying out of his wishes within the terms of the Trust Deed. What he can direct under clause 4 is the application of income to a particular charitable purpose. Similarly under clause 6 he can nominate the charitable object and the fund or investment which should be utilised for that object. This is in no sense a power to reassume control. Clause 8 enables the settlor to delegate the carrying out of a particular charitable object. For instance, he could direct some contributions to be made to a hospital or a school without obliging the trustees to see that the hospital or the school does not misapply the funds.Clauses 10 and 11 which enable the settlor to give directions regarding the investment must be read subject to the provisions of the Bombay Public Trust Act and the general principles of law relating to trusts. We have already said that he could not legally direct a loan to be made to himself. Further it is difficult to subscribe to the proposition that a loan to a company in which the settlor is interested would give power to the settlor over the assets within the meaning of the first proviso. Clause 21 only shows the wide powers which the settlor has reserved to himself. None of these clauses comes within the purview of Proviso 110. Let us now examine the Trust Deed. This indenture was made between Jayantilal Amratlal, hereinafter called the settlor, and Jayantilal Amratlal, Padmavati wife of the said Jayantilal Amratlal, Ramanlal Amratlal, Hariprasad Amratlal, Kasturlal Chandulal Parikh and Bhagubhai Chandulal hereinafter called the Trustees. Clause 1 vests the shares and the other trust properties and income in the trustees. Clause 2 gives the name of the trust. Clause 3 obliges the trustees to get and collect income of the trust properties and pay expenses, etc. Clause 4 creates the trust for the relief of poor, and for education, medical relief, etc. It further provides"The Trustees shall at the direction of the Settlor during his lifetime and after his death at their discretion set aside any portion of the income of the Trust Premises to provide cash, food and clothes for any temple or temples of the Pushti Marg Sampradaya. In applying the income of the Trust Premises for all or any of the objects hereinbefore specified the Trustees may consider the claims of any needy or poor person belonging to the Visa Porwad Community."Clause 5 enables the settlor to give direction to the trustees to accent contributions or donations to the Trust from other persons Clause 6 provides as follows :"The Settlor may at any time or times by writing direct that any specific funds or investments or property forming part of the Trust Premises and/or the income thereof shall be utilised and applied exclusively for any one more of the aforesaid charitable objects and the Settlor may by writing at any time or times vary or revoke any such directions previously given by him and Trustees shall be bound to carry into effect all such directions given by the Settlor."Clause 7 enables the Trustees to utilise tha whole or any portion of the Trust Premises for all or any of the charitable objects if the Settlor so directs. Clause 8 may be set out in full :"8. The Trustees shall from time to time at the direction of the settlor during his life time and after his death may at any time at their discretion deliver or hand over the income of the Trust premises or any part of such income to any institution, association or society to be applied for all or any of the purposes of these presents without being bound to see to the application thereof or being liable for the loss or misapplication thereof."Clause 9 enables the Trustees to invest the residue, etc., and to accumulate the same and apply towards the objects of the Trust. Clause 10 inter alia empowers the Settlor to give directions regarding the investment of moneys"as are authorised by law for investment of trust premises or in ordinary or preference shares of joint stock companies, whether partly or fully paid, or in debentures or in giving loans to any public company or firm of good standing and reputation or in the purchase or mortgage of any movable or immovable property with power to the Trustees with the like direction to vary or transpose the said investments into or for others of the same or of a like nature."Clause 11 inter alia enables the Settlor to direct the Trustees to vary the investments. Out of the other clauses we need only mention clause 21 which reads as follows:"All questions arising in the management and administration of the trusts or powers hereof and all differences of opinion amongst the Trustees shall be disposed of in accordance with the opinion of the Settlor during his lifetime and on and after the death of the settlor in accordance with the opinion of the majority of the Trustees in the case of their being equally divided the trustee senior most in age shall have a casting vote. The learned counsel for the appellant says that these clauses read fairly would enable the Settlor to direct the Trustees to give a loan to him and he could give directions to the Trustees in such a way as toreassume controlover the assets. He says that as a matter of fact thex Officer did find that the Settlor has been utilising these powers for his own benefit. There is no doubt that under the Trust Deed the Settlor has very wide powers and the Settlor could direct the Trustees to grant loan