Income Tax Appellate Tribunal - Kolkata
Income-Tax Officer vs Shri Krishna Bhandar Trust on 9 March, 1989
Equivalent citations: [1989]29ITD15(KOL)
ORDER
D.N. Sharma, Judicial Member
1. In these departmental appeals though the assessees are different but the issues involved are identical and hence for the sake of convenience, they were taken up and heard together and are being disposed of by this common order.
2. These appeals earlier came up for hearing before the Appellate Tribunal, 'B' Bench, Calcutta which found that on the question as to whether a private discretionary trust whose beneficiaries or their shares are indeterminate or unknown, should be assessed in the status of an association of persons or an Individual, there was a conflict of decisions between different Benches of the Tribunal. It was noted by the Bench that in the cases of Educational Trust Fund v. ITO [1985] 12 ITD 563 (Hyd.), First ITO v. Daxa A. Patel (P.) Bel. Trust [1986] 17 ITD 263 (Bom.) and First ITO v. Radhasaran (P.) Religious Trust [1986]17 ITD 372 (Bom.) it was held that a private discretionary trust should be assessed in the status of an individual for the purposes of giving relief under Section SOL of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). On the other hand, the decision of the Tribunal in Fifth ITO v. D.M.C.C. Employees Medical Aid Trust [1987] 22 ITD 273 (Bom.) held that the status in such a case should be that of an Association of Persons. The Bench vide its order dated 1-12-1987 accordingly referred the following question to the President of the Income-tax Appellate Tribunal for constituting a larger Bench under Section 255(3) of the Act in order to resolve conflict:
Whether in a case of private discretionary trust whose beneficiaries or their shares are indeterminate or unknown the status under which it should be assessed should be taken as 'Association of Persons' or 'Individual' ?
The President constituted a Special Bench to hear these appeals.
3. The assessment year involved in these appeals is 1984-85. The assessee in each case is a private discretionary trust. In the case of Shri Krishna Bhandar Trust the trust was created by a deed of settlement dated 26-3-55 executed by Smt. Rukmini Devi Birla, wife of Sri B.M. Birla. Under this trust the settlor settled a sum of Rs. 1,000 for the objects purposes enumerated in the deed of settlement. The settlor appointed two trustees. Clause 3 of the deed of settlement runs as under :
3. The Trustees shall hold the Trust properties and shall from time to time apply the whole or part of the income and/or whole or part of the corpus of the Trust properties for the maintenance, education, marriage, medical relief of and for transfer to and/or otherwise applying for the absolute use, benefit and enjoyment of Shri Ganga Prasad Birla, his wife, sons and grandchildren, whether now living or hereafter to be born, hereinafter referred to as the 'Beneficiaries', in such proportion or shares as the Trustees may in their absolute discretion think fit and proper and upon the death of the survivor of the Beneficiaries now living namely Shri Ganga Prasad Birla, his wife Srimati Nirmala Devi Birla and his son Shri Chandrakant Birla the Trustees shall divide and hand over the Trust properties or so much thereof as may then remain in their hands amongst and transfer to the then living male descendants in the male line of Shri Ganga Prasad Birla absolutely in equal proportion or in such other proportion as may be mutually agreed by them amongst themselves and in the event of none of the male descendants in the male line of Shri Ganga Prasad Birla living at the aforesaid time the Trustees shall divide and hand over the Trust properties amongst and transfer to the other than living descendants of Shri Ganga Prasad Birla absolutely in such proportion or shares as the Trustees may in their discretion decide.
4. Clause 3 of the deed of settlement thus shows that individual shares of the beneficiaries are indeterminate or unknown and hence the trust created by the settlor is a discretionary trust. In the other three oases, three separate trusts were created by three deeds of settlement each dated 30th March, 1962. Trusts known as Chandra Kant Trust and Chandra Lekha Trust were created under deeds of settlement executed by Sri B.M. Birla and the third trust, namely Shashi Kant Trust was created under the deed of settlement executed by Smt. Rukmini Devi Birla. wife of Sri B.M. Birla. Relevant terms of these three deeds of settlement are similar to the terms of the deed of settlement dated 26-3-1955 executed by Smt. Rukmini Devi Birla except that different persons were appointed as trustees. Trusts created under the deeds dated 30-3-1962 are also private discretionary trusts inasmuch as shares of beneficiaries are indeterminate and unknown.
5. The assessees in all these cases earned income during the year from dividend and interest. In course of the assessment proceedings the assessees claimed that the assessment should be framed not in the status of an Association of Persons but as an Individual and that deduction under Section 80L of the Act should be allowed. In support of such a claim reliance was placed on the decision of the Tribunal in the case of Educational Trust Fund (supra). The ITO, however, did not accept the assessees' claim and assessed them in the status of an association of persons and did not allow deduction under Section 80L.
