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TMI Blog2003 (3) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the income from the trust properties has to be assessed in the hands of the beneficiaries?" The brief facts necessary for the decision of these cases are as follows: The respondent-assessee is a trust. It is carrying on business in the manufacture and sale of umbrellas. The trust had income from business as well as income from house property. In the assessment under the Act for the years 1988-89 and 1989-90, the assessee claimed deduction in respect of rental income received from the building owned by the trust. The Assessing Officer disallowed the claim of the assessee holding that the building in question was an asset of the trust and the income thereform has to be considered in the hands of the trust. The Assessing Officer accordingly treated the assessee as representative assessee under section 161(1A) of the Act and tax was charged on the whole of the income at the maximum marginal rate applicable. In appeal by the assessee the Commissioner of Income-tax (Appeals), Thiruvananthapuram, allowed the appeal, inter alia, relying on the decision of this court in CWT v. Thiruvenkata Reddiar [1981] 128 ITR 689. This was confirmed by the Tribunal in the appeal filed by the De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the hands of the beneficiaries does not arise. The first appellate authority also observed that "on going through the materials on record there is no doubt that the building is owned by the trust and the share of the beneficiaries are certain". The first appellate authority accordingly held that section 26 of the Income-tax Act which deals with computation of income under the head "Income from house property" overrides section 161(1A) of the Act which deals with the definition of a "representative assessee"; all the beneficiaries or co-owners of the property have a definite share in the property; following the ratio of the decision in Thiruvenkata Reddiar's case [1981] 128 ITR 689, each one of the beneficiaries has to be treated like any other assessee; hence income from house property has to be computed in each case in accordance with sections 22 to 25 of the Income-tax Act. The Tribunal also held that in this case the shares of the beneficiaries are definite and ascertainable and therefore as per the provisions of section 161(1A) of the Act the income from the trust properties has to be assessed in the hands of the beneficiaries. The Tribunal also relied on the decision in Thir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause under which where any income in respect of which a representative assessee is liable 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. However, under the proviso to the said sub-section profits and gains 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 are excluded from the applicability of this sub-section. According to the Revenue, in view of this sub-section, the entire income received by a representative assessee has to be treated as one unit or otherwise as income received by an association of persons since income from profits and gains of business is included in the said income and the entire income of the trust has to be assessed to tax at the maximum marginal rate as provided under Explanation 2 below sub-section (3) of section 164. According to the assessee, having regard to the object with which sub-section (1A) of section 161 was inserted with effect from April 1, 1985, only the income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trust". She had interest to the extent of 18 per cent. in the income and assets of the trust. The trust had deposits in various banks. In the return filed under the Wealth-tax Act she claimed deduction under section 5(1)(xxvi) of the said Act in respect of 18 per cent. of the amounts lying in deposit in various banks as per the books of the trust. The Wealth-tax Officer did not grant the full relief. In appeal by the assessee the Income-tax Appellate Tribunal took the view that under sub-sections (1) and (2) of section 21 of the Act the Wealth-tax Officer was bound to treat the beneficiary of a trust like any other assessee and when the beneficiary under a trust is directly subjected to an assessment to wealth-tax under section 21(2) the assessee would be entitled to claim the full extent of exemption allowed by clause (xxvi) of subsection (1) of section 5. This court upheld the said findings of the Tribunal and held as follows: "Sub-section (1) of section 21 lays down, inter alia, that in the case of assets chargeable to tax under the Act held by a trustee appointed under a trust declared by a duly executed instrument in writing, wealth-tax shall be levied upon and recoverable f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest, if he were assessed directly." It was also held that no part of the corpus of the trust properties can be assessed in the hands of the trustee. In view of the above, the reason stated by the Assessing Officer that the beneficiaries are not the owners of the building cannot be sustained. Hence, by applying the dictum laid down by this court in Thiruvenkata Reddiar's case [1981] 128 ITR 689 and by the Supreme Court in Trustees of H.E.H. Nizam's Trust's case [1977] 108 ITR 555 about the asset in question to the extent to which the beneficiary has a beneficial interest therein has to be deemed to be held by the beneficiary. The position under section 161(1) of the Act is that a trustee under a trust cannot be assessed on the aggregate income received by it as a single unit. The assessment in the name of the trustee in terms of the sub-section can be made in two ways. The Assessing Officer may make as many assessments in the name of the trustee as there are beneficiaries and levy the tax appropriate to such income at the rate of tax applicable to total income of each beneficiary. The assessing authority, in the alternative, can make a single assessment on the trustee, but has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trust which is having income from business as well as income from house property, by virtue of the provisions of section 161(1A) of the Act, the income from the business earned by the trust shall be taxed at the maximum marginal rate treating it as a single unit and the income from house property has to be assessed in the hands of the trustee in the manner provided in section 161(1) of the Act. This intention of the Legislature is evident from the Statement of Objects and Reasons for the insertion of section 161(1A) of the Act vide the memorandum explaining the provisions of the Finance Bill, as also from the circular issued by the Central Board of Direct Taxes mentioned above. The stand of the Department is that by virtue of the provisions contained in section 161(1A) of the Act, in a case where a trust is having income by way of profits and gains of business, income from property, income from interest, income from dividend and also income from capital gains, the entire income so received has to be treated as one and tax has to be levied at the maximum marginal rate. This according to us, is against the very scheme of the Act as also beyond the scope of section 161(1A) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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