1990 (8) TMI 223 - AT - Income Tax

Accounting Year, Charitable Institution, Deductions In Respect, Earned Income, From Other Sources, Long-term Capital Gains

Summary

Issues Involved:
1. Whether exemptions under sections 80G, 80L, and 80T should be granted separately to each beneficiary of a trust.
2. The applicability of section 166 for direct assessment of beneficiaries.
3. Taxation of capital gains in the hands of beneficiaries versus the trustee.
4. Entitlement of beneficiaries to deductions under sections 80G, 80L, and 80T.

Detailed Analysis:

1. Exemptions under Sections 80G, 80L, and 80T for Beneficiaries:
The primary issue revolves around whether exemptions under sections 80G, 80L, and 80T should be granted separately to each beneficiary of a trust. The assessees argued that since the assessment was made against each beneficiary under section 166, each should be entitled to separate exemptions. They relied on the Allahabad High Court decision in CIT v. Smt. Shakuntala Banerjee, which supported their claim for separate deductions under section 80L.

2. Applicability of Section 166 for Direct Assessment:
The contention was that section 166 allows for direct assessment of beneficiaries, implying that each beneficiary should be treated as an assessee for the purpose of exemptions. However, the learned departmental representative argued that section 166 applies only after the total income of the trust is determined, and deductions under Chapter VIA should be allowed while computing the trust's total income, not separately for each beneficiary.

3. Taxation of Capital Gains:
The judgment examined whether capital gains should be taxed in the hands of the beneficiaries or the trustee. It was determined that the trustee, as the legal owner of the trust properties, should be assessed for capital gains. The rationale was that the capital gains, once realized by the trustee, merge into the total income of the trust and lose their independent identity. This position is supported by the Supreme Court's decision in James Anderson v. CIT and the Calcutta High Court's decision in CIT v. Alfred Herbert (India) (P.) Ltd.

4. Entitlement of Beneficiaries to Deductions:
The judgment concluded that beneficiaries are not entitled to separate deductions under sections 80G, 80L, and 80T. The reasoning was that these deductions should be allowed while computing the total income of the trust, and the beneficiaries' liability arises only after the total income is ascertained. The Bombay High Court's decision in CIT v. Balwantrai Jethalal Vaidya and the Supreme Court's decision in CIT v. H.E.H. Mir Osman Ali Bahadur were cited to support this view. These decisions clarified that section 166 comes into play only at the stage of determining the tax payable on the total income, not during the computation of income.

Conclusion:
The judgment dismissed the appeals, holding that the exemptions claimed by the beneficiaries under sections 80G, 80L, and 80T could not be granted to them separately. The correct procedure is to compute the total income of the trust, allow the deductions under Chapter VIA, and then apportion the net income among the beneficiaries. The interpretation of section 166 was restricted to determining the amount of tax payable, not the entire assessment procedure. The Allahabad High Court's decision in Smt. Shakuntala Banerjee was not followed as it did not consider the authoritative judgments of the Bombay High Court and the Supreme Court.