|DATE:||(Date of pronouncement)|
|DATE:||May 16, 2014 (Date of publication)|
|Click here to download the judgement (vikramsinghji_discretionary_trust.pdf)|
Important principles of law on taxation of discretionary & specific trusts explained
The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the USA & UK. 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 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. During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income. The said income was also included in the two returns filed by his son Jyotendrasinhiji for the AY 1970-71. Thereafter, the assessee took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the AYs 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake. 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 and not disbursed. The Tribunal while considering clause 3(2) and Clause 4 of the U.K. Trust Deeds observed that if the trusts were really intended to be 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 settlor to treat the trust property as his own. The settlor 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 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. The High court did not agree with the Tribunal’s view and held that on interpretation of the relevant clauses of the deeds of settlement executed in U.K., character of the trusts was discretionary and not specific. On appeal by the department to the Supreme Court HELD dismissing the appeal:
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 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. Having regard to the above legal position about the discretionary trust which is also applied by by this Court in the earlier judgment 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 because the Settlor 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. The two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years. The High Court has taken a correct view that the value of the assets cannot be assessed on the estate of the deceased Settlor (Snell’s Principles of Equity, 28th Edition, Page 138 followed)
The issues adjudicated upon, just as the related legislation governing the age-old concept of ‘trusts’, so also the Snell’s Principles of Equity the apex court has followed for a final adjudication of the tax dispute, all date back to not just years but decades. If critically looked at, and cared to reflect on, these prima facie, – subject to a detailed investigation of or probe into the peculiar facts of each one of such cases-, go to amply demonstrate the inescapable historical reality surrounding the notorious pend ency of court litigation, which has lately been lamented by no less a dignitary than the present CJI to have assumed a monstrous’ magnitude. The utmost urgency with which the menace has to be taken on and tackled needs no special emphasis or painful elaboration. Unless that is done mindfully keeping in full focus the root causes and suitable effective steps taken/ systemic deficiencies plugged in , there appears to be no hope for any marked improvement in the foreseeable future. Some independent thoughts are shared through posted comment on media report titled, – CJI wants courts to stay open al l365 days.
Pendency of court cases, that has already reached a ‘monstrous’, nay threateningly and devastatingly astronomical magnitude, most of its kind, certainly, requires to be taken on and tackled with all such possible measures as could be intelligently thought of. No doubt, the suggested measure could be one. But the alarming ‘pendency’ alone is not the worrisome or bewildering aspect. Further, quantity of disposal should not , by any reasoning, be ventured, to be sacrificed at the cost of quality of justice expected of. Some of the other aspects calling for suitable and truly intelligent measures, to squarely deal / meet with the inherent menace at its root, are, – an earnest attempt to minimize by discouraging ligation strictly coming within the categories – mindless and misguided , repetitive, lawyer stimulated, last but not the least- stimulated and nurtured by men entrusted with policy – and -law making functions, not barring those in governance, the bureaucrats. Ideally equipped ‘leaders’ in the law profession , with a public-centric mindset, as opposed to leaning to and contributing to any more commercialization of the still-believed-to-be a noble avocation, have a constructive role to play. In short, the malady could be hoped to be remedied in the foreseeable future, provided there is profound altruistic wish and will, combined with concerted effort and co-operation inter se / jointly by all of them.
Having miserably failed to resist the temptation, but yielding with the best of intentions, and seeking safe refuge in the fact that it is a legal legend of our own times who said:
“Lord Justice Knight Bruce cynically observed in an administration suit that “the estate will be divided in the usual way among the solicitors”. A contested case in which eminent counsel was engaged is the luxury of the rich or the refuge of despair. It often spells run to the average citizen. Voltaire used to say that he was ruined twice in his life- once when he lost a law-suit and once when he won a law suit.
in the most famous of all soliloquies, “the law’s delay” is placed by Shakespeare among the chief ills of human life….”
(Beg to borrow from a published speech of Palkhivala in the Govt. Law College, Bombay- year 1948; Source: Book, “WE, THE PEOPLE”)