Income Tax Appellate Tribunal - Pune
Bajaj Auto Employees Welfare Fund No. 1 vs Income-Tax Officer on 2 November, 1993
Equivalent citations: [1994]49ITD73(PUNE)
ORDER
Chander Singh, Accountant Member
1. These 9 appeals from two different sets of assessees raise a common issue and, therefore, are decided by the common order.
2. The only ground taken in these appeals in the cases of two different sets of assessees is the determination of the status and the deduction Under Section 80L of the Income-tax Act. In the case of Bajaj Auto Employees Welfare Fund Nos. 1, 2, 3, 4 & 5, the assessees have raised the following common grounds, namely :
1.1 On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Assessing Officer in treating the status of the appellant as that of association of persons' instead of individual' as claimed by the appellant.
1.2 The CIT (A) failed to appreciate that the provision of treating the appellant as an association of persons as per the proviso of Section 164( 1) applies only as far as the rate of tax is concerned and does not affect the status of the appellant.
1.3 The CIT (A) further failed to appreciate that the appellant cannot be treated as an association of persons in view of the fact that the essential element of an association of persons, viz., two or more persons joining in a common purpose or action with the object of producing income, is not present in the instant case.
2.1 On the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the Assessing Officer in not granting deduction Under Section 80L.
2.2 The appellant prays that since the correct status of the appellant is individual as prayed for in Ground (I) above, the appellant would be consequentially eligible for deduction u/s SOL.
3. In the case of Maharashtra Scooters Employees' Welfare Fund Nos. 1 & 2, the order of the Dy. CIT (A) has been challenged and the deduction Under Section 80L has been claimed.
4. These assessees before us are discretionary trusts settled by the companies for the welfare of its employees by way of financial assistance, providing residential housing facilities, educational assistance, to meet on hospital treatment, promote family planning etc. The employees do not contribute to the fund. The company contributes funds from time to time. The control and management, however, is fully in the hands of the board of trustees, who are employees of the company. The appellants had claimed that the status of the appellants for the purpose of taxation should be taken as that of individual and consequent deduction Under Section 80L should be allowed. However, the Assessing Officer as well as the first appellate authority negatived the claim of the appellants on both the counts, inasmuch as the status of the appellants was determined as that of Association of Persons and the deduction Under Section 80L was denied.
5. Aggrieved, the assessees have filed appeals before us. The learned counsel for the assessees Shri Sathe urged before us that under the Income-tax Act, the assessment on the representative assessees should be in the like mariner and to the same extent as would have been leviable upon the beneficiaries. Since the assessee trusts have been formed by the respective limited companies, these trusts cannot be treated as Association of Persons and, in fact, should be assessed in the status of individual and, consequently, the deduction Under Section 80L should be allowed. He also contends that Section 164 of the Income-tax Act creates a fiction and that fiction relates only to the rate of tax. The said fiction has nothing to do with the computation of income. The deduction Under Section 80L therefore, does not come within the purview of Section 164(1) of the Income-tax Act. The deduction Under Section 80L has to be allowed while computing the income of an assessee, which is beyond the purview and scope of Section 164 of the Income-tax Act. The learned counsel also draws our attention to the decision of the Calcutta High Court in the case of CIT v. Shri Krishna Bandar Trust [1993] 201 ITR 989. He points out that in the said decision, it has been laid down by the Calcutta High Court that the status of the assessee should be that of an individual and deduction Under Section 80L should be allowed. The case of the assessee is, thus, covered in favour of the assessee by the said decision of the Calcutta High Court and hence, Shri Sathe pleads that the order of the first appellate authority should be reversed.
6. On the other hand, the learned senior departmental representative, Shri Sunil Pathak vehemently opposes his contention and points out that the issue has been determined by the various Benches of the Tribunal in favour of the revenue. He also draws our attention to the decision of the Calcutta High Court in the case of Smt. Santimoyee Bosev. CIT [ 1969] 74 ITR 133. In particular, he draws our attention to the following observations of the Hon'ble High Court:
While there is good deal of force in Mr. Mitra's argument that joint decree-holders like the plaintiffs in the present suit do not associate to produce the income, we are of the opinion that in view of the deeming provisions contemplated by the proviso to Section 41, even though they do not associate to produce the income, if the person who is in actual receipt of the income fulfils the conditions mentioned in the main part of Section 41(1) and if the share of the persons on whose behalf the income is received Is indeterminate, then such income can be taxed as if it was an income of an association of persons even though, in fact, they are not an association of persons...under the proviso to Section 41 of the Income-tax Act, 1922, even though the assessees did not associate or join in any endeavor or any purpose to produce the income, they would be deemed to be an association of persons.
