P L D 1963 Supreme Court 277 (PLP)

S. A. RAHMAN, J.‑This is a certificated appeal from an order of the High Court of West Pakistan, Karachi Bench, passed on a reference under section 66 (1) of the Income‑tax Act. The question referred was in the following terms :‑ "Whether, in the facts and circumstances of the case, the assessable income of the trust property was taxable at the maximum rate as envisaged in the first proviso to section 41(1) of the Income‑tax Act." The learned Judges returned the answer that the assessable income of the trust property under sub‑clause (6) of clause 8 of the trust deed dated the 8th of July 1915, was not hit by the second limb of the first proviso to subsection (1) of section 41 of the Income‑tax Act. The Department was ordered to pay the costs of the reference. The correctness of this answer is assailed before us on behalf of the Commissioner of Income‑tax, Circle II, Karachi. The relevant facts may be briefly summarized. One, Mr. Hussain Kasam Dada, initially set aside a sum of Rs.20,000 in trust and executed a trust deed m 1907, in which the objects of the trust and the procedure of its administration were set out. Supplementary deeds of trust were executed by the settler in 1915, 1945 and 1952 by which additions were made to the trust property and further directions given for its management. It is common ground between the parties, however, that the instrument which governs the assessment years in question, namely. 1950‑51, 1951‑52, 1952‑53 and 1953‑54, is the one dated the 8th.of July 1915. The material portions of the deed of 1915 may now be briefly surveyed. The settlor declared that he himself would be the Manager of the trust during his lifetime and after his death, four persons who may be the oldest of all among the sons and daughters begotten by him and the families of those sons and daughters or in the eventuality of their number being less at any one time, a lesser number, shall carry on the management of the fund known as the "Hussaini Waqf Fund" as trustees. Neither the settlor nor his heirs, executors or trustees were to have any right to partition and distribute or to sell off or mortgage the land or buildings constructed thereon, at any time or to transfer them in such a way as to jeopardize the right of ownership. Only the annual income yielded by the properties was to be utilized every year according to the directions given in the deed. These specific directions are contained in clause 8 of the deed. The buildings had to be kept in repairs and the annual taxes thereon to be paid regularly. One man was to be employed on a small salary to maintain a genealogical register of the family and to collect rents. One‑fourth part of the income accruing in each year was to be spent on the maintenance of the feeding, clothing and education of the poor orphans or the children of the Memon community. The settlor also mentioned that he had built a mosque in Talav on the road leading to Manavadar, which he had made waqf and attached certain immovable property for its upkeep. If there was any deficiency in the income necessary for the maintenance of that mosque, it was directed to be made up from the income of other property. It was further laid down that if the income in a particular year exceeded Rs.500, the surplus over that amount should not be spent. These directions were contained in sub‑clauses (1), (2) and (3) of clause 8 of the deed. Then we come to the important sub- clause (4). This provides that after meeting the expenses mentioned in sub‑clauses (1), (2) and (3) of clause 8 of the deed, the trustees would pay from the balance of the income to the indigent descendants of the settlor, such sums as may be necessary for their food and clothing or for their education, betrothal, marriage, death ceremonies or other personal needs. In this connection the deficits of the budgets of these indigent persons were directed to be met out of the trust funds in full. If, however, the income that may accrue during a year, was found insufficient for fully meeting the requirements of these persons, the balance in hand and the sum mentioned in sub‑clause (6), were directed to be added together and to be distributed in proportion. Sub‑clause (5) recited that after providing for the expenses mentioned in sub‑clauses (1) to (4) if there be still a balance left out of the income, the annual expenses of fateha of the settlor after his death, should be met from it. We finally come to sub‑clause (6) which may be set out in extenso :‑ "(6) After providing for the expenses mentioned in sub- clauses (1), (2), (3), (4) and (5) of clause 8 of these presents, if there be any balance every year, a sum of rupees two to three thousand from it should be kept as deposit, with any person who may be found fit and proper in my family, in order to give to the persons mentioned in clause (4), where the income accruing is found to be deficient and in case if the same be in excess every year, the trustees for the time being should equally distribute in that year, among all the surviving major and minor sons and daughters belonging to my family as above stated. But whenever necessity may arise to do new masonry work after getting any immovable property belonging to this fund pulled down, the persons mentioned in sub‑clause (6) of these presents should not be paid any sum but such sum should be spent after it (after masonry work)." By clause 7 