Commissioner of Income Tax vs T.A.V. Trust

Kochu Thommen, J.—The following question in ITR Nos. 48 and 49 of 1980 has been, at the instance of the Revenue, referred to us by the Income Tax Appellate Tribunal, Cochin Bench :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that a valid trust came into existence in pursuance of the document dated August 17, 1971, and whether the Tribunal was justified in holding that the assessments for the years 1973-74 and 1974-75 on the trustees had to be made in accordance with the provisions of Section 161 of the Income Tax Act, 1961 ?"

Pursuant to the direction of this court in O.P. No. 2903 of 1980, the following additional questions in ITR Nos. 130 and 131 of 1981 have also been referred to us by the Tribunal :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that ''there is only one transfer and that was from the donor to the trust. There was no gift to the minors directly'' and is not the above finding wrong, unreasonable in law, substance and reality ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law, substance and reality in holding that the business was not a property on which the trust was declared ?

(3) Whether, on the facts and in the circumstances of the case, and in view of the fact that the donations to minors as per Clause 1 of the trust deed total only to Rs. 2,48,000 whereas the total contribution from the minors to the corpus, i.e., Rs. 2,82,000, as per Clause 17 of the deed leaving a difference of Rs. 34,000 to be related back to the original sources, the Tribunal is correct in law and fact in finding that ''donations amounting to Rs. 3 lakhs is made the subject-matter of the trust'' and is not the order of the Tribunal vitiated and the trust invalid also for the non-compliance of provisions of Section 7 of the Indian Trusts Act ?

(4) Whether, on the facts and in the circumstances of the case, an assessment in the status of an association of persons is valid ?"

The crucial point for consideration is whether or not a valid trust has come into existence for the purpose of claiming the benefit of Section 160(1)(iv) of the Income Tax Act, 1961, "the Income Tax Act". The assessment years are 1973-74 and 1974-75. In respect of those years, the assessee claimed that it was a duly constituted trust as evidenced by annexure A, deed of trust dated August 17, 1971. The Income Tax Officer rejected the claim of the assessee for the benefit of Section 160(1)(iv) on the ground that no valid trust came into existence by reason of non-compliance with the provisions of Section 7 of the Indian Trusts Act, 1882 ("the Trusts Act"). The Officer also found that, in relation to certain immovable properties alleged to be in the possession of the trust, there was no valid trust by reason of the absence of a registered document transferring those properties as required u/s 5 of the Trusts Act. The assessee appealed to the Appellate Assistant Commissioner who by his order dated March 1, 1976, annexure. G, allowed the appeal. The Revenue''s appeal against that order was dismissed by the Tribunal by its order dated September 26, 1978, annexurt L. Both the Appellate Assistant Commissioner and the Tribunal found that the condition precedent mentioned u/s 7 of the Trusts Act was not attracted for the reason that the authors of the trust were not minors so as to warrant prior sanction of the civil court as required by Clause (b) of that section. These two authorities also found that no invalidity arose by reason of Section 5 of the Trusts Act as the immovable properties were merely put in the possession of the trust subsequent to its formation.

As we stated earlier, the fundamental question which requires to be considered is whether there is a valid trust so as to enable the assessee to claim the benefit of Section 160(1)(iv) of the Income Tax Act. We shall first refer to the salient features of the trust deed, annexure A.

The first paragraph of this deed shows that what is referred to as an indenture of trust was executed by two persons calling themselves the founder trustee and trustee, respectively. The second paragraph of the deed which is styled as the preamble refers to the beneficiaries who are nine in number, amongst whom only three are majors and the remaining six are minors. The third paragraph is crucial and we shall read it :

"AND WHEREAS THE BENEFICIARIES, viz.,

Mary Varghese, on behalf of her minor daughters, (1) Laizamma Varghese and (2) Rosalin Varghese (hereinafter referred to as the beneficiaries, which expression shall, wherever the context permits, mean and include their legal heirs), has transferred and assigned to the trustees upon trust the sums referred to in Clause 17 against their respective names subject to the powers and provisions hereinafter expressed and declared and have agreed with the ''founder trustee'' to deliver to the said trustees properties, furniture, machinery, stock-in-trade and other properties and chattels and book debts as per the business balance-sheet of St. George Umbrella Mart, Alleppey, as a going concern on and from the 1st day of Chingam One Thousand one Hundred and Forty-seven M. E. in consideration of the said trustees agreeing to discharge the liabilities, such assets and liabilities being specifically described in a separate agreement entered into for assignment unto the trustees absolutely.

