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TMI Blog1984 (3) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Pewandbai, wife of Mulchand Anandani, resident of Jharipatka, Nagpur, by a duly executed instrument in writing whereby she appointed two trustees, viz., Shri Chandumal, son of Hundrajmal, resident of Jharipatka, Nagpur, and Shri Mahesh, son of Jodharam, resident of Jharipatka, Nagpur, for the benefit of six beneficiaries as under : 1. Pribhdas S/o Chandumal Aged about 7 years 2. Ravi S/o Chandumal aged about 5 years 3. Satish S/o Chandumal aged about 3 years 4. Ram S/o Jodharam aged about 11 years 5. Gyan S/o Jodharam aged about 9 years 6. Thakur S/o Jodharam aged about 3 years The relevant clauses of the trust deed are as under : "2. That for effectuating the settlement, the settlor doth hereby transfer and assign unto the trustees all the said sum of Rs. 11,500 by cash, and her beneficial interest in the said sum and to have hold the said sum and income thereof upon trust and for the purpose hereinafter declared of and concerning the same. 3. That it is hereby agreed and declared between the parties to these presents that the trustees shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he trustees for and on behalf of the trust hereby established." 3. The trustees of the trust filed returns of income for the assessment years in question. In the two assessment years, the assessee had shown the status as 'association of persons' (AOP). The returns were accompanied by a letter wherein it was stated that the shares of the beneficiaries in the trust are determinate and known. The six beneficiaries also filed the returns of income simultaneously in the status of 'individual' showing the share income from the trust. The ITO completed the assessments for the aforesaid two assessment years in the status of an AOP. In the column--Status--the words 'AOP' (Determinate Private Trust) appeared. In the assessment order the ITO further observed that the shares of the beneficiaries are determinate and known and, therefore, the same will be assessed at their hands direct, and, therefore, no demand is being raised in this case. He distributed the income of the trust amongst the beneficiaries in accordance with the shares held by them. 4. The Commissioner by a notice dated 18-11-1983 directed the assessee to show cause as to why the orders passed by the ITO could not be held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is covered by the decision of the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555. 5. The Commissioner rejected the contentions raised on behalf of the assessee for the reasons given in detail in Annexures 'A' and 'B' of his order. The Commissioner observed that the Supreme Court decision in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust was rendered on a finding of fact recorded that the single trust deed is in fact a trust in respect of each beneficiary and should be construed as several trust deeds in their favour. He observed that the Supreme Court had confirmed the Madras High Court decision in the case of N.V. Shanmugham Co. which in turn had disagreed with the conclusion of the Bombay High Court's decision in the case of CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187. According to him, there is no dispute regarding the applicability of section 161 and the assessment of the trustees as representative assessees, but section 161(1) does not say that the tax should be levied to the same extent as that is leviable upon the beneficiaries. The Commissioner further observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 41 of the 1922 Act also apply to the interpretation of section 161 of the 1961 Act. He relied upon the Supreme Court's decision in the case of C.R. Nagappa v. CIT [1969] 73 ITR 626 and the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust. Thus, according to Shri Dewani, the provisions of section 161 are mandatory and there is no option left with the revenue. 2. The beneficiaries of the trust do not constitute an AOP. It was contended that the words 'AOP' have received interpretation in the various cases decided by the Supreme Court. He then referred to the decision of the Supreme Court in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 and stated that the word 'associate' means to join in common purpose or to join in an action. He then referred to the three other decisions, namely, the decision of the Supreme Court in the case of CAIT v. Raja Ratan Gopal [1966] 59 ITR 728, the decision of the Orissa High Court in the case of Sri Ladukishore Das v. State of Orissa [1973] 87 ITR 555 and the decision of the Supreme Court in the case of G. Murugesan Bros. v. CIT [1973] 88 ITR 432. While referring to the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he receivers will pay every month certain specified amounts to the partners. Some time later the Court appointed a Commissioner for taking accounts and for arranging the sale of the business as a going concern. The business yielded for the assessment years 1958-59 and 1959-60 profits of Rs. 93,739 and Rs. 1,54,393 respectively, and the question was whether the profits could be assessed in the hands of the receivers in the status of an 'Association of persons' :" The Supreme Court held that the representative assessee derives the status from the person represented and, therefore, the assessment against the representative assessee has to be made in the status of all the persons represented who in that case were held to be an AOP. He contended that the facts of the present case are entirely different and it cannot be said that the trustees in this case are carrying on the business on behalf of the beneficiaries. For the proposition that the beneficiaries cannot constitute an AOP, three more decisions have been relied upon by the learned counsel, the first one being the decision of the Patna High Court in the case of Khan Bahadur M. Habibur Rahman v. CIT [1945] 13 ITR 189. It was a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e where : "A person owning extensive properties, executed five settlements settling different properties on five different persons. Even after the settlement all the lands continued to be managed and cultivated as usual with the same agents by the settlor, some lands under pannai cultivation and some on waram. The waram was received in common from all the lands and the income was pooled together and brought to a common day-book and ledger. It was not possible to find out from the accounts