Indian Kanoon - Search engine for Indian Law

6. Opening the case for the assessee Shri G. Sarangan submitted that incurring losses is also a concomitant of carrying on business and it is not essential always that every business should result in profit and gains only. When the trustees carry on business as per the wishes and direction of the settlor given in the trust deed then the beneficiary should not only be entitled to share the benefits and advantages arising from the profits of the trust's business but also automatically be and become liable to share and take upon themselves the detriment and disadvantages arising from the losses of trust's business. According to the assessee's counsel though the settlor has created a trust for the benefit of the beneficiaries yet the word "benefit" should not be viewed or considered by us in a very narrow and restricted sense so as to say that the beneficiaries cannot and should not be made liable for the detriment or losses which the trustees may incur while carrying on the business as per the terms of the trust deed. After all, submits Shri Sarangan the trustees carried on business for and on behalf of the beneficiaries and that being the case it is but logical that the beneficiaries shall have to share and be liable for the losses so incurred by the trustees in carrying on trust's business in accordance with the wishes and direction of the Author of the trust. Elaborating his argument further the assessee's counsel submitted that nowhere the settlor has stated in the trust deed that the beneficiaries will not be liable for losses incurred in any business being done and carried by the trustees as per the direction and wishes of the settlor. To support his case Shri Sarangan has drawn our attention to the provisions of Section 32 of the Indian Trust Act, 1882 to emphasise the point that the trustees have right to be reimbursed for the expenses incurred and loss in commercial parlance is nothing but excess of expenditure over income and, therefore, the trustees have rightly divided and apportioned the business loss to the accounts of various beneficiaries including this assessee and debited their accounts in the books of the trust with proportionate share of loss. To justify the claim and deduction of loss in trust's business from other income Shri Sarangan submitted that once the Officer assessing the trust has determined the loss of the trust's business and apportioned it amongst the various beneficiaries then it is not open to the Officer assessing the present assessee to reject and negative the claim for allowance and deduction of such share of loss of trust's business from his other income. In order to strengthen this argument Shri Sarangan submitted that in the case of firm when the Assessing Officer determines the loss of the firm and apportions the same amongst various partners of such firm then any partner-assessee has a right and in fact it is the duty of the Officer assessing such partner to give set off and deduction of such determined share of loss in the firm for arriving at the true taxable income of such a partner. The learned counsel for the assessee, Shri Sarangan, has also placed reliance on the decision of the Chancery Division in the case of Upton v. Brown (xerox copy of the decision filed) 26 Ch.D. 588 to support the case of the assessee. In the end, it was strongly urged by the assessee's counsel that the impugned order of the Appellate Commissioner be reversed and the appeal be allowed.

7. On the other hand, senior authorised representative of the revenue Shri P.K. Mondal while opposing the appeal relied and supported the orders of the lower authorities and did not advance much arguments. Shri Vasantha Kumar, junior authorised representative of the department, who assisted the senior authorised representative submitted that none of the submissions advanced by the assessee's counsel deserve consideration for allowing the appeal. The order of the Assessing Officer in the case of the trust determining and apportioning the losses amongst the various beneficiaries is invalid and non est in law and the assessee cannot derive any support from that order because there was no statutory obligation on the trustees to file any return under the provisions of Section 139(1) of the Income-tax Act, 1961 as there was a loss in trust's business. Loss return can be filed by other persons for the benefit of set off and carry forward of losses as laid down under the various relevant provisions of the Income-tax Act, 1961. The trust is not a juristic person in law submitted Shri V. Kumar and the assessment has to be made on the trustees in respect of the income of the trust derived by them in a representative capacity as per the provisions contained in Section 161/164 of the Income-tax Act, 1961. As per the provisions of Section 161/164 no assessment can be made on the trustees though in a representative capacity in the event of loss to the trust incurred through the medium of the trustees. To support the orders of the lower authorities the junior departmental representative has drawn our attention to Clauses 9(d) and 10(h) of the trust deed to convince us that in the event of losses the same has to be met from the trust fund or trust income and the beneficiaries cannot be saddled in respect thereof. That being the situation the beneficiaries are not entitled to claim for allowance of their share of loss in trust's business. It was further contended by Shri Vasantha Kumar that the trust has been created by the settlor to give and confer benefits and advantages on those persons (beneficiaries) chosen by him. The settlor did not create the trust to make the beneficiaries liable for losses, detriments and disadvantages owing to the acts of the trustees in carrying on business of the trust or in respect of any loss which may be incurred by the trustees from the other trust fund or investments in their hands. It was finally submitted by Shri Vasantha Kumar that the Assessing Officer did not commit any error in disallowing the claim of the assessee for deduction of share of loss in trust's business from other income and the Appellate Commissioner was equally right in agreeing with the Assessing Officer and as such no interference is called for.

The Trustees may pay out of the Trust Fund and the income of the Trust such losses, damages, costs, charges and expenses as they may incur, sustain or be liable in such business or other activity or otherwise, as the Trustees may think fit. Further, the Trustees shall not be personally liable for any losses or deficit that may arise from such business activity or other activities or otherwise but the same shall be divided between and borne by the beneficiaries.

While in the first part of the said clause the settlor says that the trustees may pay out of the trust fund and the income of the trust such losses, damages, cost, charges and expenses as they may incur, sustain or be liable in such business or other activity or otherwise, as the trustees may think fit. But in the later and continuing part of the same clause it is stated by him (settlor) that the trustees shall not be personally liable for any losses or deficit that may arise from such business activity or other activities or otherwise, but the same shall be divided between and borne by the beneficiaries. This is very nebulous inasmuch as the settlor has blown hot and cold in the same breath. The first part militates with the later part.

29. Under Section 9 of the Indian Trust Act every person capable of holding property may be a beneficiary and no consent is required to be obtained by the settlor from such a person for giving benefit from the trust's fund or trust's income. If a person does not intend to remain as a beneficiary under a trust he has a right under Section 9 of the Trust Act to renounce his interest by disclaimer addressed to the trustee or by alienating his interest in favour of any person as laid down under Section 59 of the Indian Trust Act. Now the question arises whether a person who has been made a beneficiary of a trust without his consent and will be saddled with liabilities of the trust or losses of trust's business carried on by the trustees particularly when the beneficiaries are not to be consulted by the trustees for carrying on a particular business or for that matter have any say in the management or day to day affairs of the trust's business carried on by the trustees? The answer obviously and emphatically shall be 'No' and only 'No'. For if the answer is in the affirmative then the result will be disasterous and ruinous because the beneficiaries and their estates will ultimately get eaten up and deplete if the liabilities and losses of the trust are to be fastened on them. They (beneficiaries) cannot be made to suffer for being made a beneficiary in a trust without their will and consent. This can neither be the intention or wish of the settlor nor even that of the Legislature in enacting the Trusts Act.