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TMI Blog1991 (9) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... section 86(v) of the Act for rate purposes, after overruling the assessee's contention that the same was not to be considered as the income of the trust was assessed in the hands of the trust at the maximum marginal rate as provided in Section 161(1A) of the Act. The assessment for the years under consideration were framed by two different ITO's and the reasons adopted by them were also different as under------- Assessment year: 1985-86 " The assessee gets a share of income of Orkay Enterprises as a beneficiary of the Mehra Family Trust. The Trust is separately assessed and hence the share of Rs. 964 is not included in the total income by the assessee. In my opinion, the share is to be considered under Chapter VII of the I.T. Act for rate purpose. The share is further taken subject to rectification. " Assessment year: 1987-88. " The assessee is a beneficiary in R.P. Mehra Family Trust which carries on the business in the name of M/s. Orkay Enterprises. From the assessment year 1985-86 onwards, the trust of R.P. Mehra Family Trust is assessed as AOP separately due to change in law. But there is no provision whereby it can be stated that share income from a trust which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sachin J. Mehra and others for the assessment years 1986-87 and 1987-88 upheld the action of the ITO. For the sake of completing our order, we reproduce below the relevant portion of the order of the CIT (Appeals) dated 30-3-1990. " (iii) Under this assumption (i.e., the trust is an AOP) it will follow that the share of the beneficiary from the AOP will be included in the total income but income-tax shall not be payable on such share. In other words the share will be included for rate purposes only. This is the plain meaning of section 86(v) as it stood at the relevant time. This provision has been modified w.e.f 1-4-1989 by the Direct Tax Laws (Amendment) Act, 1989 by which once the AOP is charged to tax at the maximum rate, the share of its member is not to be included in the total income. This modificationis not available in assessment year 1986-87 or assessment year 1987-88. " Notes on Clauses which explain the provisions of Direct Tax Laws (Amendment) Bill, 1988 have the following to say about the implication of the modification (174 ITR St. 139): " Clause 17 seeks to amend section 86 of the Income-tax Act (As it stood immediately before its substitution by section 29 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits of gains. Trustees derive their authority to carry on business, not from the beneficiaries, but from the settler under the terms of the deed of trust. They do not require the consent of the beneficiaries for exercising their authority under the deed of trust. The authority is conferred on them by the settler. The beneficiaries are mere recipients of the income earned by the trust. They have not come together for a common purpose. They cannot, therefore, be considered as an association of persons or a body of individuals. On a reference application relating to assessment years prior to the insertion of sub-section (1A) in section 161 with effect from April 1, 1985. " 8. After giving background of the amendment made in section 160 of the Act, more particularly, the insertion of sub-section (1A) with effect from 1-4-1985, he submitted that earlier the ITO had an option to tax the income of the trust either in the hands of the trustees as "representative assessee" or the beneficiaries individually on their respective shares. Onc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of persons", as used in section 3 of the Income-tax Act, means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. In the present case, the beneficiaries cannot be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust nor have they authorised the trustees to carry on business. They are merely receivers of income from the trust. The ratio of N.V. Shanmugham and Co. v. CIT [1971] 81 ITR 310 (SC), therefore, does not apply to the present case. " In view of the clear provisions of section 161 (1) of the Income-tax Act, as interpreted by our High Court and the Supreme Court, there can be no doubt that the trustees have to be assessed in the manner provided in section 161(1) of the Income-tax Act, in respect of any income of the trust. Looking to the interpretation put by the Supreme Court on the term "association of persons" also, there can be no doubt that the beneficiaries who are named in the trust as recipients of the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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