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)
