Consideration Received By Trustees For Relinquishment Of Trusteeship Cannot Be Treated As Capital Receipt: Kerala High Court

The Kerala High Court has held that consideration received by trustees for such relinquishment of trusteeship cannot be treated as a capital receipt for the purposes of assessing it under the head of capital gains; the consideration will have to be treated as the individual income of the assessees and assessed accordingly under the appropriate head.

The bench of Justice A.K. Jayasankaran Nambiar has observed that a perusal of the trust deed in the instant cases does not indicate that any power was conferred on the trustees to relinquish their position as trustees en banc. A person who is appointed as trustee is not bound to accept the trust, but having once entered upon the trust, he cannot renounce the duties and liabilities except with the permission of the court, with the consent of the beneficiaries, or by the authority of the trust deed itself.

The Carmel Educational Trust, Adoor, was constituted by a registered trust deed dated August 14, 2001. It is engaged in running educational institutions that impart education in the subjects of engineering and management. The 12 trustees of the trust belong to three closely related family groups. Due to difficulties in managing the college and also due to personal differences, the trustees decided to discontinue the business and entered into an agreement with the Believers Church on March 10, 2009, whereby all the existing trustees resigned from their trusteeship and, simultaneously, new trustees nominated by the Believers Church were inducted. The agreement between the parties also provided for the payment of Rs. 37.5 crores to the erstwhile trustees for settling their liabilities as well as completing certain construction activities that had been commenced by them prior to the agreement. The agreement also provided for the sale of 55.15 acres of land belonging to some of the erstwhile trustees for a consideration of Rs 12.50 crore.

A search under Section 132 of the Income Tax Act was conducted at the residence of the trustees on March 4, 2009, and certain documents were seized. An unsigned draft agreement dated February 23, 2009 was found, which indicated that the amount envisaged for settlement of liability was Rs. 43.50 crore and that the value of the rubber estate extending to 55.15 acres of land was Rs. 6.50 crore. Certain other documents relating to fee collection from students in excess of what was fixed by the government and investment details of trustees, etc. were also seized, but those particulars are not of any concern in the appeals.

Assessments were completed under Section 143(3) read with Section 153A for the assessment years 2003-04 to 2008-09 and under Section 143(3) for the assessment year 2009-10 in relation to the persons who were searched, namely, Gracy Babu, Jose Thomas, and P.J. Paulose, who were the heads of the respective trustee families. No assessments in consequence of the search were made in relation to other family members who were trustees by invoking the provisions of Section 153C of the Income Tax Act.

Placing reliance on the seized documents, the Assessing Authority found that the erstwhile trustees had in fact received approximately Rs. 37.5 crores towards consideration for relinquishing their trusteeship, but they had camouflaged these receipts under different heads by showing the receipt of Rs. 14.55 crores towards reimbursement of amounts paid by assessees for clearing outstanding debts and liabilities of the Trust as on the date of the agreement and also for completing certain ongoing constructions that had been undertaken by them. An amount of Rs 12.5 crore was shown as received by way of consideration for the sale of approximately 56 acres of rubber plantation to the Believers Church.

The additions to the income of the trustees by way of excess consideration received for the sale of the rubber plantation were made in relation to Jose Thomas, Gracy Babu, and Reena Jose for the assessment years 2009–10 [for all three] and 2010–11 [for Jose Thomas and Gracy Babu]. While the Assessing Authority and the First Appellate Authority had found that the excess sale consideration received by the said assessees in fact amounts to consideration paid by the Believers Church for their relinquishment of their trusteeship in the Carmel Educational Trust and was liable to be assessed in their hands, the Tribunal, in the order in the appeals, found otherwise.

The tribunal held that the amounts received by the assessees as consideration for relinquishment of their trusteeship would qualify as a capital receipt for the purpose of the Income Tax Act, and further that in the absence of any statutory provision under the Income Tax Act that provides for a determination of the cost of acquisition of the asset, the capital gains cannot be assessed.

The court held that the en banc resignation or relinquishment by the assessees of their position as trustees of the Carmel Educational Trust, too, for consideration, cannot get the imprimatur of this Court. The consideration received by them for such relinquishment cannot be treated as a capital receipt for the purposes of assessing the same under the heading of capital gains. The consideration will have to be treated as the individual income of the assessees and assessed accordingly under the appropriate head.

The court set aside the findings in the order of the appellate tribunal and remanded the matter back to the tribunal to pass a fresh order.

Counsel For Petitioner: P.K.Ravindranatha Menon

Counsel For Respondent: Jose Thomas

Citation: 2024 LiveLaw (Ker) 229

Case Title: The Principal Commissioner Of Income Tax Versus Gracy Babu

Case No.: I.T.A.NO.48 OF 2020

Click Here To Read The Order