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TMI Blog1993 (4) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 796 and 797/Mds/79. 'B' 6-7-1982 ITA Nos. 1666 to 1668/Mds/80. ITA Nos. 2164 to 2180/Mds/84. 19-9-1989 ITA No. 1913/Mds/87. The CIT (Appeals) held that the status of the assessees must be taken as that of "artificial juridical person" and that consequently, they were not entitled to deduction under section 80L of the Act. In this regard, he was impelled by the consideration that while section 2(31) of the IT Act, 1961 defined the term "person" as including "every artificial juridical person, not failing within any of the preceding sub-clauses", the 1922 Act did not contain such a mention of "artificial juridical person" and it was, therefore, that under the old Act, the assessments of even deities had to be completed in the status of 'individual', although the expression 'Individual' should clearly apply to natural or living persons. Thus, he confirmed the denial by the Assessing Officer of the assessee's claim for deduction under section 80L of the Act, though for different reasons. 4. It is in these circumstances that the assessees are now before us. 5. Before us, Shri K.R. Ramamani, the learned counsel for the assessees, contended that the lower authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dar Trust) (29 ITD 15--SB) 8. In view of the foregoing, therefore, contended Shri Ramamani, the assessees are entitled to succeed. 9. On his part, Shri Bose, the learned Departmental Representative, strongly supported the impugned orders of the CIT (Appeals). According to him, the status of the assessee-trusts cannot be 'Individual', because, that status can be applied only to living persons, that is to say, natural human beings. For this proposition, he sought to derive support from the provisions of sections 54 to 64 of the Act. He also referred to and relied upon certain passages occurring on page 444 of Sampath Iyengar's Income-tax, Vol. I, Eighth Edition. 10. Shri Bose's next thesis was that if the status of the assessee-trusts cannot be 'Individual', it can only be artificial juridical person which, in a manner of speaking, is a residuary clause of section 2(31) of the Act. In this regard, he contended that an artificial juridical person is one who can sue and be sued, can own property, earn income, etc. The discretionary trusts before us possess all the above characteristics and that consequently, the CIT(Appeals) could not be faulted when he took the status of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income, but total income which can be arrived at only after applying the provisions of Chapter VIA of the Act. It should, therefore, follow that the assessees before us are entitled to the benefit of section 80L. In this regard, the learned counsel for the assessee highlighted the fact that section 164 does not preclude the grant of any deduction/allowance enumerated under Chapter VIA of the Act. Thirdly, no doubt, section 2(31) contains an inclusive definition of the term "person". Even so, apart from the consideration that the definition contained in section 2 are to be adopted or applied unless the context otherwise requires, there is the further significant consideration that if one were to travel beyond the seven categories enumerated therein one might face difficulties in administering the Act. One difficulty readily suggested itself and that was that the Finance Act does not prescribe the rate of taxation for any category other than the seven categories enumerated in section 2(31) of the Act. Therefore, the fact that section 2(31) contains an inclusive definition of the term "person" should not impel one to so extend the definition as to make the taxation of income imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In other words, the assessee-trusts before us are not entitled to deduction under section 80L of the Act. 17. The final point made by Shri Bose was that the ruling given by the courts of law under the Wealth-tax Act, 1957 to the effect that the word "Individual" was wider enough to include a group of persons forming a unit cannot be imported into the Income-tax Act. This was because, under the Wealth-tax Act, wealth-tax is chargeable only in respect of the net wealth of only three specified entities, namely, (i) Individual, (ii) Hindu undivided family, and (iii) Company. Further, unlike the Income-tax Act, the Wealth-tax Act does not contain any definition of the term 'person'. It was, therefore, that the courts have, while dealing with cases falling under section 21(4) of the Wealth-tax Act, held that even if there was a plurality of trustees, the status must be taken as that of an "Individual". The position under the Income-tax Act, however, is different and under that Act, "Individual" can only be a living person, that is to say, a natural human being. It should, therefore, follow that in any event, the assessee-trusts before us cannot be assessed to tax in the status of an "I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) and (vii) of sub-section (31) of section 2 of the IT Act. It is, therefore, that while the assessee-trusts before us claim that their status should be taken as that of 'Individual', the Department resists that claim by contending that the assessees' status should be taken either as that of 'Association of Persons' or of 'artificial juridical person'. 23. The CIT(Appeals) has held that the correct status to adopt in these cases is 'artificial juridical person'. We may clear the decks as it were by pointing out that purely from the point of view of jurisprudence, the trustees of the trusts before us cannot be regarded as artificial juridical person. 24. The question that then arises for consideration is : "Whether the status of the assessee-trusts before us should be taken as that of an 'lndividual', as contended by the learned counsel for the assessee, or whether it would suffice if the more generic status of 'representative assessee' is adopted ?" 25. Income-tax is a tax on income. Under section 4 of the Act, income-tax is charged or levied on the person by whom the tax is payable. And as already noted, section 2(31) of the Act contains an inclusive definition of the ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commission. The Commission found that in all such cases, the assessment was being made in the hands of the above cited persons but on behalf of the "represented", namely, the incapacitated persons, non-residents, beneficiaries under trust, etc. It also noticed that while assessing the guardians etc., the old Act invariably stipulated that income received by guardians etc. on behalf of the incapacitated persons etc. should be assessed in the like manner and to the same extent as the incapacitated persons etc. According to the Commission, the best way to simplify the assessment of guardians etc. was to collect under one Chapter the related provisions, in so far as the rules applicable are common to all these cases. Towards this end, taking a leaf out of the South African Income-tax Act, 1941, the Commission coined a new expression "representative assessee" and introduced a scheme of assessment of "representative assessees". In the process, the Commission-- (i) defined the term 'representative assessee' as meaning guardians etc., (ii) defined the liability of representative assessee, (iii) rendered the representative assessee personally liable in cases where he parts with the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in such cases as recommended by the Commiission, it is not surprising that the Commission did not think it necessary to make any reference whatsoever to the status in which the trustee in such cases is to be assessed. The trust income is known. The rate at which the said income is to be taxed, namely, the rate applicable to an association of persons, is also known. The assessment is also to be made in a representative capacity and in the name of the trustee. Under the scheme recommended by the Commission, therefore, in such cases where the shares of the beneficiaries are unknown or where the income is not received on behalf of a particular beneficiary, it is unnecessary to attach to the trustee any status other than that of a representative assessee. 