Karnataka High Court
Commissioner Of Income-Tax vs K. Shyamaraju (Trustees) on 15 October, 1990
Equivalent citations: [1991]189ITR392(KAR), [1991]189ITR392(KARN), 1991(1)KARLJ233
JUDGMENT M.P. Chandrakantaraj Urs, J.
1. We propose to dispose of these petitions by the following common order inasmuch as the questions of law involved are the same.
2. The facts of the cases fall within a narrow compass depending on the trust deeds which are all more or less family trusts. The trusts represented by the trustees have been assessed by the concerned Income-tax Officer under the provisions of sub-section (1) of section 161 of the Income-tax Act, 1961, and the corresponding provisions under the 1922 Act, viz., section 41 of the latter mentioned Act. It is held that as a representative assessee, the trustee or trustees, as the case may be, is/are liable to pay tax to the extent the beneficiary or beneficiaries would be liable and form whom such tax is/are recoverable. The Commissioner of Income-tax, Karnataka, has considered that such assessment orders are prejudicial to the interests of the Revenue and has, therefore, set aside the orders of assessment and directed the Income-tax Officer to assess the liability of the trustee or trustees in their representative capacity as an association of persons calling upon them to pay tax on the total income of the trust as a single unit. Aggrieved by such orders, the assessee-trustee or trustees preferred appeals to the Income-tax Appellate Tribunal, Bangalore Bench. In all the cases. The Tribunal has set aside the order of the Commissioner holding that the assessments concluded by the Income-tax Officer concerned were correct and did not call for interference by the Commissioner. In those circumstances, the applications made before the Tribunal to get certain questions referred to this court for answer by this court, came to be rejected by the Tribunal. Therefore, the present petitions under sub-section (2) of section 256 seeking a direction calling for reference by the Tribunal stating the cases.
3. Mr. Chanderkumar appearing for the Revenue in all the above petitions contended that the question formulated in the first of the petitions above, viz., 501 of 1988, ought to have been referred for consideration by this court in all the petitions with the appropriate statements of cases in each of the petitions.
4. We may, at this stage, mention that, in all the cases, we are concerned with sub-section (1) of section 161 of the Income-tax Act, 1961, (hereinafter referred to as "the Act"). As it stood before the amendment effected on April 1, 1985 by the Finance Act of 1984 to which we will make a reference at the appropriate stage. The thrust of the argument is that the beneficiaries under the trust have the advantage of the income from the trust property or trust money and, therefore, the trust income out of such property or money in the hands of the trustee is liable to be taxed as that of an association of persons carrying on business particularly when such income of the trust is out of the business carried on by the trust which should have been construed as business carried on on behalf of the beneficiaries in the character of an association of persons. He has, in that behalf, placed reliance on the decisions of the Supreme Court in the following cases : N. V. Shanmugham and Co. v. CIT [1971] 81 ITR 310, Mohamed Noorullah v. CIT [1961] 42 ITR 115 and CIT v. Indira Balkrishna [1960] 39 ITR 546.
5. In the first of the cases, the Supreme Court indeed held that the business was carried on by an order of the court in a suit for dissolution of partnership by partners through receivers after the business of the partnership had come to an end by directing the business to be carried on by receivers and income derived was income of the firm the dissolution of which had been sought in the suit and it was so carried on with the consent of the partners and, therefore, it was on behalf of the partners and as such the income of the business in the hands of the receiver was the income of an association of persons. Similarly, in the second of the cases relied upon, the business was carried on by the widow of the deceased assessee who had, among other things, left besides the business other properties also. In a suit for partition by the son of the first wife of the deceased assessee, the business carried by the deceased assessee, viz., manufacturing of beedis which was being carried on by the widow and another person was directed to be carried on by the receivers appointed by the court before whom the suit for partition was pending. Soon after the son had filed a suit for partition, the widow also came to file a separate suit for partition of the same estate and made an application for appointment of receivers. That application was opposed by her step-son, inter alia, on the ground that she wanted a change in the receivers. In any event, the receivers appointed by the court were ordered to continue and the business was carried on as before. The income accrued by such business was held to be the income of all the heirs and as such should be treated as income of an association of persons in the hands of the receivers as it was being carried on with their consent, because none of the heirs had objected to the appointment of receivers to carry on the family business, it was in those circumstances that the Supreme Court, in those cases, held that the income as such was the income of the association of persons who carried on the business and on whose behalf the business was carried on in reality by the receivers appointed by the court.
