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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 ..... 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 stand and be possessed of the said sum of Rs. 11,500 and which sum and such shares, stocks and securities and other investments, busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 erroneous and prejudicial to the interests of the revenue as though the ITO correctly determined the status as an 'AOP', his action in distributing the income amongst the various beneficiaries is not warranted by law. According to him, the trust deed clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the business is being carried on under the trust for the benefit of a group of beneficiaries and, therefore, the person represented by the trustee is not individual beneficiary but the group itself. There is no specific provision for assessing such units as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amily (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 the Supreme Court in G. Murugesan & Bros.' case he pointed out that the Supreme Court has considered the decision in the case of N.V. Shanmugham & Co. and it has observed that in the decision in N.V. Shanmugham & Co.'s case it had relied upon the decision in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 case of waqf where the income of the business was dedicated with ultimate benefit to the poor and for maintenance and support of waqf, his family, children and descendants. The waqf deed provided that the beneficiaries should be benefited concurrently and in the same proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnai 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 that the document were not genuine or that they had not been acted upon and the Tribunal held that there could not be any inference about an association of individuals through the mere fact of common management, that the documentary evidence showed that the settlements enured to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arelal 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 upon by the Commissioner and, therefore, there is no reason or compelling circumstances to deviate from the view earlier taken by the Tribunal. He clarified that the revenue has not filed any reference against the aforesaid decision of this Bench of the Tribunal. 4. In case the tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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. It was further contended that the order under section 263 is invalid as there is no error found in the order passed by the ITO. The ITO has made the assessment consistent with a view taken by the High Court and the Tribunal. According to him, if an assessment is made consistent with any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 behalf of the revenue. He submitted that the return of income was filed in the status of an AOP and the ITO has rightly taken the same status and determined the total income. According to him, there is no provision in the Act by which an ITO can apply different rates for taxing the said income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is justified as the beneficiaries were assessable as an AOP. Shri P.N. Chandurkar, the learned standing counsel for the department, concluded the case on behalf of the revenue by addressing his arguments on a few specific points. He referred to the provisions of section 3(42) of the General Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 decisions and if any conflict is assumed, the latter decision of the Supreme Court in Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust's case shall prevail. He next referred to the provisions of section 164 as the same stood before the amendment in 1971. According to Shri Dewani, if the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 arguments advanced by the learned counsels for the assessee and the standing counsel. We have carefully gone through the records of this case. At the outset we may point out that we had an occasion to consider an identical issue in the case of Vivek Trust, whereafter considering the various arguments adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision 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 of whom where the earlier partners with the consent of all the parties. It is amply clear from the facts of the said case that the business was continued with the consent of all the owners. On the facts proved, it was held that the erstwhile partners of the firm carried on business through their r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, merely because they have a common interest therein, that cannot make that interest a joint interest in the land or in the agricultural income derived therefrom. The words 'jointly interested' have got to be understood in their legal sense and having been used in a statute are not capable of being unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 observations of the Supreme Court in that case are reproduced hereunder : "It is also necessary to notice the consequences that seem to flow from the proposition laid down in section 21, sub-section (1), that the trustee is assessable 'in the like manner and to the same extent' as the beneficiary. The consequenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under : ". . . Now in the first place, section 41 gives no such option to the Taxing Department. If the assessment is upon a trustee, the tax has to be levied and recovered in the manner provided in section 41. The only option that the Legislature gives is the option embodied in sub-section (2) of section 41, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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