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REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2312 OF 2007

COMMISSIONER OF WEALTH TAX, RAJKOT        Appellant (s)

                VERSUS

ESTATE OF LATE HMM VIKRAMSINHJI OF        Respondent(s) GONDAL

WITH                                            

Civil Appeal No. 329 of 2009      

  Civil Appeal No. 204 of 2010                                               

Civil Appeal No. 203 of 2010           

Civil Appeal No. 202 of 2010         

Civil Appeal No. 201 of 2010         

  Civil Appeal No. 200  of 2010           

Civil Appeal No. 199 of 2010          

Civil Appeal No. 198 of 2010         

          Civil Appeal No. 2158 of 2010           

 Civil Appeal No.  4561 of 2014    (arising out of S.L.P. (C) No. 3755 of 2007)

      Civil Appeal No.  4562  of 2014  

 (arising out of S.L.P. (C) No. 3756 of 2007)        

Civil Appeal No. 4564 of 2014     (arising out of S.L.P. (C) No. 3757 of 2007)  

              Civil Appeal No. 4565 of 2014  

(arising out of S.L.P. (C) No. 4623 of 2007)            

Civil Appeal No. 4566 of 2014  (arising out of S.L.P. (C) No. 8115 of 2007)  

       Civil Appeal No. 4567 of 2014  

(arising out of S.L.P. (C) No. 4980 of 2007)      

Civil Appeal No. 4568 of 2014  (arising out of S.L.P. (C) No. 2415 of 2007)

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J  U  D  G  M  E  N  T

R.M. LODHA, J. :

Leave granted in the special leave petitions.

2. This is a group of 17 Appeals  — 8 arising  

from the Income Tax Act, 1961 and 9 arising from the  

Wealth Tax Act, 1957. Of the 9 Wealth Tax appeals, one  

appeal  relates  to  'protective  assessment'  for  18  

assessment years, i.e, 1970-71 to 1976-77, 1978-79 to  

1979-80, 1981-82 to 1989-90. The remaining 8 Wealth Tax  

appeals relate to assessment years 1970-71, 1971-72,  

1972-73, 1973-74, 1974-75, 1975-76, 1976-77 and 1978-

79. In so far as 8 appeals arising from the assessment  

orders  passed  under  the  Income  Tax  Act,  1961  are  

concerned,  they  relate  to  assessment  years  1984-85,  

1985-86,  1986-87,  1987-88,  1988-89,  1989-90,  1990-91  

and 1991-92.

3. The  ex-Ruler  of  Gondal  Shri  Vikramsinhji  

executed three deeds of settlements (trust deeds) in  

the United States of America on December 19, 1963 and  

two deeds in the United Kingdom on January 1, 1964. The  

three  settlements  executed  in  U.S.  are  in  identical  

terms. Similarly, the two settlements executed in U.K.  

are similar.

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4. In the course of arguments, it was conceded by  

the learned counsel for the Revenue that in view of the  

decision of this Court in Commissioner of Income Tax,  

Gujarat,  Ahmedabad  Vs.  Kamalini  Khatau  (Smt.)1,  the  

view taken by the High Court in respect of U.S. trusts  

cannot  be  faulted  and,  to  that  extent,  the  Revenue  

accepts the judgment of the High Court.

5. Thus the dispute in these appeals – Income Tax  

and so also, Wealth Tax – remains about the deeds of  

settlements executed in U.K.  The copies of the  deeds  

of settlements executed in U.K. are on record. Perusal  

thereof  shows  that  one  Mr.  Robert  Hampton  Robertson  

McGill was designated as the trustee, referred to in  

the deeds as 'the Original Trustee'. These trusts were  

created for the benefit of (a) the Settlor, (b) the  

children  and  remoter  issue  for  the  time  being  in  

existence of the Settlor and (c) any person for the  

time being in existence who is the wife or widow of the  

Settlor or the wife or widow or husband or widower of  

any  of them,  the  children  and  remoter  issue of the  

Settlor.  The  trust  deeds  define  the  expression  “the  

Trustees” to mean and include the Original Trustee or  

the  other  trustees  for  the  time  being  appointed  in  

terms of the deeds of settlement.  

1.     1994 (4) SCC 308

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6. Clauses  3  and  4  of  the  Trust  Deeds  are  

relevant. They read as under:-

“3.  THE  Settlor  hereby  directs  that  the  Trustees shall and accordingly the Trustees  shall stand possessed of the Trust Fund and  the income thereof upon the trusts following  that is to say :-

(1) UPON  TRUST to raise and pay out of the  capital  thereof  any  further  estate  duty  which  may  still  be  payable  thereon  in  respect of the death of the Settlor's father  His  Late  Highness  Shri  Bhojrajji  Maharaja  Saheb of Gondal who died on the Thirty-first  day of July One thousand nine hundred and  fifty-two and any interest payable on such  duty and any costs incurred in connection  with the ascertainment or payment of such  duty and interest.