6. Section 160 of the Income-tax Act defines a "representative assessee" under clause (4) thereof as follows :
"160. Representative assessee. - (1) For the purpose of this Act, 'representative assessee' means -......
(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (VI of 1913)), receives or is entitled to receive on behalf, or for the benefit, of any person, such trustee or trustees.....
(2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act".
and section 161(1) of the Act as it existed prior to the amendment is as follows :
"161. Liability of representative assessee. - (1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.
(2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act".
7. The corresponding section 41 in the 1922 Act is as follows :
"41. Courts of wards, etc., - (1) In the case of income, profits or gains chargeable under this Act which the Courts of Wards, the Administrators-General, the Official Trustee or any receiver or manager (including any person whatever his designation who in fact manages property on behalf of another) appointed by or under any order of a Court, or any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including the trustee or trustees under any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913), are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such Court of Wards, Administrator-General, official Trustee, receiver or manager or trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly :
Provided that where.... of an association of persons :
Provided further that when part only.... from that part.
(2) Nothing contained in sub-section (1) shall prevent either the direct assessment of the person on whose behalf income, profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income, profits or gains".
8. As we see, in the sections extracted, while in the earlier Act, an omnibus provision was made covering several types of income in the hands of different persons under several statutes or instruments, section 161(1) specifically now deals with income of a trust in the hands of the trustee or trustees. Barring that difference, the purpose of the two sections appear to be the same. By an amendment brought about by the Finance Act, 1984, with effect from April 1, 1985, section 161(1A) with its proviso and Explanation reads as follows :
"(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 person is so liable at the maximum marginal rate :
Provided that the provisions of this sub-section shall not apply whers 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.
Explanation. - For the purposes of this sub-section, 'maximum marginal rate' shall have the meaning assigned to it in Explanation 2 below sub-section (3) of section 164".
9. The emphasis laid by Sri Chanderkumar for the Revenue before us is that the amendment suggests the intention of the Legislature at all times that the income of the trustee should have been assessed as income of an association of persons arising pout of profits and gains from business. In other words, if the trustee or trustees carry on business out of trust money or trust funds or trust property, such business is carried on on behalf of the beneficiaries and the income distributed to the beneficiaries in terms of the instrument of trust would be liable to be taxed as if such income was derived from an association of persons with whose implied consent the trustee or trustees carried on the business.
10. If the amendment is properly read and understood with the emphasis on the proviso, it is abundantly clear that the Legislature intends that one class of trusts be exempted from the operation of the amended sub-section (1A) of section 161 if the trust created is a testamentary trust and such trust is the only trust so declared for the benefit of any dependent. Therefore, the Legislature was clear in its wisdom that, in given circumstances, the law should not stand altered with effect from April 1, 1985, in regard to certain classes of trusts. Therefore, instead of supporting the argument put forward by Mr. Chanderkumar, it conveys the opposite to us.
11. In Indira Balkrishna's case [1960] 39 ITR 546, the Supreme Court, speaking through Justice S. K. Das, as he then was, ruled as follows (p. 551) :
"It is enough for our purpose to refer to three decisions : In re B. N. Elias [1935] 3 ITR 408 (Cal), CIT v. Laxmidas Devidas [1937] 5 ITR 584 (Bom) and In re Dwarakanath Harischandra Pitale [1937] 5 ITR 716 (Bom).In re B. N. Elias [1935] 3 ITR 408 (Cal), Derbyshire C.J. rightly pointed out that the word 'associate' means, according to the Oxford Dictionary, 'to join in common purpose, or to join in an action'. Therefore, an association of persons must be one 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. This was the view expressed by Beaumont C.J. in CIT v. Laxmidas Devidas [1937] 5 ITR 584 (Bom), at page 589 and also in In re Dwarakanath Harischandra Pitale [1937] 5 ITR 716 (Bom). In In re B. N. Elias [1935] 3 ITR 408 (Cal), Costello J. put the test in more forceful language. He said : 'It may well be that the intention of the Legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships.... When we find.... that there is a combination of persons formed for the promotion f a joint enterprise... then I think no difficulty whatever arises in the way of saying that.... these persons did constitute an association....."
