Income Tax Appellate Tribunal - Pune
Trustees Of Anil Kumar Trust vs Income-Tax Officer on 18 February, 1986
Equivalent citations: [1986]18ITD451(PUNE)
ORDER
T.A. Bukte, Judicial Member
1. This appeal has been filed by the assessee against the order of the Commissioner Under Section 263 of the Income-tax Act, 1961 ('the Act'), for the assessment year 1982-83, dated 17-5-1984. At the time of hearing, it was fairly conceded by both sides that the issue is covered by the judgment in Trustees of Anandani Family Trust v. ITO [1984] 9 ITD 174 (Nag.) but both sides accepted that there are certain aspects not canvassed before the Nagpur Bench for adjudication. At the request of both sides, full hearing was given. We have had the benefit of arguments from the learned members of the Bar, Shri V.G. Bhide, Shri G.N. Gadgil, Dr. R.L. Butani, Shri C.V. Khandelwal, Shri V. Jayaraman and Shri V.H. Patil. Their arguments have been consolidated and considered below.
2. Before coming to the facts and arguments, it would be proper to keep at the back of one's mind the following speech of the Hon'ble Finance Minister when he amended the law regarding the assessment of business income of the private trusts from 1-4-1985 :
While on this subject, I would like to refer to a tendency noticed to create private trusts which carry on business. To curb such practice, I propose to provide that where such trusts have profits and gains of business, the entire income of the trust will be charged to tax at the maximum marginal rate, an exception being made only in the cases where the trust is created by will for dependant relatives.
The memorandum explained as below :
44. Trustees of a private trust are ordinarily not expected to carry on any business because, implicit in the nature of business is the possibility of incurring loss and no prudent trustee would risk the trust's property in business venture. However, it has come to notice that taxpayers are increasingly conducting business through the medium of private trusts. Such arrangements are entered into for purposes of tax avoidance, the main object being to avoid payment of the registered firm's tax which would become payable if the business is carried on in partnership.
From the above, it will be clear that even as per official thinking, till 1-4-1984, private trusts could carry on business legally though it may be unethical and that the only consequence of such activity was evasion of R.F. tax. The liability of beneficiary members as an AOP was not contemplated.
3. On behalf of the appellant, Shri Inamdar took us through the basic facts. The appellant-trust (pages 51 to 67 of the paper book) came into existence on the strength of a document executed between the settlor Shri J.M. Agarwal and the trustees Shri J.K. Jain and Shri S.P. Jain. The settlor settled Rs. 1,500 on trust for the benefit of two minors, viz., Master Anilkumar J. Jain and Master Nareshkumar J. Jain. The beneficiaries could disclaim, renounce, settle or transfer their interest. The duration of the trust would be the date of death of the last survivor amongst the beneficiaries. The trustees were authorised to carry on business and to deal in movable and immovable properties which may be held as stock-in-trade or as capital assets. The trustees were required to distribute income of the trust equally amongst the two beneficiaries. On death of any beneficiary, the income to which that beneficiary was entitled would be distributed equally amongst the legal heirs of that beneficiary (settlor excluded). The trust deed also provided for distribution of the trust fund or corpus in the same proportion as the income. The trust was irrevocable and excluded the settlor from all benefits. The powers of the trustees are explained in Chapter VIII of the trust deed. As mentioned above, the trustees have powers of investment, business and other administrative powers like defending suits, appeals, etc. Other provisions of the trust deed are ancillary to the above main provisions.
4. Shri Inamdar contended that all the conditions for assessment Under Section 164(1) of the Act as a specific trust are fulfilled and this is precisely what the ITO had done in his order dated 20-5-1982, though the order would indicate that the ITO has exercised the option of assessing the beneficiaries direct. This action of ITO has not, however, led to any error prejudicial to the interest of the revenue. Relying on CIT v. V.H. Sheth [1984] 148 ITR 169 (Bom.), it was contended that the Commissioner's action amounts to double assessment, which is not permitted by law. The state of mind of the ITO would be clear from the following words in his assessment order :
Since this is a specific trust no demand is raised here. Above income is assessable in the hands of the beneficiaries as overleaf.
