1989 (3) TMI 159 - AT - Income Tax

Summary

Issues Involved:
1. Status of a private discretionary trust for assessment purposes.
2. Entitlement to deduction under Section 80L of the Income-tax Act, 1961.

Detailed Analysis:

1. Status of a Private Discretionary Trust for Assessment Purposes:

Background and Conflicting Decisions:
The primary issue was whether a private discretionary trust, where beneficiaries or their shares are indeterminate or unknown, should be assessed as an 'Association of Persons' (AOP) or an 'Individual'. There was a noted conflict in decisions among different benches of the Tribunal. Some decisions (Educational Trust Fund v. ITO, First ITO v. Daxa A. Patel (P.) Rel. Trust, First ITO v. Radhasaran (P.) Religious Trust) held that such trusts should be assessed as an 'Individual' for the purposes of Section 80L. Conversely, the decision in Fifth ITO v. D.M.C.C. Employees Medical Aid Trust held that the status should be that of an AOP.

Arguments and Legal Provisions:
The department argued that the trusts should be assessed as AOPs based on previous assessments and the provisions of Section 164(1) which mandates that tax be charged at the maximum marginal rate. The department cited various case laws and legal commentaries to support this view.

The assessees, on the other hand, argued that the amendment introduced by the Finance (No. 2) Act, 1980, which changed the wording of Section 164(1), implied that the status should not be that of an AOP. They contended that Section 164(1) is relevant only for determining the rate of tax and not for computing income or determining status.

Tribunal's Findings:
The Tribunal observed that Section 164(1) is not a charging provision and does not aid in computing income. It is applicable only after the income has been determined. The determination of the status of the trustees should be based on general principles, not Section 164(1). The Tribunal referred to the Supreme Court's decision in Trustees of H.E.H. Nizam's Family Trust and other relevant case laws to conclude that the trustees should be assessed in the status of an 'Individual' rather than an AOP.

The Tribunal also noted that the trustees or beneficiaries did not join in a common purpose or action to produce income, which is a necessary element to constitute an AOP.

2. Entitlement to Deduction under Section 80L:

Assessees' Claim:
The assessees claimed that they should be assessed as 'Individuals' and thus be entitled to deduction under Section 80L, which allows deductions from the gross total income of an individual, Hindu undivided family, or an AOP consisting only of husband and wife governed by the system of community of property.

Department's Rejection:
The Income Tax Officer (ITO) rejected the claim, assessing the trusts as AOPs and denying the deduction under Section 80L.

Tribunal's Decision:
The Tribunal upheld the assessees' claim, confirming that since the trusts are to be assessed in the status of an 'Individual', they are entitled to deduction under Section 80L. The Tribunal confirmed the orders of the Commissioner of Income Tax (Appeals) [CIT(A)], which had accepted the assessees' claims.

Conclusion:
The Tribunal concluded that the assessees, being private discretionary trusts with indeterminate or unknown shares of beneficiaries, should be assessed in the status of an 'Individual'. Consequently, they are entitled to deduction under Section 80L. The departmental appeals were dismissed.