Income Tax Appellate Tribunal - Pune
Jitendra Trust vs Income-Tax Officer. on 31 January, 1989
Equivalent citations: [1990]33ITD270(PUNE)
ORDER
Per Shri R. L. Sangani, Judicial Member - All these appeals were heard together with the consent of the parties as the point involved was identical. These appeals are directed against the order of the Commissioner of Income-tax in exercise of his powers under section 263(1) of the Income-tax Act, 1961.
2. We shall narrate the facts in I. T. A. No. 525/PN/1987. The facts in that appeal are as follows.
3. The assessee is a private specific trust. There were three beneficiaries. All of them were minors. Each had 1/3rd share in the income of the trust. The settlor had authorised trustees to carry on the business. In accordance with the said directions of the trust deed, the trustees had carried on the business. The trustees filed the return in respect of income from the trust. The income was allocated to the beneficiaries whose share were determinate. The assessee had pleaded that the assessment was required to be made in accordance with the provisions of section 161(1) of the Income-tax Act, 1961. Since each of the beneficiaries was being separately assessed in respect of his share in the income of the trust, trustees had pleaded that they were not liable to be assessed in respect of the said income. The Income-tax Officer in his assessment order had accepted this position. He determined the business income at Rs. 75,777 and observed that the above income of the trust was assessed in the hands of the beneficiaries and as such the income to be assessed in the hands of the trust was nil. He allocated the above income amongst three beneficiaries the three beneficiaries were assessed in respect of his share in the said income.
4. Subsequently the Commissioner of Income-tax, Kolhapur, commenced proceedings under section 263 of the Income-tax Act, 1961. A notice was issued to the assessee-trust to show cause why the trustees of the assessee trust should not be assessed in the status of association of persons on the ground that they represented three beneficiaries who constituted an AOP. The assessee submitted that the beneficiaries of the trust did not constitute an AOP within the meaning of that expression which has been explained in the decision of the Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546. He also relied on the decisions in the case of CAIT v. Raja Ratan Gopal [1966] 59 ITR 728 (SC), Ladukishore Das v. State of Orissa [1973] 87 ITR 555 (Ori.) and G. Murugeson & Bros. v. CIT [1973] 88 ITR 432 (SC). It was submitted, on behalf of the assessee trust before the learned Commissioner of Income-tax that the assessment of the trustees of the trust where the share of the beneficiaries were known and determinate had to be made in accordance with the provisions of section 161(1) of the Act and that each beneficiary had a definite interest in the income of the trust and as such trustees were liable to be assessed in the like manner and to the same extent as each beneficiary. It was further submitted that since each beneficiary has been assessed in respect of his share of income from the trust, the trustees were not liable to be assessed directly in respect of the income of the trust. Reliance was placed on Circular No. 157 dated 26-12-1974 of the CBDT. It was further pleaded that the order of the Income-tax Officer was in accordance with the law and there was no error in the said order.
5. The learned Commissioner of Income-tax did not accept the submission of the assessee. He put strong reliance on the decision of the Supreme Court in the case of N. V. Shanmugham & Co. v. CIT [1971] 81 ITR 310. According to him the principles laid down in the said decision would be applicable as the facts were identical. On the basis of the principles laid down in the said decision the trustees, were, according to him, liable to be assessed as an AOP under section 161(1) of the Act because the persons on whose behalf income had been received namely the three beneficiaries should be regarded as AOP. He distinguished the decisions cited on behalf of the assessee. His attention was drawn to the fact that identical question had arisen before the Tribunal in several cases including the case of Trustees of Anilkumar Trust v. ITO [1986] 18 ITD 451 (Pune) and Trustees of Anandani Family Trust v. ITO [1984] 9 ITD 174 (Nagpur) in which all the aspects of this question were dealt with in detail and ultimately the point in controversy had been decided in favour of the assessee. The learned Commissioner of Income-tax, however, took the view that some of the aspects were not considered in those decisions and as such he did not agree with the view expressed in said decisions. He set aside the assessment and directed the ITO to assess the trust as an AOP on the full income of the trust and to raise demand at the rate applicable to the AOP against that order the assessee has come in appeal before us.
