2000 (1) TMI 169 - AT - Income Tax

Summary

Issues involved:
1. Whether the CIT was justified in setting aside the order of the Assessing Officer under section 263 for the assessment year 1981-82.
2. Whether the Assessing Officer was justified in assessing the trust under section 164 for the assessment years 1982-83 and 1983-84.
3. Whether the Assessing Officer exercised an option by assessing the beneficiaries directly, thereby precluding subsequent assessment of the trust.
4. Applicability of section 166 in the context of discretionary trusts.
5. The impact of double taxation and the correct entity to be assessed.

Detailed Analysis:

1. Justification of CIT's action under section 263 for the assessment year 1981-82:
The CIT invoked section 263, finding the Assessing Officer's action of treating the trust as a specific trust erroneous and prejudicial to the interest of the Revenue. The CIT directed the Assessing Officer to assess the trust as a discretionary trust at the maximum marginal rate, citing the amendment to section 164(1) effective from 1-4-1980. The Tribunal upheld this action, emphasizing that the trust deed provided trustees with absolute discretion, making the trust a discretionary trust under Explanation 1(ii) of section 164.

2. Justification of Assessing Officer's action under section 164 for the assessment years 1982-83 and 1983-84:
For these years, the Assessing Officer initially assessed some beneficiaries but subsequently assessed the trust as a discretionary trust. The CIT(A) upheld these assessments, following the precedent set for the assessment year 1981-82. The Tribunal supported the CIT(A)'s decision, reiterating that the trust was discretionary, and the Assessing Officer was correct in taxing the trust at the maximum marginal rate.

3. Exercise of option by Assessing Officer:
The assessee argued that by assessing the beneficiaries directly, the Assessing Officer exercised his option under section 166, precluding further assessment of the trust. The Tribunal, however, found no merit in this contention, stating that the option must be explicit and not implied. The assessments of beneficiaries, mostly under section 143(1), did not constitute an exercise of option. The Tribunal emphasized that the right person to be taxed was the trust, not the beneficiaries, aligning with the Supreme Court's ruling in ITO v. Ch. Atchaiah.

4. Applicability of section 166 in discretionary trusts:
The Tribunal clarified that section 166 allows direct assessment of beneficiaries but does not preclude assessing the trust if it is deemed a discretionary trust under section 164. The CIT and CIT(A) correctly identified the trust as discretionary, and the Tribunal upheld this view, noting that the trust deed provided trustees with unfettered discretion over income distribution.

5. Impact of double taxation and correct entity to be assessed:
The Tribunal dismissed the assessee's argument of double taxation, emphasizing the duty to tax the right person. The Supreme Court's decision in Ch. Atchaiah supported this view, indicating that erroneous assessments on beneficiaries do not preclude correct assessments on the trust. The Tribunal concluded that the trust was the correct entity to be assessed, and any relief for double taxation should be sought by the beneficiaries.

Separate Judgment by Judicial Member:
The Judicial Member disagreed, emphasizing the option under section 166 to assess either the trust or the beneficiaries. He argued that once the beneficiaries were assessed, the Assessing Officer could not subsequently assess the trust. This view was supported by Supreme Court decisions in Jyotendrasinhji and Kamalini Khatau, which highlighted the option to tax either the trust or the beneficiaries but not both. The Judicial Member concluded that the assessments on the trust for the years 1981-82 to 1983-84 were invalid, while the assessment for 1984-85 was upheld.

Third Member's Decision:
The Third Member agreed with the Judicial Member, emphasizing the option under section 166 and the prohibition against double taxation. He noted that the assessments on beneficiaries constituted an exercise of the option, precluding subsequent assessments on the trust. The Third Member upheld the Judicial Member's view, invalidating the assessments on the trust for 1981-82 to 1983-84 and confirming the assessment for 1984-85.

Final Outcome:
The appeals for the assessment years 1981-82 to 1983-84 were allowed, and the appeal for the assessment year 1984-85 was dismissed. The Third Member's agreement with the Judicial Member led to the conclusion that the CIT was not justified in setting aside the Assessing Officer's order under section 263 for 1981-82, and the Assessing Officer was not justified in assessing the trust under section 164 for 1982-83 and 1983-84.