6. The assessees appealed to the CIT(A) who following the decision of the Tribunal in the case of Educational Trust Fund (supra), accepted the assessees' claim and held that the assessment should be made in the status of an Individual and that deduction under Section 80L should be allowed. Aggrieved by the decision of the CIT(A), the department has come up in appeal before the Tribunal in each case.
7. under Section 80L of the Act deduction is allowable from the gross total income of an assessee being (a) an individual, or (b) Hindu undivided family, or (c) an Association of Persons or a body of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. In each of the four cases before us the a,ssessee's contention is that it is assessable in the status of an Individual and hence deduction under Section 80L from the gross total income which is comprised of dividend and interest should be allowed. Before proceeding to record the arguments advanced before us on behalf of the parties, the conflicting decisions of the Tribunal on the point may be noted. The Hyderabad Bench 'B' of the Tribunal in the case of Educational Trust Fund following the decision of the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family Trust [1977] 108 ITR 555, held that the status of the trustees of the assessee-trust which was a discretionary trust was that of an individual and that the assessee was entitled to deduction under Section 80L. In Daxa A. Patel's case (supra) learned Single Member who decided that case allowed the assessee's claim that it should, be assessed in the status of an Individual by following the decision of the Supreme Court in the case of Trustees of Gordhandas Govindram Family Charity Trust v. CIT [1973] 88 ITR 47. Considering the language of Clause (c) of Section 80L(1) as it stood before the amendment inserted by the Taxation Laws (Amendment) Act, 1984, the Tribunal in that case further held that the assessee was entitled to relief even as an AOP under Section 80L(1)(c). In the case of Radhasaran (P.) Religious Trust (supra) the learned Single Member who decided that case was of the view that it would be more accurate to treat the status of the trust as an Individual.
8. A contrary view has been taken by Bombay Bench 'B' of the Tribunal in the case of D.M.C.C. Employees Medical Aid Trust (supra) wherein the Tribunal took the view that the assessee is a discretionary trust and is liable to be assessed in the status of an association of persons and not in the status of an Individual and as such relief under Section 80L(1)(a) would not be allowable.
9. Sri Biswas, learned senior departmental representative stated before us that for the assessment years 1982-83 and 1983-84 the assessees disclosed their status as that of an 'association of persons' and were assessed in that status for both those assessment years. It was submitted that since the assessee in each case is a discretionary trust, the case would be governed by the provisions of Section 164(1) with the result that not only tax shall be charged at the maximum marginal rate but the status of the assessee would be that of an association of persons for the purpose of computation of income. In this connection our attention was also invited to Explanation 2 to Section 164 which defines the expression "maximum marginal rate" as the rate of income-tax (including surcharge on incomes, if any) applicable in relation to the highest slab of income in the case of an association of persons as specified in the Finance Act of the relevant year. In support of the contention that the assessees before us should be assessed in the status of an association of persons, learned departmental representative placed reliance on the decision of the Calcutta High Court in the case of Smt. Santimoyee Bose v. CIT [1969] 74 ITR 133 decision of the Full Bench of the Gujarat High Court in the case of CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 and the decision of the Rajasthan High Court Jaipur Bench in Moti Trust v. CIT [1987] 165 ITR 367. Reliance has also been placed on the decision of the Tribunal in the case of D.M.C.C. Employees Medical Aid Trust (supra).
10. Learned departmental representative also referred to the following passage from Income-tax Law by Chaturvedi and Pithisaria which appears at pages 155 and 156 of the commentary :
Deemed association of persons"-In the contingency contemplated by the proviso to Section 164(1)(i) or Section 164(2) or 164(3)(a) or the proviso to Section 164(3)(a) of the 1961 Act, even though there is no association of persons, as contemplated by Section 2(31), it will be deemed to be an 'association of persons' [See, Smt. Santimoyee Bose v. CIT [1969] 74 ITR 133, 137 (Cal.)].
11. Our attention was also invited to the definition of 'person' given under Section 2(31) of the Act. In view of Sub-clause (v) of Section 2(31) 'person' includes an association of persons or a body of individuals whether incorporated or not. The provision of Section 2(31)(v) was relied upon by the learned departmental representative in support of the contention that the assessment in all these cases should be framed in the status of association of persons.
12. Learned departmental representative also relied upon the following passage from V.S. Sundaram's Law of Income-tax in India, Golden Jubilee Edition, page 2663 :
Income under the discretionary trust is only assessable in the hands of the representative assessee as if it were the total income of a fictional association of persons and is not assessable in the hands of the beneficiary even if the amount is paid to the beneficiary. In the event of any part of the income of the discretionary trust being paid to a beneficiary, the option is only as regards the rate at which the tax shall be charged but that too in the hands of the representative assessee only.
