1981 (9) TMI 98 - HC - Income Tax

Summary

Issues Involved:
1. Whether the income of the Hemant Bhagubhai Trust was includible in the assessable income of the assessee or assessable in the hands of the trust.
2. Whether the sum of Rs. 30,000 received by the assessee in each of the assessment years was assessable in the hands of the assessee.

Issue-wise Detailed Analysis:

Issue 1: Income of the Trust
The primary question was whether the income of the Hemant Bhagubhai Trust should be included in the assessable income of the assessee or be assessed in the hands of the trust. The relevant provisions of the trust deed dated April 6, 1944, were examined, specifically clause 2, which provided directions to the trustees regarding the management and distribution of the trust income.

The Income Tax Officer (ITO) initially held that the assessee, being the sole beneficiary, was entitled to demand the entire income of the trust for his support, maintenance, education, and advancement. The ITO emphasized the absence of any powers in the trustees to accumulate the income or add it to the corpus of the trust, thus including the income in the assessee's taxable income under section 41(2) of the Indian I.T. Act, 1922.

However, the Appellate Assistant Commissioner (AAC) and the Tribunal disagreed with the ITO's view. They held that the trustees had discretion in determining how much of the income was to be spent for the benefit of the assessee, making the trust a discretionary trust. The Tribunal concluded that the income was not specifically receivable on behalf of any one person, and therefore, the entire income should be assessed in the hands of the trust under the first proviso to section 41(1) of the Indian I.T. Act, 1922.

The court affirmed the Tribunal's view, stating that the trustees had discretion to apply the whole or part of the income for the support, maintenance, education, and advancement of Hemant. The trustees were not under any binding legal obligation to pay the entire net income to Hemant. The court emphasized that the trustees' discretion was absolute and not accountable to anyone, including the beneficiary. Consequently, the income was not specifically receivable on behalf of Hemant, and the first proviso to section 41(1) applied, making the income assessable in the hands of the trust.

Issue 2: Sum of Rs. 30,000 Received by the Assessee
The second issue was whether the sum of Rs. 30,000 received by the assessee in each of the assessment years was assessable in the hands of the assessee. The ITO had included this amount in the assessee's taxable income, but the AAC and the Tribunal rejected this view. They held that the beneficiary should not be taxed on the actual receipt of the amount since the trust was discretionary and the income was assessable in the hands of the trust.

The court agreed with the Tribunal, stating that the amount actually paid to the beneficiary by the trustees in any particular year could not be included in the income of the beneficiary. The fact that an identical amount was paid during all the assessment years did not alter the legal position. The court concluded that the entire income of the trust was to be assessed in the hands of the trust, and no part of it was assessable in the hands of the beneficiary.

Conclusion:
The court answered both questions in favor of the assessee, holding that the entire income of the trust was assessable in the hands of the trust and not in the hands of the beneficiary. The Commissioner was directed to pay the costs of the reference to the assessee.