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TMI Blog1984 (11) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... Ranga Rao Bahadur, his second son, and towards the education of the lineal descendants of the said families. 5. The surplus of income, if any, after expenditure, as aforesaid, shall be utilised for the education of near relations of the said families at the discretion of the trustees for the time being, which shall be final as regards relationship or otherwise. 6. It shall not be competent to any trustee to utilise or expend any part of the income of the fund in payment of any salary or remuneration to any European male tutor, but the same may be expended in remuneration of the services of any lady tutor or governess employed for the education of any of the female members of the said families and their lineal descendants. 7. Any surplus of the income of the fund, not required for the education of any members of the said families or their lineal descendants or of any of their near relations in the manner aforesaid, may be applied by the trustee at his discretion in contributing towards the expenses, so far as may be practicable or any of the members of the said families or their lineal descendants or relations, as above detailed, and of other young men of any caste seeking edu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee should be taken as an AOP but for allowing exemption under section 80L the status of the assessee must be taken as individual. It was further contended that section 80L exemption was available in the case of all discretionary trusts. It was also contended that wealth-tax was levied against the assessee as a discretionary trust. If it was to be considered as an AOP, no wealth-tax could be levied. It was also contended that simply because for the purposes of calculation of tax rate of tax applicable to an AOP was applied, it does not make the status of the trust an AOP. The decision of the Hon ble Supreme Court in CIT v. Indira Balkrishna [1960] 39 ITR 546 was cited td show the essentials to be ful-filled before a group of persons can be considered as an AOP. According to the said decision, an AOP denotes an entity where two or more persons joined for a common purpose and common action to earn income. In case of a trust, the beneficiaries do not associate with each other to earn income. As such, the trust cannot be called an AOP. Reliance was also placed on the Bombay High Court s decision in the case of Orient Club v. CWT [1982] 136 ITR 697 and the Gujarat High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80L relief. At the time of hearing, an additional ground was filed to the effect that the assessee-trust fell under clause (iii) of the proviso to sub-section (1) of section 164 and, therefore, the income was liable to be charged to tax as if it were the total income of an AOP and not at 65 per cent of the income or at the maximum marginal rate. This ground should be considered separately irrespective of determination of status as an individual or as AOP. 8. We heard Shri Ch. Srirama Rao and Shri MJ. Swamy, the learned advocates for the assessee, and Shri N. Santhanam, the learned represen-tative for the department. Shri Srirama Rao argued that conceding every-thing in favour of the department, the tax levied by the ITO for the assessment years 1980-81 and 1981-82 exceeded the maximum marginal rate, and to the extent of the excess, relief to the assessee should be granted irrespective of the merits of the case. It is argued that during these two years the maximum marginal rate was 60 per cent but not 65 per cent. As far as this argument is concerned, the learned departmental representative had nothing much to oppose. Therefore, we hold that the excess tax of 5 per cent s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was brought about in the wording of the section by the Finance (No. 2) Act, 1980, with effect from 1-4-1980, whereas the section applicable to 1978-79 and 1979-80 is as substituted by the Finance Act, 1970, with effect from 1-4-1971. Under Explanation 2 to section 164, which is applicable to the assessment years 1980-81 and 1981-82, maximum marginal rate is defined as the rate of income-tax including surcharge on income, applicable in relation to the highest slab of income in the case of an AOP. This rate, as per the Finance Acts of 1981 and 1982, was only 60 per cent but mistakenly the ITO took the maximum marginal rate at 65 per cent. Hence, the relief which we have granted in the prior para. 10. Next it is contended on behalf of the assessee that the incomes of the assessee-trust for these four assessment years fall under clause (iii) of the proviso to sub-section (1) of section 164 and, therefore, the said income was liable to be charged to tax as if it were the total income of an AOP and not at 65 per cent of the income or at the maximum marginal rate. Proviso (iii) to sub-section (1) of section 164 is as follows : Provided that in a case where- (iii) the relevant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther submission that no new fact is required to be brought on record before appreciating the claim, is also not acceptable to us. From the wording of proviso (iii) to sub-section (1) of section 164, which is already extracted above, it can be seen that in order to bring the case with- in the four corners of the proviso, a finding that the trust was created bona fide for the benefit of the relatives of the settlor and those relatives were mainly dependent on the settlor for their support and maintenance should be given by either of the lower authorities. However, no such finding was either invited or given in this case. The word maintenance , as per the definition given in the Hindu Adoptions and Maintenance Act, 1956, includes provision for food, clothing, residence, education, medical atten-dance and treatment. The trust deed does not say that the beneficiaries were all dependent on the settlor for food, clothing, residence, medical attendance and treatment. When the interest of the beneficiaries under the trust deed was indeterminate and unknown, having special regard to clauses 7 and 8 of the trust deed, it is highly difficult to hold that the