Holding

When the beneficiaries' shares in a trust are indeterminate or unknown, wealth tax must be levied on the trustee under Section 21(4) of the Wealth Tax Act, 1957, but only on the aggregate beneficial interest, not on the entire trust corpus.

Summary

A.V. Reddy created four trusts for his grandchildren and daughter, appointing himself as sole trustee. The trusts stipulated that the corpus would be transferred to beneficiaries only after they attained a specified age, making their interests contingent and indeterminate at the valuation dates. The Wealth Tax Officer assessed the entire trust assets under Section 16(3) of the Wealth Tax Act, 1957. The High Court held that assessment should be made under Section 21(4) and that the trustee should be taxed on the whole trust fund as an individual, a view later challenged. The Supreme Court affirmed that Section 21(4) applies because the beneficiaries' shares are unknown, but clarified that the trustee can be taxed only on the aggregate beneficial interest, not on the entire corpus, following the Nizam's Family Trust precedent. Consequently, the appeals were allowed in part, favouring the trust and granting costs.

Issues considered

Whether wealth tax assessment of a trust with contingent, indeterminate beneficiary interests should be made under Section 21(1) or Section 21(4) of the Wealth Tax Act, 1957.
Whether the trustee can be assessed on the entire value of the trust corpus or only on the beneficial interests of the beneficiaries.
Interpretation of Section 21(4) when the shares of beneficiaries are unknown or indeterminate.

Legislation cited

Wealth Tax Act, 1957s. 16(3), s. 21(1), s. 21(2), s. 21(4), s. 27, s. 3

Subjects

wealth taxtrustbeneficial interestcontingent interestSection 21(4)assessment of trusteeindeterminate sharesNizam's Family Trust

Judgment

A AV. REDDY TRUST AND ORS.
v.
COMMISSIONER OF WEALTH TAX

OCTOBER 8, 1999

B (D.P. WADHWA AND M.B. SHAH, JJ.]

Wealth Tax Act, 1957-S.21(1), (2) and (4}-Trust-Wealth Tax-Levy
of-Mode of Assessment-Detennination of-Trusts created for the benefit of
grand children and daughter-Sett/or constituted as sole trustee-Trust deed
C creating contigent interest on beneficiaries in the corpus of Trust fund-Interest
of beneficiaries indetenninate and unknown-Held, tax to be assessed on the
beneficial interest of the trustee in representative capacity-Assessment not on
the entire value of trust fund in the status of an individuaHiigh Court jus-
tified in holding that the provisions of S.21(4) and not S.21(1) or (2) were
D applicable.
One 'A' created four trusts for the benefit of his three grand
children and daughter and constituted himself as the sole trustee. The
terms and conditions of the trust deed stipulated certain contingencies
on fulfilment of which the beneficiaries' Interest would come into exist·
E ence. Settlor's wealth tax returns showing the entire value of assets of the
trust was rejected by the wealth tax officer and assessments were made
under S.16(3) of the Wealth Tax Act, 1957. On appeal, the Appellate
Assistant Commissioner and Income Tax Appellate Tribunal held that
only the value of the interest of the beneficiary in the Trust could be
Included in the net wealth and not the value of the corpus of the Trust
F itself. However, on reference the High Court held that the assessment was
to be made under S.21(4) of the Act and the trustee was to be assessed
on the entire value of the Trust fund in the status of an individual. Hence
the present appeal.

G On behalf of the appellants it was contended that wealth tax assess·
ment was required to be made under the provisions of S.21(1) or Z1(4)
of the. Act and the assessment was not to be made on the basis of the
corpus of the trust fund but was to be made on the basis •of•·the
beneficiaries' interest.