13. Sri R.N. Bajoria, Advocate appearing for the assessees, on the other hand, fully supported the impugned orders of the CIT (A) on the point under consideration. He contended that the assessees' case fell under the main provision of Section 164(1) and that the first proviso to Section 164(1) was not attracted in this case. It was pointed out that as a result of the amendment introduced in Section 164(1) by the Finance (No. 2) Act, 1980 with effect from 1-4-1980 the words "tax shall be charged - (i) as if the relevant income or part of relevant income were the total income of an Association of Persons or (n) @ 65 % whichever course would be beneficial to the revenue;" were substituted by the words "tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate". It was contended that in view of Section 164(1) as it stood after the amendment introduced with effect from 1-4-1980, the tax on the income of the assessees has to be charged at the maximum marginal rate and that in view of the omission of the words "as if the relevant income or part of relevant income were total income of an Association of Persons", the status of the trust cannot be taken to be that of an association of persons for the purposes of computation of its income. Sri Bajoria then submitted that the provisions of Section 164(1) are attracted only for the purpose of levying tax at a particular rate after income of the trust has been assessed. This according: to Sri Bajoria Section 164(1) comes into play after computation of income. Since question of computation of income depends on the status of the assessee, according to argument advanced by Sri Bajoria, recourse to Section 164(1) cannot be had before computation of income. According to Sri Bajoria the decisions of various High Courts and of the Tribunal relied upon by learned departmental representative have no application to the facts of the case in hand and are distinguishable.
14. Sri Bajoria next contended that the question whether the assessee-trust should be assessed in the status of an association of persons or an individual has to be decided on general principles. It was submitted that the trustees in the instant case have not mutually associated for the purpose of producing income and that they were jointly holding an office and were merely receiving income from dividend and interest. According to Sri Bajoria, the trustees could be assessed only in the status of an Individual and not as an association of persons. In support of this contention reliance has been placed on the decision of the Calcutta High Court in the case of Suhashini Karuri v. WTO [1962] 46 ITR 953 and also on the decision of the Bombay High Court in the case of Abhay L. Khatau v. CWT [1965] 57 ITR 202. Sri Bajoria also urged that the mere fact that there are more than one representative assessees could not lead to the conclusion that they constituted an association of persons and should be assessed as such. In support of this contention reliance has been placed on the decision of the Supreme Court in the case of N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310. Reliance has also been placed on the decision of the Madhya Pradesh High Court in CIT v. Karelal Kundanlal Trust [1984] 148 ITR 412 in support of the contention that the assessees cannot be assessed in the status of an association of persons. Reliance has also been placed on the decision of the Madras High Court in the case of CIT v. M.S. Menon [1987] 168 ITR. 125. Sri Bajoria submitted that in the instant case trustees or the beneficiaries whom they represented did not join in a common purpose the object of which was to produce any income. Thus according to Sri Bajoria the trustees have to be assessed in the status of an individual and not as an association of persons and therefore, deduction under Section 80L(1) was allowable in this case under Clause (a).
15. In reply, the learned departmental representative submitted that Section 164(1) applied not only for rate purposes but also to determine the status of the assessee. Relying on the provision contained in Explanation 2 to Section 164, Sri Biswas submitted that the trustees of a discretionary trust have to be assessed in the status of an association of persons. It was then contended that the decision of the Tribunal in Educational Trust Fund (supra) was erroneous. According to Sri Biswas in view of the decision of the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, the Tribunal was bound to follow the decision of the Calcutta High Court in the case of Smt. Santimoyee Bose (supra) which supported the view that in the case of a discretionary trust, trustees should be assessed in the status of an association of persons.
16. There is no dispute that in all these cases the assessee is a discretionary trust to which Section 164(1) is applicable. There is also no dispute that the first proviso to Section 164(1) which to some extent tones down the rigour of the maid section is also not applicable in this case and, therefore, tax on the total income has been charged in this case at the maximum marginal rate.
17. As has been pointed out by the learned departmental representative, in view of Sub-clause (v) of Section 2(31) 'person' includes an association of persons. under Section 4(1) income-tax is charged for any assessment year in respect of the total income of the previous year of every person. Section 160 defines "representative assessee". For the purpose of the present case we are concerned with Clause (iv) of Section 160(1). Under this clause, "representative assessee" means, 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 a Mussalman Wakf Validating Act, 1913, receives or is entitled to receive on behalf of or for the benefit of any person, such trustee or trustees. under Section 160(2), every representative assessee shall be deemed to be an assessee for the purpose of the Act.
