1990 (10) TMI 369 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner of Income-tax u/s 263.
2. Existence of common interest among beneficiaries in the business carried on by trustees.
3. Entitlement of the trust to be assessed u/s 161(1) at normal rates.
4. Consent of beneficiaries for the business carried on by trustees.

Summary:

Jurisdiction of the Commissioner of Income-tax u/s 263:
The Commissioner set aside the assessment orders made by the ITO, directing reassessment of the trustees as an Association of Persons (AOP). The Tribunal, however, held that the ITO's assessment was correct and did not warrant interference by the Commissioner. The High Court upheld the Tribunal's decision, stating that the Commissioner did not have jurisdiction to revise the assessment as it was not prejudicial to the revenue.

Existence of Common Interest Among Beneficiaries:
The Court noted that to constitute an AOP, there must be a common purpose to venture and produce income. The beneficiaries under the trust did not voluntarily consent to the business carried on by the trustees, as the business was conducted per the trust deed's directions. Therefore, the beneficiaries could not be equated with an AOP.

Entitlement of the Trust to be Assessed u/s 161(1):
The Court emphasized that the trustee is the legal owner of the trust property and holds it for the benefit of the beneficiaries, not on their behalf. The trustee's liability to pay tax is co-extensive with that of the beneficiaries. The Supreme Court's ruling in W.O. Holdsworth v. State of Uttar Pradesh and other cases confirmed that the trustee's income should be assessed in accordance with section 161(1), not as an AOP.

Consent of Beneficiaries for the Business:
The Court found that the beneficiaries did not consent to the business carried on by the trustees. The trust deed empowered the trustees to manage the trust property, including carrying on business, without requiring the beneficiaries' consent. The beneficiaries only had the option to accept or reject the benefits from the trust.

Conclusion:
The High Court dismissed the petitions, affirming that the trustees should be assessed u/s 161(1) at normal rates, and the Commissioner did not have jurisdiction to revise the ITO's assessment. The beneficiaries' lack of consent to the business carried on by the trustees further supported the decision.