H Partly allowing the appeals, the Court
580
A.V.REDDYTRUSTv. COMMR.OFWEALTHTAX[SHAH,J.] 581

HELD : 1.1. High Court was justified in holding that the appellant A
. trust is to be assessed to wealth tax under S.21(4) of the Wealth Tax Act,
19S7. [S88·E]

1.2. It is apparent from the terms and conditions of the trust deed
that rights of the beneficiaries to get the corpus of the trust fund come
into existence at the future date when the condition regarding the survival . B
is fulfilled. The High Court, therefore, rightly arriv~d at the conclusion
that interest of beneficiary is indeterminate or unknown and is contingent
and, therefore, S.21(4) of the Act would be applicable. Consequently, the
contention of the appellant that the trust should be assessed under S.21(1)
of the Act cannot be accepted. [S8S·B·CJ c
2. High Court erred in holding that the trustee will have to be assessed
on the entire value of the trust fund in the status of individual. Once it is
held that assessment is to be made under S.21(4) of the Act, there is no
question of assessing the wealth tax on the entire value of the trust fund.
Under sub· section (1) or (4) of S.21 of the Act, it is beneficial interests D
which are taxable in the hands of the trustee in a representative capacity
and the liability of the trustee cannot be greater than the aggregate liability
of the beneficiaries and no part of corpus of the trust property can be
assessed in the hands of the trustees under S.3 of the Act. [S87·A; B; E; F]

- Commissioner of Wealth Tax v. Trustees of Nizam's Family Trust,
(1977) 108 ITR SSS, relied on.
E

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 6077-
6080 of 1990.
F
From the Judgment and Order dated 3.12.87 of the Andhra Pradesh
High Court in R.C. No. 37-40 of 1983.

K. Ram Kumar for the Appellants.

K.N. Shukla, G. Venkatesh Rao, Shankar Divate, S.K. Dwivedi for G
the Respondent.

The Judgment of the Court was delivered by

SHAH, J. These appeals are filed against the Common Judgment and
Order dated 8th December, 1987 passed by the High Court of Andhra H
582 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A Pradesh in Referred Case Nos. 37-40 of 1983 in reference made to the High
Court under Section 27 of the Wealth Tax Act, 1957. The Income-Tax
Appellate Tribunal referred the following question for decision in all the
four cases :-

"Whether on the facts and in the circumstances ·of the case, the
B Tribunal was justified in holding that only the value of the interest
of the beneficiary in the Trust could be included in the net Wealth
and not the value of the corpus of the Trust itself."

The facts in brief are that one Sri A.V. Reddy of Kadiam in East
C Godavari District created four trusts for the benefit of his three grand
children and daughter. One trust was created for the benefit of his
...
grandson Dexter Anand Sear (eldest son of his daughter, Margaret) and
the relevant Trust Deed was executed on 14th March, 1972. Another Trust
Deed was created on 3rd October, 1970 for the benefit of the Settlor's
D grand-son, Harish Reddy. Third Trust Deed was created on 2nd October,
1970 for the benefit of the Settlor's grand-son. B.V. Satish Reddy and
fourth Trust Deed was created on 6th July, 1971 for Settlor's second
daughter Mrs. Lalitha Anderson. The trust deeds were similar; the author -
of the trust constituted himself as the sole trustee; he had the discretion to
apply whole or any portion of the income for the beneficiary and accumu-
E late the residue by investing; the Trust funds were to be transferred and
made over to the beneficiary of the trust after completion of the age of 45
-
years in the case of his daughters and 25 years in the case of his grandsons;
if the object of the trust cannot be fulfilled the trust property was to be
applied for the children of the beneficiary or other children. The trusts
F created by the Settlor are on uniform pattern, namely, at the time of settling
the trust, a sum of Rs. 1,116 was settled with the provision to augment the
trusts fund from time to time by further contributions. The Settlor ap-
pointed himself as the sole trustee during his lifetime. The trustee A.V.
Reddy filed the Wealth-Tax returns for the four trusts showing the entire
value of assets held by the trust for the purpose of Wealth Tax assessment.
G On 27 March, 1980, the Wealth Tax Officer made assessments under
Section 16(3) of the Wealth Tax Act.