18. Section 160(1) lays down the general law about liability of representative assessees and enacts that such representative assessees shall be subject to the same duties, responsibilities and liabilities as the beneficiaries whom they represent. Tax is to be levied on the representative assessees in the like manner and to the same extent as it would be leviable upon the persons beneficially entitled to the income. This is the general law when beneficiaries are determinate and their respective shares in the income are known. There may, however, be cases where the income or any part thereof is not specifically receivable by the representative assessee as referred to in Clause (iii) or (iv) of Section 160(1) on behalf or for the benefit of any one named person or where individual shares of the beneficiaries are indeterminate or unknown. In such a case Section 160(1) is inapplicable and Section 164(1) comes into play. At this stage it will be useful to trace out the legislative history of Section 164.
19. Section 164 as enacted in 1961 was in the following terms :
164. Charge of tax where share of beneficiaries unknown. - Where any income in respect of which the persons mentioned in Clauses (iii) and (iv) of Sub-section (1) of Section 160 are liable as representative assessees or any part thereof, is not specifically receivable on behalf or for the benefit of any person, or where the individual shares of the persons, on whose behalf or for whose benefit such income or such part thereof is receivable (which persons are hereinafter in this section referred to as the beneficiaries) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total income of an association of persons, or, where such income or such part thereof is actually received by a beneficiary, then at the rate or rates applicable to the total income or total world income of the beneficiary if such course would result in a benefit to the revenue.
20. The Finance Act, 1965 omitted the words "total world income" with effect from 1-4-1965, consequent on the deletion of Section 113 with effect from 1-4-1965.
21. The Finance Act, 1970 substituted the following section in place of the earlier section with effect from 1-4-1970 :
164. (1) Subject to the provisions of Sub-sections (2) and (3) where any income in respect of which the persons mentioned in Clauses (iii) and (iv) of Sub-section (1) of Section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereinafter in this section referred to as 'relevant income', 'part of relevant income' and 'beneficiaries', respectively), tax shall be charged--
(i) as if the relevant income or part of relevant income were the total income of an association of persons, or
(ii) at the rate of sixty-five per cent, whichever course would be more beneficial to the revenue ;
Provided that in a case where--
(i) none of the beneficiaries has any other income chargeable under this Act; or
(ii) the relevant income or part of relevant income is receivable under a trust declared by will; or
(iii) the relevant income or part of relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the Income-tax Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance ; or
(iv) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession, tax shall be charged as if the relevant income or part of relevant income were the total income of an association of persons.
(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, tax shall he charged on so much of the relevant income as is not exempt under Section 11, as if the relevant income not so exempt were the income of an association of persons.
(3) In a case where the relevant income is derived from property held under trust in part only for charitable or religious purposes and either the relevant income applicable to purposes other than charitable or religious purposes (or any part thereof) is not specifically receivable on behalf of any person or the individual shares of the beneficiaries in the income so applicable are indeterminate or unknown, the tax chargeable on the relevant income shall be either--
(a) the tax which would be chargeable if the whole of the relevant income (as reduced by the income, if any, which is exempt under Section 11) were the total income of an association of persons ; or
(b) the aggregate of--
(i) the tax which would be chargeable on that part of the relevant income which is applicable to charitable or religious purposes (as reduced by the income, if any, which is exempt under Section 11) as if such part (or such part as so reduced) were the total income of an association of persons; and
(ii) the tax on that part of the relevant income which is applicable to purposes other than charitable or religious purposes, and in respect of which the shares of the beneficiaries are indeterminate or unknown, at the rate of sixty-five per cent, .
whichever course would be more beneficial to the revenue : Provided that in a case where--
(i) none of the beneficiaries in respect of the part of the relevant income which is not applicable to charitable or religious purposes has any other income chargeable under this Act ; or
(ii) the relevant income is receivable under a trust declared by will; or
(iii) the relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the Income-tax Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust, to the extent it is not for charitable or religious purposes, was created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support or maintenance, tax shall be charged as if the relevant income (as reduced by the income, if any, which is exempt under Section 11) were the total income of an association of persons.
22. The Finance (No. 2) Act, 1980 effected, inter alia, the following further charges in the section with effect from 1-4-1980 :
'(1) The words 'tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate;' were substituted for the words "tax shall be charged-- (i) as if the relevant income or part of relevant income were the total income of an association of persons, or (ii) @ 65%, whichever course would be more beneficial to the revenue", occurring at the end of Section 164(1).
(2) Explanations at the end of the section were added. Explanation 2 reads as under :
In this section, 'maximum marginal rate' means the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an association of persons as specified in the Finance Act of the relevant year.
