Gujarat High Court
Commissioner Of Income-Tax vs Deepak Family Trust No. 1 And Ors. on 10 December, 1993
Equivalent citations: [1994]210ITR358(GUJ)
JUDGMENT G.T. Nanavati, J.
1. The question which arises for consideration in these reference is whether in a case where the assessee is a discretionary trust, it is entitled to deductions under section 80L of the Act. In all these cases the Income-tax Officer rejected the claim made under section 80L on the ground that the said section was available only to individuals and/or Hindu undivided families as they are the only assessees contemplated by that section for the purpose of the benefit conferred by it. The Appellate Assistant Commissioner held that the trust should be treated as an individual and, thus, it would be entitled to the reliefs under section 80L. The Tribunal held that section 161 and not section 164 is the basis for assessment of the representative assessee and as the trustee is only victoriously liable as a representative assessee and as the tax has to be levied upon and recovered from him in the like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him, in the assessment of the representative assessee, exemptions, deductions and benefits have to be given as the beneficiary would have been entitled to in case of direct assessment. The Tribunal held that the trustees of a trust take colour of their status from that of the beneficiary and it cannot be different from the persons they represent. The Tribunal, relying upon the observations made by the Supreme Court in matters arising under the Wealth-tax Act, 1957, held that the status of the trustees of a discretionary trust is necessarily that of an individual and, therefore, that would also be the status of the trustees for the purpose of assessment under sections 161 and 162. Taking this view, it confirmed the order passed by the Appellate Assistant Commissioner and dismissed the appeal.
2. What is contended by learned counsel for the Revenue is that the decision of the Tribunal proceeds on the basis that section 161 and not section 164 is the basis for assessment of a representative assessee. But the full bench of this court in CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 has held that section 161 does not create a charge but it is section 164 which creates a charge by using the words "tax shall be charged". He further submitted that this court has also held that section 161 contains general provisions in respect of representative assessees whereas section 164 deals with special cases in respect of representative assessees and, therefore, in cases falling under section 164 one has to look only to the special provisions of that section rather than to the provisions of section 161.
3. In Smt. Kamalini Khatau's case [1978] 112 ITR 652 (Guj) [FB], the question which had arisen before this court was, whether it is open to the tax authorities to proceed against the beneficiary under a discretionary trust who has actually received some amount from the trustees in exercise of their discretion in view of the language of section 164. After examining the relevant provisions, this court held that the income under a discretionary trust is only assessable in the hands of the representative assessee as if it were the total income of a fictional association of persons, and is not assessable in the hands of the beneficiary even if the amount is paid to the beneficiary. In the event of any part of the income of the discretionary trust being paid to the beneficiary, the option is only as regards the rate at which the tax shall be charged and that too in the hands of the representative assessee.
4. It is no doubt true that some of the observations made by the Tribunal are not consistent with the view taken by this court in Smt. Kamalini Khatau's case [1978] 112 ITR 652 [FB]; but that, in our opinion, does not affect the final conclusion reached by the Tribunal. Even if we proceed on the basis that in the case of assessment of a representative assessee, section 164 would apply, if any part of the income is not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are indeterminate or unknown, we fail to appreciate how it can have any bearing on the question as to whether such a representative assessee can get the benefit of section 80L or not. What was submitted was that if the case of a representative assessee is covered by section 164, then clause (iv) of section 160(1) indicates that in such cases one has to proceed on the basis that the income receivable by the representative assessee is the income of the assessee and not the beneficiary. Even this contention cannot be accepted because the fiction created for one purpose cannot be utilised for a different purpose. Section 164 does not provide how the total income of the representative assessee is to be computed. Therefore, obviously, the provisions relating to computation of income would be applicable even in a case where the representative assessee has to be assessed under section 164 of the Act. Therefore whether an assessee, including a representative assessee, would be entitled to the benefit of deduction under section 80L or not will have to be decided by reference to the provisions contained in that section.
5. Section 80L provides for deductions in respect of interest on certain securities, dividends, etc. These deductions are made available to an individual, or a Hindu undivided family, or an association of persons or a body of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. A discretionary trust is obviously not a Hindu undivided family nor an association of persons contemplated by that section. Therefore, such a trust would become entitled to the deductions provided it can be regarded as an individual. Therefore, the material question that is required to be decided in these references is whether a discretionary trust can be said to be an individual as contemplated by section 80L of the Act. It was submitted on behalf of the Revenue that a trust is not a living human being and, therefore, it cannot be regarded as an individual. The trust being an assessee under the Act, we have to look to the status of the trust and not to the status of the beneficiaries and as a trust would not fit in any of the categories contemplated by section 80L, it should be held that a trust is not entitled to the benefit of deduction under section 80L.
