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TMI Blog1997 (2) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... id out of dividends received by the trusts which were exempt under section 80K of the Income-tax Act, 1961?" Income-tax Reference No. 268 of 1977 : "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the distributions received by the assessee from various discretionary trusts were assessable only in the hands of the trustees of the respective trusts under section 164 of the Income-tax Act, 1961, and not in the hands of the assessee? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the amount received by the assessee from various discretionary trusts is exempt from tax inasmuch as the amount was paid out of dividends received by the trusts which were exempt under section 80K of the Income-tax Act, 1961?" These references were earlier heard and decided on March 1, 1978, and on question No. 1 of these two references, the court opined that the Tribunal was right in law in holding that the distributions received by the assessee from various discretionary trusts were assessable only in the hands of the trustees of the resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessee's contention that the deductions under section 80K would be allowable in the assessee's hands completely and not merely on a proportionate basis. In appeal before the Tribunal preferred by the Revenue, the Tribunal found that the decision of the Tribunal in the case of Smt. Kamalini Khatau rendered on November 26, 1975, had continued to hold good and since there was no distinguishing feature, there was no reason to depart from that earlier decision. It was, therefore, held that the income in question was assessable only in the trustees' hands. The decision on this question, as we have noted above, no longer stands in view of the decision of the Supreme Court on question No. 1. The Tribunal, as regards question No. 2, while observing that it did not survive gave a finding on an assumption that if it were to survive then it was a question of fact to be decided in each case separately on the basis of the material on record as to whether the amount received by the assessee was disbursed by the trustees out of the dividend income eligible for deduction under section 80K of the Act. It was noted that the Department's argument was not that the amount received by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the trust as contended by the Revenue. The relevant provisions of section 80K which prevailed at that time read as under : "80K. Deduction in respect of dividends attributable to profits and gains from new industrial undertakings or ships or hotel business.---Where the gross total income of an assessee, being the owner of any share or shares in a company, includes any income by way of dividends paid or deemed to have been paid by the company in respect of such share or shares, there shall, subject to any rules that may be made by the Board in this behalf, be allowed, in computing his total income, a deduction from such income by way of dividends of an amount equal to such part thereof as is attributable to the profits and gains derived by the company from an industrial undertaking or ship or the business of a hotel, on which no tax is payable by the company under this Act for any assessment year commencing prior to the 1st day of April, 1968, or in respect of which the company is entitled to a deduction under section 80J." The provisions of section 165 of the Act which relate to cases where part of trust income is chargeable are as follows : "165. Where part only of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 165 indicates that when part only of the trust income was chargeable under the Act, the beneficiaries' share of the income should be taken to be derived proportionately from the chargeable and non-chargeable portions of the trust income, and should be assessed accordingly. Thus if the income of the trust is Rs. 10,000, of which Rs. 5,000 is chargeable under the Act and Rs. 2,500 is receivable therefrom by the beneficiary, the proportion of the part chargeable, i.e., Rs. 5,000 to the whole income of Rs. 10,000 being 2 : 1 the same proportion will apply to the income receivable by the beneficiary, for the purpose of working out the chargeable and non-chargeable portions. Tax is required to be collected in respect of income chargeable under sub-section (1) of section 4. Therefore, the proportion of income chargeable to tax is to be worked out in respect of the income receivable by the beneficiary in that context, and that is quite different from the specific question of dealing with the dividends attributable to profits from new industrial undertakings or ships or hotel business which was dealt with by the provisions of section 80K of the Act. The income by way of dividends is incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted either in the hands of the trustee as representative assessee or in the hands of the beneficiary. Such dividend income passed on by the trustee to the beneficiary will still remain a dividend income in the hands of the beneficiary if the Department opts to directly assess the beneficiary and it cannot be said that such dividend income will change its colour and become income received from the trustees by the beneficiary and cease to be dividend income. Such contention canvassed for the Revenue ignores the fact that the same income could be assessed either in the hands of the trustee as a representative assessee (who is deemed to be an assessee for the purpose of the Act under section 160(2)), or, in the hands of the beneficiary, in view of section 166 which enables the Department to directly assess the person on whose behalf or for whose benefit income is receivable. Thus, in our view, the amount of the dividend income received by the trustee which was allowable for deduction under section 80K when passed on to the beneficiary would none the less be eligible for the same deduction. In the present cases, the amounts disbursed by the trustees out of such deductible dividend inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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