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TMI Blog1989 (3) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... e discretionary trust should be assessed in the status of an individual for the purposes of giving relief u/s 80L of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). On the other hand, the decision of the Tribunal in Fifth ITO v. D.M. C. C. Employees Medical Aid Trust [1987] 22 ITD 273 (Bom.) held that the status in such a case should be that of an Association of Persons. The Bench vide its order dated 1-12-1987 accordingly referred the following question to the President of the Income-tax Appellate Tribunal for constituting a larger Bench under section 255(3) of the Act in order to resolve conflict : "Whether in a case of private discretionary trust whose beneficiaries or their shares are indeterminate or unknown the status under which it should be assessed should be taken as 'Association of Persons' or 'Individual' ?" The President constituted a Special Bench to hear these appeals. 3. The assessment year involved in these appeals is 1984-85. The assessee in each case is a private discretionary trust. In the case of Shri Krishna Bhandar Trust the trust was created by a deed of settlement dated 26-3-55 executed by Smt. Rukmini Devi Birla, wife of Sri B.M. Birl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons were appointed as trustees. Trusts created under the deeds dated 30-3-1962 are also private discretionary trusts inasmuch as shares of beneficiaries are indeterminate and unknown. 5. The assessees in all these cases earned income during the year from dividend and interest. In course of the assessment proceedings the assessees claimed that the assessment should be framed not in the status of an Association of Persons but as an Individual and that deduction u/s 80L of the Act should be allowed. In support of such a claim reliance was placed on the decision of the Tribunal in the case of Educational Trust Fund. The ITO, however, did not accept the assessees' claim and assessed them In the status of an association of persons and did not allow deduction u/s 80L. 6. The assessees appealed to the CIT(A) who following the decision of the Tribunal in the case of Educational Trust Fund, accepted the assessees' claim and held that the assessment should be made in the status of an Individual and that deduction u/s 80L should be allowed. Aggrieved by the decision of the CIT(A), the department has come up in appeal before the Tribunal in each case. 7. Under section 80L of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at of an 'association of persons' and were assessed in that status for both those assessment years. It was submitted that since the assessee in each case is a discretionary trust, the case would be governed by the provisions of section 164(1) with the result that not only tax shall be charged at the maximum marginal rate but the status of the assessee would be that of an association of persons for the purpose of computation of income. In this connection our attention was also invited to Explanation 2 to section 164 which defines the expression "maximum marginal rate" as the rate of income-tax (including surcharge on incomes, if any) applicable in relation to the highest slab of income in the case of an association of persons as specified in the Finance Act of the relevant year. In support of the contention that the assessees before us should be assessed in the status of an association of persons, learned departmental representative placed reliance on the decision of the Calcutta High Court in the case of Smt. Santimoyee Bose v. CIT [1969] 74 ITR 133 decision of the Full Bench of the Gujarat High Court in the case of CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 and the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) as if the relevant income or part of relevant income were the total income of an Association of Persons or (ii) @ 65 % whichever course would be beneficial to the revenue; " were substituted by the words "tax shall be charged on the relevant Income or part of relevant Income at the maximum marginal rate". It was contended that in view of section 164(1) as it stood after the amendment introduced with effect from 1-4-1980, the tax on the income of the assessees has to be charged at the maximum marginal rate and that in view of the omission of the words "as if the relevant income or part of relevant income were total income of an Association of Persons", the status of the trust cannot be taken to be that of an association of persons for the purposes of computation of its income. Sri Bajoria then submitted that the provisions of section 164(1) are attracted only for the purpose of levying tax at a particular rate after income of the trust has been assessed. This according to Sri Bajoria section 164(1) comes into play after computation of income. Since question of computation of income depends on the status of the assessee, according to argument advanced by Sri Bajoria, recourse to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision contained in Explanation 2 to section 164, Sri Biswas submitted that the trustees of a discretionary trust have to be assessed in the status of an association of persons. It was then contended that the decision of the Tribunal in Educational Trust Fund was erroneous. According to Sri Biswas in view of the decision of the Bombay High Court in, the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, the Tribunal was bound to follow the decision of the Calcutta High Court in the case of Smt. Santimoyee Bose which supported the view that in the case of a discretionary trust, trustees should be assessed in the status of an association of persons. 