6. The facts in other appeals are identical. In each case there is a specific trust. The beneficiaries ar know and their shares determinate. In all the cases except the case of Dhanlaxmi Trust, all the beneficiaries are minor. In the case of Dhanlaxmi Trust there are six beneficiaries of whom four are minors and two are majors. In all the cases the trustees have been empowered to carry on the business by the settlor by direction in the trust deed. The beneficiaries have been separately assessed in respect of the share of income from the trust. In all the cases the Income-tax Officer had assessed the trustees in accordance with the provisions of section 161(1) of the Act. The Income-tax Officer had not brought the income of the trust directly to tax because the beneficiaries had been assessed in respect of the share received by them in the trust. In each case the Commissioner of Income-tax has passed a revisional order in which the reasons given are identical. The learned Commissioner has held in all the revisional orders that the beneficiaries should be regarded to be an AOP and as such the trustees were liable to be assessed directly in respect of the income of the trust in the status of an AOP. In all these cases the learned Commissioner has directed the ITO to assess the trustees directly in respect of the income of the trust in the status of an AOP. Each assessee has come in appeal before us against the direction given by the learned Commissioner. The grounds raised in each appeal are identical.
7. We have heard the parties. We find that the point in controversy is covered in favour of the assessee trust and against the department by the two reported decisions of the Tribunal namely Trustees of Anandani Family Trusts case (supra) and Trustees of Anilkumar Trusts case (supra). In both these decisions a large number of decisions of Supreme Court and High Court have been duly considered and the conclusion arrived at was that when the trustees carry on business in pursuance of the directions given in the trust deed, the beneficiaries who are entitled to receive specific individual shares from said income could not be regarded as an AOP formed to carry on the said business and the trustees could not be regarded as representative of AOP and could not be assessed in the status of AOP directly in respect of the said income. The Income-tax Officer would be bound to make as many assessment as there were beneficiaries and that when the beneficiaries have been separately assessed in respect of their share of income, the trustees could not be assessed in respect of the income of the trust. We are bound to follow the said decisions of the Tribunal. However, the learned departmental representative submitted that we should not follow the said decision and consider afresh all the aspects of the matter particularly the decision of the Supreme Court in N. V. Shanmugham & Co.s case (supra) which according to him had not been properly appreciated in the earlier decisions of the Tribunal. At the request of the learned departmental representative we have considered the matter afresh and after such consideration we are of the opinion that the view taken by the Benches of the Tribunal in the abovementioned decisions which has been followed in large number of decisions does not require any re-consideration. We proceed to state our reasons.
8. In some of the decisions under the Income-tax Act, 1922 distinction had been made in the matter of levy of tax, between income arising to a representative assessee under the head "business or profession", on the one hand, and income arising under the head other than "business or profession", such as, house property, interest on security, dividend etc., on the other. In respect of non-business income the court held that the tax should be levied on the representative in the same manner and to the same extent as it would have been leviable if the assessment had been made direct in the hands of the beneficiaries. In the case of business income, however, in some cases there were observations to the effect that there were two modes of assessing the representative assessee namely (i) levying the tax "in the same manner and to the same extent" as with reference to non-business income or (ii) ignoring the provisions relating to Chapter V of the 1922 Act (corresponding to Chapter XV of the 1961 Act) relating to special liability cases and to tax the business income in the entirety in the hands of the representative under the provisions of general charging section which was section 3 of the 1992 Act (corresponding to section 4 of 1961 Act). The reasons for applying the later mode of assessment was that the income arising from business or profession was chargeable in the