TITLE: Important principles of law on taxation of
discretionary & specific trusts explained
CASE: CWT vs.
Estate of Late HMM Vikramsinghji of Gondal (Supreme Court)
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)”
