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TMI Blog2000 (1) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer was prima facie erroneous insofar as it was prejudicial to the interest of Revenue, thus, warranting action under section 263. Accordingly he invoked jurisdiction under section 263 and after giving an opportunity of being heard to the assessee set aside the orders of the Assessing Officer and directed the Assessing Officer to assess the trust as discretionary trust on maximum marginal rate. This order of the CIT was confirmed by this Tribunal vide order dated 26-2-1986 in ITA No. 555 /PN/ 1984. 3. For the assessment year 1981-82 which is under appeal, the Assessing Officer determined the income of the trust at Rs.1,74,820 treating the trust as a discretionary trust because the income of the trust was to be divided amongst the beneficiaries as per the trust deed. The CIT called for the records and found that the action of the Assessing Officer in treating the trust as a specific trust was erroneous insofar as it was prejudicial to the interest of Revenue because the Assessing Officer did not take into consideration the amendment to section 164(1) introduced with effect from 1-4-1980. He accordingly invoked his jurisdiction under section 263 and set aside th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of revenue. 4. For the assessment years 1982-83, 1983-84 and 1984-85, the Assessing Officer treated the trust as a discretionary trust and assessed the trust at the maximum marginal rate. The assessee appealed to the CIT(A) who dismissed the appeals of the assessee following the order of the CIT under section 263 and further for the detailed reasons given in his order, dismissed the appeals of the assessee. The assessee is thus in appeals before us against the order of the CIT under section 263 for the assessment year 1981-82 and against the orders of the CIT(A) for the assessment years 1982-83 to 1984-85. 5. Dr. Sunil Pathak, the learned counsel for the assessee submitted that the beneficiaries of the assessee-trust had already been assessed as per chart of the assessment orders placed at page 11 of the paper book No. I and as such the Revenue had exercised its option to assess the beneficiaries and not the assessee-trust. According to the learned counsel, after having exercised such an option it was not open for the Revenue to assess the assessee-trust now once again because that will tantamount to double taxation. In support of there contentions, he relied upon the following d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded because erroneously the transferee had been assessed earlier. Incidentally all the assessments of the individuals completed by the ITO have been under section 143(1) but even if they were completed under section 143(3) that would be no bar to the way the ITO has completed the present assessment. This is for the reason that once the necessary pre-conditions exist the operation of the deeming provisions as contained in the Explanation 1 to section 164 are mandatory and not optional." The learned D.R. further submitted that there is no question as to why the Assessing Officer did exercise option because what is material is that it is the duty of the Assessing Officer to tax a right person and right person alone. In the present case, the assessee was a discretionary trust as held by the Tribunal in the assessment year 1980-81 vide its order dated 26-2-1986 and accordingly, it was the assessee-trust which was liable to be taxed on the maximum marginal rate and not the beneficiaries of the assessee-trust. According to the learned D.R. a wrong assessment has been made and it cannot act as an estoppel to proceed against the right person. In support of his contentions, he relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the Assessing Officer can and he must, tax the right person and the right person alone. By 'right person' is meant the person who is liable to be taxed, according to law, with respect to a particular income.The expression 'wrong person' is obviously used as the opposite of the expression 'right person'. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. 9. The Kerala High Court in the case of Neela Productions relied upon by the learned D.R. dealt with a similar situation. The facts of that case were that the members of a body of individuals were assessed to tax individually. There were legal representatives of the deceased who continued the business. Six legal representatives of the deceased had other income also. Six of the legal representitives filed individual returns for the assessment year 1979-80, wherein they included the share income received from the business. The ITO had completed their individual assessments and tax due thereon had also been collected. The seventh legal heir was also assessed on her income which did not include the share i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompleting the assessments of beneficiaries on the basis of returns filed by the beneficiaries, the Assessing Officer did not exercise his option to assess the income of the trust in the hands of the beneficiaries. Under the circumstances, we uphold the CIT's order under section 263 relating to assessment year 1981-82 and the orders of the CIT(A) relating to assessment years 1982-83 to 1984-85. 12. In the result, all the appeals are dismissed. Per Singhal (Judicial Member): 13. After going through the proposed order carefully and having, discussion with my learned Brother, I have not been able to persuade myself to agree with the view taken by him, for the reasons given hereafter. 14. The question to be considered by us is whether in law the assessee Trust can be assessed where the beneficiaries had already been assessed directly by the Assessing Officer. The following observations and findings have been given by my learned Brother:-- (a) That though in view of the Supreme Court decision in the case of Jyotindrasinhji, the Revenue has option to tax the income in the hands of beneficiaries, such decision cannot be applied since no such option has been exercised by the Revenue. