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Issues Involved:
1. Whether the share of income of the assessee in the R.P. Mehra Family Trust should be included in her total income for rate purposes. 2. Interpretation of Section 86(v) and Section 161(1A) of the Income-tax Act. Detailed Analysis: Issue 1: Inclusion of Share of Income in Total Income for Rate Purposes The primary issue revolves around whether the share of income of the assessee, who is a beneficiary of the R.P. Mehra Family Trust, should be included in her total income for rate purposes. For the assessment years 1985-86 and 1987-88, the Income Tax Officers (ITOs) included the assessee's share of income from the trust in her total income under Section 86(v) of the Income-tax Act for rate purposes. The assessee contested this inclusion, arguing that since the trust's income was already taxed at the maximum marginal rate under Section 161(1A), her share should not be taxed again. Assessment Year 1985-86: The ITO included the assessee's share of Rs. 964 in her total income, invoking Chapter VII of the Income-tax Act for rate purposes. The Deputy Commissioner (DC) accepted the assessee's contention, stating that Section 86(v) applies only to members of an 'Association of Persons' (AOP) and not to beneficiaries of a trust. The DC concluded that since the trust's income was taxed at the maximum marginal rate, it would be unfair to include the share in the assessee's hands for rate purposes. Assessment Year 1987-88: The ITO included the assessee's share of Rs. 28,864 in her total income for rate purposes, arguing that there was no provision preventing such inclusion even after the trust was taxed at the maximum marginal rate. The DC upheld the ITO's action, relying on a consolidated order of the Commissioner of Income Tax (CIT) (Appeals) for similar cases, which stated that the share of a beneficiary from an AOP should be included in the total income for rate purposes, even if the AOP paid tax at the maximum rate. Issue 2: Interpretation of Section 86(v) and Section 161(1A) The assessee argued that she was not a member of an AOP or a Body of Individuals (BOI) but merely a beneficiary of the trust, and therefore, Section 86(v) should not apply. She further argued that the trust's income, having been taxed at the maximum marginal rate under Section 161(1A), should not be taxed again in her hands. The Tribunal considered the submissions and relied on the Bombay High Court's decision in CIT v. Marsons Beneficiary Trust, which clarified that beneficiaries of a trust are not members of an AOP or BOI. The court stated that trustees derive their authority from the settlor under the deed of trust, not from the beneficiaries, who are merely recipients of the income. Therefore, the beneficiaries cannot be considered as an AOP or BOI. The Tribunal noted that the insertion of sub-section (1A) to Section 161 from 1-4-1985 aimed to tax the entire income of business trusts at the maximum marginal rate to prevent loss to the National Exchequer. However, this did not change the option given to the ITO to tax the income either in the hands of the trust or the beneficiaries, provided the tax is levied at the maximum marginal rate. Conclusion: The Tribunal upheld the DC's order for the assessment year 1985-86, agreeing that the assessee should not be taxed on her share of the trust's income for rate purposes since the trust's income was already taxed at the maximum marginal rate. For the assessment year 1987-88, the Tribunal reversed the DC's order, directing that the assessee's share should not be included in her total income for rate purposes. Final Judgment: - The appeal filed by the Revenue for the assessment year 1985-86 is dismissed. - The appeal filed by the assessee for the assessment year 1987-88 is allowed.
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