WHEREAS T.J. Joseph and his mother-in-law have transferred and assigned to the trustees upon trust the sum of Rs. 50,000 (Rupees Fifty Thousand only) as nominees of Minor T.A. George, son of Mrs. Ammini Abraham.

WHEREAS P.J. Joseph and his brothers have transferred and assigned to the trustees upon trust the sum of Rs. 25,000 (Rupees Twenty-five Thousand only) as nominees of T.S. Varghese.

WHEREAS Mrs. Mary Varghese has transferred and assigned to the trustees upon trust the sums of Rs. 29,000 (Rupees Twenty-nine Thousand only) and Rs. 21,000 (Rupees twenty-one thousand only) respectively as nominee of minors, T.S. Varghese and Daisy, the son and daughter of her son T. V. Scaria.

WHEREAS Mrs. Ammini Abraham has transferred and assigned to the trustees upon trust the sums of Rs. 54,000 (Rupees Fifty-four Thousand only) and Rs. 21,000 (Rupees Twenty-one thousand only) and Rs. 3,000 (Rupees Three Thousand only) respectively as nominee of minors, T.S. Laly and T. S. Daisy, the daughters of her brother-in law T. V. Scaria.

WHEREAS all such transfers as aforesaid were made to the trustees as nominees of the respective beneficiaries and it was agreed prior to the date of such transfers that the trustees should execute such declarations of trust." (emphasis supplied)

This shows that all contributions to the trust are made solely by or on behalf of the beneficiaries who themselves are the authors. Two persons constitute themselves as trustees who hold the properties transferred to them by the authors of the trust solely for the benefit of the latter. In other words, the authors and the beneficiaries are the same persons. We should have thought that, on the face of the deed, it does not fall in line with the definition of "trust", as defined u/s 3 of the Trusts Act which says :

"3. Interpretation clause : Trust--A '' trust'' is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner ;

''Author of the trust'', ''trustee''; ''beneficiary''; '' trust-property''; ''beneficial interest''; ''instrument of trust''--The person who reposes or declares the confidence is called the ''author of the trust'', the person who accepts the confidence is called the ''trustee''; the person for whose benefit the confidence is accepted is called the ''beneficiary''; the subject-matter of trust is called ''trust-property'' or ''trust-money''; the ''beneficial interest'' or ''interest of the beneficiary'' is his right against the trustee as owner of the trust-property ; and the instrument, if any, by which the trust is declared is called the ''instrument of trust''."

But the question whether what is styled as a trust deed does in fact constitute a trust at all, apart from the requirements of Section 7 of the Trusts Act, was not a question before the authorities, and, therefore, we shall not deal with it.

The question which we must necessarily deal with is whether the trust, purported to have been constituted under annexure A, is a validly created trust in compliance with Section 7 of the Trusts Act which says :

"7. Who may create trusts.-

A trust may be created-

(a) by every person competent to contract, and

(b) with the permission of a principal civil court of original jurisdiction, by or on behalf of a minor ;

but subject in each case to the law for the time being in force as to the circumstances and extent in and to which the author of the trust may dispose of the trust-property."

The section though couched in what may appear to be a language of permission does in fact contain a condition precedent in non-compliance with which no trust is permitted to be created. The section is mandatory in so far as it speaks of the persons qualified to create a trust. The legislative intent is that only persons competent to contract, or minors or persons acting on behalf of minors who have obtained the prior permission of the civil court, can create a valid trust. A trust created by or on behalf of a minor without obtaining the prior sanction of the civil court is not a trust which exists in the eye of law.

Section 160 of the Income Tax Act refers to two kinds of trusts. Clause (iv) of Sub-section (1) speaks of a trust created by a duly executed instrument in writing, as distinguished from an oral trust referred to in Clause (iv) of that sub-section. The trust in the present case is alleged to be a trust postulated under Clause (iv).