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Chapter. The section states in unmistakable terms that nothing contained in the preceding provisions in the Chapter shall preclude the Revenue from making a direct assessment upon the beneficiary and/or from recovering the tax payable from such person. The Revenue has thus been given an option to tax the income from a discretionary trust either in the hands of the trustees or in the hands of the beneficiaries." In view of the clear observations, it cannot be said that Assessing Officer has no option to assess the beneficiaries directly. That means, if the Assessing Officer chooses to assess the beneficiaries directly, then he cannot assess the trust through the trustees. This is exactly what has been finally held by their Lordships in the above case of Jyotendrasinhji at page 632 as under:-- "For the above reasons, we cannot agree with Mr. Ashok Desai. We hold that, by virtue of section 166, the Revenue has an option in the case of a discretionary trust either to make an assessment upon the trustees or to make an assessment upon the beneficiaries. Of course, both the trustee and the beneficiary cannot be simultaneously taxed in respect of the same income." So, the legal positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present cases, keeping in view the material on the record. Let us first examine the material in respect of Assessment year 1981-82. The perusal of the details filed at page 11 of the paper-book I shows that assessments of 20 out of 23 beneficiaries were completed in the month of February 1984 by the Assessing Officer under section 143(3) i.e., after issuing Notice to the beneficiaries and examining the issue on merits. Such assessments were completed before the assessment of the assessee trust for assessment year 1981-82 as it was assessed on 23-3-1984. The assessment of the beneficiaries under section 143(3) after due notice to the assessee, in my considered view, amounted to exercise of option by the Assessing Officer. By no means, it can be said that assessments were made by inadvertences. There is no requirement in law that Assessing Officer must express in writing that he is exercising the option. Issue of Notice under section 143(2) to the beneficiaries and completing the assessment after examination of the return certainly amounts to exercise of the option. Therefore, it is held that such assessments were the assessments under section 166 of 1961 Act. Even otherwise, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years 1981-82 to 83-84 are cancelled while the assessment for assessment year 1984-85 is upheld. Consequently, the appeals for assessment years 1981-82 to 1983-84 are allowed and while appeal for assessment year 84-85 is dismissed. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961: Per Shri B.L. Chhibber (Accountant Member) - As there is a difference of opinion between the Accountant Member and the Judicial Member, in respect of assessment years 1981-82 to 1983-84, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following questions may be referred to a Third Member or to pass such orders as the President may desire: Assessment year: 1981-82: "Whether on the facts and in the circumstances of the case and in law, the CIT was justified in setting aside the order of the Assessing Officer under section 263 and directing the Assessing Officer to assess the trust under section 164?" Asstt. years 1982-83 and 1983-84: "Whether on the facts and in the circumstances of the case and in law, the A.O. was justified in assessing the trust u/s 164?" 2. So far as the assessment year 1984-85 is concerned, both the Members have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd found that the action of the Assessing Officer in treating the trust as a specific trust and the consequent completion of the assessments in the hands of the beneficiaries was erroneous and prejudicial to the interests of the revenue inasmuch as, according to him, the trust had to be considered as a discretionary trust in view of the amendment to section 164(1) by way of Explanation added to this section with effect from 1-4-1980 and accordingly, exercising his powers under section 263, he gave the following direction:-- "8. Taking into account circumstances of this case and the clauses in the trust deed, it is clear that the Explanation (1)(ii) to section 164 is attracted and hence the trust is required to be assessed as a discretionary trust for assessment year 1981-82. The ITO's action in treating the trust as specific trust in the assessment order was erroneous and prejudicial to the interest of revenue within the meaning of section 263 and is revised by this order. 9. The ITO is directed to treat the trust as a discretionary trust for assessment year 1981-82 and recompute the income and tax accordingly in that status." For the two subsequent assessment years, i.e., 1982- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A), that as the assessments had been completed initially in the hands of the beneficiaries for both assessment years, i.e., 1982-83 and 1983-84, there is no justification for making a separate assessment in the hands of the appellant trust holding it as a discretionary trust and levying the tax at the maximum marginal rate under the provisions of section 164 of the Income-tax Act. There is no dispute before the two learned Members of the Bench who considered these appeals or even before me about the fact that the assessments of some of the beneficiaries had been completed before the assessments on the trust levying tax at the maximum marginal rate were completed for the assessment years 1982-83 and 1983-84. 