2003 (11) TMI 52 - HC - Income Tax

The question referred to us is as to whether the Appellate Tribunal was right in law in cancelling the Commissioner s order under section 263, and proceeding to hold that the status of the trust should not be taken as that of an association of persons - section 161(1) does not contemplate the treatment of the beneficiaries of the trust which carried on business as constituting an association of persons , in cases where the extent of interest of each of the beneficiaries is known and is determinate - question referred is answered in affirmative and in favour of the assessee and against the Revenue.

Summary

Issues:
1. Whether the Appellate Tribunal was right in canceling the Commissioner's order under section 263 regarding the status of a trust as an association of persons.

Analysis:
The case involved an assessment year of 1983-84 concerning a trust created under a trust deed where all beneficiaries were minors, and the trust was engaged in the construction business. The Assessing Officer allocated income among beneficiaries, but the Commissioner deemed this prejudicial to Revenue, advocating for assessment as an association of persons based on Supreme Court precedents. However, the Tribunal disagreed, stating that the trust couldn't be considered an association of persons as the minor beneficiaries had no involvement in creating the trust or its business activities.

The Revenue challenged the Tribunal's decision, arguing that the principles from previous Supreme Court cases were reflected in the law. They contended that even before the introduction of a specific provision, the beneficiaries of a trust involved in business should be assessed as an association of persons. However, the Tribunal's decision was based on the lack of common interest among beneficiaries in this case, as the trust was unilaterally created by the settlor without beneficiaries' consent or involvement in business decisions.

The judgment emphasized the statutory provision of section 161(1) of the Income-tax Act, stating that tax should be levied on the representative assessee as if it were levied on the person represented by him. It clarified that beneficiaries of a trust engaged in business should not be automatically treated as an association of persons, especially when each beneficiary's interest is known and determinate. The court also highlighted that the introduction of section 161(1A) post the assessment year did not have retrospective or clarificatory effect, creating a new liability.

The decision distinguished the current case from the precedent involving court-appointed receivers carrying on business for winding up, where a common interest was established. In contrast, the trust in question was unilaterally created by the settlor without creating a common interest among beneficiaries. Ultimately, the court ruled in favor of the assessee, rejecting the Revenue's contentions and refraining from awarding costs due to the assessee's absence in representation.