COMMISSIONER OF WEALTH TAX, RAJKOTversusESTATE OF LATE HMM VIKRAMSINHJI OF GONDAL

                      [20141 9 s.c.~ . 1


       COMMISSIONER OF WEALTH TAX, RAJKOT                         A
                              v.
  ESTATE OF LATE HMM VIKRAMSINHJI OF GONDAL
              (Civil Appeal No. 2312 of 2007)
                      APRIL 16, 2014
                                                                  B
      [R.M. LODHA AND SHIVA KIRTI SINGH, JJ.]

     Income Tax Act, 1961/Wealth Tax Act - Income from
Foreign Trust - Tax liability of the sett/or of the Trust - Held:
In view of the facts of the case, the character of the trust is C
discretionary and not specific - The discretionary trust gives
discretion to the trustee to distribute the income of the tn1st to
trust-beneficiaries - But if the trustees fail to distribute in due
time, the power to distribute is not extinguished - In the
present case, merely because the income has been retained' D
and not disbursed to the beneficiaries because th?J seWor
failed to appoint the discretion exercisers, the character of the
subject trust does not get altered - Therefore, the settler is
not liable to pay either income tax on the income from the
Trust or wealth tax - The value of the assets cannot be E
assessed on the estate of the deceased sett/or.

    The questions fbr consideration in the present
appeals which were filed by Revenue related to income
tax and wealth tax liability of the settlor of a foreign trust.
                                                                  F
    Dismissing the appeals, the Court

    HELD: 1. 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 G
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
                               1                                  H
    2        SUPREME COURT REPORTS            [2014) 9 S.C.R.


A   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. [Para 18] [12-
    C-E]
B
       2. In view of 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
C son did not exercise their power to appoint the discretion
  exercisers, the character of the subject trusts does not
  get altered. Thus, in view of the facts, the two U.K. trusts
  continued to be 'discretionary trust' for the subject
  assessment years. [Para 19] (12-F-G]

D     3. 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. [Para 20]
E [12-G; 13-A]

         4. 16 Civil Appeals arising from substantive
    assessment under the Income Tax and Wealth Tax,
    accordingly, have no substance and are dismissed.
    Since the Appeals arising from the substantive
F   assessments have no merit and have been dismissed,
    nothing remains in Civil Appeal under the Wealth Tax Act
    arising from 'protective assessment' for 18 assessment
    years, and it is dismissed as well. [Paras 21 and 22] [13-
    8-C]
G
         Commissioner of Income Tax, Gujarat, Ahmedabad vs.
    Kamalini Khatau (Smt.) 1994 (4) SCC 308; Jyotendrasinhj{
    vs. S./. Tripathi and Others 1993 Supp. (3) SCC 389: 1993
    (2) SCR 938 - referred to.
H
COMMISSIONER OF WEALTH TAX, RAJKOT v. ESTATE OF             3
       LATE HMM VIKRAMSINHJI OF GONDAL

    Snell's Principles of Equity, 28th Edition - referred to.   A
                    Case Law Reference:
    1994 (4) sec 308          referred to         Para 4
    1993 (2) SCR 938          referred to         Para 10
                                                                B
     CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2312 of 2007.
    From the Judgment and Order dated 05.08.2004 of the
High Court of Gujarat at Ahmedabad in Tax Appeal No. 31 of
2004 to 48 of 2004.                                             C
                             Will'!
C. A. Nos. 329 of 2009, 204, 203, 202, 201, 200, 199, 198,
2158 of 2010, 4561, 4562, 4564, 4565, 566, 4567, 4568 of
2014.                                                           D
    Arijit Prasad, W. A. Quadri, Sadhna Sandhu, Rahul
Kaushik, Anil Katiyar for the Appellant.
    R. P. Bhatt, Chirag M. Shroff, Sumit Goel, Kumar
Shashank, Abhishek V. Deshmukh, Shashaank Bhansali, Bina        E
Madhavan, Shashaank Bhansali, (for Lawyer's Knit & Co., )
Shashaank Bhansali, ( Parekh & Co.) for the Respondent.
    The Judgment of the Court was delivered by
      R.M. LODHA, J. : 1. Leave granted in the special leave
petitions.                                                      F
     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   G
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
                                                                H
    4         SUPREME COURT REPORTS               [2014] 9 S.C.R.


A   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 Gonda! 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
8   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.

       4. In the course of arguments, it was conceded by the
C learned counsel for the Revenue that in view of the decision of
  this Court in Commissioner of Income Tax, Gujarat,
  Ahrredabad 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
D 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
E 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
F 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
G settlement.

        · 6. Clauses 3 and 4 of the Trust Deeds are relevant. They
    read as under:-

H   1.   1994 (4) sec 3oa.
COMMISSIONER OF WEALTH TAX, RAJKOT v. ESTATE OF              5
 LATE HMM VIKRAMSINHJI OF GONDAL [R.M. LODHA, J.]

   "3. THE Settlor hereby dir~cts that the Trustees shall and     A
   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     B
   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 Gonda! who
   died on the Thirty-first day of July One thousand nine
   hundred and fifty-two and any interest payable on such duty
   anq any costs incurred in connection with the ascertainment    C
   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 D
   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 E
   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 F
   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   G
          or the Younger Son; or

          (b) \n favour of the person making the appointment
          save with the consent of the Trustees (being at least
          two in number or a trust corporation) such consent      H
    6       SUPREME COURT REPORTS                [2014] 9 S.C.R.