12. If we keep in mind what is stated above, the earlier rulings as to what constitutes an association of persons were relied upon by the Supreme Court. We should therefore, have no hesitation to come to the conclusion that, to be an association of person, there must be a common purpose to venture and produce income on the part of the persons so venturing into business with the intention of making profits and gains from such business and, only then, the persons so joining together would be an association of persons; whether it be a registered firm or an unregistered firm, it should not make a difference. Same must be the reason why, in the other two cases relied upon by learned counsel for the Revenue, the Supreme Court took the view that the heirs or the partners, as the case may be, before the court had given the consent or expressed on their own volition for the business to be carried on by the receiver or receivers on their behalf and, therefore, the income earned from the business was income of the association of person from business.
13. In the cases on hand, by no stretch, of imagination, could it be said that the beneficiary or beneficiaries of the trust, by his or their own volition, had consented to the carrying on of the business by the trustee, regard being had that the business carried on was in order to give effect to the direction of the makers of the trusts. Trust is a defined term under the Indian Trusts Act, 1882, and has the same meaning under the Act as well. The definition is as follows :
"A 'trust' is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner....."
14. In the making of a trust, the beneficiary is not required to consent to the maker's wish. In the appointment of a trustee also, the consent of the beneficiary or beneficiaries is not a necessary ingredient to make it a trust. Similarly, for endowing a trust with money or property, consent of the beneficiary or beneficiaries is not a necessary ingredient. In fact, the trustee who is in charge of the administration of the trust in accordance with the wishes of the maker of the trust does not depend on the consent of the beneficiary who has no right to interfere with such administration, except in cases where the trustee may also be the beneficiary in which case he has to function by separating his two identities. At best, the beneficiary under the instrument of trust created by the maker of the trust has the option in law to accept or reject the benefit.
15. Therefore, applying the ratio decidendi of the cases relied upon by Sri Chanderkumar for the Revenue, it is impossible to hold that the beneficiaries under a trust can be equated with an association of persons who had voluntarily come forward to constitute themselves as a group with the common intention of pursuing a venture from which they may derive profits. No such consent can be implied in the construction of any trust deed. On the other hand, in one of the cases on hand, the trust deed specifically empowers the trustees to do what they liked with the trust money; to invest in business or to keep it in a bank or buy securities; but the only direction to them in terms of the trust is that profits, if any, gained out of such investments or carrying on of business with the trust money should enure to the individual beneficiary's benefit in the specified proportion and further provides as to what would happen if some of the beneficiaries died which clearly establishes that the beneficiaries have no right whatsoever to interfere with the administration of the trust money or the property from which the income is derived.
16. In fact, this discussion, though necessary to dispose of the petitions, in our opinion, is somewhat superfluous in the light of the questions already decided. At this stage, it will be useful for us to extract the question raised in the series of petitions which are as follows :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the Commissioner of Income-tax has no jurisdiction to pass an order under section 263 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the common interest of the beneficiaries did not exist in the business carried on in terms of the trust deed ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the trust is entitled to be assessed under section 161(1) of the Income-tax Act at the normal rate and in the like manner and to the same extent as that of the beneficiaries ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the business was carried on as per authority given to the trustees under the deed of trust and the beneficiaries have not consented for the same ?"
17. The third question extracted above is the key question which directly deals with the points raised and that question is no longer res integra. In the case of W. O. Holdsworth v. State of Uttar Pradesh [1958] 33 ITR 472, the Supreme Court had occasion to consider the role of trustees under the U.P. Agricultural Income-tax Act and ruled as follows (P. 480) :
"The passage quoted above makes it abundantly clear that the legal estate is vested in the trustees and they hold it for the benefit of the beneficiaries.