23. As has already been pointed out above, the assessees' case falls under the main section, i.e., Section 164(1). In the main section as it stood at the relevant time there is no reference to an 'association of persons' and in a case to which the main section is applicable tax, has to be charged at the maximum marginal rate which is defined in Explanation 2. In the instant case, therefore, it is not permissible to assess the trustees in the status of an association of persons with the aid. of the provision contained in the main section. Section 164(1) only lays down the rate at which the tax has to be charged on the income in the case of a discretionary trust". In view of the language of Section 164(1) it is clear that the provisions contained therein are called into play only after income had been determined and not before that. The provisions of Section 164(1) are not charging provisions, nor aid to computing income. In our opinion, it cannot be applied, for the purpose of computation of income. We are fortified in taking this view by the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family Trust (supra). Section 41 of the Indian Income-tax Act, 1922 and the proviso thereto are analogous to Section 160(1) and 160(4) of the Act. Their Lordships in the case of Trustees of H.E.H. Nizam's Family (supra) have held that Section 41 only comes into play after the income has been computed in accordance with Chapter III and then the question of payment of tax arises and it is at that stage that Section 41 issues a mandate to the taxing department that when they are dealing with the income of a trustee they must levy the tax and recover it in the manner laid down in Section 41 (at page 593 of the report). It must, therefore, be held that for the purpose of computation of income recourse cannot be had to Section 164(1) and from this it necessarily follows that the status of a representative assessee cannot be determined or ascertained with reference to Section 164(1) for the simple reason that determination of status of an assessee is a part of process of computation of income. In the instant case, therefore, for the purpose of determining the status of trustees we have to fall back upon the general principles which are germane for determining the question whether for the purpose of computation of income the status of the assessee is to be taken to be that of an association of persons or individual.
24. It has already been stated above that in all these cases the assessee-trust derived only dividend and interest income for the assessment year under consideration. In order to constitute an association of persons, the beneficiaries or trustees must voluntarily join in a common purpose or common action and the object of the association must be to produce income, profits or gains ; it is not enough that the income is received jointly. The mere fact that the beneficiaries or representative assessees are more than one cannot lead to the conclusion that they constitute an association of persons. The decision of the Supreme Court in the case of N.V. Shanmugham & Co. (supra) establishes the important principle that the mere fact that there are joint representative assessees, e.g., trustees or receivers, will not make them assessable as an association of persons. Representative assessees take their status from the beneficiaries they represent and it is wholly immaterial whether there is one representative assessee or there are two or more of them representing the same beneficial interest. Trustees would be assessable in the status of individual where they represent beneficiaries who are assessable separately in the status of individual.
25. In N.V. Shanmugham & Co. (supra), their Lordships of the Supreme Court have pointed out that the expression 'association of persons' is not defined in the Indian Income-tax Act, 1922. In that Act Section 3 was the charging section which is analogous to Section 4 of the 1961 Act. While considering the question as to the true meaning of the expression 'association of persons' their Lordships made the following observations :
In Commissioner of Income-tax v. Indira Ballcrishna [I960] 39 ITR 546, this court accepted the observations of Sir Harold Derbyshire CJ. in In re B.N. Elias that the word 'associate' means 'to join in common purpose or to join in an action.' Therefore, 'association of persons' as used in Section 3 of the Act means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one, the object of which is to produce income, profits or gains.
26. The Calcutta High Court in the case of Suhashini Karuri (supra) held that an association of persons is one in which two or more persons join in a common purpose or common action, the object of which is to produce income, profits or gains. It was further held that joint trustees must be taken to be a single unit in law and there is nothing wrong in treating such a unit as an individual. So this authority supports the proposition that the expression 'individual' takes within its sweep a group of individuals.
27. In the instant case neither the beneficiaries nor the trustees have joined in a common purpose or common action, the object of which is to produce income, profits or gains. In the assessment year under appeal the assessee in each case derived income from investment, i.e., from dividend and interest. The mere fact that beneficiaries or trustees are more than one cannot lead to the conclusion that they constituted an association of persons, the necessary element to constitute an association of persons as pointed out by the Supreme Court in the case of N.V. Shanmugham & Co. (supra) being altogether missing in the instant case, so the status of trustees in the instant case can only be that of an individual and not that of an association of persons. In the instant case there are more than one trustees and they are to be assessed as one unit in the status of an individual.
28. Hyderabad Bench 'B' of the Tribunal followed the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (supra) in holding that the atatus of the trustees in that case was that of an individual and so the assessee was entitled to deduction under Section 80L. The Tribunal in that case relied upon the following passage from the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (supra):
Obviously, in such a case it is not possible to make direct assessment on the beneficiaries in respect of their interest in the trust properties, because their shares are indeterminate or unknown and that is why it is provided that the assessment may be made on the trustees as if the beneficiaries for whose benefit the trust properties are held were an individual.