the settlor directed that after his death the fund should be increased and for that purpose, if it be found necessary, the payment of the same to be made to persons mentioned in sub‑clause (6) should be postponed, if those who are major out of the persons concerned, vote by a majority, in favour of non‑distribution of the surplus amount among themselves. The property was then to be utilized in making or purchasing other immovable property for the fund. By clause 8 it was provided that if no member of the family of the settlor is alive, at any time, the fund should still be maintained for ever and the income there from should be spent annually for the purposes laid down in sub‑clauses (1) to (5) of clause 8 and "the rulers of Government" for the time being should appoint a committee of management for this purpose. Section 41 of the Income‑tax Act, 1922, requires interpre tation and may therefore be set out in full: ‑ "41. (1) In the case of income, profits or gains chargeable under this Act which the Courts of Wards, the Administrators General, the Official Trustees or any receiver or manager (including any person whatever his designation who in fact manages property on behalf of another) appointed by or under any order of a Court or any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including the trustee or trustees under any waqf deed which is valid under the Mussalman Waqf Validating Act, 1913), are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such Court of Wards, Administrator‑General, Official Trustee, receiver or manager or trustee or trustee, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act, shall apply accordingly: Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate or the rate applicable to such income, profits, or gains, whichever is the higher, but, where such persons have no other personal income chargeable under this Act and none of them is an artificial juridical person, as if such income, profits or gains or such part thereof were the total income of an association of persons: Provided further that when part only of the income, profits and gains of a trust is chargeable under this Act, that pro portion only of the income, profits and gains receivable by a beneficiary from the trust which the part so chargeable bears to the whole income, profits and gains of the trust shall be deemed to have been derived from that part. (2) Nothing contained in subsection (1) shall prevent either the direct assessment of the person, on whose behalf income profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income, profits or gains." This is an enabling section, which permits the Income‑tax Depart ment, if it so chooses, to assess the income of a trust either in the hands of the trustees or other representatives of the trust, or to assess the beneficiary direct, as is visualized clearly by subsection (2) of this section. The section is also expressly made applicable to Mutawallis appointed under a valid waqf deed, The section seems to be designed to afford facilities to the department to charge income‑tax while the income is still in the hands of the trustees or the Mutawalli etc. as it would be easier to deal with the trustees etc., than with individual bene ficiaries. Subsection (1) of the section, however, makes it clear that the tax shall be levied in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable. This means that normally the assessment should be at the individual‑ rates of tax applicable separately to the total income of each beneficiary. There are, however, two provisos to this subsection, of which the first proviso is material for our purpose. In two exceptional cases as mentioned in this proviso, the above basis of assessment would not be followed. These two cases are (a) where the income or any part thereof is not specifically receivable on behalf of any one person, and (b) where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown. In both these cases the tax would be recoverable at the maximum rate or the rate applicable to such income, profits or gains whichever is the higher. The language at the same time clearly provides that if a part of the income is specifically receivable on behalf of any one person or on behalf of beneficiaries whose individual shares are determinate and known and the other part of the income is not so receivable, it is only the latter part of the income which would attract the provision for the maximum rate and not the former part. The proviso also contemplates that where the beneficiaries whose individual shares may be indeterminate, have no other personal income chargeable under the Act and none of them is an artificial juridical person, the assessment would not be made at the maximum rate but income‑tax would be assessed as if they were an association of persons. The principle of sever ability is carried further by the second proviso to subsection (1), which enacts that when part only of the trust income is chargeable under the Act, the beneficiary's share would be estimated to have been derived proportionately from the chargeable and non‑chargeable portions of that income and would be assessed on that basis. It was agreed between the parties in the High Court that the effect of the second limb of the first proviso to subsection (I) of section 41 alone required consideration in this case and the High Court opinion is also confined to that aspect of the matter. On the factual