hands of the persons "carrying on business" as expressed in section 10 of the 1922 Act (corresponding to section 28 of 1961 Act). The view taken was that so long as the representative was authorised by the terms of his appointment, either by deed or by an order of the Court, to carry on the business, he would be deriving income in his own right as a businessman and it was of no concern to the revenue as to how the representative of assessee distributed income among the beneficiaries. According to this view the charge would have attracted to the totality of income accruing to the "person carrying on the business". Consequently the rate of tax to be levied would be the rate applicable to such total income unaffected by the circumstances that such total income belong to several beneficiaries having definite shares. As corollary to the above it had been held that there was option to the revenue to choose either of the two modes of assessment. The decided cases expressing the above view came under examination in CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187 (Bom.) Birendra Kumar Datta v. CIT [1961] 42 ITR 661 (Cal.)., A Razzak v. CIT [1963] 48 ITR 276 (Cal.), CIT v. Court Receiver [1957] 31 ITR 885 (Bom.), Joint Receivers of the Estate of Dewan Bahadur C. Arunachala Mudaliar v. CIT [1961] 41 ITR 432 (Mad.) and CIT v. V. S. Kumaraswamy Reddiar Trust [1982] 138 ITR 808/8 Taxman 192 (Ker.). These cases elucidated the correct principle underlying the scheme of representative assessment, namely that the primary liability for payment of tax was that of beneficiary. The liability of representative was vicarious liability designed to facilitate collection, since representative was the person ordinarily handing the income of the beneficiary and as such, the method of tax liability in the hands of the representative should be the same as in the hands of the beneficiary. On such principle it was held that where the facts were that the income of any beneficiary was handled by a representative assessee as defined in section 160, such income whatever kind was exclusively assessable under the head "special liability" provisions of Chapter XV which drew no distinction between the income arising from "business or profession" and income arising from property, interest, dividend etc. The recommendation of the Law Commission in its 12th Report, pages 425 and 426 was as follow :
"Persons liable as representative assessee, especially the trustees, guardian or manager (i. e. the assessee governed by existing sections 40 and 41) at present, liable to be charged directly under section 3 also. In any case, the absence of a specific provision lends support to the opinion expressed by some commentators that the Act leaves an option with the Department to assessee the trustee, etc. either under section 3 or under section 40 or 41. Since the assessment under section 3 might be more onerous than under section 40 or 41, it seems desirable to make it clear that it is obligatory on the Department to apply the provisions of sections 40 and 41 in cases where they are applicable, leaving the general liability under section 3 to be applied only in case which are outside sec. 40 and 41. The draft sub-clause under discussion is intended to achieve this object. The above recommendation has been embedded in sub-section 2 of section 161 which is as follows :-
"Where any persons is, in respect of any income, assessable under this Chapter in the capacity of representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act."
9. Out of the cases referred to above, we refer to the decision of the Bombay High Court case. That is the decision which is binding on us. The Bombay High Court decision referred to above in the case of Balwantrai Jethalal Vaidya (supra). It is laid down in the said decision that section 41 of the 1922 Act was mandatory and that the assessment of the income returned by a trustee whether it is derived from property held by him or from business carried on by him or from ownership of shares can only be made in accordance with the special provisions laid down in that section and that it was not upon to the department to ignore the provisions of section 41 of the Income-tax Act, 1922 and levy taxes on a trustee in the same way as on an assessee who does not fulfil the character to trustee. It was further held there in that the liability of trustees to income was co-extensive with that of the beneficiaries and could not in any case be a larger or wider liability. If the assessment was made upon a trustee, whatever the nature of income, whatever the mode of computation, his liability to pay tax must be determined in accordance with section 41 of 1922 Act which was pari materia with section 161(2) of 1961.