29. Their Lordships of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (supra) were dealing with a case under the Wealth-tax Act, 1957. Section 21 of the WT Act is analogous to Section 41(1) of the Indian Income-tax Act, 1922. The only difference between the two Sections is that whereas the former deals with the assets, the latter deals with income. Their Lordships noted that the assessment which is contemplated to be made on the trustee under Sub-section (1) or Sub-section (4) of Section 21 is assessment in a representative capacity. It is really the beneficiaries who are sought to be assessed in respect of their interest in the trust properties through the trustee. Their Lordships further observed that Sub-section (1) of Section 21 provides that in respect of trust properties held by a trustee, tax shall be levied upon him in the like manner and to the same extent as it would be leviable on the beneficiary for whose benefit the trust properties are held. Their Lordships held that this provision obviously can apply only where the trust properties are held by the trustees for the benefit of a single beneficiary or, where there are more beneficiaries than one, the individual shares of the beneficiaries in the trust properties are determinate and known.
30. Sub-section (4) of Section 21 of the WT Act applied to a discretionary trust and it laid down that in such a case wealth-tax shall be levied upon the representative assessee as if the persons on whose behalf or for whose benefit the assets are held were an individual for the purpose of the Act. The observations of the Supreme Court relied upon by the Tribunal in the case of Educational Trust Fund (supra) were made while considering the case where beneficiaries were more than one and their shares were indeterminate or unknown. To such a case Sub-section (4) of Section 21 of the WT Act was applicable which provides in explicit terms that wealth-tax shall be levied upon and recovered from representative assessee as if the persons on whose behalf or for whose benefit the assets are held were an individual. So, it was on the basis of the phraseology of Sub-section (4) of Section 21 of the WT Act that it was held by their Lordships that where beneficiaries are more than one and their shares are indeterminate or unknown, the assessment may be made on the trustees as if the beneficiaries for whose benefit the trust properties were held were an individual. Sub-section (4) of Section 21 of the WT Act is not analogous to Section 164(1) of the Income-tax Act, 1961 and, therefore, the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (supra) cannot be pressed into service in support of the contention that in the instant case the trustee should be assessed in the status of an individual. However, considering the facts of the case and the decision of the Supreme Court in the case of N.V. Shanmugham & Co. (supra), as also the decision of the Calcutta High Court in the case of Suhashini Karuri (supra) we have already held above that in the present case the trustees in their representative capacity must be assessed in the status of an individual.
31. The contention advanced on behalf of the department that the assessee trust or the trustees should be assessed in the status of an association of persons is based on the authorities cited on its behalf. It will, therefore, be necessary to consider those authorities in some detail. The Calcutta High Court in the case of Smt. Santimoyee Bose (supra) was concerned with the assessment years 1955-56 and 1956-57. In that case, in a suit for maintenance filed by the assessee Smt. Santimoyee Bose on behalf of herself and her minor children against her husband, the Court directed payment of maintenance at certain rates and also arrears of maintenance. The assessing officer rejected the contention of the assessee that under the decree awarded by the Court the share of each plaintiff was specific and determinate. The assessee and her children were treated by the assessing officer as an association of persons and the decretal amount was assessed accordingly. The following two questions were referred to the High Court under Section 66(1) of the Income-tax Act, 1922 :
(i) Whether, on the facts and in circumstances of the case, the share of decree holders in the maintenance awarded in the decree dated 1st February, 1955, passed by an order of the Hon'ble High Court in Suit No. 4059 of 1948 are equal ?
(ii) If the answer to question No. (i) is in the affirmative, whether the assessment should be made rateably on the amount receivable by each of the decree holders or otherwise ?
32. The High Court after considering the terms of the decree found that it was a joint decree and the maintenance was not on the basis of the shares of each of the plaintiffs. It has been held by the High Court that income was received on behalf of the persons whose shares were indeterminate and as such the proviso to Sub-section (1) of Section 41 of the Income-tax Act, 1922 applies. It was further held in that view of the matter that the assessee may be deemed to be an association of persons even though they are not an association of persons in fact.
33. Section 41 of the Income-tax Act, 1922 and the proviso thereto are analogous to Sections 161 and 164(1) of 1961 Act. Proviso to Section 41 of the Old Act which was considered by the High Court was as follows :
Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate ; but, where such persons have no other personal income chargeable under this Act and none of them is an artificial juridical person, as if such income, profits or gains or such part thereof were the total income of an association of persons.
34. In view of the aforesaid proviso to Section 41 of the Old Act, the Calcutta High Court held that in the contingency contemplated by the proviso even though there is no association of persons, as contemplated under Section 3 of the Act, it will be deemed to be an association of persons, if the person who manages or receives the income on behalf of other persons whose shares are indeterminate or unknown and the person who receives the income fulfils the character mentioned in the main part of Section 41(1). It was further held that in view of the deeming provisions contemplated by the proviso to Section 41 even though they (plaintiffs) 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 shares 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. Because of the use of the words "as if such income, profits or gains or such part thereof were the total income of association of persons" in the proviso to Section 41, a deeming provision was available as a result of which the assessee and her children in that case were deemed to be an association of persons even though in fact they did not constitute an association of persons. Such a deeming provision, however, is not available in the instant case. All the four cases before us undeniably fall within the main part of Section 164(1) which after the amendment introduced with effect from 1-4-1980 by the Finance (No. 2) Act, 1980 did not contain the deeming provision. Section 164(1) as it stood at the material time after the amendment introduced with effect from 1-4-1980 was as follows :
164. (1) Subject to the provisions of Sub-sections (2) and (3), where any income in respect of which the persons mentioned in Clauses (m) and (iv) of Sub-section (1) of Section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as 'relevant income', 'part of relevant income' and 'beneficiaries', respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.