6. In Suhashini Karuri v. WTO [1962] 46 ITR 953, the Calcutta High Court held that joint trustees must be taken to be a single unit in law and not as an "association of persons" and there is nothing wrong in treating such an unit as an individual holding property and becoming assessable under section 3 of the Wealth-tax Act for the purposes of wealth-tax. It was submitted on behalf of the assessee that this decision of the Calcutta High Court has been approved by the Supreme Court in Trustees of Gordhandas Govindram Family Charity Trust v. CIT [1973] 88 ITR 47. It was, however, submitted by learned counsel for the Revenue that these two cases arose under the Wealth-tax Act and the language of the relevant sections of the Wealth-tax Act and the Income-tax Act being different, those decisions cannot be regarded as authorities for the purpose of holding that trustees of discretionary trust should be regarded as an individual.
7. Mr. Patel, learned counsel, appearing for one of the assessee, submitted that the Supreme Court in N. V. Shanmugham and Co. v. CIT [1971] 81 ITR 310 has held that a firm of persons should not make them an association of persons. In that case, the question which had arisen was, whether profits should be assessed in the hands, of the receivers in the status of an "association of persons". The Supreme Court held that they were only representative assessees and the fact that there were three receivers did not make them an association of receivers. The three receivers jointly represented the real owners. The Supreme Court, after referring to its earlier decision in CIT v. Indira Balkrishna [1960] 39 ITR 546, observed that "association of persons" means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one, the object of which is to produce income, profits or gains. It was submitted that in the case of trustees of a discretionary trust, it cannot be said that they have joined in a common purpose or common action and the object of their association is to produce income, profits or gains. It was submitted that they became trustees of the trust not because they have mutually agreed to be trustees but because they have been appointed as such under the trust deed. By no stretch of imagination, can it be said that they have joined together in common for the purpose of carrying on an activity which would produce income, profits or gains. The persons, who come together as trustees, must be such that left to themselves they might not on their own even sit together or do anything jointly. Therefore, applying the test laid down by the Supreme Court in N. V. Shanmugham and Co.'s case [1971] 81 ITR 310, the trustees cannot be regarded as an association of persons.
8. This court in CIT v. Harivadan Tribhovandas [1977] 106 ITR 494 construed the words "body of individuals" occurring in section 2(31) of the Act as a conglomeration of individuals who carry on some activity with the object of earning income. In order to construe the said words, this court referred to the decisions wherein the expression "association of persons" came up for consideration. After referring to Indira Balkrishna's case [1960] 39 ITR 546 (SC), this court observed that according to the Supreme Court for forming an association of persons the members of the association must join together for the purpose of producing income and an association of persons can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence, volition on the part of the members of the association is an essential ingredient. This court further held that persons holding property as tenants-in-common cannot be said to be an association of persons. Similarly, after the partition of a Hindu undivided family by metes and bounds the erstwhile coparceners who become exclusive owners of separate parcels of land would not constitute an association of individuals merely because they live together in joint mess and one of the coparceners looks after the management of the property. It was submitted that in view of this decision, it becomes quite clear that merely because a combination of individuals receives income jointly without anything further, they cannot be regarded as an association of persons.
9. Learned counsel for the assessees also relied upon the following observations made by the Supreme Court in CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 (at page 592) :
"It may be noted that, while interpreting the corresponding provisions in section 41 of the Indian Income-tax Act, 1922, and section 161 of the Income-tax Act, 1961, this court in C. R. Nagappa v. CIT [1969] 73 ITR 626, 632, 633 (SC) approved the following observations made by Chagla C. J., in regard to the scheme of section 41 of the Indian Income-tax Act, 1922, in CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187, 194 (Bom) :
"If the assessment is upon a trustee, the tax has to be levied and recovered in the manner provided in section 41. The only option that the Legislature gives is the option embodied in sub-section (2) of section 41 and that option is that the Department may assess the beneficiaries instead of the trustees, or having assessed the trustees, it may proceed to recover the tax from the beneficiaries. But, on principle the contention of the Department cannot be accepted that, when a trustee is being assessed to tax, his burden which will ultimately fall upon the beneficiaries should be increased and whether that burden should be increased or not should be left to the option of the Department. The basic idea underlying section 41, and which is in conformity with the principle, is that the liability of the trustees should be co-extensive with that of the beneficiaries and in no sense a wider or a larger liability. Therefore, it is clear that every case of an assessment against a trustee must fall under section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III...... Section 41 only comes into play after the income has been computed in accordance with Chapter III. Then the question of payment of tax arises and it is at that stage that section 41 issues a mandate to the taxing Department that, when they are dealing with the income of a trustee, they must levy the tax and recover it in the manner laid down in section 41."