(2) Subject as aforesaid UPON TRUST for all  or  such  one  or  more  exclusively  of  the  others or other of the Beneficiaries at such  age or time or respective ages or times if  more than one in such shares and with such  trusts for their respective benefit and such  provisions for their respective advancement  and  maintenance  and  education  at  the  discretion of the Trustees or of any other  person or persons as the person who for the  time being is the Maharaja or (if the title  is abolished) would have been the Maharaja  had the title not been abolished shall at  any time during the specified period by any  deed  or  deeds  revocable  or  irrevocable  appoint AND in default of any subject to any  such appointment UPON the trusts and with  and  subject  to  the  powers  and  provisions  hereinafter  declared  and  contained  concerning the same PROVIDED ALWAYS that the  foregoing power of appointment shall not be  capable of being exercised:-

(a) by anyone other than the Settlor or  the Elder Son or the Younger Son; or

(b) in favour of the person making the  appointment  save  with  the  consent  of  the  Trustees  (being  at  least  two  in

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number  or  a  trust  corporation)  such  consent to be testified by their being  parties to the deed of appointment and  executing the same.

4. SUBJECT  as aforesaid the Trustees shall  stand possessed of the Trust Fund and the  income  thereof  upon  the  trusts  following  that is to say:-

(1)  The  income  of  the  Trust  Fund  accruing during the life of the Settlor  shall  belong  and  be  paid  to  the  Settlor.

(2) Subject as aforesaid the income of  the Trust Fund accruing during the life  of the Elder Son shall belong and be  paid to the Elder Son.

(3) Subject as aforesaid the Trust Fund  shall be held in Trust for the person  who  (being  a  descendant  of  the  Elder  Son) first during the specified period  (a)  becomes  the  Maharaja  or  would  become  the  Maharaja  if  his  title  had  not been abolished and (b) attains the  age of eighteen years.

(4) Subject as aforesaid the income of  the Trust Fund accruing during the life  of the Younger Son shall belong and be  paid to the Younger Son.

(5)   Subject  as  aforesaid  the  Trust  Fund  shall  be  held  in  trust  for  the  person who (being a descendant of the  Younger Son) first during the specified  period  (a)  becomes  the  Maharaja  or  would become the Maharaja if his title  had not been abolished and (b) attains  the age of eighteen years.

(6) Subject as aforesaid the Trust Fund  shall be held in trust for the person  who (being a son of the Settlor younger  than  the  Younger  Son  or  being  a  descendant  of  such  a  Son  of  the  Settlor)  first  during  the  specified  period  (a)  becomes  the  Maharaja  or  would become the Maharaja if his title  had not been abolished and (b) attains  the age of eighteen years.”

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7. It  appears  that  during  his  life  time,  the  

settlor, Shri Vikramsinhji, was including the whole of  

the income arising from these trusts in his returns of  

income. The said income was also included in the two  

returns  filed  by  his  son  Jyotendrasinhiji  for  the  

assessment year 1970-71. Thereafter, it appears that  

the assessee – Jyotendrasinhiji took the stand that the  

income  from  these  trusts  is  not  includible  in  his  

income.  Jyotendrasinhiji  also  took  the  stand  that  

inclusion of the said income in the returns submitted  

by his father for the assessment years 1964-65 to 1969-

70 and by himself for the assessment year 1970-71 was  

under a mistake.  

8. Bereft of unnecessary details, suffice it to  

say  that  Jyotendrasinhiji  approached  the  Settlement  

Commission with an application for settlement relating  

to income from U.K. trusts just as he made application  

for settlement relating to U.S. trusts. As regards U.K.  

trusts, the Settlement Commission observed as follows:-

“So  far  as  the  U.K.  trusts  are  concerned,  clause  (3)  did  never  come  into  operation  inasmuch  as  no  additional  trustees  were  appointed as contemplated by it. If so, clause  (4)  sprang  into  operation  whereunder  the  entire income under the settlements flowed to  the  settlor  during his lifetime and on his  death, to his elder son, the appellant herein.  In other words, these settlements are in the  nature of specific trusts. In any event, the  entire income from these trusts was received  by the settlor during his lifetime and after

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the  settlor’s  death,  by  the  appellant.  Therefore,  the  said  income  was  rightly  included in the total income of the settlor  and  the  assessee  during  the  respective  assessment years.”

9. The   Settlement  Commission,  accordingly,  

computed the taxable income of the Settlor under both  

the sets of trusts – U.S. and U.K. – for the assessment  

years 1964-65 to 1970-71 (up to the date of the death  

of the Settlor) as also the income of Jyotendrasinhiji  

for the assessment years 1970-71 to 1982-83.