The relevant paragraph of the deed which we have extracted above shows that six contributories are minors. It is, however, contended on behalf of the assesses that, as found by the Appellate Assistant Commissioner and the Tribunal, the contributions did not come from the minors, but from other persons who are majors and whose names are mentioned in the portion of the deed which we have extracted above. The assessee''s counsel refers to certain letters, produced as annexure K, addressed by various persons to either the firm called St. George Umbrella Mart, whose business was subsequently taken over by the trust, or to Mrs. Mary Varghese who is the mother of the two trustees and who is also one of the beneficiaries. These letters show that a few days before the execution of the deed of trust, the writers of these letters informed the firm or Mrs. Mary Varghese of their intention to forgo certain amounts due to them from the firm and which they intended to contribute to the proposed trust for the benefit of the minors who were related to these persons. None of these letters is referred to in the trust deed, although the persons who addressed these letters are specifically mentioned in the portion extracted above as nominees contributing the sums on behalf of minors. Mrs. Mary Varghese made two types of contributions as seen from Clause 17 of the deed. She contributed in her own right Rs. 6,000. She contributed further sums on behalf of two minors. All the other persons mentioned as nominees also likewise contributed different sums as nominees of the respective minors. The deed is thus clear as to the persons who made the contributions. The contributions, in our view, are made by the named beneficiaries or by the nominees who contributed on behalf of the minor beneficiaries. In other words, apart from the three major beneficiaries who contributed in their personal capacity, all the other contributions came from nominees who acted on behalf of the minors. Thus the contributories are at once the beneficiaries and the authors of the trust. On the face of it, the instrument discloses that out of the nine authors, six are minors on behalf of whom their guardians or nominees acted admittedly without obtaining the permission of the civil court.

The instrument, in our view, must be understood in terms thereof and independently of any other document which does not form part of it. The terms of the instrument being clear, the Tribunal misdirected itself in allowing extraneous evidence to contradict, vary, add to or subtract from those terms.

The assessee''s counsel submits that even if the trust were to fail by reason of non-compliance with the mandatory provisions of Section 7(b) of the Trusts Act, such failure can only be partial, in so far as the trust relates to minor persons and the trust should be saved in so far as the others are concerned so as to enable the assessee to claim the benefit of Section 160(1)(iv) in regard to the income earned by the trust after taking Over the business of the firm as a going concern.

The total amount contributed by the beneficiaries under annexure A is Rs. 3 lakhs, out of which Rs. 18,000 alone can be attributed to the shares of the major persons. If the trust were to fail only partially, as the assessees'' counsel would have it, the trust would then have to be regarded as having been constituted merely with Rs. 18,000. The consideration paid by the trust to take over the business as a going concern was Rs. 3 lakhs, as shown by annexure B. This would lead to the anomalous situation, apart from the principle of law, of a trust created with a sum of Rs. 18,000 taking over a business on the following day on payment of the total consideration of Rs. 3 lakhs contributed solely by the persons intended to be benefited by the trust. This anomaly apart, Section 7 of the Trusts Act, as we pointed out above, contains provisions relating to a condition precedent, failure to comply with which results in an invalidity going to the very root of what is purported to be a trust. Such non-compliance defeats the very legislative object of protecting the interests of minors by whom or on whose behalf no trust can be created otherwise than in compliance with the condition precedent. To permit a trust to operate, even by means of mutilation, in the face of such legislative prohibition imposed in the public interest concerning minors is a futile attempt to breathe life into what is, ab initio, still-born and therefore non-existent. Such a trust is not severable and it cannot be saved partially.

In the circumstances, we answer the question referred to us in ITR Nos. 48 and 49 of 1980 in the negative, that is, in favour of the Revenue and against the assessee. In the light of our answer to that question, it is unnecessary for us to answer the questions referred in ITR Nos. 130 and 131 of 1981.

Counsel for the assessee submits that, in any view, the assessee is entitled to claim the status of co-owners for the purpose of assessment. That is a matter on which we express no view as it does not arise from the questions referred to us.

We direct the parties to bear their respective costs in these tax referred cases.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.