16. There is no dispute that in all these cases the assessee is a discretionary trust to which section 164(1) is applicable. There is also no dispute that the first proviso to section 164(1) which to some extent tones down the rigour of the maid section is also not applicable in this case and, therefore, tax on the total income has been charged in this case at the maximum marginal rate. 17. As has been pointed out by the learned departmental representative, in view of sub-clause (v) of section 2(31) 'person' includes an associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total income of an association of persons, or, where such income or such part thereof is actually received by a beneficiary, then at the rate or rates applicable to the total income or total world income of the beneficiary if such course would result in a benefit to the revenue." 20. The Finance Act, 1965 omitted the words "total world income" with effect from 1-4-1965, consequent on the deletion of section 113 with effect from 1-4-1965. 21. The Finance Act, 1970 substituted the following section in place of the earlier section with effect from 1-4-1970 : "164. (1) Subject to the provisions of sub-sections (2) and (3) where any income in respect of which the persons mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither--- (a) the tax which would be chargeable if the whole of 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 ;or (b) the aggregate of--- (i) the tax which would be chargeable on that part of the relevant income which is applicable to charitable or religious purposes (as reduced by the income, if any, which is exempt under section 11) as if such part (or such part as so reduced) were the total income of an association of persons; and (ii) the tax on that part of the relevant income which is applicable to purposes other than charitable or religious purposes, and in respect of which the shares of the beneficiaries are indeterminate or unknown, at the rate of sixty five per cent, whichever course would be more beneficial to the revenue : Provided that in a case where--- (i) none of the beneficiaries in respect of the part of the relevant income which is not applicable to charitable or religious purposes has any -other income chargeable under this Act ; or (ii) the relevant income is receivable under a trust declared by will ; or (iii) the relevant income is receivable under a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called into play only after income had been determined and not before that. The provisions of section 164(1) are not charging provisions, nor aid to computing income. In our opinion, it cannot be applied for the purpose of computation of income. We are fortified in taking this view by the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family Trust. Section 41 of the Indian Income-tax Act, 1922 and the proviso thereto are analogous to section 160(1) and 160(4) of the Act. Their Lordships in the case of Trustees of H.E.H. Nizam's Family have held that section 41 only comes into play after the income has been computed in accordance with Chapter III and then the question of payment of tax arises and it is at that stage that section 41 issues a mandate to the taxing department that when they are dealing with the income of a trustee they must levy the tax and recover it in the manner laid down in section 41 (at page 593 of the report). It must, therefore, be held that for the purpose of computation of income recourse cannot be had to section 164(1) and from this it necessarily follows that the status of a representative assessee cannot be determined or ascertaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'association of persons' as used in section 3 of the 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." 26. The Calcutta High Court in the case of Suhashini Karuri held that an association of persons is one in which two or more persons join in a common purpose or common action, the object of which is to produce income, profits or gains. It was further held that joint trustees must be taken to be a single unit in law and there is nothing wrong in treating such a unit as an individual. So this authority supports the proposition that the expression 'individual' takes within its sweep a group of individuals. 27. In the instant case neither the beneficiaries nor the trustees have joined in a common purpose or common action, the object of which is to produce income, profits or gains. In the assessment year under appeal the assessee in each case derived income from investment, i.e., from dividend and interest. The mere fact that beneficiaries or trustees are more than one cannot lead t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit of a single beneficiary or, where there are more beneficiaries than one, the individual shares of the beneficiaries in the trust properties are determinate and known. 30. Sub-section (4) of section 21 of the WT Act applied to a discretionary trust and it laid down that in such a case wealth-tax shall be levied upon the representative assessee as if the persons on whose behalf or for whose benefit the assets are held were an individual for the purpose of the Act'. The observations of the Supreme Court, relied upon by the Tribunal in the case of Educational Trust Fund were made while considering the case where beneficiaries were more than one and their shares were indeterminate or unknown. To such a case sub-section (4) of section 21 of the WT Act was applicable which provides in explicit terms that wealth-tax shall be levied upon and recovered from representative assessee as if the persons on whose behalf or for whose benefit the assets are held were an individual. So, it was on the basis of the phraseology of sub-section (4) of section 21 of the WT Act that it was held by their Lordships that where beneficiaries are