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TMI Blog1986 (2) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Minister when he amended the law regarding the assessment of business income of the private trusts from 1-4-1985 : "While on this subject, I would like to refer to a tendency noticed to rate private trusts which carry on business. To curb such practice, I propose to provide that where such trusts have profits and gains of business, the entire income of the trust will be charged to tax at the maximum marginal rate, an exception being made only in the case where the trust is created by will for dependent relatives." The memorandum explained as below : "44. Trustees of a private trust are ordinarily not expected to carry on any business, because implicit in the nature is the possibility of incurring loss and no prudent trustee would risk the trust's property in business venture. However, it has come to notice that taxpayers trusts are increasingly conducting business through the medium of private trust Such arrangements are entered into for purpose of tax avoidance, the main object being to avoid payment of the registered firm's tax which would become payable if the business is carried on in partnership." From the above, it will be clear that even as per official think ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t no demand is raised here. Above income is assessable in the hands of the beneficiaries as over leaf." The only point that could be seen if at all under the circumstances, is whether the option exercised by the ITO under section 166 of the Act is correct. There is nothing to show that the option exercised is not correct Under section 164(1) assessment is to be made on the trustees as a procedural measure so as to enable the revenue to collect tax directly from the trustees rather then to keep on chasing the elusive beneficiaries. In this case, there is no suggestion that by framing assessment directly on the beneficiaries revenue has been put in jeopardy. 5. This aspect of the case need not detain us long. From the order of the Commissioner under section 263 of the Act, it is clear that the Commissioner did not have in his mind the option of the type now high lighted by Shri Inamdar. What the Commissioner has held is that if direct assessment is due at all, the same should have been made on the AOP of beneficiaries and not beneficiary individual. Thus, the ITO has not erred in exercising the option of assessing the beneficiaries directly under section 166 but has erred in iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icklish issue as to whom the trustees represent. 7. Now, we have to examine they reasons given by the Commissioner. According to the Commissioner unless there is a separate trust deed for each individual beneficiary, the beneficiaries in a trust cannot be the individual named therein. When the trustees are carrying on business for the common benefit of all the beneficiaries collectively, there is no scope for nationally splitting the trust obligations in respect of each beneficiary separately. For this purpose, the Commissioner relied on the ratio of Supreme Court judgment in N. V. Shanmugham Co. v. CIT [1971] 81 ITR 310. In the case before the Commissioner, the beneficiaries are brought together by the trust. As there is common control and management of the business, the condition laid down in N. V. Shanmugham Co. case are fulfilled. It is the trust unit which has earned the income. Consequently, specification of shares is not relevant for assessing such a unit. The Commissioner has further discussed the question of common content as an essential ingredient in the constitution of an AOP and has rejected the contention raised on behalf of the appellant on the plea that whatev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together on their own volition and acquiesced in the authority of the receiver to carry on business son their behalf. Carrying on business is one thing and receiving income or becoming entitled to receive income for the persons whom they represent is another thing. This, the findings regarding consent played a determinative role in the ultimate conclusion. The ratio cannot be applied by any stretch of imagination, where a trustee carries on business in terms of the trust deed unmindful of any consent or objection of the beneficiaries who in turn derive their benefit not from act as of the trustees but from the terms of the trust deed. Whilst the trustees acted in terms of the solemn contract with the settlor accepting a property with an obligation annexed to the ownership of the property, there is no such contractual relationship, express or implied, between the beneficiaries individually or collectively and the trustees. The mere fact that the beneficiaries pocketed the amounts given to them is no ground for implying consent or choice or voice in the matter of carrying on business or the mode of deriving income. 11. Another facet of the case was that the beneficiary income is fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis, for our purpose the two judgments can be reconciled. H. E. H. Mir Osman Ali Bahadur's case deals with character of income and Haji Abdul Hameed's case deals with the origin of income vis-a-vis business carried on by the trustees. The latter judgment read with G. Murugesan Bros. case leaves no doubt about the proposition that there can be no AOP for income from other sources received by the beneficiaries without any mutual link. 12. Some supplementary arguments followed. It was contended that an AOP as such, has no legal existence qua the trust and, consequently, each individual beneficiary is to be taken as deriving his income from the trust independently. It was also contended that Haji Abdul Hameed's case is confined in its scope to the concept of earned income and nothing more should be read. Even if the income of the beneficiaries is from business, the beneficiaries have no inter se link. Section 161 of the Act comes into play after income is determined and, therefore, the question of redetermining the character already determined does not arise. 13. Shri Inamdar next pointed out that the contention of the Commissioner, relying on the Trustees of H. E. H. Nizam's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. In reply, Shri Sathe, the learned departmental representative submitted that there are two issues involved in this case, firstly, whether the ITO is right in determining the income of the trust which had filed its return and yet holding back his hands as far as fixation of tax liability on the trust is concerned. The second aspect is whether the ITO has interpreted the terms of the trust deed correctly as to the true status of the beneficiaries, viz., AOP or BOI or individual. If the ITO has wrongly held the status of the beneficiaries as individual and not AOP, he has obviously committed an error which would necessitate the 263 order now under appeal. 