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TMI Blog2015 (2) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... terest of the beneficiary of its Trust, it cannot reach to the Third Level Trust or the beneficiaries of the Third Level Trust as sought to be canvassed. Had the option been not available under Section 164 of the Act to the Assessing Officer, possibly the beneficiaries of Second Level Trust could also not be considered, but as such option is expressly made available under Section 164 of the Act, we are inclined to read and interpret that for the purpose of tax under the Act, the Assessing Officer may be in a position to find out the status of the beneficiaries of the First Level Trust and while finding out the status of the beneficiaries of the First Level Trust, he may look upon the taxable liability of the beneficiaries of Second Level Trust, who are the beneficiaries of First Level Trust and if the tax payable is higher, while making assessment of the First Level Trust, option may be resorted to under Section 164 of the Act to that extent only, but such cannot be permitted again to reach to the Third Level Trust and to find out the taxable liability of the beneficiaries of the Third Level Trust. Hence, the said contention to that extent of the Revenue cannot be accepted. The que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciate the respective questions formulated in the respective matters, the questions can be reformulated and thereafter based on the answer, in facts of each case, the ultimate decision can be recorded. 2. In our view, mainly two substantial questions of law would arise in the present group of matters as referred to hereinafter and to be specific in the first group of matter, comprising of Tax Appeal No.20 of 2001, ITR No.28 of 2000, ITR No.25 of 2003, ITR No.74 of 1996 and ITR No.141 of 1996, following question would be required to be considered:- Whether on facts and circumstances of the case, the Appellate Tribunal has substantially erred in law in holding that since some or all beneficiaries of the Trust are discretionary Trust, to the extent of share of beneficiary as discretionary Trust, the tax can be charged at the maximum marginal rate under Section 164 and not under Section 161 of the Income Tax Act, 1961 (hereinafter referred to as the, Act ). 3. Whereas, in the second group of ITR No.42 of 2000, ITR No.43 of 2000, ITR No.44 of 2000 and Tax Appeal No.141 of 2001, the substantial question of law which may be required to be considered, would be as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Trust and will have to be regarded as discretionary Trust liable to tax at the maximum marginal rate. The matter was carried in appeal before CIT(A) and CIT(A) confirmed the order of the A.O. The matter was further carried before the Tribunal and the Tribunal dismissed the appeal by confirming the order passed by the CIT(A). Under these circumstances, the present appeal by the Assessee before this Court. ITR No.141/1996 The A. O. found that the Assessee cannot be treated as Specific Trust and will have to be regarded as discretionary Trust liable to tax at the maximum marginal rate. The matter was carried in appeal before the CIT(A) and CIT(A) confirmed the order of the A.O. The matter was further carried before the Tribunal and the Tribunal dismissed the appeal of the Assessee, by confirming the order passed by the CIT(A). Under these circumstances, the present appeal by the Assessee before this Court. ITR No.42 of 2000 with ITR No.43 of 2000 with ITR No.44 of 2000:- The facts are common inasmuch as the A. O. found that the Assessee Trust cannot be treated as Specific Trust but are discretionary Trust liable to pay tax at the maximum marginal rate. The matter wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant statutory provisions under the Indian Trust Act 1882 (hereinafter referred to as the Trust Act ) and also the relevant provisions of Income Tax Act (hereinafter referred to as the Act ). Section 4 of the Trust Act provides for creation of Trust for any lawful purpose. Since the factum of creation of Trust is not in dispute, nor is under challenge, we find that no further discussion may be required in this regard. Section 9 of the Trust Act provides that every person capable of holding the property can be beneficiary. Chapter III of the Trust Act provides for the duties and liabilities of the Trustees. Section 11 of the Act provides that the Trustee is bound to fulfill the purpose of the Trust and to obey the direction of the author of the trust unless modified by consent of all the beneficiaries being competent to contract. Section 13 of the Act creates an obligation upon the Trustees to protect the title of the Trust properties. Section 14 provides that the Trustee must not himself or another set up any title to the property adverse to the interest of the beneficiaries. An obligation is created upon the Trustees by Section 15 to deal with the trust properties as careful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, be levied upon 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 subsection (1), where any income in respect of which the person mentioned in clause (iv) of subsection (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 so liable at the maximum marginal rate : Provided that the provisions of this subsection 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. [***] (2) Where any person is, in respect