to him. The Trustees could even grant loan to a firm in which he was interested. But this would be contrary to the provisions of the Bombay Public Trust Act. Section 35(1) of the Bombay Public Trust Act provides:"35 (1). Investment of Public Trust Money :Where the trust propertly consists of money and cannot be applied immediately or at an early date for the purposes of the public trusts the trustee shall be bound (notwithstanding any direction contained in the Instrument of the Trust) to deposit the money in any scheduled bank as defined in the Reserve Bank of India Act, 1934, in the Postal Savings Bank or in ae Bank approved by the State Government for the purpose or to invest it in Public Security;Provided . .Provided further that the Charity Commissioner may by general or special order permit the Trustee of any public trust or classes of such trusts to invest the money in any other manner."We are unable to accept this submission. The Bombay Public Trust Act must, to the extent it operates, override any provisions in the Trust Deed. As Shelat, J., observed"when proviso 1 talks about a right to reassume power, prima facie, that must mean that there is such power lawfully given under the deed oft seems to us that the legislature in proviso 1 to S. 16(1)(c) is thinking of powers lawfully given and powers lawfully exercised. Any person can commit breach of trust and assume power over the income or assets but for that reason the income of the trust cannot be treated as the income of the settlor under the proviso.12. The Calcutta High Court in Commissioner ofWest Bengal v. S. M. Bose. (1952) 25 ITR 135   at p. 141 (Cal) observed:"The first proviso to S. l6(1)(c) only contemplates cases where the settlor can lawfully reassume power over the income or the assets. Unless that was so, the proviso would cover every trust where a settlor has made himself trustee because a trustee acting dishonestly could always assume control over the income."We agree with these observations. Similarly, in an unreported judgment (Commissioner ofx Bombay North v. Mathuradas Mangaldas Parekh)*the Bombay High Court repelled a similar argument by observing :*I. T. Ref. No. 4 of 1954, judgment dated August 26, 1954, reported in Unreportedx Judgments of the Bombay High Court, Book One, Published by "Western India Regional Council of the Institute of Chartered Accountant of India, Bombay p. 314 at p. 316"The first answer to this contention is that the trustees would be committing a breach of the law if they were to advance moneys to themselves. There is a clear prohibition under S. 54 of the Trusts Act."What then is the fair meaning of S. l6(l)(c), proviso 1?It seems to us that the words "reassume power" give indication to the correct meaning of the proviso. The latter part of the proviso contemplates that the settlor should be able, by virtue of something contained in the Trust Deed, to take back the power he had over the assets or income previous to the execution of the Trust Deed, provision enabling the settlor to give directions to trustees to employ the assets or funds of the trust in a particular manner or for a particular charitable object contemplated by the trust cannot be said to confer a right to reassume power within the first proviso. Otherwise a settlor could never name himself a sole trustee.It seems to us that the latter part of the proviso contemplates a provision which would enable the settlor to take the income or assets outside the provisions of the Trust Deed. Mr. Desai says that if a settlor can derive some direct or indirect benefit under a trust deed the trust deed would fall within the first proviso.But the first proviso does not use these words. The words "direct or indirect benefit" occur only in the third proviso. This Court held in Commissioner ofPunjab v. S. Raghbir Singh,7 ITR 408 = (AIR 1966 SC 18  ) that although the settlor in that case obtained a benefit from the trustpayment of hise first proviso was not attracted14. Coming to the various clauses of the Trust Deed there is no doubt that the settlor has retained power to see that his wishes are carried out while he is alive. But he can only direct the carrying out of his wishes within the terms of the Trust Deed. What he can direct under clause 4 is the application of income to a particular charitable purpose. Similarly under clause 6 he can nominate the charitable object and the fund or investment which should be utilised for that object. This is in no sense a power toreassume. Clause 8 enables the settlor to delegate the carrying out of a particular charitable object. For instance, he could direct some contributions to be made to a hospital or a school without obliging the trustees to see that the hospital or the school does not misapply the funds.Clauses 10 and 11 which enable the settlor to give directions regarding the investment must be read subject to the provisions of the Bombay Public Trust Act and the general principles of law relating to trusts. We have already said that he could not legally direct a loan to be made to himself. Further it is difficult to subscribe to the proposition that a loan to a company in which the settlor is interested would give power to the settlor over the assets within the meaning of the first proviso. Clause 21 only shows the wide powers which the settlor has reserved to himself. None of these clauses comes within the purview of Proviso