34. There is yet another 'change of substance' made by the Commission that needs to be noticed and that is the substitution of the word 'person' for the words 'Individual', 'Hindu undivided family', etc. occurring in section 3 of the old Act and the consequential amplification or widening of the definition of 'person' in section 2(9) of the old Act. In this regard, the Commission stated that the use of the word 'person' in the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is liable at the maximum marginal rate : Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. Explanation : For the purposes of this sub-section 'maximum marginal rate' shall have the meaning assigned to it in Explanation 2 below sub-section (3) of section 164. (2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot, therefore, ordinarily affect the incidence of tax on the beneficiary. 42. To sum up : As pointed out by the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family Trust [1977] 108 ITR 555, the assessment of a trustee in such cases has three consequences. First, there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though for the sake of convenience there may be only one assessment order specifying separately the tax due in respect of the income of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. And lastly, 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 provisions of section 161(1) can obviously apply only when income is specifically receivable by a trustee on behalf or for the benefit of a single beneficiary, or, where there are more beneficiaries than one, the individual shares of the beneficiaries are determinate and known. They beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Finance Act, 1970, the income received by the trustees of a discretionary trust was chargeable at the rate of sixty five per cent or the rate which would be applicable if such income were the total income of an association of persons, whichever course is more beneficial to the revenue. (c) Then came the Finance (No. 2) Act, 1980, which stipulated that income of discretionary trusts would be charged to tax at the maximum marginal rate, the term "maximum marginal rate" being defined as the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in case of an association of person as specified in the Finance Act of the relevant year. 44. Thus, under the new Act, the general rule of assessment of discretionary trusts is as follows : The assessment is made (a) in the name of the trustee(s), (b) but in a representative capacity, (c) the trust income being brought to charge at the maximum marginal rate as defined in Explanation 2 to section 164/section 2(29C). 45. The question that then arises for consideration is whether, given the aforesaid scheme of assessment of discretionary trusts, is it at all necessary to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessments made on representative assessees under section 161 of the Act. When it comes to section 164, however, the entire complexion of the assessment changes. To the extent that the income of the trust is not specifically receivable by the trustee on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income is indeterminate or unknown, section 164 clearly stipulates that the entire trust income would be charged to tax at the maximum marginal rate. In other words, whereas under section 161 it becomes necessary to compute the tax attributable to the share of each beneficiary and then aggregate the taxes so computed for the several beneficiaries for the purpose of determining the tax liability of the representative assessee, no such need arises under section 164 for the simple reason that the latter section has incorporated a totally different rule of assessment. It should, therefore, follow that whereas status becomes relevant under section 161(1), it becomes irrelevant under section 164. That is why we have earlier said that even if it is assumed that some status must be attributed to the trustees o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouncils, Corporations Sole and deities in whose favour private religious trusts have been created. With the amplification of the definition, the present term 'Individual' used in section 2(31) would signify natural human beings. Since even companies could be trustees of discretionary trusts, it would be clearly inappropriate to call them 'Individual' while making an assessment in their name but in a representative capacity. Conceptually speaking, therefore, the trustee(s) of a discretionary trust cannot be assigned the status of 'Individual' within the meaning of section 2(31) of the Act. 52. The status of 'Association of Persons' is not also apposite because, as pointed out by the Supreme Court in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546, the chief characteristic of an "association of persons" is that a group of persons must be associated in a common endeavour for producing taxable income. In the case of a trust, neither the trustees nor the beneficiaries satisfy the said basic criterion. Therefore, the status of " association of persons" is out. 53. That leaves the status "Body of Individuals". In the case of N.P. Saraswathi Ammal v. CIT [1982] 138 ITR 19 (Mad.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence between an association and a body is too pronounced to be slurred over. While an 'association' might well connote an active element of combining or associating, a 'body' would include even a comparatively inert mass of people or institutions. The only essential attributes of a BOI are that there should be a plurality of individuals and they must, in the gross have a nexus to a source of income. This conception at once excludes the crucial characteristics which we associate with an AOP, such, for instance, as a common intention and a common activity to produce taxable income. In other words, persons who do nothing but stand and wait may not be an AOP : but they may yet be a BOI, if they stand together, and wait for something to be shared between them. " 54. As we see it, the status "Body of Individuals" will be more appropriate than the status "Individual" in the context of assessment of trustee(s) of discretionary trusts under section 164 of the Act. In such cases, the beneficiaries of the trust constitute a plurality of individuals and they have, in the gross, a nexus to a source of income, namely, the income of a discretionary trust. Thus, they satisfy the basic characteri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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