of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of relevant income as if it] were the total income of an 69[association of persons] : [Provided further that where any income in respect of which the person mentioned in clause (iv) of subsection (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, the preceding proviso shall apply only if 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.] [(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, 72[or which is of the nature referred to in subclause (iia) of clause (24) of section 2,] 73[or which is of the nature referred to in subsection (4A) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11 74[or section 12], as if the relevant income not so exempt were the income of an association of persons : [Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance, tax shall be charged 83[on the relevant income] as if the relevant income (as reduced by the income, if any, which is exempt under section 11) were the total income of an association of persons :] [Provided further that where the relevant income consists of, or includes, profits and gains of business, the preceding proviso shall apply only if the income is 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 : Provided also that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of subsection (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]] [Explanation 1.-For the purposes of this section, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary and they are identified as representative Assessee. There is substance in the contention of the learned Counsel for the Revenue that when the Trust in representative capacity through its Trustees are to be assessed, the Assessing Officer may examine the aspects of beneficiaries of a particular Trust. Such is apparent because the Trustees are to represent the Trust property and the beneficiaries of the Trust are to enjoy and get the benefits of the Trust property. However, the same is subject to two limitations; one is that while undertaking the exercise to find out as to whether a particular Trust can be said as specific Trust or a Discretionary Trust, one has to examine the contents of the Trustdeed for processing a particular share of the beneficiary, if provided by the Trustdeed. If the share of the beneficiary/s is determined and specified, such Trust can be termed as specific Trust, but if the share is not determined or uncertain depending upon the decision of the Trustees as they may take from time to time, then such Trust can be termed as Discretionary Trust. The second aspect for the purpose of application of the Act is concerned, as the Trustees are in representative c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the purpose of chargeability of the tax, it can reach to any beneficiary of the beneficiary Trust at any level and if the ultimate beneficiary, may be at the second level Trust or third level Trust, is found to be a discretionary Trust, or the shares of the beneficiary is found to be uncertain, the first level Trust can be assessed as discretionary Trust for the chargeability of the tax and if the assessment is not considered accordingly, one can easily get away from the liability to pay tax at the maximum marginal rate, though the shares of the ultimate beneficiaries may be uncertain or unknown. 10. Whereas on behalf of the Assessee, it was contended that when any assessment is to be made of the representative Assessee, the Assessing Officer has to find out whether the shares of the beneficiaries are specific or not as per the Trustdeed. If the shares of the beneficiaries are specific, irrespective of the fact that whether it is discretionary Trust or any specific Trust or any individual person, the assessment can be under Section 161 of the Act and cannot be under Section 164 of the Act. It was submitted that it is not open to the Assessing Officer to look at the status ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 164 of the Act to the extent of the respective share of such beneficiary trust and can assess the income of the First Level Trust by segregating the income of each of the beneficiary separately, whether, individual beneficiary or a beneficiary Trust, which is a discretionary Trust and not specific trust. But if the Second Level Trust, which is a beneficiary of the First Level Trust is found to be specific, then the assessment of the First Level Trust should rest there. 14. Attempt to contend that if the beneficiary of Second Level Trust is a discretionary Trust or the shares are uncertain of the beneficiaries of Second Level Trust, the beneficiary of the First Level Trust can also be taxed at the maximum marginal rate under Section 164 of the Act, in our view cannot be accepted because the relationship between the Trustees in representative capacity and the answerability of the Trustees to the beneficiary is limited to the beneficiary of a particular Trust as per the Trust Act and it cannot be stretched or reached to the beneficiaries of the beneficiary and then again beneficiaries beneficiary. If such an interpretation is made, it would not only result into stretching the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable liability of the beneficiaries of the Third Level Trust. Hence, the said contention to that extent of the Revenue cannot be accepted. 