Income Tax Appellate Tribunal - Hyderabad
Tokarshi Lalji Kapadia Family Trust vs Income Tax Officer on 8 February, 2002
Equivalent citations: [2002]83ITD734(HYD), (2003)78TTJ(HYD)247
ORDER
M.V.R. Prasad, A.M.
1. These three appeals are filed by the assessee. They are directed against a common order of the CIT(A)-V, Hyderabad, dt. 25th Nov., 1997, for the asst. yrs. 1991-92 to 1993-94. As a common issue is involved in these appeals, they are being disposed of by this common order for the sake of convenience.
2. The appellant-assessee is a private family trust. During the year of account, relevant for the assessment years under appeal, the assessee-trust has two beneficiaries, with each one of them having 50 per cent share. In other words, the shares of the beneficiaries are determinate and specific. The grievance of the assessee is that the Department having earlier made assessments on the beneficiaries, chose to issue a notice under Section 148 to the assessee for the three years under consideration, and framed assessments on the assessee-trust in terms of Section 161(1A) of the IT Act, on the ground that the assessee-trust derived income from business, and that it has to be charged on the whole of its income at the maximum marginal rate.
3. The assessee-trust came into existence by an Indenture dt. 3rd Oct., 1950, and the settlor was Shri T.L. Kapadia. The corpus of the trust was an amount of Rs. 1,25,000. We need not bother about the life interest created under the trust and the only relevant point for the purpose of these appeals is that during the years of account, relevant for the assessment years under appeal, the trust had two beneficiaries, Shri Dhirajlal Kapadia and Shri Kirtikumar T. Kapadia, the sons of the settlor, with, as mentioned hereinbefore, each one of them having 50 per cent beneficial interest in the income of the trust.
4. The main contention of the assessee before us has been that assessments have already been made in respect of these two beneficiaries, including the share income from the trust, and as such, the Department is barred from reopening the assessments of the assessee-trust, for the purposes of making a direct assessment on the trust in terms of Section 161(1A) of the Act. The details of the intimations sent under Section 143(1)(a) or the assessments made under Section 143(3) on these two beneficiaries, for the years under consideration, are given by the assessee in a note before us, and the said note reads as under:
".......
Asst. yr. 1991-92 '. 1. Date of filing of return of income Dhitajlal T. Kapadia 29-2-1992 Kirtilsumar T. Kapadia 29-2-1992
2. Income declared in : the return :
His personal incomes + share from income of trust consisting of property income and interest receipts His personal income + share from income of trust consisting of property income and interest receipts
3. Manner in which AO dealt with the return
(i) Intimation under s. 143(l)(a) issued on 20-10-1992 Return processed under s. 143(l)(a) dt. 28-8-1992. No Intimation or further action.
Notice under s 148 dt. 30-3-1994 served on 30-3-1994, in the case of trust
(ii) Later, AO issued notice under s. 147 dt. 30-3-1994 to include income by way of his share from the trust relating to sale of flats. Return in response to this notice filed on 29-4-1994. In the note appended to return of income, the assessee explained that income on sale of flats would be offered to tax on completion of the project and registration of flats in favour of the buyers. The AO accepted the explanations and passed order under s. 143(3) on 10-2-1995.
Asst yr. 3992-93 (1) Date of filing of return of income 4-3-1993 28-4-1993 (2) Income declared in the return Personal income + share from the income of the trust consisting of property income and interest receipts.
Personal income + share from the income of the trust consisting of property income and interest receipts.
(3) Manner in which AO dealt with the return Assessment under s. 143(3) including assessee's share from the trust income made on 8-3-1995.
Intimation dt. 13-1-1994 accepting the income.
(Appeal filed against certain mistakes in assessment order.
Assessment set aside for de Novo assessment vide dt. 18th Dec., 1995. No further order by the AO) Asst. yrs. 1993-94 (1) Date of filing of return 31-5-1994 31-5-1994 (2) Income declared in the return Personal income + share from the income of the trust consisting of property income and interest receipts.
Personal income + Share from the income of the trust consisting of property income and interest receipts.
(3) Manner in which AO dealt with the return Intimation under s. 143{l)(a) on 22-2-1995 No communication to the beneficiary from AO.
