COMMISSIONER OF INCOME TAX Vs. GOSAR FAMILY TRUST

JUDGEMENT

(1.) THE Tribunal has referred to us for our opinion the following two questions under S. 256(2) of the IT Act, 1961 (hereinafter referred to as "the said Act") :

(2.) BY a deed dt. October 3, 1981, a private trust known as "Gosar Family Trust" was created by the settlor, Shri Hirji Pethraj Shah. A sum of Rs. 500 was handed over by the settlor to the trustees for holding it jointly upon trust. The trustees were empowered to invest the amount and authorised to collect the interest and income of investments representing the said sum as well as of any other amounts which may be received by them as provided in the trust deed as also the share of profits in any business which may be carried on by them pursuant to the powers granted to them under the deed. Under cl. 2 of the trust deed, it was provided that the trustees may either accumulate the net income or may appropriate or apply the whole or such part of the income as the trustees may, in their absolute discretion, think fit or for maintenance, medical expenses or such necessary expenses or advancement and benefit including the setting up in business of all or any of the beneficiaries, namely, (1) Shri Gosar Devashi Jakharia, (2) Smt. Lakhmaben Gosar Jakharia, and (3) Shri Mukesh Gosar Jakharia, in such shares and proportions and generally in such manner as the trustees, in their absolute discretion, think fit. It was further provided that it shall be lawful for the trustees to exclude any of them while dividing the said net income with or without any reasons and shall accumulate the residue, if any, of the income from the trust by investing the same and the resulting income therefrom, in any of the investments authorised under the deed with the power to vary such investments accordingly. The provision which was made in cl. 2 of the trust deed was to operate until the time of distribution for which provision was made in cls. 3 and 4 of the deed. The trustees were empowered, until the date of distribution, to apply the accumulations or any part thereof as if the same were income from the trust fund arising in the current year. As provided in cls. 3 and 4 of the deed, the trustees had an absolute discretion to distribute the trust fund and all accumulations of the net income of the accretion to the trust fund amongst the second group of beneficiaries named in para. 3, who are (1) Smt. Lakhmaben Gosar Jakharia, (2) Family members of Shri Devchand Shamji Shah, and (3) Smt. Kankuben Gulabchand Shah, up to three generations in such proportions or proportion as the trustees may, in their absolute discretion, think fit after the expiry of two years but prior to the period of 18 years from the date of the deed. It was made lawful for the trustees to exclude any of these persons mentioned in cl. 3 while dividing the trust fund without giving any reasons. It was open to the trustees to distribute a part of the trust fund including the accumulated income and the trust was to continue with regard to the balance of the trust fund including the accumulated income remaining in the hands of the trustees after such distribution. As regards the part of the trust fund and the accumulated income which was distributed, the trust was to come to an end to that extent. It was also provided that, in case, at any time of distribution, none of the said beneficiaries named in cl. 3 is living, then the trust fund and all accumulations of the net income and the accretion to the trust fund shall be given to a charitable trust or be given for the formation of a charitable trust in the name of Hirji Pethraj Shah Charitable Trust. Under sub cl. (k) of cl. 6 of the deed, it was provided that the trustees shall be entitled to determine whether any money or property shall, for the purposes of this trust, be considered as capital or income and whether expenses, outgoing or loans ought to be paid or borne out of the corpus or income and any and every such determination of the trustees shall be conclusive. Under cl. 24, it was provided that notwithstanding anything stated in the deed, in case of death of any of the beneficiaries of income mentioned in clause 2, the trustees were directed that the income shall be accumulated and they shall have no power or authority to distribute the money for the objects mentioned in cl. 2 of the trust deed.

(3.) IN the above background of the nature of the trust created under the deed, the ITO assessed the income of the trust under S. 143(3) for the asst. year 1982 83, holding that the trust was not created with a bona fide object to help the settlor's relatives but the sole object was to retain the income, tax free with the family members of the second group of beneficiaries and further holding that since the benefi ciaries of the second group (described as corpus beneficiaries) were having taxable income and were also beneficiaries of several other trusts, the trust was not entitled to be taxed at a concessional rate but was to be taxed at the "maximum marginal rate" under S. 164(1) of the said Act.