4. As already mentioned, both the learned Members have proceeded on the assumption that the appellant-trust is a discretionary trust in view of certain provisions of the trust deed read with Explanation 1 inserted with effect from 1-4-1980 by the Finance (No. 2) Act, 1980, in section 164. The learned Accountant Member held that the action of the CIT in directing the Assessing Officer to treat the appellant as a discretionary trust and to levy tax at the maximum marginal r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act are not restricted to making assessments on the beneficiaries of a specific trust. The provisions of section 166 apply, according to him, to the making of assessments on the beneficiaries of even a discretionary trust covered under section 164. He further mentioned that there is a wrong assumption that when as assessment is made under section 166 of the Income-tax Act on the beneficiaries of a discretionary trust, there is a loss of revenue inasmuch as tax cannot be levied at the maximum marginal rate and tax has to be levied only at the rates applicable to the beneficiaries. According to him, making separate assessments on beneficiaries need not necessarily result in a loss of revenue because the incomes brought to tax in the hands of the beneficiaries can also be subjected to tax at the maximum marginal rate in view of the provisions of section 164. According to the learned counsel for the assessee, the Assessing Officer committed the mistake of not taxing the beneficiaries on whom he initially made the assessments for all the assessment years in question at the maximum marginal rate and taxing them only at the rates applicable to them. Instead of taking remedial action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 263 for the assessment year 1980-81 and there is no reason for the learned Judicial member to take contrary assessment year 1981-82 when the circumstances for the assessment years 1981-82 and 1980-81 are identical. On merits, he pleaded that the provisions of section 164(1) are mandatory in the case of a discretionary trust and the provisions of sections 166 are applicable only to the beneficiaries of a specific trust and they have no application in respect of the beneficiaries of a discretionary trust, as in the present case. He also pointed out that the Apex Court in the case of Kamalini Khatau held that the provisions of section 166 are only of a clarificatory nature and they do not empower any assessment on any beneficiary or recovery of tax. He further stressed that it is not the sweet will of the revenue to act under section 164 and assess the trust or act under section 166 and assess the beneficiaries, and according to him, the provisions of section 166 can be restored to make assessments on the beneficiaries under limited circumstances, such as when the trust is dissolved after distribution of assets and assessment on the income of the trust has to be made. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer to proceed against either the beneficiaries is or the trust. In the case of Jyotendrasinhji, the Apex Court, as per the relevant portion of the headnote, held as follows:-- "The trustees in the case of a trust declared by a duly executed instrument in writing are treated as representative assessees by section 160(1)(iv). It is equally true that, in the case of a discretionary trust, the trustees are liable to be taxed in respect of the income received by them at the rate specified in section 164(1). At the same time, section 166 expressly declares that "nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person, on whose behalf or for whose benefit income therein referred to is receiveable or the recovery from such person of the tax payable in respect of such income". The language of this section is clear. The opening words "nothing in the foregoing sections in this Chapter" - which means Chapter XV, wherein sections 159 to 165 among other sections occur--give it an overriding effect over the preceding provisions in the Chapter. The section states in unmistakable terms that nothing contained in the preceding provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the subsequent decision of Moti Trust, as per the head note, the Apex Court held as follows:-- "Even if the assessee-trust is regarded as a discretionary trust it is the beneficiaries in whose hand the income will be assessed once the profits have been credited to respective accounts of the beneficiaries." It may be observed that when the amounts are credited to the accounts of the beneficiaries, according to the above decision of the Apex Court, they become liable to be assessed. Before me, it is not the case of the Department that the incomes from the trust on which the beneficiaries have been assessed in the respective years have not been received by them or that they have not been even credited to their accounts in the books of the trust. So it must be held that the assessments on the beneficiaries have been validly made in the respective years and so there in no justification for making fresh assessments in the case of the trust. 9. The Hon'ble Kerala High Court in the case of Dr. David Joseph has also clearly held that the trustee cannot be assessed in respect of the income of the trust in his representative capacity after the assessments have been made in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to proceed against the trust subsequent to the completion of assessments on the beneficiaries. I also find that the decisions relied on by the learned DR before the Tribunal during the earlier hearing which are mentioned at para 6 on page 5 of the learned Accountant Member's order are all distinguishable on facts. The argument of the learned DR that the Assessing Officer was pot even aware of the fact that the beneficiaries were actually the beneficiaries of the trust in question has to be rejected in the light of the decision of the Apex Court in the case of Murlidhar Jhawar & Purna Ginning & Pressing Factory where considering a similar argument, the Apex Court observed as follows:-- "Mr. Viswanatha Sastri for the department contends that the Income-tax Officer making the first assessment of the three parties to the joint venture was not informed that the three parties constituted an unregistered firm and therefore the Income-tax Officer was in law competent to assess the entity which was in truth liable to be assessed to tax, and in making the earlier order of assessment he cannot be deemed to have exercised an option which precluded him from assessing the income of the three p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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