1994 (5) TMI 1 - SC - Income Tax

Held that the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of such income thereof as has been distributed and received by the beneficiaries in the course of the accounting year.

Issues Involved:
1. Option to assess and recover tax from trustees or beneficiaries of a discretionary trust.
2. Applicability of Section 164 of the Income-tax Act, 1961.
3. Interpretation of Sections 160 to 166 of the Income-tax Act, 1961.
4. Direct assessment of beneficiaries under Section 5 of the Income-tax Act, 1961.
5. Judicial precedents and their relevance to the issue.

Issue-wise Detailed Analysis:

1. Option to assess and recover tax from trustees or beneficiaries of a discretionary trust:
The primary question in these appeals is whether the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust when the income is distributed and received by the beneficiaries in the accounting year. The judgment concludes that the Revenue does have this option. The court holds that the Revenue can assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of such income that has been distributed and received by the beneficiaries during the accounting year.

2. Applicability of Section 164 of the Income-tax Act, 1961:
Section 164 deals with the charge of tax where the share of beneficiaries is unknown. It states that where income is not specifically receivable on behalf of any one person or where the individual shares of the beneficiaries are indeterminate or unknown, tax shall be charged as if such income were the total income of an association of persons. The court clarifies that Section 164 does not create a charge on the income of a discretionary trust but sets out how such tax shall be charged when the income is not distributed and when the income is distributed. The court rejects the contention that Section 164 is a code in itself and must be read with other provisions dealing with representative assessees.

3. Interpretation of Sections 160 to 166 of the Income-tax Act, 1961:
The court examines the provisions of Chapter XV, particularly Sections 160 to 166, which deal with the liability of representative assessees. Section 160 defines a representative assessee, including trustees. Section 161 states that every representative assessee shall be subject to the same duties, responsibilities, and liabilities as if the income were received by him beneficially and shall be liable to assessment in his own name in respect of that income. Section 166 clarifies that nothing in Sections 160 to 165 shall prevent the direct assessment of the person on whose behalf the income is receivable or the recovery of tax from such person. The court concludes that Section 164 must be read with these provisions and does not stand alone.

4. Direct assessment of beneficiaries under Section 5 of the Income-tax Act, 1961:
Section 5 defines the total income of a person resident in India to include all income received or deemed to be received in India. The court holds that the income of a discretionary trust distributed to and received by the beneficiary within the accounting year is subject to assessment in the hands of the beneficiary under Section 5. The court emphasizes that the beneficiary of a discretionary trust who has received income in the accounting year can be taxed thereon, as this income falls within the broad sweep of total income under Section 5.

5. Judicial precedents and their relevance to the issue:
The court refers to several judgments, including C. R. Nagappa v. CIT, Jyotendrasinhji v. S. I. Tripathi, and CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust, which support the view that the Revenue has the option to assess either the trustees or the beneficiaries. The court reiterates the principle that a representative assessee may be assessed in respect of income received by him as such and tax recovered from him only under and in the manner provided by the provisions dealing with representative assessees. The court also notes that the direct assessment of beneficiaries is permissible under other provisions of the Act, particularly Section 5.

Conclusion:
The court holds that the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of income distributed and received by the beneficiaries during the accounting year. The appeals are allowed, and the judgment of the majority under appeal is set aside. The references are answered in favor of the Revenue. There is no order as to costs.

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