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

c             (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
D             the Elder Son) first during the specified period (a)
              becomes the Mahciraja or would become the
              Maharaja if his title h~d not been abolished and (b)
              attains the age of eighteen years.

E             (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
F
              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.          ·

G             (6) Subject as aforesaid the Trust Fund shall be held
              in trus~or the person who (being a son of the
              Settlor younger than the Younger Son or being a
              descendant of sµch a Son of the Settlor) first during
              the specified period (a) becomes the Maharaja or
H
COMMISSIONER OF WEALTH TAX, RAJKOT v. ESTATE OF                  7
 LATE HMM VIKRAMSINHJf 0.f GONDAL [R.M. LODHA, J.]

            would become the Maharaja if his title had not been       A
            abolished and (b) attains the age of eighteen years."

     7. It appears .that during his life time, the settler, Shri
Vikramsinhji, was including the whole of the income arising from
these trusts in his returns of income. The said income was also
                                                                      B
included in the two returns filed by his son Jyotendrasinhiji for
the assessment year 1970-7-1. Thereafter, it appears that the
assessee - Jyotendrasinhiji took the stand that the income from
these trusts is not includible in his income. Jyqtendrasinhiji also
took the stand that inclusion of the said income in the returns
submitted by his father for the assessment years 1964-65 to           C
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            D
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 CommisSipn observed
as follows:-
                                                                      E
     "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 settler during his lifetime
     and on his death, to his elder son, the appellant herein. In F
     other words, these settlements are in the nature of specific .
     trusts. In any event, the entire income from these trusts was
     received by the settler during his lifetime and after the
     settler's death, by the appellant. Therefore, the said income
     was rightly included in the total income of the settler and G
     the assessee during the respective assessment years.".

    9. The Settlement Commission, accordingly, computed the
taxable income of the Settler under both the sets of trusts - U.S.
and U.K. - for the assessment years 1964-65 to 1970-71 (up            H
    8         SUPREME COURT R~PORTS                 [2014] 9 S.C.R.


A   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./. Tripathi
8
     & 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
    !hese trusts are recorded in para 37 of the report which reads
    as under:-
c
         "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
D        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
E        existence. Properly construe~. says Shri Desai, clause (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
F
         did decide not to exercise their discretion underclause (3).
         If so, no income ever arose or accrued to the settler 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
G
         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

H 2.    1993 Supp. (3) sec 389.
COMMISSIONER OF WEALTH TAX, RAJKOT v. ESTATE OF                    9
 LATE HMM VIKRAMSINHJI OF GONDAL [R.M. LODHA, J.]

    among the specified beneficiaries; only then does the trust         A
    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."
                                                                        B
    11. This Court, however, observed that the question urged
on behalf of the a$sessee was academic in the fact~ 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   C
     have been re~eiving the income from these trusts during
     the seve~I assessment years concerned herein. Shri
     Vikramsinhj), 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            D
     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              E
     support of their opinion that all concerned with the trusts,
     acted on the basis that the trust income was flowing to the
     settler, and after his death to tpe appellant. The
     Commission also referred specifically to similar
     declarations made by the appellant in his returns. It              F
     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 yea'r after the death of his father. Even               G
     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, ';975 written by the ·appellant to the
     l.T.O., A-Ward, Rajkot relating to the A.Y. 1972-73, he had        H
    10        SUPREME COURT REPORTS                  [2014] 9 S.C.R.


A        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
B        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
c        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 Gonda! has created
         trusts in U.K. The assessee has been informed that
D
         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 settler as well as himself
         had included the said income in their returns out of
E        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 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 an such income to tax."

G      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 ihat there is an endorsement at
H the bottom of the statement of funds ending on 31 sNl,/larch of
COMMISSIONER OF WEALTH TAX, RAJKOT v. ESTATE OF                  11
 LATE HMM VIKRAMSINHJI OF GONDAL [R.M. LODHA, J.]

each previous year, "Net Income for the year retained".                A
    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
                                                                       8
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             C
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 settler    D
to treat the trust property as his own. The settler 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           E
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.             F

      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 previouci           G
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             H
    12         SUPREME COURT REPORTS                             [2014] 9 S.C.R.


A 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
8
    High Court was also of the view that on interpretation of the
    relevant clauses o(the deeds of settlement executed in U.K.,
    character of the trusts appears to be discretionary and not
    specific.

C      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
D 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
E
       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
F because the Settler 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 our opinion, the two U.K. trusts continued to
  be 'discretionary trust' for the subject assessment years.
G
         20. The above position with regard to the discretionary
    trust is equally applicable to the controversy in appeals under

    3.   Snell;s Principles of Equity, 28'" Edition, Page 138.
H   2.   1993 Supp. (3) 389.
COMMISSIONER OF WEALTH TAX, RAJKOT v. ESTATE OF             13
 LATE HMM VIKRAMSINHJI OF GONDAL [R.M. LODHA, J.)

the Wealth Tax Act. The High Court has taken a correct view       A
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
                                                                  8
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'     C
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.                                             D
Kalpana K. Tripathy                          Appeals dismissed.