35. Section 164(1) thus prescribes the rate at which tax is to be charged on the relevant income or part thereof. In the case falling under the main part of Section 164(1) tax is to be charged at the maximum marginal rate. The expression "maximum marginal rate" is defined under Explanation 2 to mean the rate of income-tax (including the surcharge on income-tax, if any) applicable in relation to a highest slab of income in the case of an association of persons as is specified in the Finance Act of the relevant year. Even with the help of Explanation 2, deeming provision is not available under the main part of Section 164(1) in the case of a discretionary trust. So, the decision in the case of Smt. Santimoyee Bose (supra) which was essentially based on the deeming provision contained in the proviso to Section 41 of the Old Act, cannot be applied to the present case for the simple reason that the deeming provision on the basis of which a representative assessee is to be deemed to be an association of persons even though in fact there is no association of persons, is not available under the main Section 164(1) which is applicable in the instant case. Here it is noticeable that the first proviso to Section 164(1) tones down the rigour of the main part of Section 164(1) in cases falling under Clause (i), (ii), (in) or (iv) of that proviso and in such cases tax shall be charged on the relevant income or part of relevant income as if it were the total income of an association of persons. So, it is only in respect of the cases falling under the first proviso to Section 164(1) that the deeming provision is available. Since the present case does not fall under the proviso but falls under the main part of Section 164(1), it necessarily follows that the representative assessees cannot be regarded as a fictional association of persons.
36. The Appellate Tribunal, Bombay Bench 'B' in the case of D.M.C.C. Employees Medical Aid Trust (supra) following the decision of the Calcutta High Court in the case of Smt. Santimoyee Bose (supra) held that trustees in that case were liable to be assessed in the status of AOP and not that of an individual. That case fell under Clause (iv) of the first proviso to Section 164(1) as a result of which tax in that case was to be charged on the relevant income or part of relevant income as if it were the total income of an association of persons. So, in that case also the deeming provision in view of which the assessee-trust could be treated as an association of persons by legal fiction was available. It was for this reason that the decision of the Calcutta High Court in Smt. Santimoyee Bose's case (supra) was applicable in that case. For the reasons that we have just stated above, the decision of the Tribunal in the case of D.M.C.C. Employees Medical Aid Trust (supra) is also not applicable to the present case.
37. The assessee in the case of Smt. Kamalini Khatau (supra) decided by a Full Bench of the Gujarat High Court was an individual and the assessment year involved was 1969-70. The assessee was a beneficiary under nine different trusts. She was the sole beneficiary in three of the nine trusts. In the return filed by her for the assessment year 1969-70 the assessee included the income from the said three trusts. The dispute in that case centred round income from the remaining six trusts which were all discretionary trusts. Under those six trusts the assessee was not the sole beneficiary but she was one of the groups of beneficiaries in each of the said six trusts. The assessee received an amount aggregating to Rs. 18,000 from the said six trusts and contended before the ITO that the said income of Rs. 18,000 was not liable to be assessed in her hands and that the same was taxable only in the hands of the trustees of the respective trust in view of Section 164. The ITO rejected this contention of the assessee and assessed the amount of Rs. 18,000 in her hands under Section 166 of the Act.
The assessee unsuccessfully challenged the said order of the ITO before the AAC. The assessee then appealed to the Tribunal. It was held by the Tribunal that no direct assessment on the assessee could be made in respect of the amount of Rs. 18,000 and that the said amount could be assessed only in the hands of the trustees of respective trust under Section 164. At the instance of the revenue the following question was referred to the High Court:
Whether on the facts and in the circumstances of the case, various amounts totalling Rs. 18,000 received by the assessee and the income of the six discretionary trusts are liable to be taxed in the hands of the assessee ?
38. The Gujarat High Court considered the provisions of Section 164 as it stood before the amendment introduced with effect from 1-4-1970 by the Finance Act, 1970. Section 164 which was considered. by the Gujarat High Court was as follows :
164. Where any income in respect of which the persons mentioned in Clauses (iii) and (iv) of Sub-section (1) of Section 160 are liable as representative assessees. or any part thereof, is not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable (which persons are hereinafter in this section referred to as the beneficiaries) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total income of an as sociation of persons, or, where such income or such part thereof is actually received by a beneficiary, then at the rate or rates applicable to the total income or total world income of the beneficiary if such course would result in a benefit to the revenue.
