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Issues Involved:
1. Grouping of trustees as a unit for taxation. 2. Trustees as an "association of individuals" under Section 3 of the Income Tax Act. 3. Liability of beneficiaries versus trustees under Section 40 of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Grouping of Trustees as a Unit for Taxation: The primary issue was whether the three trustees should be grouped as a unit for taxation purposes. The court examined the provisions of the Income Tax Act, 1922, particularly Sections 3 and 55, which charge income tax and super-tax on "every individual, Hindu undivided family, company, firm, and other association of individuals." The court concluded that the trustees of the Hotz Trust, who carried on the hotel business, should be considered an "association of individuals" and thus liable for income tax and super-tax on the profits and gains of the business. 2. Trustees as an "Association of Individuals" under Section 3 of the Income Tax Act: The court analyzed whether the trustees could be considered an "association of individuals" under Section 3 of the Act. It was argued that the trustees, by virtue of their collective management and operation of the business, formed an effective business association. The court noted that the term "association of individuals" includes entities like firms and Hindu undivided families, which are not necessarily voluntary associations. The trust deed provided the trustees with extensive powers to manage the business, including borrowing money and accumulating income, which further supported their classification as an "association of individuals." 3. Liability of Beneficiaries versus Trustees under Section 40 of the Income Tax Act: The third issue was whether, under Section 40 of the Act, only the beneficiaries were liable for taxation. The court clarified that Section 40 is a machinery provision designed to facilitate tax collection in specific cases, such as when beneficiaries are minors, lunatics, or non-residents. This section does not preclude the taxation of trustees under the general provisions of the Act. The court referred to English case law, which established that trustees carrying on a business could be taxed on the profits of that business. The court emphasized that the trustees, being in receipt and control of the income from the business, were the appropriate parties to be taxed. Conclusion: The court answered the first and second questions affirmatively, confirming that the trustees should be grouped as a unit and considered an "association of individuals" for taxation purposes. The third question was answered by stating that Section 40 is merely a machinery section and does not affect the trustees' liability under the general provisions of the Act. The trustees of the Hotz Trust were thus liable to be assessed for the profits and gains of the hotel business. No order as to costs was made, as this issue had not previously been before the courts in India.
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