10. In view of the above decision the submission of the learned departmental representative before us was based on the provisions of section 4 read with section 28(1) of Income-tax Act, 1961 are liable to be rejected and we reject the same. Another submission made before us was that the beneficiaries should be regarded as an AOP and for that reason the trustees should be assessed directly in respect of the income in the status of AOP. We are unable to accept this submission also. As already stated in all these cases (except one) all the beneficiaries are minors. These minors could not be regarded to have formed an AOP to earn income. It is submitted that their guardians should be regarded as form of AOP to earn the income. We are unable to accept this submission also. There is nothing on record to draw such inferences. We may mention here that the words "AOP" has an entity for assessment under section 2(31) of the Act 1961 which are not used in any technical sense but are required to be construed in their plain and ordinary meaning. Those words indicate that there is a combination of persons formed for the promotion of joint enterprise. In other words there are co-adventures who are branded together in common action. They would be assessable as AOP when they do not in law constitute a partnership. Generally speaking there can not be "AOP" in business unless the members of the group have joined together of their volition of free will. However, if the test governing the AOP is satisfied, the circumstance that the AOP emerges as a result of an order of the Court appointing a receiver would be immaterial. Where the income does not result from any joint venture or joint act, assessment in the status of AOP would not be justified. Reviewing the entire case law on the subject, the Supreme Court has held in Indira Balkrishnas case (supra) which was followed in G. Murugesan & Bros. case (supra) that in order to constitute an AOP persons must have joint for a common purpose or common action. The object of the association must be to produce income. It is no enough, that the persons receive income jointly. In Raja Ratan Gopals case (supra) this principle was followed and it was observed that collection of entire income from the establishment by one of the share or even by common employee would not make that income as income from a joint venture. In view of the above principle co-heirs, co-legatees or co-beneficiaries could not be regarded as an "AOP" merely because all of them receive income from a common source. In the present case the only facts on record are that settlor created a trust and authorised trustees to carry on the business. That the settlor directed that the income of the trust would be paid to the beneficiaries in particular proportion. In pursuance of the directions of the settlor the trustees carried on the business and divided the income amongst the beneficiaries. From these facts no inference can be drawn that the beneficiaries had formed an "AOP" to earn particular business income. In fact the consent of the beneficiaries for carrying on the business was irrelevant. The trustees who carried on the business were not directed by the beneficiaries either expressly or by implication to carry on the business. It is true that any beneficiary was entitled to disclaim the income receivable by him under the provisions of the Trust Act. However, non-exercise of that right of disclaiming the in come would not lead to an inference that the said beneficiary had been asked by the trustees to give his consent to the carrying on the business and had given consent for carrying on the business. As already stated the act of carrying on business does not depend on the consent of the beneficiaries, the trustee derive authority from the mandate given by the settlor in the trust deed. The fact that any beneficiary has not disclaimed the income from the business would lead to conclusion that the beneficiary did not want to disclaim his share of income from the trust property. That would not give rise to an inference that the beneficiary had directed the trustees to carry on the business. The difference between the right and duties of trustees and rights of the beneficiaries should be kept in mind in order to draw a proper inference. We therefore do not agree with the submission of the learned departmental representative to the effect that implied consent of beneficiaries given to the trustees for carrying on the business should be inferred in the circumstances of the present case.
11. We shall now refer to the decision of the Supreme Court in the case of N. V. Shanmugham & Co. (supra) on which strong reliance has been placed by the learned Commissioner of Income-tax and also by the learned departmental representative before us. This decision has been duly considered in the two decisions of the Tribunal in Trustees of Anandani Family Trusts case (supra) and Trustees of Anilkumar Trusts case (supra). However a submission has been made on behalf of the department to consider this decision afresh. We proceed to do so.
12. The facts in this case were that once of the partners of the firm had filed a suit in Civil Court for dissolution of the partnership firm with effect from 31-8-1956 and taking accounts. On 21-9-1956 the Court appointed three receives, two of whom were partners and the third was an advocate. The business had stopped prior to the appointment of the three receivers. The Court directed the receivers to re-open business and conduct snuff business subject to the terms, inter alia, that the receivers would carry on the business normally, that the profits, if any, earned will be treated as an assets of the firm. The business carried on by the receivers yielded income and the ITO proceeded to assess the same in the status of "AOP". The Supreme Court observed that the business was carried on by the receivers on behalf of erstwhile partners, with their consent and that the control and management was unified one. The Supreme Court further found that the receivers had joined in common purpose and they acted jointly and that when they did so, they acted on behalf of the persons who were the owners of the business. The Supreme Court recorded specific finding that the receivers did not and could not have represented, on the facts of the case, the individual interests of the various owners of the business. According to the Supreme Court profits had been earned on behalf of persons who had common interest created by the order of the Court and were on that account an "AOP". In law, according to the Supreme Court the erstwhile partners of the firm called on business through their representatives and the profits were earned from a business carried on by an "AOP".
13. It is obvious that in that case the partners were the owners of the business. They were not in a position to carry on the business because of the suit filed for dissolution of the firm. The Court directed that the business should be carried on during the pendency of the suit. Thus the business that was carried on was the business of the partners. The partners were the joint owners of the business. The receivers appointed by the Court represent the said partners who were joint owners of the business. It was on these facts that the Supreme Court held that the partners formed an "AOP" and as such receivers were liable to be assessed in the status of an "AOP".
