1986 (2) TMI 150 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the Commissioner's order under section 263 of the Income-tax Act, 1961.
2. Determination of the correct status of the beneficiaries (AOP, BOI, or individual).
3. Applicability of section 164(1) and section 166 of the Income-tax Act.
4. Assessment of income derived from a trust carrying on business.
5. Interpretation of the trust deed and its implications on tax liability.

Detailed Analysis:

1. Validity of the Commissioner's Order under Section 263:
The appeal was filed against the order of the Commissioner under section 263 of the Income-tax Act, 1961, for the assessment year 1982-83. The Commissioner had directed that the return filed by the trustees should have been processed for determining the tax liability and not merely for determining the income. This was based on the view that the trustees represented an AOP (Association of Persons) of the beneficiaries, and thus, the assessment should be made on the trustees in like manner and to the same extent as the beneficiaries would have been assessed.

2. Determination of the Correct Status of the Beneficiaries:
The core issue was whether the beneficiaries constituted an AOP, BOI (Body of Individuals), or were individual beneficiaries. The Commissioner held that the trustees should be assessed as representing an AOP of beneficiaries. However, the Tribunal found that the beneficiaries were individuals with specific shares and that the trustees were carrying on business independently of the beneficiaries. The Tribunal concluded that there was no basis for holding that the beneficiaries constituted an AOP or BOI.

3. Applicability of Section 164(1) and Section 166:
Section 164(1) allows for the assessment of trustees as a procedural measure to enable the revenue to collect tax directly from the trustees rather than chasing the elusive beneficiaries. The Tribunal noted that the ITO had exercised the option under section 166 to assess the beneficiaries directly. The Tribunal found no error in this exercise of option, as it did not lead to any loss of revenue or jeopardize tax collection.

4. Assessment of Income Derived from a Trust Carrying on Business:
The Tribunal examined the nature of the trust and its business activities. It was noted that the trust was created for the benefit of two minors, and the trustees were authorized to carry on business. The Tribunal distinguished the case from N.V. Shanmugham & Co. v. CIT, where receivers carried on business on behalf of erstwhile partners with their consent. In the present case, the trustees acted independently of the beneficiaries, and there was no common bond or consent among the beneficiaries to constitute an AOP.

5. Interpretation of the Trust Deed and Its Implications on Tax Liability:
The trust deed provided for the distribution of income and corpus among the beneficiaries. The Tribunal found that the trustees were not carrying on business as agents of the beneficiaries but were acting based on the authority given by the settlor. The beneficiaries derived their income from the trust independently of each other, and there was no mutual link or common interest among them to constitute an AOP or BOI.

Conclusion:
The Tribunal concluded that the beneficiaries did not constitute an AOP or BOI and that the ITO's assessment of the beneficiaries directly did not lead to any error prejudicial to the interest of the revenue. The action taken by the Commissioner under section 263 was found to be invalid, and the appeal was allowed. The decision in Trustees of Anandani Family Trust's case was upheld, confirming that there was no AOP of the beneficiaries assessable to tax.