The only point, that could be seen if at all under the circumstances, is whether the option exercised by the ITO Under Section 166 of the Act is correct. There is nothing to show that the option exercised is not correct. Under Section 164(1) assessment is to be made on the trustees as a procedural measure so as to enable the revenue to collect tax directly from the trustees rather than to keep on chasing the elusive beneficiaries. In this case, there is no suggestion that by framing assessment directly on the beneficiaries revenue has been put in jeopardy.
5. This aspect of the case need not detain us long. From the order of the Commissioner Under Section 263 of the Act, it is clear that the Commissioner did not have in his mind the option of the type now highlighted by Shri Inamdar. What the Commissioner has held is that if direct assessment is due at all, the same should have been made on the AOP of beneficiaries and not beneficiary individual. Thus, the ITO has not erred in exercising the option of assessing the beneficiaries directly Under Section 166 but has erred in identifying the beneficiaries correctly for thepurpose. Since, however, the trustees did file a return, the ITO could as well have assessed the trustees instead of processing the return merely for the purpose of determining the income. The real issue has been noted correctly by the Commissioner in para 4 of his order as below :
The point in short is who is the person represented by the trustees and in this case the person represented is an AOP/BOI for whose benefit the business is being carried on and the assessment is being made in the status of an AOP. Not because the trustees themselves constitute an AOP but because the persons represented by them are themselves an AOP.
Thus, the Commissioner has directed that the return filed by the trustees should have been processed for determining the tax liability and not merely for determining the income as the ITO has done because without determination of tax, income computation is meaningless. Direct assessment might be more appropriate when the beneficiaries have other income but tax liability would be the same whether the assessment is made on the trustees or on the beneficiaries. We, therefore, hold that the Commissioner was not wrong in directing the ITO to frame the assessment on the trustees in like manner and to the same extent as the beneficiaries would have been assessed. The departmental representative has rightly pointed out that it is not merely for recovery that the provision Under Section 164 is made. It is for ensuring that income is assessed on the first possible occasion instead of chasing the beneficiaries. The contentions of the assessee are rejected. The issue, however, is academic for reasons given below.
6. The real issue, therefore, is whether the person whom the trustees represent is one AOP of J.K. Jain and S.P. Jain or the individuals J.K. Jain and S.P. Jain. Whilst the ITO has held the latter to be the person whom the trustees represent, the Commissioner has held that the former is the person whom the trustees represent. The ITO has not given his reasons specifically but appears to have held, on a plain reading of the trust deed that the beneficiary for whose benefit and on whose behalf the trustees receive income, are the individuals. As the ITO opted to assess directly the person who he thought were the beneficiaries, he did not obviously consider it necessary to give any finding on the ticklish issue as to whom the trustees represent.
7. Now, we have to examine the reasons given by the Commissioner. According to the Commissioner unless there is a separate trust deed for each individual beneficiary, the beneficiaries in a trust cannot be the individuals named therein. When the trustees are carrying on business for the common benefit of all the beneficiaries collectively, there is no scope for notionally splitting the trust obligations in respect of each beneficiary separately. For this purpose, the Commissioner relied on the ratio of Supreme Court judgment in N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310. In the case before the Commissioner, the beneficiaries are brought together by the trust. As there is common control and management of the business, the conditionsLald down in N. V. Shanmugham & Co.'s case (supra) are fulfilled. It is the trust unit which has earned the income. Consequently, specification of shares is not relevant for assessing such a unit. The Commissioner has further discussed the question of common consent as an essential ingredient in the constitution of an AOP and has rejected the contention raised on behalf of the appellant on the plea that whatever is done by the trustees is to be treated as done by and for the benefit of the beneficiaries themselves. Relying on CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 in which Supreme Court have affirmed their view in CIT v. Managing Trustees Nagore Durgha [1965] 57 ITR 321, the Commissioner has held that the beneficiaries themselves constituted an AOP. The impact of the other case law relied upon, on behalf of the assessee, has been examined by the Commissioner and it is held that the same does not help the assessee. The Commissioner was not impressed by the decision of the Tribunal in Tekawade group on the ground that 'it is not a final one for the purpose of finalisation of the issue'. In the final para 7, however, the Commissioner observed :
ITO's action in taxing the income in the hands of the beneficiaries separately and not in the hands of an AOP represented by trust deed is erroneous and prejudicial to the interest of revenue.
