1. Transfer of shares to a trust for the benefit of a charitable trust for a limited period, then for minor children — inclusion in net wealth under Section 4(1)(a)(iii), Wealth Tax Act. (Para 1 , 2 , 7 , 8 )
Back
Next 
1966 Supreme(SC) 154
SUPREME COURT OF INDIA
K.N. WANCHOO, J.C. SHAH AND S.M. SIKRI, JJ.
His Highness Yeshwant Rao Ghorpade Appellant
Versus
Commissioner of Wealth Tax, Bangalore, Respondent.
Civil Appeals Nos. 1133 and 1134 of 1965 dated 6-5-1968.
Advocates appeared
M/s. R. Venkataram and R. Gopalakrishnan, for Appellant; Mr. S. V. Gupte, Solicitor-General of India, (M/s. R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey, Advocates. with him), for Respondent.
Advocates:
R.Ganapathy Iyer, R.GOPAL KRISHNAN, R.H.Dhebar, R.N.SACH, R.VENKATARAMANA, S.V.Gupta
R.Ganapathy Iyer, R.GOPAL KRISHNAN, R.H.Dhebar, R.N.SACH, R.VENKATARAMANA, S.V.Gupta
The term "benefit" in Section 4(1)(a)(iii) of the Wealth Tax Act, 1957 (pre-1964 amendment), refers to immediate benefit. Assets held for a charitable trust for a fixed term before reverting to minor children are not held for the children's immediate benefit during that term.
Headnote:(A) Wealth Tax Act, 1957 - Section 4(1)(a)(iii) - Inclusion of assets in net wealth - Assets transferred for the benefit of minor children - Interpretation of the word "benefit" - Whether "benefit" includes deferred benefit or only immediate benefit - Amendment by Wealth Tax (Amendment) Act, 1964, adding the words "immediate or deferred benefit" held not to be declaratory but a substantive change in law - If assets are held for a charitable trust for a specified period before being held for the benefit of minor children, such assets are not held for the immediate benefit of the children during the initial period. (Paras 4, 5)
(B) Interpretation of Trust Deeds - Conflict between clauses - Rule of harmonious construction - Where a trust deed provides for the benefit of a charitable entity for a fixed term and subsequently for the benefit of individuals, a general power to spend income for the individuals' maintenance and advancement does not necessarily override the initial charitable interest if the clauses can be read harmoniously to mean the power applies only after the initial term expires. (Paras 12, 14)
Facts of the case:
An assessee transferred shares to a trust. The trust deed stipulated that the shares and their income would be held for the benefit of a charitable trust for specific periods (ranging from 2 to 12 years) and thereafter for the benefit of the assessee's minor children. The tax authorities included the value of these shares in the assessee's net wealth for the assessment years 1958-59 and 1959-60, asserting they were held for the benefit of the minor children under Section 4(1)(a)(iii) of the Act.
Findings of Court:
The court found that the word "benefit" in the original Section 4(1)(a)(iii) of the Act meant immediate benefit. Since the trust property was held for a charitable trust during the valuation dates, it was not held for the immediate benefit of the minor children.
Issues: Whether the value of shares transferred to a trust, which were to be held for a charitable trust for a limited period before being held for the benefit of minor children, could be included in the net wealth of the transferor under Section 4(1)(a)(iii) of the Wealth Tax Act.
Ratio Decidendi: The court held that the 1964 amendment introducing "immediate or deferred benefit" was not declaratory. Under the original Act, "benefit" meant immediate benefit. Because the trust deed expressly directed that the corpus and income be held for a charitable trust for the first few years, the minor children had no immediate interest in the assets during that period. A "notwithstanding" clause allowing expenditure for the beneficiaries' maintenance was interpreted as applying only to income accruing to them after the charitable period ended, rather than overriding the initial charitable interest.
Result: Appeals allowed.