10. The above order of the Settlement Commission  

reached this Court in a group of appeals.  This Court,  

by its judgment dated April 2, 1993,  Jyotendrasinhji  

Vs. S.I. Tripathi & Others2, with regard to U.K. trusts  

did not consider the arguments advanced on behalf of  

the  assessee  on  merits.  The  arguments  advanced  on  

behalf of the assessee with regard to these trusts are  

recorded  in  para  37  of  the  report  which  reads  as  

under:-

“37.  The first contention urged with respect  to  U.K.  trusts  is  that  the  Commission  has  wrongly  construed  clause  (3)  which  we  have  extracted hereinbefore. Shri Desai argues that  the trust had already come into existence with  the  appointment  of  the  sole  trustee,  Mr.  McGill, and that the coming into existence of  the trust did not depend upon the appointment  of  additional  trustees.  The  Commission  was  wrong  in  holding that until  and unless  the  additional trustees are appointed, the trust  in clause (3) does not come into existence.  Properly  construed,  says  Shri  Desai,  clause  

2.     1993 Supp. (3) SCC 389

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(3) creates a discretionary trust. Inasmuch as  the  sub-clause  does  not  prescribe  any  time  limit within which the trustees must decide to  distribute the income among the beneficiaries,  says the counsel, clause (4) has not and had  never come into operation. In this case the  trustees  never  did  decide  not  to  exercise  their discretion under clause (3). If so, no  income ever arose or accrued to the settlor or  the  appellant  under  clause  (4).  If  the  trustees  fail  to  exercise  their  discretion  under  clause  (3),  the  only  remedy  for  the  beneficiaries  is  to  approach  the  court  to  compel  the  trustees  to  exercise  their  discretion  one  way  or  the  other,  but  they  cannot say that the trust income has accrued  to them. Clause (4) comes into operation, says  the counsel, only where the trustees decide  not  to  distribute  the  income  among  the  specified  beneficiaries;  only  then  does  the  trust income belong to and has to be paid over  to the settlor  — and after the death of the  settlor  to  his  elder  son,  the  appellant.  Accordingly, the counsel says, the Commission  was wrong in law in treating these trusts as  specific trusts.”

11. This  Court,  however,  observed  that  the  

question urged on behalf of the assessee was academic  

in the facts and circumstances of the case.  In para 38  

of the Report, this Court stated:-

“38. ... As a matter of fact, both the settlor  and  the  appellant  have  been  receiving  the  income from these trusts during the several  assessment  years  concerned  herein.  Shri  Vikramsinhji  had  voluntarily  included  the  entire  income  from  the  U.K.  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

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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. It referred to  his statements made in the two returns filed  for the assessment year 1970-71, one relating  to the income received by his father till his  death and the other with respect to the income  received  by  him  during  the  accounting  year  after the death of his father. Even subsequent  to  the  death  of  Shri  Vikramsinhji,  the  Commission pointed out, the appellant has been  making similar declarations from time to time.  For instance,  in the letter  dated March  3,  1975 written by the appellant to the I.T.O.,  A-Ward, Rajkot relating to the A.Y. 1972-73,  he had stated, "as per statement of U.K. sent  herewith, the trustees have arrived at income  of  13,027  pounds  for  the  benefit  of  Shri  Jyotendrasinhji.  According  to  our  opinion,  this income is not taxable as U.K. trust is  discretionary. However, as it has been taken  last, the income may be included in the hands  of  Shri  Jyotendrasinhji  subject  to  our  appeal".  It  is  significant  to  notice  the  ground of non-taxability put forward in the  said letter. The appellant did not say that he  did not receive the income. 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.  Similarly, in the return relating to the A.Y.  1973-74, a note was appended by the appellant  to the following effect: “Late H.H. Maharaja  Vikramsinhji of Gondal has created trusts in  U.K.  The  assessee  has  been  informed  that  income falling in the hands of the assessee is  12,627 pounds. This is, therefore, shown as  income in his return.” (emphasis supplied). It  is true that the appellant had argued before  the Commission  that the settlor  as  well  as  himself had included the said income in their  returns out of ignorance and on the basis of  wrong legal advice but the said explanation  has not been accepted by the Commission — and  we must go by the findings of the Commission.  It is not brought to our notice that during  any of  the  years concerned  herein,  did  the  appellant ever say that he did not receive the  income from these trusts. If so, the question

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of law urged is of mere academic interest and  need not be dealt with by us. Section 5 of the  Act is wide enough to bring all such income to  tax.”

12. Insofar  as  these  appeals  are  concerned,  as  

observed  above,  8  appeals  relate  to  income  tax  

assessment years 1984-85 to 1991-92. The copies of the  

returns and balance sheets relating to above assessment  

years  have  been  placed  on  record.  It  transpires  

therefrom that there is an endorsement at the bottom of  

the statement of funds ending on 31st March of each  

previous year, “Net Income for the year retained”.