8. Shri Inamdar first contended that the Commissioner erred in brushing aside the impact of the Tekawade judgment [IT Appeal Nos. 69 and 70 (Pune) of 1983 dated 30-3-1984]. It is held that the status of the trustees with regard to the assessments to be framed on them had to be that of individual as the individual is the beneficiary. In para 8 of this judgment, the impact of N.V. Shanmugham & Co's. case (supra) has been examined in extenso. It has been held that the mere fact that there were three receivers did not make them AOP. But on the special facts, it was found that business was carried on by the receivers on behalf of the persons who had a common interest created by the order of the Court. According to Shri Inamdar, this decision of the Tribunal is clear.
9. Shri Inamdar next contended that there is no reason whatever to depart from the decision in the case of Trustees of Anandani Family Trust (supra).
10. A good portion of the subsequent arguments rested on the impact of N.V. Shanmugham & Co.'s case (supra). That was a case where receivers were carrying on business in terms of a mandate given by the Court not merely to carry on business but also to hold the income so produced for the benefit of the, erstwhile partners with whose consent, one of them acted as receiver. Although the ex-partners were initially on inimical terms and dissolved the partnership, ultimately they associated themselves together on their own volition and acquiesced in the authority of the receiver to carry on business on their behalf. Carrying on business is one thing and receiving income or becoming entitled to receive income for the persons whom they represent is another thing. Thus, the findings regarding consent played a determinative role in the ultimate conclusion. The ratio cannot be applied by any stretch of imagination, where a trustee carries on business in terms of the trust deed unmindful of any consent or objection of the beneficiaries who in turn derive their benefit not from acts of the trustees but from the terms of the trust deed. Whilst the trustees acted in terms of the solemn contract with the settlor accepting a property with an obligation annexed to the ownership of the property, there is no such contractual relationship, express or implied, between the beneficiaries individually or collectively and the trustees. The mere fact that the beneficiaries pocketed the amounts given to them is no ground for implying consent or choice or voice in the matter of carrying on business or the mode of deriving income.
11. Another facet of the case was that the beneficiary income is from other sources although the income of the trustees may be from business, as explained in Haji Abdul Hameed v. CIT [1985] 156 ITR 230 (SC). The learned advocate contended that there may be an arguable case for assessing an AOP on business incomes but it cannot be said by any stretch of imagination that there is an AOP constituted with the object of deriving income from other sources of a type where the members of the association have no such joint animus. Relying on W.O. Holdsworth v. State of U.P. [1958] 33 ITR 472 (SC) and G. Murugesan & Bros. v. CIT [1973] 88 ITR 432 (SC) Shri Inamdar contended that there is no AOP of the type mentioned by the Commissioner. Shri Inamdar was aware of the observations of the Supreme Court in Haji Abdul Hameed's case (supra) that the ratio applies where the revenue opts for assessing the beneficiaries and that the situation might be different if the department wishes to invoke the provision enabling the revenue to frame assessment on the representative assessee as in this case. It was, however, contended that the observations of the Supreme Court merely meant that their Lordships were not called upon to decide the issue which was not before them directly. The issue is left open and does not even constitute obiter. If the assessment is on the trustees as a mere procedural measure, which states specifically that the liability would be restricted to that imposable on the person whom the trustees represent, there is no reason why the ratio applicable to direct assessment should not be considered applicable to trust assessment. Shri Inamdar pointed out that there is an apparent conflict between Haji Abdul Hameed's case (supra) and earlier judgment in CIT v. H.E.H. Mir Osman Alt Bahadur [1966] 59 ITR 666 (SC) where it was held that "there is no distinction in the matter of the assessability of the income in the hands of a trustee or the beneficiary as the case may be". This judgment of a Bench of 3 Judges has not been expressly overruled in Haji Abdul Hameed's case (supra). It was held in H.E.H. Mir Osman Ali Bahadur's case (supra) that interest from securities retained its character whether the assessment was made on the trustees or on the beneficiaries and, therefore, in assessing the interest on securities in the hands of the respondent (individual), he is entitled to the same exemption to which the trustees were entitled. However, in the final analysis, for our purpose the two judgments can be reconciled. H.E.H. Mir Osman Ali Bahadur's case (supra) deals with character of income and Haji Abdul Hameed's case (supra) deals with the origin of income vis-a-vis business carried on by the trustees. The latter judgement read with G. Murugesan & Bros, case (supra) leaves no doubt about the proposition that there can be no AOP for income from other sources received by the beneficiaries without any mutual link.