Legal Category Hierarchy
Table of Contents
2. Whether benefit includes deferred benefit and whether a power to expend income for beneficiaries' maintenance overrides a prior interest granted to a charitable trust. (Para 4 , 12 , 25 , 26 )
3. The 1964 amendment is not declaratory; benefit implies immediate benefit; trust clauses are read harmoniously to prioritize the charitable trust's initial interest. (Para 4 , 5 , 8 , 11 , 12 , 14 )
4. Assets transferred for the benefit of a third party for a fixed term are not held for the immediate benefit of the ultimate beneficiaries during that term. (Para 5 , 15 )
5. Appeals allowed; High Court judgment set aside; shares excluded from the assessee's net wealth. (Para 16 , 30 )
6. Does the term benefit under Section 4(1)(a)(iii) of the Wealth Tax Act include deferred benefits?
No, the court held that in the context of the original Act, benefit means immediate benefit. If property is held for one party for a term before another, it is not held for the benefit of the latter during the first party's term. (Para 5 )
7. Is the 1964 amendment to the Wealth Tax Act, which added immediate or deferred benefit, considered declaratory?
No, the court ruled that the amendment was a deliberate change and not mere declaratory legislation, meaning it cannot be used to interpret the law as it stood prior to the amendment. (Para 4 )
8. How should conflicting clauses in a trust deed be interpreted when one grants a prior interest to a charity and another allows spending for beneficiaries?
Such clauses should be read harmoniously. A power to spend income for beneficiaries' maintenance does not override a specific prior interest granted to a charitable trust for a fixed period. (Para 12 , 14 )
Judgement
SIKRI, J. (with Wanchoo, J.) : These appeals by special leave are directed against the judgment of the Mysore High Court in a reference under S. 27 (1) of the Wealth Tax Act (XXVII of 1957) - hereinafter referred to as the Act - answering the question "whether the sums of Rs 4,30,684 and Rs. 4,13,353 being the value of the shares transferred by the assessee to the Sandur Ruler s Family (Second) Trust could be included in the net wealth of the assessee for the assessment years 1958-59 and 1959-60 under the provisions of Section 4 (1) (a) (iii) of the Wealth Tax Act" in favour of the Revenue.
2. The question arose in the following circumstances: The appellant, His Highness Yeshwant Rao Ghorpade, hereinafter referred to as the assessee, held 12,750 shares in Sandur Manganese and Iron Ores Ltd. on March 31, 1957. On August 24, 1957, he created two Trusts; one may be called the Charitable Trust and the other the Sandur Ruler s Family (Second) Trust-may hereinafter be referred to as the Second Trust. The assessee transferred some shares to the Second Trust under conditions contained in the Trust Deed. The Wealth Tax Officer and the Appellate Assistant Commissioner, in computing the net wealth of the assessee on March 31, 1958, and March 31, 1959, the valuation dates respectively for the assessment years 1958-59 and 1959-60, included the value of these shares held by the Trustees under the Second Trust. On appeal, the Appellate Tribunal reversed the decisions of the authorities below and came to the conclusion that the value of the shares could not be taken into consideration in computing the net wealth of the assessee. The Tribunal, however, at the instance of the Department referred the question of law already set out above for the opinion of the High Court. The High Court, as mentioned earlier, answered the question against the assessee. The assessee having obtained special leave, the appeals are now before us.
3. The short question that arises is whether the shares in question held by the Trustees under the Second Trust are held for the benefit of the three minor children mentioned in the Second Trust deed. The answer to this question depends, first, on the interpretation of the words "for the benefit of .............. minor child" in S. 4 (1)(a)(iii) of the Act, and secondly, on whether on the true interpretation of the Second Trust, these assets are held for the benefit of the minor children. Section 4 (1) (a) (iii) reads as follows :
"4. (1) In computing the net wealth of an individual, there shall be included, as belonging to him
(a) the value of assets which on the valuation date are held,
(iii) by a person or association of persons to whom such assets have been transferred by the individual otherwise than for adequate consideration for the benefit of the individual or his wife or minor child or".
4. The learned Solicitor-General, Mr. Gupte, on behalf of the Revenue, contends that the word "benefit" in this section means the immediate or deferred benefit. He says that the amendment of the section made by the Wealth Tax (Amendment) Act, 1964 (46 of 1964), which came into force on April 1, 1965, is in effect declaratory. Section 4 of the Amending Act substituted a new clause for the clause set out above. The new clause is :
"(iii) by a person or association of persons to whom such assets have been transferred by the individual otherwise than for adequate consideration for the immediate or deferred benefit of the individual, his or her spouse or minor child (not being a married daughter) or both, or".
We are unable to regard the new amendment as declaratory. The amendment makes a deliberate change and the addition of the words "the immediate or deferred benefit" before the words "of the individual", apart from other changes, cannot be called a mere declaratory legislation, and we must construe the word benefit apart from the amendments made by Act 46 of 1964.
5. It seems to us that the word benefit in the context means for