Against those orders, assessec preferred the appeals before the
Appellate Assistant Commissioner. In those appeals, the method of valua-
H tion of the wealth tax was disputed; additional ground was raised by
A.V.REDDYTRUSTv. COMMR.OFWEALTHTAX[SHAH,J.] 583

contending that in view of Section 21 which applied to all trusts only A
interest of the beneficiary should be assessed to wealth tax and not the
entire corpus of the trust fund. By order dated 29th November, 1980, the
appeals were allowed. The appellate authorities directed the Wealth Tax
Officer to assess the beneficial interest according to Section 21(1) or 21(2)
of the Wealth Tax Act. Against that order, Wealth Tax Officer preferred
appeals before the Income Tax Appellate Tribunal, Hyderabad
B
(hereinafter referred to as "the Tribunal"). The Tribunal arrived at the
conclusion that the corpus of the t~ust was to 0e transferred to the
beneficiary on completing the stipulated age and the intention of the Settlor
was to vest the corpus in the beneficiary only on reaching the stipulated
age. The Tribunal, therefore, held that there was only a contingent interest c
in the corpus of the trust till the beneficiary attained the stipulated age and
what could be included in the hands of the assessee would be the interest
of beneficiaries in the terms of the trustee and not the corpus of the trust
fund itself. The appeals were, therefore, dismissed with clarification with
which we are not concerned.
D
The High Court after considering the various contentions and the
decision relied upon by the Counsel for the parties and the terms of the
trust deed arrived at the conclusion that the fund is held by the trustee on
behalf of and for the benefit of the beneficiary or the beneficiaries whose
interest may come to surface at a future date depending upon the happen· E
ing of the events provided in the trust deed; on the valuation dates under
consideration, it was not possible to say that the trustee held the fund of
the trust on behalf of or for the benefit of known beneficiaries and much
less could it be said that the shares of the persons on whose behalf the
trust fund is held were determinate and known. Hence, the wealth tax
F
assessment is to be made under Section 21(4) of the Act; the trustee will
have to be assessed on the entire value of the trust fund in the status of an
individual. Thereafter, the Court upheld the assessment made by the
Wealth Tax Officer subject to any relief in the quantum granted either by
the Appellate Assistant Commissioner or by the Income-Tax Appellate
Tribunal. That finding of the High Court is challenged in these appeals by G
special leave.

The learned Counsel for the appellants submitted that in these cases,
wealth tax assessment is required to be made undf(r Section 21(1) or 21(2).
He further submitted that presuming that tlhe High Court has rightly H
•
584 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.

A arrived at the conclusion that assessment is to be made under Section 21(4)
of the Act, yet it committed error in giving final direction contrary to the·
ratio laid down by this Court in the case of Commissioner of Wealth Tax v.
Trnstees of Nizam's Family Trnst, (1977) 108 ITR 555. He submitted that
once it is held that the trust was valid, the wealth tax assessment is required
to be made under the provisions of Section 21(1) or 21(4) of the Wealth
B Tax Act and, in such cases, the assessment is not to be made on the basis
of the corpus of the trust fund but is to be made on the basis of the
beneficiaries interest as discussed by this Court in detail in Nizam 's Family
Trust case. ·

c learnedIn Counsel
our view, there is much substance in the contention raised by the
for the appellant because after arriving at the conclusion
to the effect that wealth tax assessment is required to be made under
Section 21(4) of the Wealth Tax Act, the Court erroneously held that it is
to be assessed on the entire value of the trust fund in the status of an
individual and the said directions are contrary to the ratio laid down in
D Nizam's Family Trnst case (supra).
~·-

Regarding the contention of the learned counsel for the appellant
that assessment is required to be made under Section 21(1) or 21(2), we
would refer to the relevant terms of the Trust Deed on which the High
E Court has relied upon. They are as under :-

"18. The Trustee for the time being may at his discretion apply the
-
whole or any portion of the income of the Trust Fund for the
maintenance education or advancement in life of the Beneficiary
and shall accumulate all the residue by investing the same in the
F aforesaid manner.