12. Some supplementary arguments followed. It was contended that an AOP as such, has no legal existence qua the trust and, consequently, each individual beneficiary is to be taken as deriving his income from the trust independently. It was also contended that Haji Abdul Hameed's case (supra) is confined in its scope to the concept of earned income and nothing more should be read. Even if the income of the beneficiaries is from business, the beneficiaries have no inter se link. Section 161 of the Act comes into play after income is determined and, therefore, the question of redetermining the character already determined does not arise.
13. Shri Inamdar next pointed out that the contention of the Commissioner, relying on the Trustees of H.E.H. Nizam's Family Trust's case (supra) judgment is not correct. This judgment is on wealth-tax and does not constitute authority for proposing beneficiaries as an AOP. The Commissioner hasLald stress on certain observations in Managing Trustee, Nagore Durgha's case (supra) that though formalities of carrying on the business are done by the trustees themselves, these acts are done on behalf of or for the benefit of the beneficiaries. From this, the Commissioner has concluded that the beneficiaries themselves have formed an AOP. Shri Inamdar contended that this Supreme Court judgment is not an authority for the proposition that trustees are carrying on business as agents or representatives of the beneficiaries. In law, there is no distinction between 'on behalf of or 'for the benefit of vide CWT v. Kripashankar Dayashanker Worah [1971] 81 ITR 763 (SC). Nevertheless, the issue as to whether the beneficiaries should be treated as an AOP is quite clear.
14. Shri Inamdar next dealt with the argument of the Commissioner that in terms of the trust deed, the proximate beneficiary is the joint entity of the beneficiaries and that the individual beneficiaries can at best constitute ultimate beneficiaries. Consequently, trustees represent AOP of beneficiaries. Shri Inamdar submitted that the Commissioner has no basis for such a conclusion. There can, thus, be no distinction of the type attempted by the Commissioner, viz., ultimate and proximate beneficiary. There is only one set of beneficiaries who could be called both proximate and ultimate. The fiction of assessment on the trustees in like manner and to the same extent as the beneficiaries should, therefore, be taken to its legitimate end by holding that each of the beneficiaries gets the rights independently of the rights of other beneficiaries.
15. Regarding the impact of the Madras High Court judgment in N.P. Saraswathi Ammal v. CIT [1982] 138 ITR 19, the Commissioner has dealt with the same in para 6 of his order. The Commissioner has held that in that case the question of determination of the status of an AOP or BOI was to be considered with reference to different facts of the case and no question regarding determination and taxation of the trust income as such was involved. Shri Inamdar contended that if the Commissioner is not relying on N.P. Saraswathi Ammal's case (supra) it is all the more why no BOI status can be ascribed.
16. In reply, Shri Sathe, the learned departmental representative submitted that there are two issues involved in this case, firstly, whether the ITO is right in determining the income of the trust which had filed its return and yet holding back his hands as far as fixation of tax liability on the trust is concerned. The second aspect is whether the ITO has interpreted the terms of the trust deed correctly as to the true status of the beneficiaries, viz., AOP or BOI or individual. If the ITO has wrongly held the status of the beneficiaries as individual and not AOP, he has obviously committed an error which would necessitate the 263 order now under appeal.
