COMMISSIONER OF INCOME TAX Vs. JAYANTILAL AMRATLAL

JUDGEMENT

(1.) BY a trust deed dated June 19, 1947, the assessee, Jayantilal Amaratlal, settled 80 ordinary shares held by him in M/s Jayantilal Amratlal and Co. Ltd. upon trust, known as Jayantilal Amratlal Charitable Trust for the following objects, namely, "For the relief of poor, for education, for medical relief, for advancement of religion, knowledge, commerce, health, safety or any other objects beneficial to mankind. " The trust deed was registered with the Charity Commissioner under the Bombay Trust Act (Act XXIX of 1950). Originally, as the recitals in the said deed of trust show, the trust fund consisted of the aforesaid 80 shares of the market value of Rs. 40,000. By his letter dated March 27, 1957, the settlor added to those 80 ordinary shares certain other shares held by him in other companies, bringing the total trust fund to about rupees three lakhs and a little more. Till the asst. year 1957 58, the IT Department accepted the trust as a valid charitable trust and gave the necessary exemption to the trustees thereof in respect of its income. But while assessing the trust for the asst. year 1958 59, the ITO came to the conclusion that S. 16(1)(c), proviso 1, applied and, therefore, the income of the trust could not be assessed in the hands of the trustees but was assessable in the hands of the settlor, the assessee Jayantilal Amaratlal. The ITO gave the reasons for so holding, (1) that the assessee had de facto control over the income and corpus of the trust and even the charities and temples to receive the benefit would be chosen by him, and (2) that the infringement of S. 35(1) of the Bombay Trust Act, 1950, entailed a small penalty which was hardly deterrent. Finding that the assessment of Jayantilal Amratlal for the asst. yrs. 1955 1956 and 1956 1957 was still open, the ITO assessed the income of the trust in the hands of the settlor and he passed the assessment orders for the assessment of Jayantilal Amratlal for the assessment of the trust for the asst. yrs. 1958 1959 and 1959 1960 on the same day, i.e., on March 11, 1960. The assessee, Jayantilal Amratlal, and the trust filed appeals against these orders before the AAC who confirmed the orders of the ITO. The matters were then carried in appeal to the Tribunal and the Tribunal consolidated all the four appeals of the trust and the settlor, Jayantilal Amratlal, for all the assessment years and disposed them of by a single order dated December 26, 196 1. The Tribunal was of the view that the decision in the appeal before it had to be based on a proper construction of the trust deed as it stood and it would be its duty then to ascertain if the deed contained any provision for the retransfer directly or indirectly of the income or the assets of the trust to the settlor or in any way gave the settlor a right to reassume power directly or indirectly over the income or the assets. The Tribunal came to the conclusion that the de facto position of the settlor, whatever it is, would fall clearly outside the scope of its investigation and so long as the trust deed did not contain any provision which had the effect of a retransfer or a right to reassume power over the income or the assets directly or indirectly, proviso 1 to S. 16(1)(c) could not apply. After analysing cls. (4), (10) and (21) of the deed of trust relied upon by the Department, the Tribunal came to the conclusion that it did not see anything in these clauses which conferred upon the assessee the right to retransfer directly or indirectly the income or the assets, or the right to reassume power over them. The Tribunal also was of the opinion that, though cl. (10) of the deed conferred power upon the settlor to invest the trust properties or their income, and that under the provisions of that clause he could, if he so desired, invest them in his own companies, that power was overridden by S. 36 of the Bombay Trust Act (XXIX of 1950). The Tribunal was also of the opinion that the fact that the settlor could offend against the provisions of that Act with impunity as the penalty thereunder was light, was a matter which was completely extraneous to the consideration before it. On these grounds, the Tribunal held that the trust deed did not fall within the mischief of the first proviso to S. 16(1)(c) and, therefore, the income of the trust was not includible in the income of the assessee, Jayantilal Amaratlal.

(2.) BEFORE the Tribunal reliance was placed upon the decision of this High Court in a case under s. 23A of the Act, viz., Jayanlilal AmratIal (P.) Ltd. vs. CIT (1961) 43 ITR 331, where this High Court held, inter alia, that the promoters of the assessee company there, i.e., Jayantilal Amratlal and his two brothers, Hariprasad and Ramanlal, were persons acting in union and when they subscribed to a portion of the capital, they could be said to have held the voting power in connection therewith as a block and that there was a community of interest and they could not be regarded as holding those shares as members of the public. As regards the aforesaid 80 ordinary shares, the High Court held that though they were settled upon trust by Jayantilal Amratlal as it was within his power as the settlor to give directions in connection with the voting right to be exercised by the trustees in respect of those shares and, therefore, these 80 shares also could not be regarded as shares held by members of the public. The High Court, therefore, held that the assessee company was a company in which the public were not substantially interested within the meaning of the Explanation to S. 23A. The Tribunal was of the opinion, and in our opinion rightly, that this decision had nothing to do with the question before it and, as we have already said, held that S. 16(1)(c), proviso 1, did not appy to the facts of the case and that the income of the trust should not be assessed in the hands of the settlor and was entitled to exemption under S. 4(3)(i) of the Act. The Department mainly relied upon, as seen from the order of the ITO and the Asstt. CIT, two facts, (1) that Jayantilal Amaratlal had utilised those 80 shares for the purpose of controlling Jayantilal Amratlal & Co. Ltd.; and (2) that the income of the trust properties had been invested by Jayantilal Amratlal in three companies in which he and his two brothers had a shareholding. The Department also was of the view that though S. 35 of the Bombay Trust Act, 1950, as amended in 1954, prohibited investment in any manner other than prescribed there, the assessee, under the proviso thereto, could obtain sanction of the Charity Commissioner and that even if he'did not do so and transgressed the provisions of S. 35, the penalty was only Rs. 1,000, which was not a deterrent one and, therefore, the provisions of that section did not tend to prevent such contravention. The question that arises before us is whether these facts attract the application of proviso 1 to S. 16(1)(c) of the Act.

(3.) THE clause also provides that on and after the death of the settlor the trustees may permit the whole or any part of the trust premises to remain in the state of investment in which the same are at the time of the death of the settlor or may at any time or times sell the same or any part thereof and invest the moneys produced by such sale and all other moneys lying invested with them in such of the investments as are authorised by S. 20 of the Indian Trusts Act (II of 1882). Lastly, cl. 21 provides that all questions arising in the management and administration of the trust and all differences of opinions 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.