14. In our case the facts are entirely different. In our case the business is legally owned by the trustees. The business is not owned by the beneficiaries. As already stated the beneficiaries have not joined in common venture to carry on the business. The beneficiaries have not initiated the business. The business is being carried on because of the directions of the settlor in the trust deed. In fact consent of the beneficiaries is not at all relevant for carrying on the business. Thus the facts in our case are materially different from the facts in the decision of the Supreme Court. Consequently the principle applied in said decision would not be applicable to the facts of the present case.
15. We find that the important principle that emerges from the decision of the Supreme Court in the case of N. V. Shanmugham & Co. (supra) is that the mere fact that there are joint representative assessees e. g. co-trustees or co-receivers, will not make them assessable as an "AOP". According to this decision 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 interests. For instance, according to this decision co-trustees would be assessable in the status of "individual" where they represent beneficiaries who are assessable separately in the status of "individual"; and, likewise, they would be assessable in the status of "AOP" where they represent beneficiaries who constitute an "AOP". Consequently the crucial question which would arise in the such case would be as to what was the status of the beneficiaries. In the present case as already stated the status of the beneficiaries was not that of "AOP". In accordance with the principle laid down by the Supreme Court in the case of CWT v. Trustees of H. E. H. Nizams Family (Remainder Wealth) Trust [1977] 108 ITR 555 there could be as many assessments as there are beneficiaries when the shares of the beneficiaries are determinate. Consequently in a case where there are three beneficiaries each of whom has a definite and distinct share, the trustees would be liable to be liable to be assessed in the status of individual in respect of their individual shares in their individual assessments. However, when the beneficiaries have been assessed in respect of their shares in the income of the trust, trustees would not be liable to be assessed again in respect of the income of trust in view of the provisions of section 161(2) of the Act.
16. It may be noted here that if the submission of the department to the effect that by not making disclaimer, the beneficiaries had given consent in respect of activities of the trust and as such they formed an "AOP" were to be accepted, the result would be that in all trust cases trustees would be liable to be assessed in respect of income of trust directly as an "AOP" irrespective of the fact that the income derived was income from business or income from any other source. In that case the provisions of section 161(1) would be rendered nugatory. We do not accept the submission made on behalf of the department.
17. Reference was made in the course of arguments on behalf of the department to the decisions in Hotz Trust of Simla v. CIT 5 ITC 8 (Lahore) and J. V. Saldhana v. CIT 6 ITC 114 (Mad.). In view of what we have stated above the principle laid down in those decisions would not be applicable to the facts of the present case. Consequently it is not necessary to discuss those decisions.
18. It was submitted on behalf of the department that receivers will receive income on behalf of the persons concerned while trustees would receive the income for the benefit of beneficiaries and that, the position would be the same in both the cases and as such the principle that has been applied in case of receiver would be applicable in case of trustees. We find that this submission is correct. However, that does not advance the case of the department any further. We have already stated the distinguishing facts of the decision of the Supreme Court in the case of N. V. Shanmugham & Co. (supra) in which the income had been received by the receivers on behalf of partners who were joint owners of the business and who formed A. O. P. We have pointed out that in the peculiar facts of that case the receivers did not and could not have represented the individual interest of the authorised owners of the business. They represented the joint interest of the owners. In the present case, in view of the provisions of trust deed, the trustees represent the individual interest of each beneficiary. The beneficiaries do not have common interest. Each beneficiary has specific interest in the income of the trust and there is no "AOP" as far as beneficiaries are concerned.
19. For reasons given above we are of the opinion that the decisions of the Tribunal in the case of Trustees of Anandani Family Trust (supra) and Trustees of Anilkumar Trust (supra) do not require re-consideration. We respectfully follow those decisions. We particularly rely on the decision of the Bombay High Court referred to in this order and also the decision of the Supreme Court discussed in this order and hold that in these cases the trustees were not liable to be assessed directly in respect of the income of the trust in the status of "AOP". We hold that since beneficiaries have been assessed in respect of their shares of income, trustees were not liable to be assessed in respect of such income. The original assessment had been correctly made. There was no error in the original assessments and as such the learned Commissioner of Income-tax was not justified in exercising the revisional powers. We therefore set aside the orders of the Commissioner of Income-tax and restore the original assessment orders.
20. Appeals are allowed.