1990 (10) TMI 43 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Commissioner of Income-tax under Section 263.
2. Existence of common interest among beneficiaries in the business carried on by the trust.
3. Assessment of trust income under Section 161(1) of the Income-tax Act.
4. Consent of beneficiaries for carrying on the business by trustees.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income-tax under Section 263:
The Commissioner of Income-tax, Karnataka, set aside the assessment orders made by the Income-tax Officer, considering them prejudicial to the interests of the Revenue. The Commissioner directed the Income-tax Officer to assess the trustees as an association of persons. The Tribunal, however, set aside the Commissioner's order, holding that the assessments by the Income-tax Officer were correct and did not require interference. The court upheld the Tribunal's decision, stating that if the assessment was correctly made under Section 161(1) of the Act, the Commissioner could not assume jurisdiction under Section 263 on the grounds of prejudice to the Revenue.

2. Existence of Common Interest among Beneficiaries in the Business Carried on by the Trust:
The court examined whether the beneficiaries had a common interest in the business carried on by the trust. The Revenue argued that the income from the trust should be taxed as that of an association of persons, citing Supreme Court decisions in N. V. Shanmugham and Co. v. CIT, Mohamed Noorullah v. CIT, and CIT v. Indira Balkrishna. However, the court distinguished these cases, noting that in the present case, the beneficiaries did not consent to the business being carried on by the trustees. The trust deeds empowered the trustees to manage the trust property without requiring beneficiary consent, thus negating the existence of a common interest or association among the beneficiaries.

3. Assessment of Trust Income under Section 161(1) of the Income-tax Act:
The court emphasized that under Section 161(1) of the Income-tax Act, as it stood before the 1985 amendment, the trustee is liable to be assessed in a representative capacity, and the tax is levied as if the income were received by the beneficiaries. The court referenced the Supreme Court's ruling in W. O. Holdsworth v. State of Uttar Pradesh, which clarified that trustees hold the legal estate for the benefit of beneficiaries but do not act on their behalf. The trustee's liability is co-extensive with that of the beneficiaries, as reaffirmed by the Supreme Court in C. R. Nagappa v. CIT and CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust. The court concluded that the assessment should be made under Section 161(1) at the normal rate applicable to the beneficiaries.

4. Consent of Beneficiaries for Carrying on the Business by Trustees:
The court found that the beneficiaries' consent was not required for the trustees to carry on the business, as the trust deeds explicitly empowered the trustees to manage the trust property. The court noted that trust creation, trustee appointment, and trust property management do not necessitate beneficiary consent. The beneficiaries' role is limited to accepting or rejecting the benefits conferred by the trust. Consequently, the court held that the beneficiaries could not be considered an association of persons with a common purpose or consent to the business activities carried on by the trustees.

Conclusion:
The court dismissed the petitions, affirming that the assessments made by the Income-tax Officer were correct and did not warrant interference by the Commissioner under Section 263. The court held that the trust income should be assessed under Section 161(1) at the normal rate applicable to the beneficiaries and that the beneficiaries did not constitute an association of persons. The court emphasized the distinction between "for the benefit of" and "on behalf of," concluding that the trustees acted for the benefit of the beneficiaries without their consent, thus negating the association of persons argument.