1992 (9) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Liability of a beneficiary in a private non-discretionary trust for the trust's business losses.
2. Entitlement of the beneficiary to set off the trust's business losses against other income.
3. Validity of the assessment order apportioning the trust's business losses among beneficiaries.

Detailed Analysis:

1. Liability of a Beneficiary in a Private Non-Discretionary Trust for the Trust's Business Losses:

The primary issue was whether the beneficiary of a private non-discretionary trust could be held liable for the losses incurred by the trust's business. The Tribunal observed that the trust, Emjak Trust, was a private non-discretionary trust with definite and determinate shares of various beneficiaries, subject to the provisions of the Indian Trust Act, 1882. According to Section 3 of the Trust Act, a trust is an obligation annexed to the ownership of property for the benefit of another. The trustee is the legal owner of the trust property, holding it for the benefit of the beneficiaries but not on their behalf. This distinction was crucial as it indicated that the trustee, not the beneficiaries, was responsible for managing the trust property, including any business activities.

The Tribunal referred to Clause 9(d) of the trust deed, which stated that trustees could pay losses from the trust fund or income but also mentioned that trustees would not be personally liable for any losses, which would be divided among the beneficiaries. However, the Tribunal noted that this clause was contradictory and ambiguous. Additionally, Clause 10(h) indicated that trustees would indemnify any nominee for losses incurred as a partner in a business, further suggesting that beneficiaries should not bear such losses.

2. Entitlement of the Beneficiary to Set Off the Trust's Business Losses Against Other Income:

The assessee argued that since the trust's business losses were apportioned among the beneficiaries, he should be entitled to set off his share of the loss against other income. The Tribunal examined the provisions of the Indian Trust Act and the Income Tax Act, 1961, to determine the validity of this claim. Section 55 of the Indian Trust Act grants beneficiaries the right to the rents and profits of the trust property but does not mention liability for losses. The Tribunal emphasized that beneficiaries are entitled to enjoy the benefits and advantages of the trust's income or property but cannot be burdened with the detriments or losses.

The Tribunal also noted that the trust is not a juristic person and, therefore, not an assessable entity under the Income Tax Act. Trustees are assessed in a representative capacity for the income derived for the benefit of the beneficiaries. The Tribunal rejected the assessee's reliance on the Supreme Court decision in CIT vs. J.H. Gotla, which interpreted "income" to include "loss," as it was not relevant for Section 161 of the Income Tax Act.

3. Validity of the Assessment Order Apportioning the Trust's Business Losses Among Beneficiaries:

The Tribunal scrutinized the assessment order where the trust's business losses were apportioned among the beneficiaries. It concluded that the assessment order was invalid and non est in law because there was no statutory obligation for trustees to file a return under Section 139(1) of the Income Tax Act in the event of a loss. The Tribunal reiterated that trustees are assessed for income in a representative capacity, and loss does not fall under the purview of Sections 161 or 164 of the Income Tax Act.

The Tribunal also highlighted that the trustees themselves had set off the business loss of the trust against future business profits, indicating that they did not consider the beneficiaries liable for the losses.

Conclusion:

The Tribunal concluded that the assessee, as a beneficiary of the private trust, was not liable for the trust's business losses and could not set off such losses against his other income. The appeal was dismissed, affirming the order of the Appellate CIT but for different reasons elaborated by the Tribunal.