10. Placing reliance upon these observations and the observation that the assessment of the trustees will have to be made in hands of the trustee, it was submitted that what is relevant even for the purpose of section 80L is to find out the status of the beneficiary and decide whether deductions under that section would be available to the representative trustee or not. Therefore, even if the trust cannot be said to be an individual falling within the definition of the word "persons", for the purpose of determining whether deductions under that section should be allowed or not, what is material to find out is the status of the beneficiary or beneficiaries as in all these cases the beneficiaries are individuals. Therefore, it should be held that the benefit of deduction under section 80L was rightly granted.
11. In Orient Club v. WTO [1980] 123 ITR 395, this court had to consider whether the assessee-club was an "association of persons" or an "individual" for the purpose of the Wealth-tax Act. While deciding that question, a passing observation has been made that the trustees would be covered by the word "individual" in section 3 of the Wealth-tax Act. This being a decision arising under the Wealth-tax Act and as only a passing observation has been made, we do not think that it can be of any help to the assessees.
12. Mr. J. P. Shah, learned counsel, appearing for same of the assessee, drew our attention to the decision of the Supreme Court in WTO v. C. K. Mammed Kayi [1981] 129 ITR 307, wherein it has been held that the expression "individual" in section 3 of the Wealth-tax Act, 1957, includes within its ambit Mappilla Marumakkathayam tarwads and they are well within the purview of the taking provisions of the enactment. Even after their inclusion in the term "individual", section 3 is not violative of article 14 of the Constitution of India. In that case, the Supreme Court referred to its earlier decision in CIT v. Sodra Devi [1957] 32 ITR 615, wherein it is held (at page 313 of 129 ITR) : "............ the word 'individual' has not been defined in the Act (Indian Income-tax Act, 1922) and there is authority for the proposition that the word 'individual' does not mean only a human being but is wide enough to include a group of persons forming a (natural) unit." This decision, though not directly on point, does lay down that the term "individual" as used in the Income-tax Act does not mean a single living human being but would include in its ambit a body of individuals constituting a unit for the purposes of the Act.
13. The Bombay High Court in Lalchand Tikamdas Makhija v. J. K. Kuriyan, CIT [1991] 188 ITR 253 has held that in a case where the shares of the beneficiaries were known or determinate, the fact that the trust was carrying on business was not material and the assessment had to be made in like manner and to the same extent a it would have been made on the beneficiaries separately. For that reason, it was further held that the assessment of the income of the trust in the status of a body of individuals was not justified. In that case also, the question which we have to consider did not directly arise, but it does indirectly help in the sense that even though the assessment of income is in the hands of the trust, it had to be made in the same manner and to the same extent as it would have been made in the hands of the beneficiaries. Learned counsel for the assessees also drew our attention to the decision of the Supreme Court in Jyotendrasinhji v. S. I. Tripathi [1993] 201 ITR 611, wherein it is held (headnote) :
"The trustees in the case of a trust declared by a duly executed instrument in writing are treated as representative assessees by section 160(1)(iv). It is equally true that, in the case of a discretionary trust, the trustees are liable to be taxed in respect of the income received by them at the rate specified in section 164(1). At the same time, section 166 expressly declares that 'nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person, on whose behalf or for whose benefit income therein referred to is receivable or the recovery from such person of the tax payable in respect of such income'. The language of this section is clear. The opening words 'nothing in the foregoing sections in this Chapter' - which means Chapter IV, wherein section 159 to 165 among other sections occur - give it an overriding effect over the preceding provisions in the Chapter. The section states in unmistakable terms that nothing contained in the preceding provisions in the Chapter precludes the Revenue from making a direct assessment upon the beneficiary and/or from recovering the tax payable from such person. The Revenue has thus been given an option to tax the income from a discretionary trust either in the hands of the trustees or in the hands of the beneficiaries."