plane, it is conceded that in respect of all the assessment years in question, no money had been distributed under sub‑clause (4) of clause 8 of the deed and the balance of income has been distributed in accordance with sub‑clause (6) of clause 8. The main contention raised by Mr. Noorul Arfin, on behalf of the appellant, is that sub‑clauses (4) and (6) of clause 8 of the deed had to be read together, and if this is done, then on the face of the deed itself it becomes apparent that the shares of the beneficiaries would become indeterminate. The word "receivable" occurring in the first proviso to subsection (1) is stressed and it is urged that the relevant point of time for consideration whether the shares are determinate and definite or not, is not the time of assessment but that the position has to be looked at in the light of the provisions of the trust deed itself. The argument proceeds in this way. Under sub‑clause (4) of clause 8, although the trustees have to meet the deficit for the budget of each indigent beneficiary and such a sum may become an ascertained amount as soon as the budget of the particular individual has been made up, yet the deficit would vary with individual beneficiaries as it would depend on how much such beneficiary can find from his own resources. The distribution made under clause (4) therefore would be unequal and indeter minate in any year. As under sub‑clause (6) all the descendants of the settlor were to share in the balance, if any, of the income, some of the recipients of aid under sub‑clause (4): would again share in the balance under sub‑clause (6) and this circumstance would affect the shares of all the beneficiaries with uncertainty and indefiniteness. A feeble suggestion was also put forward that even if sub‑clause (6) was to be considered separately from sub‑clause (4), in so far as the balance had to be arrived at after meeting sundry other charges mentioned in the previous sub‑clauses and those charges were variable from year to year, the actual sums falling to the lot of beneficiaries under clause 6 would also vary similarly and should not therefore be said to be definite. This line of argument, however, would be possible in all cases where the trust properties yield varying income from year to year. The quantum of the money available for distri bution, even if it varies, cannot be pressed into service for leading to the conclusion that the beneficiaries' shares were indeterminate, in the face of the provision that they had all to share equally. The proportion of the shares being thus fixed and the number of the beneficiaries in any one year being determined and certain, it must be held that the shares of the beneficiaries under this clause alone must be declared to be definite and certain. If sub‑clause (6) therefore is to be considered apart from sub‑clause (4), the decision must be in favour of the assessee. Would the position be different if the two clauses are considered in conjunction ? Mr. Noorul Arfin invited our attention to certain decisions from the Indian Jurisdiction in support of his position. In D. V. Arur v. Commissioner of Income‑tax ((1945) 13 I T R 465 at p. 480), the following observations of Kania, J. were relied upon: ‑ "It was argued that on the exercise of discretion by the trustees the names and shares of the beneficiaries will get deter mined. That however is a wrong approach because the question is not about the position arising after the trustees have exercised their discretion but whether on a perusal of the trust deed the beneficiaries and their individual shares can be determined:" The principle of reference to the provision of the trust deed also appears to have been adopted in B. P. Mahalaximiwala v. Commissioner of Income-tax, Bombay ((1954) 26 IT R 177 at p. 181). The validity of this principle may be accepted for the purpose of this argument. However some qualification seems to have been introduced to this principle in two decisions one dating from the time of pre‑Partition India and the other rendered subsequently to the Partition. The view has been taken in these cases that even though the trust deed may not define the shares of the bene ficiaries but if those shares are fixed by law, the objection o C indeterminacy would be repelled. Reference may be made in this connection to Sri Jyotishwari Kalimata and others v. Commissioner of Income‑tax, Bihar and Orissa ((1946) 14 ITR 703) and Commis sioner of Income‑tax, West Bengal v. Pulin Behari Dey ((1951) 20 ITR 314). The trusts in those two cases were in favour of certain deities without specification of their shares in the relevant deeds. As under the Hindu Law the deities took shares equally, it was held in both these cases that the shares of the deities were known and certain and their income would not be within the mischief of the first proviso to subsection (1) of section 41 of the Act. We would however assume for the purpose of argument that in any particular year, all the various clauses of the trust deed may be brought into play. It does not follow, that sub -clauses (4) and (6) must be combined, even on this assumption. The doctrine of severability which is provided for in the section itself, could be successfully invoked to separate what is distri buted under sub‑clause (4) from that which is distributed under sub‑clause 16). The indeterminacy might affect the shares of recipients under the former sub-clause but