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TMI Blog1983 (12) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1971, they sold the jewellery mentioned in Part I of the First Schedule relating to Prince Muffakkam Jah for Rs. 8,27,600. The trustees filed two separate returns in respect, of the two beneficiaries of the trust and claimed therein that the jewellery was sold in the year of account and it is not a capital gain and hence not taxable. The ITO, however, issued notice under s. 139(2) of the I.T. Act calling upon the trustees to file the returns in the status of " association of persons ". Thereupon, the trustees filed a the return showing an income of Rs. 650 representing interest on Government of India securities, specified in the Third Schedule. They contended before the ITO that they cannot be assessed as " association of persons " as there are two trusts in respect of the two grandsons and if at all assessment is to be made, there should be two assessments. They also contended that no tax can be levied on capital gains inasmuch as the definition of capital assets under s. 2(14)(ii) excludes jewellery held for personal use by the assessee. The ITO did not accept these contentions. Hence, appeals were preferred by the trustees to the AAC. The AAC accepted their contention that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, capital gains tax is not exigible on the profit arising on the sale of jewellery ? The Department again filed another reference application before the Tribunal for making a reference to this court under s. 256(1) on the following question : " Whether, on the facts and in the circumstances of the case, capital gain arising on sale of jewellery is assessable ? " The Tribunal allowed the said application and framed the said question and referred the same to this court under s. 256(1). The reference is registered as R.C. No. 28 of 1979. The question No. 3 in R.C. No. 92 of 1978 and the question in R.C. No. 28 of 1979 are one and the same. Hence, all the questions in both the references can be answered by a common judgment. From the facts mentioned above, it is clear that the late Nizam created trusts in favour of his two grandsons, viz., (1) Mukkaram Jah, and (2) Muffakkam Jah, in respect of the jewellery mentioned in the deed. The terms of the trust created in respect of each of the beneficiaries are identical. According to the terms of the trust, each of them is to wear the jewellery mentioned as item No. 1, in the First Schedule on the occasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of the assessee but held that the sale proceeds are capital gains. The AAC also agreed with the ITO on this aspect and held that the benefit under s. 2(14)(ii) does not enure in the case of the trustees who are the assessees. According to the AAC, the trustees are holding the sale proceeds and the benefit given under s. 2(14)(ii) does not apply to sale proceeds held by the trustees. The Tribunal held that the trustees did not use them for their personal use and the use if at all is for the beneficiaries who are the assessees and, hence, the jewellery held by the trustees for the benefit of the beneficiaries is exempted under s. 2(14)(ii) and, consequently, the beneficiaries cannot be liable to assessment. The question is whether the finding of the Appellate Tribunal on this aspect is correct. The jewellery was sold in the year 1971. The assessment year is 1972-73. In such a case, the definition given to s. 2(14)(ii) of the I.T. Act, 1961, i. e., prior to the Amendment Act, applies. It reads as follows: " 2. (14) ' Capital asset " means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include . ...... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely and commonly used by the assessee that can be treated as personal effects. In Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (SC), their Lordships held that the legislature intended these articles to be included within the expression " personal effects " as they are intimately and commonly used by the assessee. Sri Y. V. Anjaneyulu, the learned counsel for the assessees, on the other hand, contends that even under the terms of the trust, the jewellery is required to be worn by the beneficiaries on the occasions of marriages or any other ceremonies and, hence, the jewellery comes under personal effects. From the terms of the trust mentioned above, it is clear that the jewellery given to the beneficiaries under the said trusts is not for the daily use of the beneficiaries. The beneficiaries, therefore, have limited rights to wear the jewellery and they have to wear them only on occasions like marriages and after the ceremonies are over, the beneficiaries have to return them to the trustees immediately for safe custody. On account of the restrictions imposed on the use of the jewellery in the case on hand under the terms of the trusts, it is clear that the jewellery can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the aforesaid meaning assigned to the expression in various dictionaries and cases, the silver bars or bullion can by no stretch of imagination be deemed to be " effects " meant for personal use. Even the sovereigns and the silver coins which are alleged to have been customarily brought out of the iron safes and boxes on two special occasions, namely, the Ashtami day of " Sharadh, Paksh " for Maha Lakshmi Puja and for worship on the occasion of Diwali festival cannot also be designated as personal effects meant for personal use. They may have been used for puja of the deities as a matter of pride or ornamentation but it is difficult to understand how such user can be characterised as personal use. Their Lordships held that an intimate connection between the effects and the person of the assessee must be shown to exist to render them " personal effects " within the meaning of the expression used in cl. (ii) of the exceptions in 2(4A) of the Indian I.T. Act, 1922. In the light of this decision, we have no hesitation in holding that the jewellery in question, which is intended to be used by the beneficiaries on wedding day and other ceremonial occasions as a mark of status and pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the corpus will not be treated as capital gain merely because it is invested in securities of the Government of India. As the income derived from the sale of the jewellery, in respect of which the trusts were created, is treated, in the circumstances stated above, as capital gain, it is liable to tax. As the trustees are holding the corpus for the benefit of the beneficiaries, as could be seen from the terms of the trust, they are liable to be assessed as representative assessees. Whenever an assessment is made on the trustees in their representative character, the assessment shall be made either under s. 161 or under s. 164 of the I.T. Act. We have, therefore, to examine whether the trustees in the case on hand should be assessed under s. 161 or under s. 164 of the Act. Sri Anjaneyulu contends that this question cannot be gone into at this stage as this was not raised at any stage before any of the lower authorities including the Tribunal. The learned standing counsel for the Revenue, on the other hand, contends that the assessment itself was made by the ITO under s. 143(3) read with s. 164. He further contends that the ITO's assessment order and also the order of the AAC cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be given to the expression in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him occurring in section 161(1). While dealing with this aspect, the question of ownership or the meaning to be given to the word 'held' will be immaterial. Mr. Swaminathan, the learned departmental representative, no doubt, contended that the language used in the Wealth-tax Act in section 5(1)(viii) is different from the language used in section 2(14)(ii). In our view, this would hardly make any difference in view of section 161(1). One need not look as to whether the trustees are the owners or the beneficiaries are the owners. It may be that the trustees are the owners, but when an assessment is made on the trustees, it should be in the same manner as if an assessment is made on the beneficiaries in which case the provisions of the Act will have to be looked into qua beneficiaries ......... " The Tribunal, therefore, adverted to the provisions of s. 161(1) and its effect. Since the Tribunal came to the conclusion that the corpus realised on the sale of the jewellery which is the subject-matter of the trust, does not come under capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons on whose behalf they are receivable are indeterminate or unknown, then the tax shall be levied and recoverable at the maximum rate. Therefore, the proviso clearly contemplates two cases. One case is where the trust is in favour of one beneficiary and if the trustees do not receive the income specifically for that person, then the liability is that the tax shall be paid at the maximum rate. The other case contemplated is where the beneficiary is more than one person and in such a case if the trustees do not receive the income for the beneficiaries in specific shares, then also the liability is to be taxed at the maximum rate. Therefore, the scheme of the proviso is clear that if there is one beneficiary, no question of share arises and the income must be received specifically on behalf of that individual. But where there are more than one beneficiary, then the question of their shares arises and those shares must be determined and known. " Following the above decision, the Gujarat High Court in Kum. Pallavi S. Mayor v. CIT [1981] 127 ITR 701 held that under s. 161(1) the tax to be realised from a beneficiary, etc., can be levied upon and recovered from a representative asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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