39. It will thus be seen that Section 164 as it stood before the amendment introduced with effect from 1-4-1970 contained a deeming provision because of the use of the words "tax shall be charged as if such income or such part thereof were the total income of an association of persons".
40. At page 666 of the report, the High Court quoted the following observati ons from CWT v. Kripashankar Dayashanker Worah [1971] 81 ITR 763 (SO) :
Section 21(1) of the Act is analogous to Section 41(1) of the Indian Income-tax Act, 1922. The only difference between the two Sections is that whereas the former deals with the assets, the latter deals with the income. Subject to this difference, two provisions are identically worded. Hence, the decisions rendered under Section 41(1) of the Indian Income-tax Act, 1922 have a bearing on the question arising for decision in this case.
41. The High Court then proceeded to observe that in view of the aforesaid pronouncement of the Supreme Court it is clear that the provisions of Section 21 of the WT Act being almost in identical language and being analogous to the provisions regarding representative assessee as enacted in Sections 161 and 164 of the Income-tax Act, the decisions under the WT Act will also have their impact in interpreting Sections 161 and 164.
42. Interpretation of Section 164 by the Full Bench of the Gujarat High Court is contained in the following passage which is at pages 671 and 672 of the report:
When one comes to Section 164, the only departure that is made from the scheme of Section 21(4) of the Wealth-tax Act is that instead of creating the fiction that the body of beneficiaries is a single individual, under Section 164 the fiction is created that the income received by the representative assessee in the case covered by Section 164 is 'as if the income were the total income of an association of persons.' It is to be borne in mind that unlike the fiction in Section 21(4) of the Wealth-tax Act, the fiction under Section 164 is that the income is deemed to be the income of an association of persons and the tax has to be charged as if the income of the trust were the income of an association of persons when it is not specifically receivable on behalf of or for the benefit of any one person or where the individual Shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown. Therefore, it is clear that the tax is to be charged on such income as if it were the total income of an association of persons and the rates applicable to an association of persons and all provisions applicable in law to the income of association of persons are applicable to this income which is covered by Section 164.
43. It will thus be seen that it was because of the deeming provision contained in Section 164 as it stood at the material time, that is, before the amendment introduced with effect from 1-4-1970 that the Gujarat High Court held that the income is to be deemed to be the income of an association of persons and the tax has to be charged as if the income of the trust were the income of an association of persons and further that all provisions applicable in law to the income of an association of persons are applicable to the income which is covered by Section 164. Finally, it was held that the income under the discretionary trust is only assessable in the hands of the representative assessees as if it were the total income of a fictional association of persons and is not assessable in the hands of the beneficiary even if the amount is paid to the beneficiary. The question referred to the High Court was accordingly answered in the negative, that is, in favour of the assessee and against the revenue.
44. For the reasons already stated above while considering the decision of the Calcutta High Court in the case of Smt. Santimoyee Bose (supra), the decision of the Gujarat High Court in the aforesaid oase cannot be applied in the present case with the result that the assessee trust or the trustees in each of the four cases before us cannot be held to be a fictional association of persons. In fact, the trustees or the beneficiaries do not constitute an association of persons as already found above. Here it may also be pointed out that it was not contended before us on behalf of the department that as a fact beneficiaries or trustees in these cases constitute an association of persons. The case of the department is that by legal fiction the trustees should be regarded as an association of persons and should be assessed as such.
45. The department has also placed reliance on the decision of the Rajasthan High Court in the Case of Moti Trust (supra). In that case the following questions were referred to the High Court for its opinion :
(1) Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in holding that the Commissioner of Income-tax was justified in passing the order under Section 263 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the findings of the Commissioner of Income-tax that the trust was a discretionary trust ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the shares of beneficiaries were indeterminate or unknown and, as such, the provisions of Section 164 were applicable ?
46. The High Court in the said case after considering the provisions of the trust deed, held that the assessee was a discretionary trust and the shares of the beneficiaries were not known and determinate. It will thus be seen that the issue involved and considered by the Rajasthan High Court in the case of Moti Trust (supra) was entirely different. The decision in that case has no bearing on the controversy raised in these appeals. Reliance on that, case by the department is, therefore, misplaced.
47. In view of the reasons given above, we hold that the assessee in each case is to be assessed in the status of an individual. It has not been disputed before us that if the status of the assessees is to be taken to be that of an individual, they would be entitled to deduction under Section 80L. We, therefore, confirm the order of the lower appellate authority in each case holding that the assessee is entitled to deduction under Section 80L.
48. In the result, all these departmental appeals fail and are hereby dismissed.