13. Clause 3 of the deeds of settlement executed  

in U.K. leaves at the discretion of the trustees to  

disburse benefits to the beneficiaries. The endorsement  

made in the returns, as noted above, shows that income  

was retained by the trustees and not disbursed.

14. The Income Tax Appellate Tribunal (for short,  

'Tribunal'), while considering clause 3(2) and Clause 4  

of the U.K. Trust Deeds referred to the findings of the  

Settlement Commission and  observed that if the trusts  

were really intended to be discretionary, the trustees  

had a duty cast on them to ascertain the relative needs  

and personal circumstances of all the beneficiaries and  

to allocate the income of the trusts,  among them from  

time to time, according to the objects of the trusts,  

however, the tell tale facts bring out the intention of  

the settlor to treat the trust property as his own. The

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settlor and after his death his son have been showing  

the income of foreign trusts in the returns of income  

filed  from  time  to  time.  Had  the  trust  deeds  been  

really understood by the trustees and the beneficiaries  

as  discretionary  by  virtue  of  the  operation  of  

clause 3, one would have expected the state of affairs  

to  have  been  different.   Consequently,  the  Tribunal  

held that due to failure on the part of the Maharaja to  

appoint  discretion  exercisers  as  per  clause  3(2),  

clause 4 has become operative and the U.K. trusts  have  

to be held to be specific trusts.

15. The High court, however, did not agree with  

the Tribunal's view on consideration of the relevant  

clauses of the U.K. Trust Deeds and various judgments  

of this Court as well as some High Courts and held that  

there were distinguishing features for assessment years  

under appeal and the previous order of the Settlement  

Commission and the earlier judgment of this Court.

16. For the assessment years under consideration  

in these appeals, the High Court noted the following  

distinguishing features, viz., (i) the assessee has not  

admitted having received the income, (ii) the assessee  

has not received the said income and (iii) the assessee  

has not shown as taxable income in the returns of all  

the years under appeal.

17. Having  observed  the  above  distinguishing  

features, the High Court was also of the view that on

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interpretation of the relevant clauses of the deeds of  

settlement executed in U.K., character of the trusts  

appears to be discretionary and not specific.

18. A  discretionary  trust  is  one  which  gives  a  

beneficiary no right to any part of the income of the  

trust  property,  but  vests  in  the  trustees  a  

discretionary  power  to  pay  him,  or  apply  for  his  

benefit, such part of the income as they think fit. The  

trustees must exercise their discretion as and when the  

income  becomes  available,  but  if  they  fail  to  

distribute in due time, the power is not extinguished  

so that they can distribute later. They have no power  

to bind themselves for the future.  The beneficiary  

thus has no more than a hope that the discretion will  

be exercised in his favour.3  

19. Having  regard  to  the  above  legal  position  

about the discretionary trust which is also applied by  

by this Court in the earlier judgment2 and the fact  

that the income has been retained and not disbursed to  

the beneficiaries, the view taken by the High Court  

cannot be said to be legally flawed. Merely  because  

the  Settlor  and  after  his  death,  his  son  did  not  

exercise  their  power  to  appoint  the  discretion  

exercisers, the character of the subject  trusts does  

not get altered. In view of the facts noted above, in  

3 .   Snell's Principles of Equity, 28th Edition, Page    138

2.      1993 Supp. (3) SCC 389

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our  opinion,  the  two  U.K.  trusts   continued  to  be  

'discretionary trust' for the subject assessment years.

20. The  above  position  with  regard  to  the  

discretionary  trust  is  equally  applicable  to  the  

controversy in appeals under the Wealth Tax Act. The  

High Court has taken a correct view that the value of  

the  assets cannot be  assessed  on  the  estate of the  

deceased Settlor.

21. 16  Civil  Appeals  arising  from  substantive  

assessment  under  the  Income  Tax  and  Wealth  Tax,  

accordingly, have no substance and are dismissed with  

no order as to costs.

22. Since the Appeals arising from the substantive  

assessments  have  no  merit  and  have  been  dismissed,  

obviously  nothing  remains  in  Civil  Appeal  No.  2312  

of  2007  under  the  Wealth  Tax  Act  arising  from  

'protective  assessment'  for  18  assessment  years,  

i.e, 1970-71 to 1976-77, 1978-79 to 1979-80, 1981-82  

to 1989-90 and it is dismissed as well.  

23. All  17  Civil  Appeals  are,  accordingly,  

dismissed with no order as to costs.

.........................J. ( R.M. LODHA )

NEW DELHI; .........................J. APRIL 16, 2014 ( SHIVA KIRTI SINGH )