17. Referring to section 161(4), Shri Sathe pointed out that a representative assessee means a trustee appointed under a trust in respect of income which a trustee receives or is entitled to receive on behalf of or for the benefit of any such person. The object of section 161(1) is clearly to frame an assessment on the trustees so as to tax income at the earliest possible opportunity wherever taxable income is found. In this connection, Shri Sathe referred to Sampath Iyengar page 3697. Shri Sathe then pointed out that when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this judgment shows clearly that where the trustees are assessed under section 41(1) of the Indian Income-tax Act, 1922 (under section 161 of 1961 Act), the assessment will have to be made as if the person whom the trustees represent, earned business income if the trustees are carrying on the business. The character of the income does not change as explained in N. E. H. Mir Osman Ali Bahadur's case though the head of income may change. As the ITO was duty bound to adopt that option which would garner proper revenue, the ITO was obviously in error in assessing the person who were held by him wrongly to be the beneficiary. The Commissioner is thus right. 19. Shri Sathe then referred to section 9 of the Indian Trust Act, 1882 under which a proposed beneficiary can (revoke) his interest. Thus, even a minor beneficiary has a vested interest. The rights and liabilities of the beneficiaries are, thus, conterminous with those of the trustees. Therefore, on a proper interpretation of the trust deed and the conduct of the trustees, the conclusions that the beneficiaries constitute an AOP for business is inevitable. For this purpose, the contention raised by Shri Inamdar that consent betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either directly or in the case of minors through their guardian stop the trustees from willful abuse of the trust property. After all, the trustees are exposing the trust property to the risk of losses. To that extent, the minors do have a voice in the matter and being the beneficiary in a common trust have, by their conduct, agreed to associate themselves jointly with the activities of the trust. The beneficiaries thus constitute an AOP. If they do not constitute an AOP, at least they constitute BOI as explained in CIT v. Harivadan Tribhovandas [1977] 106 ITR 494 (Guj.) and N. P. constitute Saraswathi Ammal's case. 23. Shri Sathe then referred to Meera Co. v. CIT [1979] 120 ITR 564 (Punj. Har.). In this case, it has been held that on the death of an individual, the business continued by widow and three minor children is assessable as a BOI. In this case also there was no question of any consent by minor children. Each of the persons, viz., widow and children had specific business interest devolving on them and has continued the business for the benefit of all. Their Lordships have highlighted the fact that the minors had no legal capacity to enter into an agreement is irrel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eficiaries. For this purpose, there is no distinction between business and other income. Shri Inamdar then pointed out that the return filed by the trustees has been duly processed by the ITO though there is no demand. In the return itself the income assessable was shown as nil and the computation and distribution alone was given to enable the ITO to determine the share of each individual beneficiary. Even if the ITO were to assess the trustee, he would be required to frame the assessment and fix the liability as if each individual is beneficiary. Such liability would not be greater than what was actually been fixed on the individual beneficiary whose share is determinate. Reiterating his contentions regarding the impact of N. V. Shanmugham Co.'s case, Shri Inamdar submitted that in essence the receivers acted on behalf of the partners and circumstantial evidence indicated that there was agreement between the ex-partners, including those interested in safeguarding the interest of minors. Unless there is an express or implied agreement between the two beneficiaries directly, there cannot be AOP or BOI. The alleged nexus with the common income does not have the common bond required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iaries. The trustees are carrying on business on the strength of authority given to them in terms of the trust deed by the settlor. To the beneficiaries, it makes no difference how the trustees derive their income for the purpose of distribution amongst the beneficiaries. 29. In our opinion the case of a trustee carrying on business in terms of the mandate given to him in the trust deed (independently of what the beneficiaries ultimate or proximate do) is different form the case of a receiver who carries on business clearly on behalf of certain person. The ratio of N. V. Shanmugham Co.'s case applied only to latter. The element of consent amongst the various persons on whose behalf the receiver was working doubtless formed the basic foundation of the Supreme Court judgment. There is a distinction between carrying on of business in terms of mandate given by the beneficiaries (in N. V. Shanmugham Co.'s case the erstwhile partners) and business carried on by trustee independently of what the person whom they represent do. The common interest of the beneficiaries is not existing in the business carried on in terms of the trust deed. Mere pocketing of benefits is no ground for ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciaries, but they are not carrying on business on behalf or for the benefit of an AOP of beneficiaries. Section 161 speaks of receipt of income and makes no distinction on the basis of the origin. Tekawade Groups case decided by this Bench is no longer good law in view of the later Supreme Court pronouncement in Haji Abdul Hameed's case. 31. Now comes the question whether the beneficiaries could be taken as constituting BOI. We uphold the contention of Shri Inamdar that whatever be the position in the order of the Commissioner other than the operative para, the fact remains that ultimately the Commissioner has directed adoption of the status of an AOP and not BOI. The departmental representative cannot be permitted to make a new case now. Nevertheless, since the matters may not remain at this stage, in view of the observations of Gujarat High Court in CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42 partly reversed by the Supreme Court on another point, that where alternate or interlocutory matters are raised, the Tribunal should decide all the matters, we proceed to examine the claim. The case law relied upon by the departmental representative, viz., Harivadan Tribhovandas's case, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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