1995 (1) TMI 109 - AT - Income Tax

Summary

Issues Involved:
1. Whether the trustees should be assessed as an Association of Persons (AOP).
2. Determination of beneficiaries and their shares under the Trust Deed.
3. Applicability of Section 161 and Section 164 of the Income-tax Act, 1961.
4. Taxability of accumulated income versus distributed income.

Detailed Analysis:

1. Assessment as Association of Persons (AOP):
The CIT held that the trustees should be assessed as an AOP representing the group of beneficiaries, not as individual beneficiaries. This was based on the view that the trustees were carrying on business for the beneficiaries' benefit, implying consent from the beneficiaries to form an AOP. The CIT relied on the Supreme Court decision in N.V. Shanmugham & Co. v. CIT, which held that beneficiaries receiving profits implied their consent to the business being carried on jointly for mutual benefits. However, the Karnataka High Court in CIT v. K. Shyamaraju (Trustees) clarified that beneficiaries do not consent to the maker's wish in a trust, and hence, trustees should be assessed under Section 161(1) at the normal rate as prior to the amendment by the Finance Act, 1984. Thus, the Tribunal found the CIT's objection invalid.

2. Determination of Beneficiaries and Their Shares:
The CIT argued that due to the contingencies in the Trust Deed, such as marriage, death, or joining a religious order, the shares of the beneficiaries were indeterminate. However, the Tribunal noted that these contingencies were fixed and did not make the shares indeterminate at any particular point in time. The Supreme Court in CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust held that the possibility of beneficiaries changing in the future does not make their shares indeterminate if they are ascertainable at the relevant valuation date. The Tribunal concluded that the beneficiaries and their shares were ascertainable each year, thus not falling under the ambit of Section 164.

3. Applicability of Section 161 and Section 164:
The Tribunal held that Section 161(1) applied to the 1/4th income of the trust distributed annually, as the beneficiaries and their shares were ascertainable. However, for the 3/4th income accumulated annually, Section 164 applied because the beneficiaries' shares were indeterminate due to potential future changes. The Tribunal referred to the ITAT, Bangalore Bench's decision, which stated that accumulated income could not be assessed in the hands of beneficiaries annually as they might not be entitled to it due to death or other contingencies.

4. Taxability of Accumulated Income versus Distributed Income:
The Tribunal differentiated between the 1/4th income distributed annually and the 3/4th income accumulated. The 1/4th income was to be assessed under Section 161, allocated among beneficiaries based on their shares. The 3/4th income, due to its accumulation and potential changes in beneficiaries, was to be assessed under Section 164 at the maximum marginal rate. This distinction was upheld for the assessment years 1983-84 and 1984-85 as well, following the same rationale.

Conclusion:
The Tribunal partially allowed the assessee's appeal for the assessment year 1982-83, directing that 1/4th of the trust income be allocated among beneficiaries and assessed under Section 161, while the remaining 3/4th be assessed under Section 164. The departmental appeals for assessment years 1983-84 and 1984-85 were also partially allowed, following the same assessment method.