20. On the Beneficiary completing the age of 25 years the trustee
shall transfer and make over to be beneficiary all the trust funds
and on so transferring this Trust deed shall stand cancelled and
G be of no effect.

21. If the object for which the Trust has been created fails and

H
cannot be fulfilled, the Trustee for the time being shall be at liberty
to apply the trust property to the benefit of the other sons,
daughters of my last daughter Mrs. Margaret Anne Reddy Sear in
-
A.V. REDDY TRUST v. COMMR.OF WEALTH TAX [SHAH, J.] 585

the proportion of one share for· a son and half- share for a A
daughter."

On the basis of the aforesaid terms and conditions, it is apparent that
rights of the beneficiaries to get the corpus of the trust fund come into
existence at the future date when the condition regarding the survival is
fulfilled. The High Court, therefore, rightly arrived at the conclusion that
B
interest of beneficiary is indeterminate or unknown and is contingent and,
therefore, held that Section 21(4) would be applicable. In this view of the
matter, there is no substance in the contention of the learned Counsel for
the appellant that the trust should be assessed under Section 21(1) of the
Wealth Tax Act. c
Once it is held that assessment is to be made under Section 21( 4),
there is no question of assessing the wealth tax on the entire value of the
trust fund. In such a situation, in the case of Nizam 's Family Trnst case
(supra), this Court has laid down that two assessments are required to be D
made on the trustee; one in respect of actual valuation of the life interest
· of beneficiary under sub-Section (1) of Section 21 and the other in respect
of actual valuation of the totality of the beneficial interest in remainder as
if it belonged to one individual under sub-Section (4) of Section 21. Under
sub-Section (1) or (4) of Section 21, it is beneficial interests which are
taxable in the hands of the trustee in a representative capacity and the E
liability of the trustee cannot be greater than the aggregate liability of the
beneficiaries and no part of corpus of the trust property can be assessed
in the hands of the trustees under Section 3.

This aspect is considered in detail in the aforesaid decision. The F

..
Court first reproduced the relevant part of Section 21, as it stood at that
time, as under :

"21. Assessment when assets are held by courts of wards, ad-
ministrators-general, etc. (1) Subject to the provisions of sub-Section
(lA), in the case of assets chargeable to tax under this Act, which G
are held by a court of wards or an administrator-general or an
official trustee or any receiver or manager or any other person, by
whatever name called, appointed under any order of a court to
manage property on behalf of another, or any trnstee appointed
under a trnst declared by a duly executed instrnment in writing, H
586 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.

A whether testamentary or otherwise (including a trustee under a
valid deed of wakf), the wealth-tax shall be levied upon and
recoverable from the court of wards, administrator-general, official
trustee, receiver, manager or trustee, as the case may be, in the
like manner and to the same extent as it would be leviable upon and
recoverable from the person on whose behalf (or for whose benefit)
B the assets are held, and the provisions of this Act shall apply
accordingly.

(2) Nothing contained in sub-section (1) shall prevent either the
direct assessment of the person on whose behalf (or for whose
C benefit) the assets above referred to are held, or the recovery from
such person of the tax payable in respect of such assets .......

(3) ........

(4) Notwithstanding anything contained in the foregoing provisions
D of this section, where the shares of the persons on whose behalf
or for whose benefit any such assets are held arc indeterminate or
unknown, the wealth-tax shall be levied upon and recovered from
the court of wards, administrator-general, official trustee, receiver,
manager or other person aforesaid, as the case may be, in the like
E manner and to the same extent as it would be leviable l!pon ·and
recoverable from an individual who is a citizen of India and
resident in India for the purposes of this Act, and :