17. Referring to Section 161(4), Shri Sathe pointed out that a representative assessee means a trustee appointed under a trust in respect of income which a trustee receives or is entitled to receive on behalf of or for the benefit of any such person. The object of Section 161(1) is clearly to frame an assessment on the trustees so as to tax income at the earliest possible opportunity wherever taxable income is found. In this connection, Shri Sathe referred to Sampath Iyengar page 3697. Shri Sathe then pointed out that when the trustees have actually filed return showing the entire income with the status of an AOP the ITO was bound to take the status of an AOP and frame the assessment on the trustees. Although the ITO adopted the status as an AOP correctly, as he failed to raise demand in accordance with Section 161(1), the ITO was clearly wrong in giving a finding about the specific trust and separate assessment on the beneficiaries. The trustees are carrying on the business and have no personal interest in the fortunes or misfortunes of that business. Profits emanate as a result of skill, capital, etc. In this respect, the case of the trustees is no different from that of receivers in N.V. Shanmugham & Co's. case (supra). The question whether the trustees themselves constitute an AOP or not is not relevant. The real question is, whom did they represent ? In N.V. Shanmugham & Co.'s case (supra), their Lordships held that by virtue of the order of the Court an AOP was constituted, although amongst beneficiaries, viz., as per constitution of the dissolved firm, interest of minors were also involved. Thus, the element of consent as a determining factor in determining the status of an AOP had a minor role. It is true that their Lordships have referred in their judgment to the consent aspect, but since the guardian has not been shown to have actually given any such consent, the ultimate ratio of the judgment is that express consent is not an essential ingredient for constitution of an AOP for carrying on the business. N.V. Shanmugham & Co.'s case (supra) shows that an AOP is constituted whenever-there is common interest and participation in production of income. The participation by the-beneficiaries need not be direct. The test of voluntary coming together as explained in Nagpur Bench judgment in Trustees of Anandani Family Trust's case (supra) is not applicable because the test of consent is an essential ingredient of an AOP as determinative was accepted in that case. In the case before us, the Commissioner has correctly applied the ratio of Managing Trustees, Nagore Durgha's case (supra), relevant portion at page 324. Shri Sathe further pointed out that the Nagpur Bench has not considered the true import of G. Murugesan's case (supra). That case was regarding dividend income and not business income.
18. This aspect brought Shri Sathe face to face with Haji Abdul Hameed's case (supra). According to the learned departmental representative, this judgment shows clearly that where the trustees are assessed Under Section 41(1) of the Indian Income-tax Act, 1922 (Under Section 161 of 1961 Act), the assessment will have to be made as if the person whom the trustees represent, earned business income if the trustees are carrying on the business. The character of the income does not change as explained in H.E.H. Mir Osman Ali Bahadur's case (supra) though the head of income may change. As the ITO was duty bound to adopt that option which would garner proper revenue, the ITO was obviously in error in assessing the person who were held by him wrongly to be the beneficiary. The Commissioner is thus right.
19. Shri Sathe then referred to Section 9 of the Indian Trusts Act, 1882 under which a proposed beneficiary can (revoke) his interest. Thus, even a minor beneficiary has a vested interest. The rights and liabilities of the beneficiaries are, thus, coterminous with those of the trustees. Therefore, on a proper interpretation of the trust deed and the conduct of the trustees, the conclusion that the beneficiaries constitute an AOP for business is inevitable. For this purpose, the contention raised by Shri Inamdar that consent between one beneficiary and another is not proved, is not relevant as seen from N.V. Shanmugham & Co.'s case (supra).
20. Shri Sathe then invited our attention to para 13 of the Nagpur Bench judgment and highlighted the fact that in N.V. Shanmugham & Co.'s case (supra) ownership of firm has not weighed in the mind of the Supreme Court nor has the concept of consent been treated in the manner indicated in the Nagpur Bench. Regarding reliance on CIT v. Karelal Kundanlal Trust [1984] 148 ITR 412 (MP) as also in the case of Nagpur Bench in Vivek Trust [IT Appeal No. 271 (Nag.) of 1980], Shri Sathe pointed out that in those cases, there was no dispute that the beneficiaries were actually individuals. This aspect is missing in the case before us. Consequently, the ratio of those cases would not be applicable.
21. Regarding the Pune Bench judgment in Tekawade Group's case (supra) (pages 1 to 6 of compilation), Shri Sathe submitted that this case is not an authority for the proposition canvassed by the assessee's advocate. In that case, the trust was filing returns in Ahmednagar and income was assessed in the hands of the beneficiaries in Pune, one ITO being not aware of the going on before the other. The question, thus, was reduced to a narrower proposition, namely, Sections 80JJ and 80A(3) of the Act. The trust's assessment itself was not before the Tribunal and this is the reason why it was held that each beneficiary is entitled separately to relief Under Section 80JJ. Actually Tekawade Group's case (supra) supports his proposition that the beneficiaries have business income and that the trustees represent beneficiaries having business income, though not actually carrying on business.
