1997 (2) TMI 67 - HC - Income Tax

Summary

Issues Involved:

1. Whether the distributions received by the assessee from various discretionary trusts were assessable only in the hands of the trustees under section 164 of the Income-tax Act, 1961, and not in the hands of the assessee.
2. Whether the sum received by the assessee from various discretionary trusts is exempt from tax as it was paid out of dividends received by the trusts which were exempt under section 80K of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessability of Distributions from Discretionary Trusts:

The court initially opined that the distributions received by the assessee from various discretionary trusts were assessable only in the hands of the trustees under section 164 of the Income-tax Act, 1961, and not in the hands of the assessee. This was affirmed in favor of the assessee and against the Revenue. However, the Supreme Court reversed this judgment, following its decision in CIT v. Kamalini Khatau, holding that the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust. Consequently, question No. 1 was answered in the negative, in favor of the Revenue and against the assessee.

2. Exemption of Sum Received from Dividends Eligible under Section 80K:

The Tribunal initially observed that this question did not survive due to the answer given to question No. 1. However, it provided a finding on an assumption that if the question were to survive, it was a factual matter to be decided based on the material on record. The Tribunal noted that the Department did not argue that the amount received by the assessee did not come from the separate account maintained by the trustees regarding the dividends eligible for deduction under section 80K. The Tribunal held that the sum received by the assessee was eligible for deduction since it was paid out of dividends received by the trusts, which were eligible under section 80K.

Upon remand from the Supreme Court, the High Court considered whether the distribution of dividends eligible for deduction under section 80K, when passed on to the assessee, would also be eligible for such deduction. The court analyzed the provisions of section 80K and section 165, concluding that the dividends eligible for deduction under section 80K in the hands of the trustees would remain eligible for the same deduction when passed on to the beneficiaries. The court emphasized that the dividend income retains its character and does not change when passed from the trustee to the beneficiary. Thus, the amounts disbursed by the trustees out of such deductible dividend income are eligible for deduction under section 80K in the hands of the assessees.

The court concluded that the amounts received by the assessees from the discretionary trusts, which were paid out of the dividend income eligible for deduction under section 80K, were indeed eligible for the same deduction. Consequently, question No. 2 was answered in the affirmative, against the Revenue and in favor of the assessee in both references.

Conclusion:

Both references were disposed of with no order as to costs, affirming that the dividend income received by the trustees and passed on to the beneficiaries retains its eligibility for deduction under section 80K in the hands of the beneficiaries.