5. After dealing with the returns filed by the beneficiaries in the manner detailed above, the AO chose to issue notices under Section 148 in the case of the assessee-trust, and in consequence of the said notices, proceeded to frame the impugned assessments for the years under appeal. On appeal, the CIT(A) upheld the action of the AO in this behalf.
6. The learned counsel for the assessee pleaded before us that the AO has option of making a direct assessment on the beneficiaries or making an assessment on the trustees in their capacity as representative assessee, in terms of Section 161(1) r/w Section 116 of the Act, For this proposition, he relied upon the decision of the apex Court in the case of CIT v. Kamalini Khatau (1994) 209 1TR 101 (SC). In this case, the apex Court was considering the position in respect of a discretionary trust. It was held that even in the case of a discretionary trust, a beneficiary can be assessed directly on the income received by him from the trust, in spite of Section 164, which stipulates that tax shall be charged on the income of the trust at maximum marginal rate in the hands of the trustees in their capacity as representative assessee. The relevant portion of the headnote of the said decision reads as under :
"Sec. 164 cannot be read as being a code in itself applicable to the taxation of the income of a discretionary trust. Consequently, it cannot be held that the beneficiary of a discretionary trust, even if he has received its income in the accounting year, cannot be taxed thereon because Section 164 does not provide for such contingency (see p. 119GH).
Sec. 166 is clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that ss. 160 to 165 do not bar the direct assessment of the person on whose behalf or for whose benefit the income is receivable or the recovery from such person of the tax payable thereon, provided that is permissible under any other provisions of the Act. Even so, since the word used in Section 166 is "receivable", it cannot apply to a discretionary trust, for it cannot be said that the income thereon is "receivable" for one or more beneficiaries it being left to the discretion of the trustees whether or not the income should be distributed to one or more of the beneficiaries or not at all. But that is not to say that the beneficiary of a discretionary trust, because he does not fall within the ambit of Section 166, may not be assessed upon income received by him and tax recovered from him thereon if that is permissible under any other provisions of the Act for Section 166 is merely clarificatory.....
Sec. 5 of the Act defines the total income of any person to include income received by him or received on his behalf or which accrues or arises to him. A person may be directly assessed in respect of such income. The income of a discretionary trust which is within the accounting year distributed to and received by the beneficiary would, therefore, be subject to assessment in his hands and tax thereon would be recoverable from him. Such income would squarely fall within the broad sweep of total income under Section 5 and the beneficiary would be liable to assessment and recovery of tax thereon under Section 4."
In the light of the above decision, it is pleaded that what is applicable to a discretionary trust is all the more applicable to a trust with determinate shares of the beneficiaries, like the assessee-trust So, as the AO has the option of making the assessment on the beneficiaries directly or on the trustees in their capacity as representative assessee, the AO having exercised the said option to make the assessment on the beneficiaries, cannot be permitted to back on the option exercised and to initiate proceedings under Section 148 against the trustees, as done in the present case. For this proposition, he relied on the decision of the Kerala High Court in the case of CIT v. Dr. David Joseph (1995) 214 1TR 658 (Ker) and also the decision of the Tribunal (TM) in Mirje Family Trust v. ITO (2000) 67 TTJ (Pune) (TM) 326 : (2000) 73 ITD 27 (Pune) (TM) to which one of us was a party as a Third Member.
7. The learned Departmental Representative, on the other hand, pleaded that the assessee-trust carried on the business of construction and sale of flats, etc. and so, this is a case where the provisions of Section 161(1A) are attracted, as held by the CIT(A) and so, a direct assessment on the trustees is not barred, notwithstanding the assessments made earlier on the beneficiaries. He further pleaded that simply because 'an assessment has been made on a wrong person, it does not follow that a direct assessment on the right person is barred. For this proposition, he relied upon the decision of the apex Court in ITO v. Ch. Atchaiah (1996) 218 ITR 239 (SC).
