1988 (6) TMI 56 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement of a discretionary trust to deduction under Section 80L of the Income-tax Act, 1961.
2. Status of trustees of a discretionary trust for tax assessment purposes.
3. Applicability of Section 161 and Section 164 of the Income-tax Act, 1961, in the context of discretionary trusts.

Detailed Analysis:

1. Entitlement of a discretionary trust to deduction under Section 80L of the Income-tax Act, 1961:

The primary issue in this appeal was whether a discretionary trust is entitled to a deduction under Section 80L of the Income-tax Act, 1961. The Income Tax Officer (ITO) had rejected the trust's claim for a deduction of Rs. 3,000 under Section 80L, arguing that such a deduction was available only to 'Individuals' and 'Hindu Undivided Families' (HUF), and not to an 'Association of Persons' (AOP). However, the Commissioner of Income-tax (Appeals) [CIT (A)] had allowed the deduction, relying on the Tribunal's decision in the case of Educational Trust Fund v. ITO, which held that trustees of discretionary trusts could be treated as 'individuals' for the purposes of Section 80L.

The Tribunal upheld the CIT (A)'s decision, affirming that trustees of a discretionary trust are entitled to the deduction under Section 80L. This decision was consistent with previous Tribunal rulings, including those by the Madras Bench in Gopal Srinivasan Trust v. ITO and the Pune Bench in Shri Rajesh B. Rathi Trust v. ITO, which had established that discretionary trusts should be assessed as 'individuals' and thus eligible for the deduction.

2. Status of trustees of a discretionary trust for tax assessment purposes:

The Tribunal examined the definitions and provisions related to 'person', 'assessee', and 'representative assessee' under the Income-tax Act. It emphasized that the trustees of a discretionary trust are to be assessed in their representative capacity, meaning they take on the status of the beneficiaries they represent. According to Section 161, the assessment on trustees should be made "in like manner and to the same extent" as it would be on the beneficiaries.

The Tribunal cited multiple Supreme Court decisions, including CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust and CIT v. Sodra Devi, which supported the view that the status of trustees should align with that of the beneficiaries. Therefore, if the beneficiaries are 'individuals', the trustees should also be assessed as 'individuals'.

3. Applicability of Section 161 and Section 164 of the Income-tax Act, 1961, in the context of discretionary trusts:

The Tribunal clarified the interplay between Sections 161 and 164. Section 161 outlines the liability of a representative assessee, stating that the tax shall be levied upon and recovered from the representative assessee in the same manner and to the same extent as it would be from the person represented. Section 164 deals with the charge of tax where the shares of beneficiaries are unknown or indeterminate.

The Tribunal noted that Section 164 does not alter the basis of assessment on the trustees of a discretionary trust. Instead, it reinforces that the trustees' liability is coextensive with that of the beneficiaries. This means that trustees are entitled to all exemptions, deductions, and abatements that the beneficiaries would be entitled to, including the deduction under Section 80L.

The Tribunal also addressed the contrary view expressed by the Bombay Bench 'B' in the case of Fifth ITO v. D. M. C. C. Employees Medical Aid Trust, which had held that a discretionary trust should be assessed as an AOP. However, the Tribunal distinguished the facts of the present case from that of the Bombay Bench, noting that the latter involved a different factual scenario and legal footing.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming that the trustees of the discretionary trust are entitled to the deduction under Section 80L. The status of the trustees for tax assessment purposes aligns with that of the beneficiaries, which in this case is 'individual'. The Tribunal's decision is consistent with previous rulings and Supreme Court judgments, reinforcing the principle that the liability of a representative assessee is coextensive with that of the person represented.