the income from the lands given to each of the beneficiaries. All the income arising as per the account books was deposited in a bank in the joint names of the settlor and another person. There was also nothing in the accounts to show that the profits were ever distributed to the trustees for the beneficiaries or deposited in a bank in the names of trustees. From these circumstances, the assessing officer as well as the Assistant Commissioner of Agricultural Income-tax came to the conclusion that the several beneficiaries under the five documents were liable to be assessed as an association of individuals on their agricultural income. In the opinion of the Tribunal, there was nothing to show tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom business. These decisions of the Gauhati High Court in the case of CIT v. Gangadhar Sikaria Family Trust [1983] 142 ITR 677, the Kerala High Court in the case of CIT v. V.S. Kumaraswamy Reddiar Trust [1982] 138 ITR 808 and the Madhya Pradesh High Court in the case of CIT v. Karelal Kundanlal Trust 1983 Tax LR 1539 laid down that where the shares of the beneficiaries are known and determinate, the assessment has to be made under section 161(1). Holding so, the aforesaid High Courts have directed that the assessment made and the tax payable be determined on the footing that each beneficiary is liable for a separate assessment. On this issue he also strongly relied on the decision of this Bench of the Tribunal in the case of Vivek Trust [IT Appeal No. 271 (Nag.) of 1980, dated 4-4-1981], and stated that the contentions of the revenue in this case have already been considered and even the decision in the case of N.V. Shanmugham Co., which is the backbone of contention of the revenue, is also considered. He stressed that the case of the assessee is fully covered by the aforesaid decision and the aforesaid decision has taken note of all the points and the authorities now relied upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries of a trust are known and determinate and their shares are also known and determinate, the assessment cannot be made on the footing that the beneficiaries constitute an AOP. (d) The business as such when carried on by the trustees is as much a property of a trust and the income from the said property is the income from property held under trust and, therefore, the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust is applicable. In addition to the aforesaid arguments Shri Dewani had two other alternative contentions which, according to him, make the order of the Commissioner passed under section 263 as invalid. He stated that the beneficiaries of the trust are separately assessed to tax and when once the revenue has exercised an option to assess the beneficiaries, it is no longer open to the revenue to make an assessment against the trustees in respect of the same income. In this context he relied upon the Board's circular, a copy of which is placed before us. For the aforesaid proposition, he relied upon the decision of the Bombay High Court in the case of Trustees of Chaturbhuj Raghavji Trust v. CIT [1963] 50 ITR 693. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee. It related to a case where the trustee having been assessed, the same income was being added for rate purposes in the hands of the beneficiary. It is in this context that the Board has issued the aforesaid circular. Secondly, he justified the action of the Commissioner under section 263 as, according to him, there is still a difference of opinion with regard to the point in issue and it cannot be said that the law on this point is well settled. He further submitted that the words 'persons represented' appearing in section 160(1)(iv) of the Act and section 161 does not necessarily mean beneficiary. According to him, when the assessment is made on an AOP, there is no provision for application of a different rate of tax than the one prescribed in the Finance Act. Thirdly, he submitted that the decision of the Madhya Pradesh High Court in the case of Karelal Kundanlal Trust, relied upon by the assessee, does not apply to the facts of this case as, according to him, the ratio in the aforesaid decision, namely, that the department can assess the trustees jointly, has flown from the contention of the department. Shri Chhotare, the IAC, also made certain submissions on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immaterial whether the shares of the beneficiaries are determinate or not. It is the earning of a unity of a business and not the ultimate destination of income which is assessable. He further submitted that the decision of the Bombay High Court in the case of Balwantrai Jethalal Vaidya is not approved by the Supreme Court as the Madras High Court decision in the case of CIT v. N.V. Shanmugam Co. [1966] 62 ITR 701 did not approve the said decision of the Bombay High Court and the Supreme Court has ultimately affirmed the decision of the Madras High Court. With regard to the applicability of the decision of the Tribunal in the case of Vivek Trust, he distinguished the aforesaid decision and stated that the same was given in the context that the trustees derive the share income from the firm and the Tribunal might have thought that the income in that case was an income from same investments. According to him, the decision of the Tribunal in the case of Arvind Pattiwar Children Trust [IT Appeal No. 474 (Nag.) of 1982], is directly applicable to the case as the said case decided the issue of status of persons. He concluded his arguments by saying that the action of the Commissioner i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t evasion of tax has taken place by formation of trust and the trust with paltry sums is carrying on with huge businesses. He, therefore, submitted that the Commissioner was justified in initiating proceedings under section 263. 