beneficiaries were all relatives ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the total income of the assessee is determined. His main contest is that this provision cannot be invoked to determine the status of the asses-see, with reference to which the total income has to be determined, especially after Chapter VI-A deals with deductions to be made in compu-ting the total income and section 80L deduction is to be determined at a stage when computing total income of the assessee. He further argues that the status of the assessee and computation of the total income of the assessee are quite different and distinct from the rate of tax, he is liable to pay on the said income. Section 164(1), according to Shri Srirama Rao, deals with the second aspect mentioned above but not with the first aspect. He further contended that the trustees assessable under section 161 of the Act, as well as under section 164, are only to be regarded as the represen-tative assessees within the meaning of section 160(1)(iii) of the Act. What has to be taxed is the interest which the beneficiary derives from the income of the trust. In a case where beneficiaries are more than one and their shares are indeterminate or unknown, the trustees would be assessable in respect of their tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to the status of the benefi-ciaries. It was also held that the beneficiaries under the three trusts before them cannot be considered as either AOP or BOI within the meaning of the Madras High Court s decision in CIT v. Deghamwala Estates [1980] 121 ITR 684. In order to constitute a BOI, the following requirements are essential, according to the Madras Bench. It held as follows : ... A common purpose, a common tie, actual or potential capacity to hold properties or disposable income, it was observed, would be a minimum requirement of a body of individuals. In the present case, these attributes cannot be said to be fulfilled with reference to the beneficiaries under the three trusts. Except that they are beneficiaries under a common fund of the trust, they have no other capacity or potentiality to hold or dissolve the funds. We must, therefore, hold that the status in the assessment cannot be that of body of individuals.... Next, they considered whether the beneficiaries under the trust deed can be considered to be within the definition of the word individual . The Bench held that the word individual was not defined under the Act but the ambit of the word individual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermined as individual in which case the deduction under section 80L was available while deter-mining its total income. 13. As against this contention of the learned counsel for the assessee, the learned departmental representative, Shri Santhanam, raised the contention that while assessing the trustee under a descretionary trust, the status of the trustee should always be taken to be an AOP, and he relied upon the decision of the Gujarat High Court in Smt. Kamalini Khatau s case, where B.J. Divan, C.L, expressing the majority view, held as follows : When one comes to section 164, the only departure that is made from the scheme of section 21(4) of the Wealth-tax Act is that instead of creating the fiction that the body of beneficiaries is a single individual, under section 164 the fiction is created that the income received by the representative assessee in the case covered by section 164 is as if the income were the total income of an association of persons . It is to be borne in mind that unlike the fiction in section 21(4) of the Wealth-tax Act, the fiction under section 164 is that the income is deemed to be the income of an association of persons and the tax has to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities to proceed against the beneficiary where the beneficiary is not any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate and unknown, it is not open to the tax authorities to treat the income of the trust except as the income of a fictional association of persons and the last portion of section 164 is only for the purpose of giving an option as to rates as explained above, the question of proceeding under section 166 against the beneficiary directly or recoverable from the beneficiary the tax payable by the representative assessee in respect of the amount paid in the course of a particular year of account by the trustees under a discretionary trust to one or other of the beneficiaries under section 164 can never arise. As the very language of section 166 says, it is an enabling section and as the Supreme Court has pointed out in C.R. Nagappa s case [1969] 73 ITR 626 section 166 makes express what is implicit in section 161(1) but, as we have pointed out above, since section 164 is an exception to section 161(1), the previsions of section 166 can only apply to those cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, we are not able to find as to how it helps the assessee in any of its contentions. There the question was whether the trust has to be assessed under section 161(1). Thus, the question that is referred to the High Court as well as the decision thereon is quite foreign to the real point in controversy before us and we, therefore, hold that it has no relevance for our purpose. 15. Reference was also made to the decision rendered by the Madhya Pradesh High Court in CIT v. Karelal Kundanlal Trust [1984] 148 ITR 412 for the proposition that when there are more trustees than one under the trust deed and when they are to be assessed as the representative assessee under section 161, whether they can be assessed as an AOP. The Hon ble High Court held that they cannot be so assessed. It was held that the assessment should be made either in the hands of the represen-tative assessee or directly in the hands of the beneficiaries but while assessing the representative assessees, it could be only with regard to the income to which the beneficiaries are entitled and the liability of the representative assessee will also be restricted to that extent. In our opinion, this decision does not fu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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