Whatever be the position in English law, the Indian Trusts Act (II of 1882), is clear and categoric on this point. Section 3 of the Act defines a trust as an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner : the person who accepts the confidence is called the 'trustee' : the person for whose benefit the confidence is accepted is called the 'beneficiary' : 'the beneficial interest' or 'interest' of the beneficiary is his right against the trustee as owner of the trust property; the subject-matter of the trust is called 'trust property' or 'trust money'.
These definitions emphasise that the trustee is the owner of the trust property and the beneficiary only has a right against the trustee as owner of the trust property. The trustee is thus the legal owner of the trust property and the property vests in him as such. He no doubt holds the trust property for the benefit of the beneficiaries but he does not hold it on their behalf. The expression "for the benefit of" and "on behalf of" are not synonymous with each other. They convey different meanings. The former connotes a benefit which is enjoyed by another thus bringing in a relationship as between as trustee and a beneficiary or cestui que trust, the latter connotes an agency which brings about a relationship as between principal and agent between the parties, one of whom is acting on behalf of another."
18. Therefore, the clear distinction as to what constitutes "for the benefit of" and "on behalf of" is only that where consent of the persons is implicit or explicit to carry on the business, then the expression "on behalf of" would be attracted. If that element is totally wanting or absent, then what a trustee does is no more than an act for the benefit of the beneficiary or the beneficiaries. Applying the same ratio, the High Court of Judicature at Bombay, speaking through a Division Bench, in the case of CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187, held as follows (headnote) :
"The liability of trustees to income-tax is co-extensive with that of the beneficiaries and cannot in any case be a large or wider liability. If the assessment is made upon a trustee, whatever the nature of the income, whatever the mode of computation, his liability to pay tax must be determined in accordance with section 41 of the Income-tax Act.
Section 41 is mandatory and the assessment of the income returned by a trustee, whether it is derived from property held by him or from a business carried on by him or from the ownership of shares, can only be made in accordance with the special provisions laid down in that section. It is not open to the Department to ignore the provisions of section 41 and levy tax on a trustee in the same way as on an assessee who does not fulfil the character of a trustee.
Even though the income to be assessed is the income of a trustee, it must be assessed under one of the heads mentioned in Chapter III of the Act and the provisions laid down with regard to the computation of the income must be carried out. Section 41 will come into play after the income has been so computed."
19. This ruling of the High Court of Bombay was approved by the Supreme Court in the case of C. R. Nagappa v. CIT and in the case of CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555.
20. When the provisions of section 161(1) of the Income-tax Act fell for consideration under the Wealth-tax Act in the case of CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust , the Supreme Court ruled as follows (headnote) :
"The question in regard to the applicability of sub-section (1) or (4) of section 21 has to be determined with reference to the relevant valuation date. The Wealth-tax Officer has to determine who are the beneficiaries in respect of the remainder on the relevant valuation date and whether their shares are indeterminate or unknown. It is not at all relevant whether the beneficiaries may change in subsequent years before the date of distribution. Depending upon contingencies which may come to pass in future. So long as it is possible to say on the relevant valuation date that the beneficiaries are known and their shares are determinate, the possibility that the beneficiaries may change by reason of subsequent events such as birth or death would not take the case out of the ambit of sub-section (1) of section 21. The position has to be seen on the relevant valuation date as if the preceding life interest had come to an end on that date and if, on that hypothesis, it is possible to determine who precisely would be the beneficiaries and on what determinate shares, sub-section (1) of section 21 must apply and it would be a matter of no consequence that the number of beneficiaries may vary in the future either by reason of some beneficiaries ceasing to exist or some new beneficiaries coming into being."
21. Thus, the third question stands fully answered by the authoritative pronouncement of the Supreme Court is binding on us and it becomes totally unnecessary to call for a reference to answer the third question.
22. In the view we have expressed, if the assessing authority has correctly assessed in accordance with sub-section (1) of section 161 of the Act, as it was prior to the amendment, then, it cannot be said that the Commissioner could assume jurisdiction on the ground that it was prejudicial to the Revenue and, therefore, he certainly would not get jurisdiction to revise.
23. Thus, even the other questions raised would be inconsequential in the light of the answer already given by the authoritative pronouncement of the Supreme Court in regard to question No. 3.
24. In the result, we dismiss these petitions, but there will be no order as to costs.