7. The learned Sr. departmental representative also points out that the said decision was also followed by the Pune Bench in the case of Bajaj Auto Employees' Welfare Fund Nos. 1 to 5 who are the appellants before us, in [IT Appeal Nos. 1588 to 1593 and 1659 (Pune) of 1987] etc. On the similar issue, the Tribunal had held that the decision of the Calcutta High Court in Smt. Santimoyee Bose's case (supra) was a direct authority for the proposition that the representative assessee to whom the provision of Section 41(1) of the Income-tax Act, 1922 applied, were liable to be assessed in the status of AOP because of a deeming provision contained therein in spite of the fact that they could not be said to have formed an association or combined together to earn the particular income. In other words, the status of AOP has been conferred on them by a deeming provision. In view of this direct authority of the Calcutta High Court, we are bound to hold that the trustees of the funds involved in these appeals were liable to be assessed in the status of AOP and not that of individual and as such, the provisions of Section 80L would not be applicable. Thus, Shri Pathak asserts that in case of one of the appellants before us now the issue has been decided in favour of the department and against the assessee. This issue, therefore, should be considered as having been finally decided in favour of the department and the Tribunal should follow its own order in the assessee's own case for the earlier years.
8. Shri Pathak also draws our attention to some other decisions of the Bombay Benches, especially one in the case of Fifth ITO v. D.M.C.C. Employees Medical Aid Trust [ 1987] 22 ITD 273 and points out that similar decision was rendered by the Bombay Benches. In that case, the Tribunal had followed the decision of the Calcutta High Court in the case of Smt. Santimoyee Bose (supra). Thus, it is more or less settled that the trust has to be assessed in the status of AOP and is not entitled to the deduction Under Section 80L of the Income-tax Act. The learned Sr. departmental representative, therefore, supports the decision of the first appellate authority.
9. We have heard the rival submissions in the light of the judicial pronouncements relied upon. We have given our anxious thought to the provisions of Section 164(1) of the Income-tax Act. In the said provision, it has been laid down that the tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. It, therefore, appears that the said provision only prescribes the rate of tax and has no connection with the computation of income, which has to be done Under Section 143(3) or Section 144 of the Income-tax Act. Section 164, therefore, creates a fiction. It is settled law that the legal fictions are created only for some definite purpose and these must be limited to that purpose alone and should not be extended beyond that legitimate field. A legal fiction should no doubt ordinarily be carried to its logical end to carry out the purposes for which it. is enacted, but it cannot be carried beyond that. For this proposition, we are well supported by the decision of the Supreme Court in the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 and State of Maharashtra v. Narayan Rao Sham Rao Deshmukh [1987] 163 ITR 31.
10. Applying the aforesaid principles to the fiction created in Section 164( 1), we are of the view that the said fiction has been created and, in fact, has to be restricted for determining the rate of tax to be levied on a trust. The said fiction, therefore, in our view, cannot be extended for the computation of income.
11. The important question that arises for consideration is, whether the appellant trusts can be treated as an 'individual' and, consequently are entitled to the deduction Under Section 80L of the Income-tax Act. We are aware that the Pune Bench as well as the Bombay Benches have decided this issue against the assessee and in favour of the department. As a matter of fact, in the case of Bajaj Auto Employees' Welfare Fund Nos. 1 to 5 (supra), the decision was rendered against the appellant before us by the Pune Bench itself. The judicial propriety, therefore, demands that we should follow our own decision. However, in view of the decision of the Calcutta High Court in the case of Shri Krishna Bandar Trust (supra), we are compelled to take the contrary view. This necessitates us to deal with the Calcutta High Court decision referred to above at some length. The question posed before their Lordships of the Calcutta High Court was:
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income of Shri Krishna Bandar Trust should be assessed taking the status of the assessee as 'individual' and not 'association of persons' and, consequently, the deduction Under Section 80L of the Income-tax Act, 1961, should be allowed?
Dealing with this question, the Calcutta High Court rendered the decision in favour of the assessee and held that the status of the trust has to be taken as that of individual and the assessee was entitled to the deduction Under Section 80L of the Income-tax Act. The High Court observed that before the amendment in 1980, the provisions of the Income-tax Act, 1961, created a fiction whereby, in the case of a discretionary trust, the exigible tax was the tax payable by an association of persons or at the rate of 65%, whichever course would be more beneficial to the revenue. 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 "an 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 an "individual" and, consequently, deduction u/s SOL of the Income-tax Act, 1961 was allowable.
12. We have given our serious thoughts to the sole decision of Calcutta High Court. In this decision, Their Lordships have clearly brought out the fiction created by Section 154(1) of the Income-tax Act. Since the facts of the case before us are identical, we find ourselves persuaded to apply the ratio of this decision to the cases before us. We are aware that the Calcutta High Court in the case of Smt. Santimoyee Bose (supra) has given a contrary decision, which has been followed by the various Benches of the Tribunal, including that of Pune Bench. We however, do not follow the said decision, in view of the fact that the decision in the case of Shri Krishna Bandar Trust (supra) is the later decision and, in our view, the earlier decision in Smt. Santimoyee Bose's case (supra) is impliedly overruled by the same High Court, though the said decision in Smt. Santimoyee Bose's case (supra) was not cited before the same High Court in the subsequent decision, but implied overruling is very clear from the facts of the case. Moreover, the decision in Smt. Santimoyee Bose's case (supra) does not deal with the deduction Under Section 80L of the Income-tax Act, 1961 and deals only with the status of a trust. Considering all the facts and circumstances of the case, we follow the later decision of the Calcutta High Court and, accordingly, direct the revenue to assess the appellants in the status of an individual and, consequently, allow the deduction Under Section 80L of the Income-tax Act.
13. In the result, the appeals of the assessees are allowed.