2003 (3) TMI 85 - HC - Income Tax

On the facts, it may be mentioned that the trust in the present case, is a fixed trust and not a discretionary trust and, therefore, section 164(1), relied upon by the Department, has no application. Secondly, in this case, section 164 has no application. That section only makes the trustees assessable, which is not the issue before the court. The only issue which arises for determination is whether section 45(4) applies to the facts of this case. That section would apply only if the trustees constitute an association of persons. Basically, in order to constitute an association of persons, persons must come together with the object of earning profits. In the case of CIT v. Marsons Beneficiary Trust, it has been held by the Bombay High Court that the trustees who are authorised to carry on business under the trust deed derive their authority from the settlor and not from the beneficiaries and, therefore, the trustees cannot be considered as an association of persons or body of individuals. This judgment applies to the facts of our case. In the present case, therefore, the trustees cannot be assessed as an association of persons and consequently, section 45(4) will have no application. Accordingly, we set aside the impugned notice.

Issues: Alleged escapement of income for the assessment year 1995-96; Applicability of section 45(4) of the Income-tax Act.

Analysis:
The judgment delivered by the High Court of Bombay pertained to a petition challenging the decision of the Department to reopen the assessment for the assessment year 1995-96 under section 148 of the Income-tax Act, 1961. The petition raised concerns regarding the alleged escapement of income. The case involved the L.R. Patel Family Trust, which owned a flat in Mumbai that was later sold. The Assessing Officer sought to reopen the assessment under section 45(4) of the Act, claiming that profits from the transfer of capital assets upon the dissolution of the trust were chargeable to tax. The petitioners contested this decision, leading to a legal dispute.

In the arguments presented before the court, the key issue revolved around the interpretation and applicability of section 45(4) of the Income-tax Act. The petitioner's counsel argued that section 45(4) would only apply in specific scenarios, such as the dissolution of a firm or association of persons. Reference was made to relevant judgments from the Bombay High Court to support the contention that the trustees should not be considered an association of persons. On the other hand, the Revenue's counsel argued that the trustees fell within the definition of "representative assessee" under section 160(1) and were liable to be taxed accordingly.

Upon analysis, the court found that the trust in question was a fixed trust, not a discretionary trust, rendering section 164(1) inapplicable to the case. The court emphasized that the crux of the matter was whether section 45(4) applied to the circumstances. To constitute an association of persons, individuals must come together with the intent of earning profits. Citing previous judgments, the court concluded that the trustees could not be assessed as an association of persons, thereby negating the application of section 45(4). Consequently, the court set aside the impugned notice issued by the Department.

In the final judgment, the court ruled in favor of the petitioners, making the rule absolute in terms of the prayer clauses (a) and (b) and decided no order as to costs. The judgment provided clarity on the interpretation of relevant sections of the Income-tax Act and their application in the context of trust entities, offering a significant legal precedent for similar cases in the future.

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