1988 (7) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Assessment status of the private trust.
2. Applicability of Section 164 of the Income-tax Act.
3. Liability of trustees as representative assessees.
4. Determination of beneficiaries' shares.
5. Assessment of trustees as an 'Association of Persons'.

Detailed Analysis:

1. Assessment Status of the Private Trust:
The primary issue in this appeal was whether the private trust should be assessed in the status of 'Association of Persons'. The trust was set up by an indenture of trust declared on 27-5-82, where the author of the trust, Shri L. Narayana Iyer, established the trust with a sum of Rs. 1,500 for the benefit of specific beneficiaries. The trustees filed a return of income showing an income of Rs. 780 and claimed a refund of tax deducted at source amounting to Rs. 3,75,000 out of a sum of Rs. 15,00,000 received as a lottery prize. The Income Tax Officer (I.T.O.) assessed the entire amount received as income in the hands of the trustees in the status of 'Association of Persons'. This assessment was confirmed by the CIT (Appeals).

2. Applicability of Section 164 of the Income-tax Act:
The assessee contended that the trustees could only be assessed as representative assessees to the same extent and in the same status as the beneficiaries. Since the beneficiaries were not liable to tax, there could not be an assessment on the trustees either. They argued that there cannot be an assessment outside the scope of Section 164, especially when the shares of the beneficiaries were known and determinate. The revenue, however, argued that since the income was earned by the trust, it was assessable in its hands directly before being distributed to the beneficiaries.

3. Liability of Trustees as Representative Assessees:
The tribunal considered the historical context and judicial precedents, noting that prior to the Income-tax Act, 1961, there was ambiguity regarding whether the revenue could choose to tax the beneficiary directly or the trustee. Judicial interpretations clarified that the primary liability for payment of tax was that of the beneficiary, and the trustee's liability was vicarious, designed to facilitate collection. This principle was reinforced by the Law Commission's recommendations and the enactment of Section 161 in the Income-tax Act, 1961, which made it clear that income received by a representative assessee could not be taxed under the general charging section.

4. Determination of Beneficiaries' Shares:
The tribunal found that the shares of the beneficiaries were determinate and known, as specified in the trust deed. The trust deed prescribed the distribution of 1/3rd of the net interest income to the beneficiaries annually, with the remaining income being capitalized. The tribunal rejected the revenue's argument that the shares were indeterminate because part of the income was being capitalized. The tribunal distinguished this case from others where trustees had discretion over the distribution of income.

5. Assessment of Trustees as an 'Association of Persons':
The tribunal held that the income arising from investments made by the trustees could not be said to be income arising to the beneficiaries, disregarding the provision in the trust deed. The tribunal cited the Supreme Court's decision in W. O. Holdsworth v. State of Uttar Pradesh, which clarified that a trustee is not an agent of the beneficiary. The tribunal concluded that the income earned by the trustees from investments was for the benefit of the beneficiaries, not on their behalf. Consequently, the assessment of the trustees as an 'Association of Persons' was not justified.

Conclusion:
The tribunal set aside the assessment made by the I.T.O. and directed the Income-tax Officer to frame a fresh assessment in accordance with the law. The appeal was allowed, emphasizing that the assessment of the trustees should align with the liability of the beneficiaries and that there should be no independent assessment of the trustees apart from the beneficiaries.