Scope of Sec.161 where trustee runs business on behalf of beneficiary. - Income Tax - 1643/CBDT

INSTRUCTION NO. 1643/CBDT Dated: July 29, 1985 The question whether trustees who are assessed in the capacity of representative assessees u/s.161 of the I.T. Act 1961 can be assessed in the status of an Association of persons where such trustees are authorised by the settler to carry on behalf of an for the benefit of the beneficiaries was examined by the Board in consultation with the Ministry of Law. The opinion given by the Ministry of law on the subject is as follows: U/s.161 the tax shall be levied upon and recovered from the representative assessee in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. In other words, the amount of tax payable by the Trustee would be the same as that payable by each beneficiary in respect of his beneficial interest if he were assessed directly. The status to be assigned to the representative assessee is the same as that of the beneficiaries. The status becomes all the more important in cases where the trustee is to carry on business by the settler on behalf of the beneficiaries. In such cases the trustees can be treated as an association of persons, the charge would be attracted to the totality of the income accruing to the person carrying on the business. In this context we may refer to the judgement of the Supreme Court reported in N.V.Shanmugham and Co. It was held by the Supreme Court that the profits were earned on behalf of the persons who had a common interest created by the order of the court and were on that account an association of persons. The liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of profit. Referring to the facts of the case in Indra Balakrishna (39 ITR p.546), it was observed - it was not said that any of them declined to receive the same. That means all of them acquiesced in the continuance of business. Each one of the assessee wants to share the profits earned on behalf of all of them but when it comes to question of paying tax, they want to deny that the business was conducted on behalf of all of them. It is true that considerations of equity are irrelevant in interpreting taxing provisions but while considering the question who carried on a business the course of conduct of the concerned parties is relevant. In other words in a case where a Trustee is authorised by the settler to carry on business on behalf of the beneficiaries the status of the beneficiaries is that of the Association of persons. Except in the case of minors it cannot be said that there was no consent is implied and therefore it is possible to take a view that the beneficiaries constitute an Association of persons. However we are not expressing any final view in case of trust exclusively for minors. The Supreme Court categorically held that where the beneficiaries received profits that means they have acquiesced in the continuance of the business. The course of conduct of the beneficiaries is relevant in determining who carried on the business. In the case of Shanmugham and Co. it is no doubt true that the business was carried on by the orders of the court. However in the cases where a trust is created in writing and the trustee is authorised to carry on business by the settler for the benefit of beneficiaries the profits were earned on behalf of the persons who had a common interest created under the trust deed and therefore they were on that account an Association of persons. As far as the assessment year 1985-86 is concerned the problem is solved by the Taxation Laws(Amendment) Act, 1984. In other cases since the language of section 161 is clear the status of the trustee shall be the same as that of the beneficiary and the tax shall be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. In other words the judgement of the Supreme Court in CWT Vs. Trustee of Nizam Family Trust(108 ITR p.555) may have to be followed. The position of law is explained in the MOLs opinion may kindly be brought to the knowledge of all officers working in your charge.