22. On the question of BO I, Shri Sathe contended that although operative part of the Commissioner's order refers only to an AOP, since the main content of the Commissioner's order Under Section 263 refers to the status of BOI also, he would submit an alternate contention that if the status of an AOP is not correct, status of BOI would be applicable with equal force, in view of the Madras High Court judgment in N.P. Saraswathi Ammal's case (supra). Meeting the argument of Shri Inamdar that mere joining together is not enough, Shri Sathe contented that this argument would fall when seen in the light of N.V. Shanmugham & Co's case (supra). It may be that the beneficiaries were not consulted at the time of execution of the trust deed. But the beneficiaries are not as helpless as attempted to be made out by Shri Inamdar. They can either directly or in the case of minors through their guardian stop the trustees from wilful abuse of the trust property. After all, the trustees are exposing the trust property to the risk of losses. To that extent, the minors do have a voice in the matter and being the beneficiary in a common trust have, by their conduct, agreed to associate themselves jointly with the activities of the trust. The beneficiaries thus constitute an AOP. If they do not constitute an AOP, at least they constitute BOI as explained in CIT v. Harivadan Tribhovandas [1977] 106 ITR 494 (Guj.) and N.P. Saraswathi Ammal's case (supra).
23. Shri Sathe then referred to Meera & Co. v. CIT [1979] 120 ITR 564 (Punj. & Har.). In this case, it has been held that on the death of an individual, the business continued by widow and three minor children is assessable as a BOI. In this case also there was no question of any consent by minor children. Each of the persons, viz., widow and children had specific business interest devolving on them and has continued the business for the benefit of all. Their Lordships have highlighted the fact that the fact that the minors had no legal capacity to enter into an agreement is irrelevant for determining the status of BOI in terms of Section 2(31)(v) of the Act. Their Lordships have approved the Andhra Pradesh High Court judgment in Deccan Wine & General Stores v. CIT [1977] 106 ITR 111 and the Gujarat High Court judgment in Harivadan Tribhovandas's case (supra).
24. On the question raised by Shri Inamdar that the ITO having exercised the option of assessing the beneficiaries direct, Shri Sathe submitted that the case law relied upon, namely, V.H. Sheth's case (supra), does not deal with the case of the type before us. As seen above, there was no such option. If there was option at all, it was to assess either the trustee or beneficiary AOP directly. As a guardian of revenue, the ITO has to exercise the option vested in him in a manner that would be conducive to the proper collection of revenue. He referred to Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 (Cal.). Their Lordships have observed that anything which is prejudicial to the interest of the revenue would be erroneous and that anything which is not lawful would be prejudicial to the interest of the revenue. Thus, by his failure to assess the trustees as an assessable entity representing the AOP beneficiaries on the income from business carried on by it, the ITO fell into an error which could be set right only through Under Section 263 proceedings. Accordingly, Shri Sathe sought confirmation of the Commissioner's order Under Section 263. Shri Sathe wound up his arguments with the remark that this is a case of tax avoiding device and should not receive benediction.
25. As an explanatory submission in respect of the new points raised by Shri Sathe, Shri Inamdar explained that for an AOP to exist as contended, the group should be in a position to earn income and produce without the help of trustees. Actually it cannot be said that the beneficiaries could earn income by coming together because the beneficiaries themselves could not have carried on business either themselves or compel the trustees to carry on the business in the manner desired by the beneficiaries. Regarding the observations of Sampath Iyengar, it was pointed out that regarding assessments on trust for taxing income at the earliest point of time, the author has actually referred to the recovery aspect of the case. The assessment on the trust would enable the ITO to recover the tax due from the beneficiaries. For this purpose, there is no distinction between business and other income. Shri Inamdar then pointed out that the return filed by the trustees has been duly processed by the ITO though there is no demand. In the return itself the income assessable was shown as nil and the computation and distribution alone was given to enable the ITO to determine the share of each individual beneficiary. Even if the ITO were to assess the trustee, he would be required to frame the assessment and fix the liability as if each individual is beneficiary. Such liability would not be greater than what has actually been fixed on the individual beneficiary whose share is determinate. Reiterating his contentions regarding the impact of N.V. Shanmugham & Co.'s case (supra), Shri Inamdar submitted that in essence the receivers acted on behalf of the partners and circumstantial evidence indicated that there was agreement between the ex-partners, including those interested in safeguarding the interest of minors. Unless there is an express or implied agreement between the two beneficiaries directly, there cannot be AOP or BOI. The alleged nexus with the common income does not have the common bond required for AOP. Unlike N.V. Shanmugham & Co.'s case (supra) where the appointment of a receiver arose on account of Court's order acquiesced in by affected parties, in this case, there is no such acquiescence. The beneficiaries have no choice even about the source. There is no volition of any sort between the beneficiaries themselves inter se or between the beneficiaries on the one hand and the trustees on the other.