9. In reply Shri Dewani submitted that there is no conflict between the two decisions of the Supreme Court in the case of N.V. Shanmugham Co. and in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust. He read out a passage from Kanga and Palkhivala's Law and Practice of Income-tax, Seventh edition, Volume I, page 953 which, according to him, clarified the two decisions. The case of N.V. Shanmugham Co. decides the issue of status of representative assessee. A representative assessee derives the status from the beneficiary and if a beneficiary is an AOP, the person represented, that is the trustee, shall be an AOP. He gave an example of a trust consisting of three individuals and one AOP as the beneficiaries. According to him, the assessment in respect of the three beneficiaries will be completed as individual and in respect of an AOP the trustees shall be assessed as an AOP. According to him, there is no conflict between the two dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT v. Jagadish Jakati Co. [1979] 119 ITR 19. He concluded his arguments by saying that the case of the assessee is fully covered by the various authorities and also the decision of the Tribunal and there are no compelling circumstances or reasons for deviating from the view taken earlier. He further referred to the two page statement of admitted facts and the reasoning placed on record to show that the beneficiaries do not constitute an AOP and, therefore, the order passed by the Commissioner under section 263 is illegal. The only way to make the assessment, according to him, is the one which the ITO has made. He again stressed that the circular of the Board applied to the facts of this case. He, therefore, contended that the order passed by the Commissioner deserves to be quashed. 10. Shri M.M. Jain, in reply submitted that the trustee by the nature of obligation is obliged to distribute the income amongst the beneficiaries and having regard to the nature of the obligation, the income gets diverted at source and, therefore the Commissioner's order can be vacated on this ground itself. 11. We have carefully considered the facts and circumstances of the case and the argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n purpose. Hence, volition on the part of the members of the association is an essential ingredient. This is well recognised by the Supreme Court in the case of Indira Balkrishna. The ratio laid down in the aforesaid case was followed by the Supreme Court in the case of G. Murugesan Bros. This decision also takes note of the earlier decision of the Supreme Court in the case of N.V. Shanmugham Co. There does not appear to be any conflict between the Supreme Court decision in the case of G. Murugesan Bros. and in the case of N.V. Shanmugham Co. The decision rendered by Supreme Court in the case of N.V. Shanmugham Co. was rendered on its own facts. The facts of the case were that a firm, consisting of three partners and a minor admitted to the benefits of partnership, was carrying on business in the manufacture and sale of snuff. One of the partners filed a suit in the civil court for dissolution of the firm from 31-8-1956 and for taking of accounts. He also applied for the appointment of a receiver. The Court appointed three receivers, two of whom were partners and the third was an advocate. The business carried on by the firm was thereafter carried on by the receivers, two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty vests in him as such. He no doubt holds the trust property for the benefit of the beneficiaries but he does not hold it on their behalf. The expression 'for the benefit of' and 'on behalf of' are not synonymous with each other. They convey different meanings. The former connotes a benefit which is enjoyed by another thus bringing in a relationship as between a trustee and a beneficiary or cesti que trust, the latter connotes an agency which brings about a relationship as between principal and agent between the parties, one of whom is acting on behalf of another . . . ." [Emphasis supplied]. "The beneficiaries are also not necessarily persons who are jointly interested in such land or in the agricultural income derived therefrom. The term 'jointly interested' is well-known in law and predicates an undivided interest in the land or in the agricultural income derived therefrom as distinguished from a separate or an individual interest therein. If on a true reading of the provisions of the deed of trust the interest which is created in the beneficiaries is a separate or individual interest of each of the beneficiaries in the land or in the agricultural income derived therefrom, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying on the business on behalf of the erstwhile partners. (iii) The joint endorsement of the parties in the Court stated that the profit, if any, earned from September 1956 will be treated as an asset of the firm. (iv) The conclusion of the Supreme Court was based on the finding of consent of all the owners. 15. The next question that arises for determination is whether there is any conflict between the two Supreme Court decisions in the case of N.V. Shanmugham Co. and in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust. The question that came up for consideration in the case of N.V. Shanmugham Co. was whether the erstwhile partners of the firm who were represented by the receivers constitute an AOP. The Supreme Court laid down that the representative assessee derived the status from the persons whom they represented. Since the persons represented constituted an AOP, it became a single beneficiary liable for assessment as an AOP. Against this the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust was considering a case where there were five beneficiaries whose shares are known and determinate. The relevant obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have already held that the beneficiaries do not constitute an AOP, the case squarely falls under the Supreme Court's decision in the case of Trustees of H.E.H. Nizam's Family, (Remainder Wealth) Trust. The authorities quoted on behalf of the assessee also squarely apply. We cannot take it for granted that the Courts, including the Supreme Court, were not conscious of a situation where the beneficiaries of the trust carry on the business and while approving the Bombay High Court's decision in the case of Balwantrai Jethalal Vaidya the Supreme Court was not conscious of the observations made by the Bombay High Court which are as under : ". . . Whether the assessee carries on business or is the owner of a property or owns shares and receives dividend, if he is a trustee and if he is being assessed as a trustee then section 41 must come into play and his liability to pay tax must be determined according to the provisions of section 41 . . . ." 16. It is also very relevant for the purpose of deciding the case under consideration before us to take note of the important proposition laid down by the Bombay High Court in the case of Balwantrai Jethalal Vaidya wherein it is held as und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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