more than one and their shares are indeterminate or unknow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a joint decree and the maintenance was not on the basis of the shares of each of the plaintiffs. It has been held by the High Court that income was received on behalf of the persons whose shares were indeterminate, and as such the proviso to sub-section (1) of section 41 of the Income-tax Act, 1922 applies. It was further held in that view of the matter that the assessee may be deemed to be an association of persons even though they are not an association of persons in fact. 33. Section 41 of the Income-tax Act, 1922 and the proviso thereto are analogous to sections 161 and 164(1) of 1961 Act. Proviso to section 41 of the Old Act which was considered by the High Court was as follows : "Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate ; but, where such persons have no other personal income chargeable under this Act and none of them is an artificial juridical person, as if such income, profits or gains or such part thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and such persons being hereafter in this section referred to as ,relevant income', 'part of relevant income' and 'beneficiaries', respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate." 35. Section 164(1) thus prescribes the rate at which tax is to be charged on the relevant income or part thereof In the case falling under the main part of section 164(1) tax is to be charged at the maximum marginal rate. The expression "maximum marginal rate" is defined under Explanation 2 to mean the rate of income-tax (including the surcharge on income-tax, if any) applicable in relation to a highest slab of income in the case of an association of persons as is specified in the Finance Act of the relevant year. Even with the help of Explanation 2, deeming provision is not available under the main part of section 164(1) in the case of a discretionary trust. So, the decision in the case of Smt. Santimoyee Bose which was essentially based on the deeming provision contained in the proviso to section 41 of the Old Act, cannot be applied to the present case for the simple reason that the deeming provision on the basis of which a represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry trusts. Under those six trusts the assessee was not the sole, beneficiary but she was one of the groups of beneficiaries in each of the said six trusts. The assessee received an amount aggregating to Rs. 18,000 from the said six trusts and contended before the ITO that the said income of Rs. 18,000 was not liable to be assessed in her hands and that the same was taxable only in the hands of the trustees of the respective trust in view of section 164. The ITO rejected. this contention of the assessee and assessed the amount of Rs. 18,000 in her hands u /s 166 of the Act. The assessee unsuccessfully challenged the said order of the ITO before the AAC. The assessee then appealed to the Tribunal. It was held by the Tribunal that no direct assessment on the assessee could be made in respect of the amount of Rs. 18,000 and that the said amount could be assessed only in the hands of the trustees of respective trust u/s 164, At the instance of the revenue the following question was referred to the High Court: "Whether on the facts and in the circumstances of the case, various amounts totalling Rs. 18,000 received by the assessee and the income of the six discretionary trusts are liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir impact in interpreting sections 161 and 164. 42. Interpretation of section 164 by the Full Bench of the Gujarat High Court is contained in the following passage which is at pages 671 and 672 of the report : "When one comes to section 164, the only departure that is made from the scheme of section 21(4) of the Wealth-tax Act is that instead of creating the fiction that the body of beneficiaries is a single individual, under section 164 the fiction is created that the income received by the representative assessee in the case covered by section 164 is 'as if the income were the total income of an association of persons.' It is to be borne in mind that unlike the fiction in section 21(4) of the Wealth-tax Act, the fiction under section 164 is that the income is deemed to be the income of an association of persons and the tax has to be charged as if the income of the trust were the income of an association of persons when it is not specifically receivable on behalf of or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown. Therefore, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case, the learned Tribunal was right in holding that the Commissioner of Income-tax was justified in passing the order under section 263 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the findings of the Commissioner of Income-tax that the trust was a discretionary trust ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the shares of beneficiaries were indeterminate or unknown and, as such, the provisions of section 164 were applicable ?" 46. The High Court in the said case after considering the provisions of the trust deed, held that the assessee was a discretionary trust and the shares of the beneficiaries were not known and determinate. It will thus be seen that the issue involved and considered by the Rajasthan High Court in the case of Moti Trust was entirely different. The decision in that case has no bearing on the controversy raised in these appeals. Reliance on that case by the department is, therefore, misplaced. 47. In view of the reasons given above, we hold that the assessee in each case is to be assessed in the status of an ind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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