1944 (12) TMI 1 - HC - Income Tax

Summary

Issues Involved:

1. Whether Section 41 of the Income-tax Act is a machinery section or a charging section.
2. Whether the status of the beneficiaries is that of an association of persons.
3. Whether the assessee mutawalli should be taxed on the basis of profits falling to the share of each beneficiary or on the footing of all the beneficiaries constituting an association of persons.

Detailed Analysis:

1. Whether Section 41 of the Income-tax Act is a machinery section or a charging section:

The Tribunal found that Section 41 is not a charging section but a machinery section. It was noted that the principle underlying Section 41 in regard to trust income is that, so far as it is specifically the trust income of an individual beneficiary, it should be assessed as income of that individual. The Tribunal stated that the tax should be computed in the same way as it would have been computed had the assessment been made directly on the beneficiary. Thus, the assessment is to take into account the rate at which the beneficiaries are individually assessable, and the rate of tax is not to be computed by reference to the total business income of the trust.

2. Whether the status of the beneficiaries is that of an association of persons:

The Income-tax Officer initially considered that the beneficiaries should be treated as an association of persons and tax computed on that basis should be levied on the trustee under the provisions of Section 41. However, the Tribunal upheld the trustee's contention that on a proper construction of the deed, it cannot be contended that the beneficiaries or their individual shares are indeterminate and unknown. The Tribunal found that the first proviso to Section 41 (1) had no application to the case, and that the assessment of beneficiaries collectively in the status of an association of persons cannot be maintained having regard to the language of Section 41 (1). The Tribunal concluded that the persons entitled to be treated as beneficiaries under the waqf deed are the settlor, his wife, his five sons, seven daughters, and ten grandchildren, and that they take profits simultaneously and in equal shares.

3. Whether the assessee mutawalli should be taxed on the basis of profits falling to the share of each beneficiary or on the footing of all the beneficiaries constituting an association of persons:

The Tribunal directed that the profits falling to the shares of each beneficiary should be calculated separately, and the rate applicable to the total income of each beneficiary should be applied thereto and tax determined accordingly. The total amount of tax so calculated payable by all the beneficiaries shall be leviable upon and recoverable from the mutawalli. The High Court agreed with the Tribunal's conclusion, stating that the assessee mutawalli should be taxed on the basis of profits falling to the share of each beneficiary and not on the footing of all the beneficiaries constituting an association of persons. The High Court emphasized that the first proviso of Section 41(1) is inapplicable and the tax should be levied in the manner indicated by the Appellate Tribunal.

Judgment:

The High Court answered the reference by stating that the assessee mutawalli should be taxed on the basis of profits falling to the share of each beneficiary and not on the footing of all the beneficiaries constituting an association of persons. The assessee was entitled to the costs of the Court, with a hearing fee of Rs. 250. The judgment was concurred by both judges, with an appreciation for the clarity and lucidity of the Appellate Tribunal's order.