1962 (7) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Application of the first proviso to section 41(1) of the Indian Income-tax Act, 1922.
2. Determination of the status and rate of taxation for income from trust properties.
3. Interpretation of "on behalf of" in the context of section 41(1).

Issue-wise Detailed Analysis:

1. Application of the First Proviso to Section 41(1) of the Indian Income-tax Act, 1922:
The primary legal question was whether the first proviso to section 41(1) of the Act was rightly applied. The court examined the trust deed executed by C.R. Thiruvengadam Chetty, which conveyed self-acquired properties to trustees to administer for the benefit of his son and grandchildren. The Income-tax Officer had applied the maximum rate of tax, holding that the shares of the beneficiaries were indeterminate. The Appellate Assistant Commissioner and the Tribunal upheld this decision. The court noted that the income subject to tax was realized from trust properties and that the beneficiaries under the trust deed were indeterminate during the relevant assessment year. Consequently, the trustees were liable to be taxed under the first proviso to section 41(1).

2. Determination of the Status and Rate of Taxation for Income from Trust Properties:
The court analyzed whether the income from the trust properties should be taxed at the maximum rate, given the indeterminate shares of the beneficiaries. According to section 41(1), "any trustee or trustees appointed under a trust declared by a duly executed instrument in writing... are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from... trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable." The first proviso to section 41(1) stipulates that if the individual shares of the persons on whose behalf the income is receivable are indeterminate or unknown, the tax shall be levied at the maximum rate. The court concluded that the trust deed created a valid trust, and the income from the trust properties fell within the scope of section 41(1) and the first proviso.

3. Interpretation of "On Behalf of" in the Context of Section 41(1):
The court addressed the argument that a trustee is the legal owner of the trust properties and does not hold them "on behalf of others," but for their benefit. The assessee relied on the Supreme Court decision in W.O. Holdsworth v. State of Uttar Pradesh, which held that a trustee does not hold property "on behalf of others" under the U.P. Agricultural Income-tax Act, 1948. However, the court distinguished this case, stating that the expression "receive on behalf of any person" in section 41(1) was intended to mean "for the benefit of any person." The court emphasized the need for a harmonious construction of the statute, ensuring that no part of section 41(1) or its proviso becomes otiose. The court concluded that the expressions in section 41(1) should be interpreted to mean "for the benefit of other person or persons," thereby applying the first proviso to the trust in question.

Conclusion:
The court held that the first proviso to section 41(1) of the Act was rightly applied, as the trust deed created a valid trust with indeterminate beneficiaries during the relevant assessment year. The trustees were liable to be taxed at the maximum rate. The court interpreted the expressions in section 41(1) to mean "for the benefit of" rather than "on behalf of," ensuring a harmonious construction of the statute. The assessee was ordered to pay the costs of the department, with an advocate's fee of Rs. 250.