(a) at the rates specified in Part I of the Schedule I; or

F (b) at the rate of three per cent,

whichever course would be more beneficial to the revenue."
\

After considering the various contentions raised by the parties and
G exhaustively dealing with the provisions of the Wealth Tax Act, Court, inter
alia, held thus :-

(a) Charging Section 3 of the Wealth Tax Act is made expressly
subject to Section 21 and it must yield lo that section insofar
as the later makes a special provision for assessment of a
H trustee of a trust. Section 21 is mandatory in its terms.
AV. REDDY TRUST v. COMMR.OF WEALTH TAX (SHAH, J.] 587

(b) Once it is established that a trustee of a trust can be assessed A
only in accordance with the provisions of section 21 and under
these provisions, it is only the beneficial interests which are
taxed in the hands of the trustee, it must follow as a necessary
corollary that no part of the value of the corpus in excess of
the aggregate value of the beneficial interest can be brought
to tax in the assessment of the trustee.
B

(c) Under the scheme of Section 21, the revenue has two modes
of assessment available for assessing the interest of a
beneficiary in the trust properties; it may either assess such
interest in the hands of the trustee in a representative capacity c
under sub-section (1) or assess it directly in the hands of the
beneficiary by including it in the net wealth of the beneficiary.
What is important to note is that in either case what is taxed
is the interest of the beneficiary in the trust properties and
not the corpus of the trust properties. So also where
D
beneficiaries are more than one, and their shares are indeter-
minate or unknown, the trustees would be assessable in
respect of their total beneficial interest in the trust properties.

(d) Under sub-sections (1) and (4) of Section 21 it is the benefi-
cial interests which are taxable in the hands of the trustee in E
a representative capacity and the liability of the trustee cannot
be greater than the aggregate liability of the beneficiaries, no
part of the corpus of the trust properties can be assessed in
the hands of the trustee under Section 3 and any such assess-
ment would be contrary to the plain mandatory provisions of F
Section 21.

(e) For making it clear as to how the wealth tax is to be computed,
the Court gave an illustration for assessment under sub-Sec-
tion (1) and ( 4) of Section 21. In a case where property is
held on trust for giving income for life to A and on his death, G
to such of the children of A as the trustee might think fit. The
Court held that section 21, sub-section (4), would be clearly
attracted in such a case so far as the reversionary interest is
concerned, because, on the relevant valuation date, the
remaindermen and their shares would be indeterminate and H
588 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R. ·

A unknown. But here also two assessments would have to' be .•
made on the trustee - one in respect of the actuarial valuation
of the life interest of A under sub-section ( 1) of Section 21
and the other in respect of the actuarial valuation of the
totality of the beneficial interest in the remainder as if it
belonged to one individual under sub-section (4) of Section
B 21. The difference between the value of the corpus of the
trust property and the aggregate of the actuarial valuations
of the life interest of A and the remainderman's interest
would not be assessable in the hands of the trustee because,
as pointed out above, the trustee can be taxed only in respect
c of the beneficial interests and there being no other beneficiary
apart from A and such of the children of A as the trustee
might think fit, the balance of the value of the corpus cannot
be brought to tax in the hands of the trustee under sub-section 1
(1) or (4) of Section 21.

D (f) The correct interpretation of sub-section (4) of Section 21
must, therefore, be that even where the beneficiaries of the
remainder are indeterminate or unknown, the trustee_ can be·
assessed to wealth-tax in respect of the totality of the benefi-
cial interest in the remainder, treating the beneficiaries fic-
E tionally as an individual."

In view of the aforesaid discussion, we agree with the findings given
by the High Court that in the case of appellant trust beneficial interest is
to be assessed to wealth tax in the hands of the trustee under Section 21(4)
F of the Act. However, the direction given by the High Court that "trustee
will have to be assessed on the entire value of the trust fund in the status
of individual" is contrary to the direction given in Nizam 's case.

In the result, the question is answeri i partly in favour of the assessee
and against the Revenue. The appeals are is allowed with costs.
G
S.V.K. Appeal allowed.