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1981 Supreme(Cal) 185
High Court Of Calcutta
SABYASACHI MUKHERJI, SUDHINDRA MOHAN GUHA
SETH KESHRICHAND KHAITAN EDUCATION AND WELFARE TRUST - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 75 Of 1978
Decided On : 06/02/1981
PRABIR MAJUMDAR, R.N.BAJORIA, S.CHAKRABORTY, SUHAS SEN
The determination of whether a trust was created bona fide for the benefit of relatives under the proviso to Section 164(1) of the Income Tax Act, 1961, should focus on the circumstances at the time of creation, not subsequent conduct.
Headnote:
INCOME TAX - Assessment of Trust Income - Applicability of Proviso to Section 164(1) - Bona Fide Creation of Trust - Consideration of Subsequent Conduct - Held, the Tribunal erred in considering the subsequent non-application of trust funds as a determinative factor in assessing the bona fides of the trust's creation. The focus should be on the circumstances at the time of creation, not subsequent conduct.
Fact of the Case:
The assessee trust was created in 1964 with the object of providing for the education, maintenance, and general well-being of the settlors' relatives and descendants. The trust deed gave the trustees discretion to apply the income for various purposes, including education, medical expenses, and maintenance. The trust was assessed at 65% under Section 164(1) of the Income Tax Act, 1961, as the Income Tax Officer (ITO) was not satisfied that the trust was created bona fide for the benefit of the relatives of the settlors.
Finding of the Court:
The Tribunal upheld the ITO's decision, holding that the trust was not created bona fide as there was no evidence of any application of the trust fund for the declared objects since its inception. The Tribunal considered that the words 'having regard to all the circumstances existing at the relevant time' in the proviso to Section 164(1) included circumstances existing subsequently, including the previous year to which the assessment related.
Issues: 1. Whether the Tribunal erred in considering subsequent conduct in determining the bona fides of the trust's creation. 2. Whether the non-application of trust funds for the declared objects since inception is a determinative factor in assessing the bona fides of the trust.
Ratio Decidendi: 1. The proviso to Section 164(1) requires the ITO to be satisfied that the trust was created bona fide exclusively for the benefit of the relatives of the settlors 'having regard to all the circumstances existing at the relevant time'. 2. The relevant time for determining the bona fides of the trust's creation is the time of its creation, not subsequent conduct. 3. The non-application of trust funds for the declared objects since inception, in the absence of any evidence of misutilisation or improper application, is not a determinative factor in assessing the bona fides of the trust's creation.
Final Decision: The Tribunal erred in considering subsequent conduct in determining the bona fides of the trust's creation. The non-application of trust funds for the declared objects since inception, in the absence of any evidence of misutilisation or improper application, is not a determinative factor in assessing the bona fides of the trust's creation. The question is answered in the negative, in favor of the assessee.
( 1 ) THIS reference relates to the assessment year 1971-72. The question with which we are concerned in this reference is, whether the proviso to Section 164 (1) of the I. T. Act, 1961, which was introduced by the Finance Act of 1970, with effect from 1st April, 1971, would be applicable in assessing the present trust.
( 2 ) THE assessee is a trust. The trust was created by a declaration made on the 9th of December, 1964, by the four sons of Keshrichand Khaitan (deceased) settling upon trust of Rs. 5,000 contributed by each of the four settlors with the object of the benefit and use of the heirs, successors and children of the settlors and for their and each of their education, training and vocational pursuits and for their general well being. The objects of the trust were, inter alia, according to the trust deed, as follows :" (a) To meet and defray the costs and expenses of education of the male and female members of the family of the settlors descending in the male line from Seth Keshri Chand Khaitan since deceased including their male and female children already born on the date of these presents, and to be born hereinafter until the trust comes to an end as hereinafter provided. (b) Education in the foregoing clause means and shall mean education of the male and female members of the family of the settlors as stated above in all spheres and of every kind and description, including inter alia, primary, secondary, higher secondary, undergraduate, post graduate, technical, medical, legal, engineering, accountancy, fine arts, pure arts or pure science and mixed arts and science and in the different branches thereof, and research works in any and every field and sphere of education. (c) Without prejudice to the generality of the foregoing clauses, to meet and defray the costs and expenses for text and other necessary books and equipments, school and college tuition fees, tuition fees for private coaching at home or elsewhere, conveyance charges including costs and expenses for sending eligible candidates from amongst the beneficiaries to foreign countries for higher education. (d) In addition to the foregoing objects and purposes the trustees will also be justified in expending the income of the said trust fund to meet and defray the maintenance, medical expenses and similar necessaries of any and every member of the family of the settlors male as well as female descending in the male as well as in the female line from the said Keshri Chand Khaitan. Provided also that during the lifetime of the settlors in the application of the said income the trustees shall have regard to the wishes of the settlors who shall also be entitled to direct if they so desire that the income for the time being of the trust funds or any part thereof may be applied to such matter or objects of education or otherwise as the said settlors shall direct and in such case the trustees shall so apply the income. "
( 3 ) THE Trust deed contains Clause 25 which provides as follows :" Upon the attainment of majority of the last child to be born to any of the beneficiaries hereinbefore named being the descendant of the settlors in the male or female line alive on the date of these presents trust shall come to an end and the trust property then in existence shall vest absolutely in the male descendants of the settlors in the male line already born at that time in equal shares. "
( 4 ) PRIOR to the assessment year 1971-72, the assessment on the income of the trust where the shares of the beneficiaries were indeterminate had to be made at the rate applicable to an association of persons. However, from the assessment year 1971-72, in view of the Finance Act, 1970, which came into effect from 1st of April, 1971, the scheme was changed and it provided that the assessment had to be made as if the relevant income were the total income of an association of persons or at the rate of 65% whichever course would be more beneficial to the Revenue.