26. Regarding the reference made to the device as a tax avoidance measure, Shri Inamdar contended that the reasons for creation of the trust are not relevant. There is nothing to show that business was benami or sham. There can be no tax by implication or intendment and, therefore, the trustees have been rightly taken as not liable to separate assessment as an AOP of person they represent. In later years, when the law was amended and all business income was assessed at maximum rate, disputes of this type would not arise.
27. We now examine the contentions before us. On the first question, namely, exercise of option, if the beneficiaries individuals are beneficiaries in terms of the trust deed, exercise of option by the ITO of assessing the individual beneficiaries does not lead to loss of revenue. As pointed out by Shri Inamdar, Section 161(1) is procedural and has to be taken recourse to whenever the ITO feels that on account of existence of mete life interest or for any other reason direct assessment on the beneficiaries is likely to put the revenue in jeopardy. As due revenue on this basis has already been collected, there is no question of the order of the ITO being erroneous and prejudicial on this count.
28. The real question is whether the beneficiaries constitute an AOP/BOI. For this purpose, it is necessary to note the distinction between the trustee AOP and the beneficiary AOP if any. The tenor of the Commissioner's order indicates whilst the ITO treated the trustees as an AOP, the Commissioner held that the trustees should be assessed in like manner and to the same extent as a beneficiary AOP should have been assessed.
In other words, the contention of the Commissioner is that on a proper interpretation of the trust deed, the real beneficiary is the AOP/BOI, consisting of the various beneficiaries. Actually, the beneficiaries are not carrying on any business. Nor can it be said that the trustees are carrying on the business as agents of the beneficiaries. The trustees are carrying on business on the strength of authority given to them in terms of the trust deed by the settlor. To the beneficiaries, it makes no difference how the trustees derive their income for the purpose of distribution amongst the beneficiaries.
29. In our opinion the case of a trustee carrying on business in terms of the mandate given to him in the trust deed (independently of what the beneficiaries ultimate or proximate do) is different from the case of a receiver who carries on business clearly on behalf of certain persons. The ratio of N.V. Shanmugham & Go's case (supra) applies only to latter. The element of consent amongst the various persons on whose behalf the receiver was working doubtless formed the basic foundation of the Supreme Court judgment. There is a distinction between carrying on of business in terms of mandate given by the beneficiaries (in N.V. Shanmugham & Co.'s case (supra) the erstwhile partners) and business carried on by trustee independently of what the persons whom they represent do. The common interest of the beneficiaries is not existing in the business carried on in terms of the trust deed. Mere pocketing of benefits is no ground for assuming consent or common interest or even remote participation and involvement in the activities carried on by the trustees for producing income. The beneficiaries are themselves not liable for losses though their interest might suffer as a result of losses. But such a situation can arise in respect of other income, e.g., where property held in trust is lost in fire or money is embezzled. There is no common bond between the beneficiaries which would suggest that they have agreed to share the profits or surplus jointly or that one has agreed to take the benefits only if the other takes similar benefits. A plain reading of the trust deed shows that the settlor himself never intended to make the benefit available to one beneficiary dependent on the fancies or volition of other beneficiaries. Nor did the trustees consider themselves as carrying on the business as representative of the beneficiaries individually or collectively. Acting as representative of business is different from acting as representative of persons on whose behalf or for whose benefit the representative receives or becomes entitled to receive income irrespective of the source. It is the latter category which is referred to in Section 161(1) and not the former. It is not clear what the Commissioner has meant in para 7 'in the hands of an AOP represented by trust deed'. Obviously, the Commissioner did not mean AOP of trustees. The Commissioner possibly meant AOP of beneficiaries. We do not see any basis for holding that the persons whom the trustees represent constitute AOP of beneficiaries. The beneficiaries whom the trustees represent are individuals with specific shares, consequently even if the assessment were to be made on the trust, the same could be made only in like manner and to the same extent as would have been made on the persons whom they represent. What the ITO has done is a mere procedural lapse, if at all, in framing the assessment directly on the beneficiaries. As this action has not been shown to have put the revenue in jeopardy in this case (as full recovery has been made in the individual cases), there is no error causing prejudice to the revenue.