not of the beneficiaries under the latter sub‑clause. To the portion of the income which must be deemed to be receivable for the beneficiaries mentioned in sub‑clause (4) the second limb of the first proviso to subsection (1) may be attracted. There is, however, no reason why an identical result should follow in the case of the beneficiaries of sub‑clause (6). We are here presuming that some balance has become available for division under that sub‑clause in any year. As the division is to be on an equal basis among the beneficiaries whose identity and number is definitely ascertainable, it cannot be said that qua the income thus distributable, the second limb of this particular proviso would be at all applicable. If we adopt the criterion of server ability, no assistance would be afforded to the position of the appellant in the present case. It is admitted that there was no occasion for the application of sub-clause (4) of clause 8 of the deed in respect of the assessment years under consideration. The whole of the balance therefore fell to be distributed under sub-clause (6) thereof and this distribution is not tainted with any uncertainty in respect of shares of the beneficiary. The proviso could not, therefore be invoked by the department to charge the maximum rate. Only that portion of the income to which uncertainty attaches in respect of shares of beneficiaries, would fall within: the ambit of the proviso. The principle of sever ability appears E to have received recognition in a judgment of the Calcutta High Court reported as The Official Trustee of West Bengal v. Commissioner of Income‑tax ((1954) 26 1 T R 410 at pp. 416‑417) and a decision of that Andhra Pradesh High Court in Trustees of Sahebzadas of Sarf‑e‑Khas Trust v. Commissioner of Income‑tax ((1962) 44 1 T R 332). As has been observed above, this principle has the sanction of the enactment itself on which reliance is placed on behalf of the department. Our attention was drawn to certain other decisions from the Indian Jurisdiction which proceeded on their own peculiar facts and therefore need not be discussed. There appears to have been some conflict of opinion as to the true interpretation and scope of the first proviso to subsection (1) of section 41 in the Indian High Courts. For instance, in Yaqub Versey Laljee and another v. Commissioner of Income‑tax ((1946) 14 1 T R 548), it was held by Stone, C. J. and mania, C. J. that the word "or" occurring in this proviso should be read as equivalent to "and". This view was dissented from by the same High Court in B. P. Mahalaxmiwala v. Commissioner of Income‑tax, Bombay and also by the Calcutta High Court in The Official Trustee of West Bengal v. Commis sioner of Income‑tax ((1954) 26 1 T R 410) and if we might say so with respect, rightly. In the former case, Chagla, C. J. seems to have attempted a paraphrase of the proviso, which with all respect, suffers from over‑simplification. The learned Chief Justice thought that the proviso contemplates only two cases. One case, according to him, was that where the trust is in favour of one beneficiary, and if the trustees had not received the income specifically for that person, then the liability is that the tax shall be paid at the maximum rate. The other case contemplated, according to him, was where the beneficiary is more than one person and in such a case if the trustees had not received the income for the beneficiaries in specific shares, then also the liability is to be taxed at the maximum rate. The proviso in both parts is in the negative form and the first limb is obviously not confined to cases of a trust having a single beneficiary. The F correct interpretation of the first limb of the proviso appears to have been adopted by the Andhra Pradesh High Court in Trustee of Sahebzadas of Sarf‑e‑Khas Trust v. Commissioner of Income‑tax. It was pointed out therein that the first limb of the proviso applies to income receivable on behalf of a single person who is not specified, or on behalf of several persons who are not specified or designated. This aspect of the matter need not detain us, for it does not really arise for consideration in the present case. A parallel to the present case seems to be provided by another pre‑Partition Indian decision reported as K. D. M. Habibur Rahman v. Commissioner of Income‑tax ((1945) 13 1 T R 189). In that case a running business had been made the subject of a waqf‑alal aulad. The deed of waqf provided that in the event of profit accruing beneficiaries would receive it concurrently and in the same proportion. The family included children and grand children whose number could be known and determined at any given time. It was held in that case that the variation or expansion of the family from time to time was immaterial as the assessing officer was concerned with the constitution of the family as it was in the relevant accounting period. The new shares were also held to be definite and determinable on account of the clause which declared the beneficiaries to be equally entitled to share in the profits. The proviso to subsection (1) of section 41 of the Act was held to be inapplicable in these circumstances. The upshot of the whole discussion is that the view taken by the High Court in the circumstances of the present case does not appear to be open to any exception. The appeal therefore fails and is hereby dismissed, with costs. A. H. Appeal dismissed.