16. In the decision of the Apex Court in the case of Wealth Tax vs. Trustees of H.E. H. Nizam s Family, reported at (1977) 108 ITR 555, in which the decision of the Apex Court begins at page 580, wherein at page 593, the Apex Court observed inter alia, relevant of which reads as under: The basic idea underlying section 41, and which is in conformity with principle, is that the liability of the trustees should be coextensive with that of the beneficiaries and in no sense a wider or a larger liability. On the very page, it has been observed inter alia, as under: This Court also observed that the same considerations must apply in the interpretation of section 161 (2) of the Income Tax Act, 1961 . 17. At this stage, we may record that in the case of one of the assessee, viz., Neo Trust V. Asst. Commissioner, Income Tax, the Tribunal in its decision, reported at 41 I.T.D. 418, at paragraph 11.3, had observed thus- We do not agree with the submission of the learned counsel for the assessee to the effect that the trustees o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o record that Mr.Soparkar, learned counsel appearing for the assessee did contend that the view was also taken by the Tribunal in the case KV Patel Family Trust to the effect that the Trust could be termed as specific trust and the matter was carried in reference before this Court being ITR 67/95 and others, wherein this Court vide order dated 05.08.2014, has held that since the shares of the beneficiaries of that particular trust were specific, the trust is to be treated as specific trust and the question was answered in favour of the assessee against the Revenue. 22. However, Mr.Bhatt, learned counsel appearing for the Revenue contended that in the said case of KV Patel Family Trust, none of the beneficiary was discretionary trust nor there was any further inquiry that the beneficiaries of the beneficiary was discretionary trust and therefore, the said decision may not apply to the present question to be considered by this Court in the present group of matters. 23. We find that it is true that to classify the trust as specific trust or not is considered by this Court in the above referred decision. But, in the said decision, the question did not come up for consideration be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pter 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. The aforesaid shows that the option is available to the assessing officer as observed earlier to tax the trustees or to the beneficiaries who receive the share in the trust property. 27. In view of the aforesaid observations and discussions, we find that on the first question, reproduced at paragraph No.2 hereinabove, the answer would be against the revenue and in favour of assessee, but with the option available to the assessing officer to resort to the provisions of section 164 of the Act in the event the beneficiary of the first level trust are discretionary trust to the extent of their respective shares, but such analogy or the mode would not be available by connecting the beneficiary of second level trust with third level trust even if they are discretionary trust or the shares of the beneficiaries are uncertain and such aspect may arise for consideration only if there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement dt. 14.1.1982 has been placed at Page 57 to 67 of the paper book No.1. Clause 17 of the said agreement reads as under: 17. As per this agreement, the amount of remuneration of the concerned year is required to be paid on completion of account year of the party of second part. As per this agreement, the account year of the party of second part completes at the end of February so the aforesaid amount of remuneration is required to be paid as under at the rate of 8% of ₹ 65,00,00000 i.e. at the rate of 3% of total amount of remuneration in first year and at the rate of 2% for the remaining two years. That amount comes to ₹ 5,20,000/. This amount is required to be paid every year at the end of February. Dt . 28.2.1983 1,95,000 Dt. 29.2.1984 1,62,500 Dt. 28.2.1985 1,62,500 5,20,000 However, whenever financial necessity arise for both the parties, such financial transaction can be made with a view to help each other irrespective of such amount is due or not. Similar agreements have been execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal after considering the terms of the agreement has recorded the finding of fact that as per the agreement, the income which had already accrued in favour of the assessee trust during the completion of accounting year cannot be treated as no income merely because the respective societies sent notices after many years demanding the refund of the aforesaid amount. Nothing is brought to our notice that the agreement expressly provided for the refund of the amount already paid by way of remuneration nor there is any adjudication by any authority that the assessee was under obligation to refund the amount. Under these circumstances, when the Tribunal has recorded ultimate finding of fact after considering the agreement on record that the refund as sought to be contemplated cannot be termed as no real income as contended by the assessee and the Tribunal has found that it can be termed as real income based on the terms and conditions of the agreement, we do not find that the same can be interfered with while undertaking the examination of the so called substantial questions of law. Whether a particular income was real income as per the terms and conditions of the agreement of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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