8. The learned counsel for the assessee countered in his rejoinder by stating that the said decision of the apex Court in the case of ITO v. Ch. Atchaiah (supra) is distinguishable and applicable only in a case where the AO has no option of making the assessment on either of the two specified persons, and has initially framed the assessment on wrong person and subsequently framed the assessment on the right person. As that is not the position in the present case inasmuch as the AO has the option of framing the assessment either on the beneficiaries direct or on the trustees, the ratio of the decision of the apex Court in the case of Ch. Atchaiah (supra) does not apply. He also clarified that even Section 161(1A) does not stipulate that an assessment has to be made on the trust adopting its status as AOP as done for all the three years, by the AO in this case. It only stipulates that the income in respect of which a representative assessee is liable, shall be charged at the maximum marginal rate. According to him, Section 161(1A) does not stipulate that the entire income of the trust can be brought to tax in the hands of the trustees in their capacity as the representative assessee at maximum marginal rate. Separate assessments on the representative assessees have to be made in respect of the incomes of each of the beneficiaries, applying maximum marginal rate. So, it is conceded that at the most, the AO could have reopened the assessments framed on the beneficiaries and charged the shares incomes from the trust at the maximum marginal rate.
9. We are of the view that the assessee deserves to succeed. We agree with the contentions made out by the learned counsel for the assessee. Section 161(1A) on which the CIT(A) relied, reads as under;
"161(1).........
(1A) Notwithstanding anything contained in Sub-section (1), where any income in respect of which the person mentioned in Clause (iv) of Sub-section (1) of Section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such income is so liable at the maximum marginal rate :
Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him."
In terms of Section 161(1) tax shall be levied upon and recovered from a representative assessee 'in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him'. In the light of the ratio of the decision of the apex Court in the case of Kamalini Khatau (supra), we have to hold that Section 161(1A) does not impose the charge on the representative assessee. It applies in a specific situation, i.e., where the income of the trust, consists of business income and it only lays down the rate at which tax has to be levied on the income of the trust when it includes profits and gains of business, So, the conditions laid under Section 161(1) that the tax shall be levied upon and recovered from the representative assessee 'in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him', is not waived by Section 161(1A). In this view of the matter, we agree with the learned counsel for the assessee that Section 161(1) does not empower the AO to frame a direct assessment on the trustees, including therein the entire income of the trust. We agree with him that the AO has the option of making the assessment either directly on the beneficiaries or on the trustees in their representative capacity in the light of the decision of the apex Court in the case of Kamalini Khatau (supra).
10. We also find that the plea of the learned counsel for the assessee in this context finds support in the decision of the Hon'ble Kerala Supreme Court in CIT v. Dr. David Joseph (supra) and also the decision of the Tribunal (TM) in Mirje Family Trust (supra), to which one of us was a party, In this decision of the Tribunal at p. 46 of the Reports (73ITD), it was held that the decision of the apex Court in the case of Atchaiah (supra) is applicable only in a situation where there is no option for the Department to proceed against either of two or more entities and the assessment had been made initially on the wrong person. As per the relevant portion of the headnote of this decision, the Tribunal held in a similar situation, as under :
"Section 166 r/w Sections 161 and 164, gives a clear option to the AO to proceed against either the beneficiaries or the trust.
When the amounts are credited to the accounts of the beneficiaries, they become liable to be assessed. It was not the case of the Department that the incomes from the trust on which the beneficiaries had been assessed in the respective years had not been received by them or that they had not been even credited to their accounts in the books of the trust. So it must be held that the assessments on the beneficiaries had been validly made in the respective years and so there was no justification for making fresh assessments in the case of the trust.
It could not be held that when the AO proceeded against the beneficiaries, he was not aware of what he was doing or the consequence of his action. At any rate, the Department could not take advantage of its own casual approach to the matter and penalise the assessee by subjecting the same income to double taxation in the hands of both the beneficiaries and the trust."
11. For the foregoing reasons, we hold that the AO was not justified in reopening the assessments under Section 148 of the Act in the case of the trust for the years under appeal. In this view of the matter, we set aside the order of the CIT(A) and cancel the impugned assessments for all the three years.
12. The assessee has taken some other grounds relating to computation of income and rejection of method of computation adopted by the assessee. Learned counsel for the assessee has not pressed these grounds. At any rate, as we have cancelled the very assessments impugned in these appeals, these grounds have become infructuous. They are accordingly rejected.
13. In the result, assessee's appeals are treated as allowed.