14. The Supreme court in that case referred to the decision of this court in Kamalini Khatau's case [1978] 112 ITR 652 [FB] and observed that it was inclined to agree with the dissenting opinion of P. D. Desai J. In view of this decision of the Supreme court, we will have to proceed on the basis that the majority view expressed in Kamalini Khatau's case [1978] 112 ITR 652 (Guj) [FB] is no longer good law. Our attention was also drawn by learned counsel for the assessee to the decision of the Calcutta High Court in CIT v. Shri Krishna Bandar Trust [1993] 201 ITR 989. In that case, the Calcutta High Court considered the amendment effected by the Finance Act, 1980, and observed as under (headnote) :
"........... The amendment effected by the finance Act, 1980, has done away with the deeming provisions whereby a trust, under section 164(1), could be assessed as though it were an association of persons. where, however, a case falls under sub-section (2) of section 164, the tax is chargeable as if the income to be charged were the income of an association of persons. But the fiction of an association of persons as contained in sub-section (2) or, for that matter, sub-section (3) of section 164 relates only to a charitable or public religious trust but not to a discretionary private trust dealt with by sub-section (1) of section 164. Section 164(1) only lays down the rate of tax applicable to a discretionary trust. It is not concerned with the manner of computation of total income. In fact, this section comes into play only after the income has been computed in accordance with the other provisions of the Income-tax Act, 1961. Since the determination of the status of an assessee is a part of the process of computation of income, it is necessary to look into the general principles for determining whether the status of the trustees of a discretionary trust can be taken to be as 'association of persons' or as 'individual'. It is now well-settled that the word 'individual' does not necessarily and invariably always refer to a single natural person. A group of individuals may as well come in for treatment as an individual under the tax laws if the context so requires. The word 'association' means 'to join in any purpose' or 'to join in action'. Therefore, 'association of persons' as used in section 2(31)(v) of the Income-tax Act, 1961, means an association in which two or more persons join in a common purpose or common action. The association must be one the object of which is to produce income, profits or gains. In the case of a discretionary trust, neither the trustees nor the beneficiaries can be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust. The trustees derive their authority under the terms of the trust deed. Neither the trustees nor the beneficiaries come together for a common purpose. They are merely in receipt of income. The mere fact that the beneficiaries or the trustees, being representative assessees, are more than one, cannot lead to the conclusion that they constitute 'an association of persons'. The trustees of a discretionary trust have to be assessed in the status of 'individual' and, consequently, deduction under section 80L of the Income-tax Act, 1961, was allowable."
15. As regards what should be the approach of the High Court on the interpretation of the section of a statute, which is an all-India statute, learned counsel relied upon the decision of the Bombay High Court in Maneklal Chunilal and Sons Ltd. v. CIT [1953] 24 ITR 375, wherein the Bombay High Court has observed that (at page 385) : "in conformity with the uniform policy which we have laid down in income-tax matters, whatever our own view may be, we must accept the view taken by another High court on the interpretation of the section of a statute which is an all-India statute".
16. In CIT v. Chimanlal J. Dalal and Co. [1965] 57 ITR 285, the Bombay High Court, again reiterated the same position by observing that (at page 290) : "Barring some exceptions, it has been the general policy laid down by this court in income-tax matters that whatever our own view may be, we should follow the view taken by another High Court on the interpretation of a section".
17. This court also in Arvind Boards and Paper Products Ltd. v. CIT [1982] 137 ITR 635, has observed that in income-tax matters, which are governed by an all-India statute, when there is a decision of another High Court on the interpretation of a statutory provision, it would be a wise judicial policy and practice not to take a different view (whatever one's own view may be), barring, of course, certain exceptions, like where the decision is sub-silentio, per incuriam, obiter dicta or based on a concession or takes a view which it is impossible to arrive at or there is another view in the filed or there is a subsequent amendment of the statue or reversal or implied overruling of the decision by a higher court or some such or similar infirmity is manifestly perceivable in the decision.
18. Following the decision of the Bombay High Court in Maneklal Chunilal's case [1953] 24 ITR 375, this court in CIT v. Sarabhai Sons Ltd. [1983] 143 ITR 473, 486, observed that, "even though we may be persuaded to take a different view, we are not inclined to do so in view of the settled practice referred to in the decision of the Madras High Court and the decisions of the Bombay High Court and the Madhya Pradesh High Court adverted to above".
19. In view of this settled legal position and also because we agree with the view expressed by the Calcutta High Court, it will have to be held that the representative assessee in the case of a discretionary trust must be regarded as an individual and thus would be entitled to the benefit of deductions under section 80L of the Act.
20. In the result, we answer the questions referred in all these references accordingly, that is, in favour of the assessee and against the Revenue. No order as to costs.