30. The case law relied upon by both sides is distinguishable. We have already pointed out how the ratio of N.V. Shanmugham & Co's. case (supra) does not apply to facts. Trustees may be earning income on behalf of or for the benefit of beneficiaries, but they are not carrying on business on behalf or for the benefit of an AOP of beneficiaries. Section 161 speaks of receipt of income and makes no distinction on the basis of the origin. Tekawade Groups case (supra) decided by this Bench is no longer good law in view of the later Supreme Court pronouncement in Haji Abdul Hameed's case (supra).
31. Now comes the question whether the beneficiaries could be taken as constituting BOI. We uphold the contention of Shri Inamdar that whatever be the position in the order of the Commissioner other than the operative para, the fact remains that ultimately the Commissioner has directed adoption of the status of an AOP and not BOI. The departmental representative cannot be permitted to make a new case now. Nevertheless, since the matters may not remain at this stage, in view of the observations of the Gujarat High Court in CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42 partly reversed by the Supreme Court on another point, that where alternate or interlocutory matters are raised, the Tribunal should decide all the matters, we proceed to examine the claim. The case law relied upon by the departmental representative, viz., Harivadan Tribhovan-das's case (supra), Meera & Co.'s case (supra) and N.P. Saraswathi Animal's case (supra) does indicate that the element of consent is not an ingredient of the concept of BOI. A common nexus with the origin of income is, however, an essential ingredient. In other words, fortunes of all the beneficiaries should be linked together by a common nexus with the source of income. In our opinion, this test is not satisfied in this case, because as already mentioned, there is no business income of the beneficiaries. Each beneficiary derives his benefit from the trust independently of the other and the mere fact that two or more beneficiaries have been thrown together through the discretion of the settlor in a trust to which they were not parties, cannot make them BOI, merely because they have not given up their interest. The nexus, if any, is with the trust and not the income or the business. On facts, therefore, we hold that the beneficiaries do not constitute BOI also.
32. On other points raised by the parties, we need not say much, because they are not all germane to the main issue. Element of consent, as mentioned above, does not arise where two beneficiaries are not carrying on business, as explained in Haft Abdul Hameed v. CIT [1971] 82 ITR 495 (All.). Their income is assessable under other sources as the origin is the trust deed and not the activities of trustees or the origin of income in their hands. We have, therefore, not considered it necessary to examine the impact of N.V. Shanmugham & Co.'s case (supra) any further. We, however, agree with the departmental representative that the issue was not canvassed on the above lines before the Nagpur Bench in the case of Trustees of Anandani Family Trust (supra), or in this Bench's decision in Tekawade Groups case (supra). We also agree with the departmental representative that the Madhya Pradesh High Court judgment in Karelal Kundanlal Trust's case (supra) is not applicable as it has proceeded on the accepted position that the beneficiaries of the trust were actually individuals and not AOP or BOI. We also agree with the departmental representative that the assurance given by the Commissioner that he would take appropriate action Under Section 264 in respect of the individual beneficiaries, if necessary, takes the wind out of the argument on behalf of the assessee that there is double assessment or that there is likely to be any hardship.
33. We have carefully examined the recitals of the trust deed and the facts placed before us. We have taken into account the painstaking arguments of both the sides on the factual as well as legal aspects of the matter. The issue involved in the instant appeal is whether the AOPs of the beneficiaries is assessable for tax as an AOP. In view of the above discussed facts and the case law, in our opinion, there is no AOPs of the beneficiaries assessable to tax. In our considered opinion, the action taken by the Commissioner Under Section 263 does not stand nor there is any error in the order of the ITO insofar as it is prejudicial to the interests of the revenue.
The decision in Trustees of Anandani Family Trust's case (supra) need no review even after considering the new arguments.
We are satisfied to allow the appeal and the appeal is allowed.