1. The learned Commissioner (Appeals) has erred in law and on facts that 50 per cent of 20 per cent share from the firm of Laxmi Talkies was not to be included in the total income of the assessee but only the balance of 50 per cent of 20 per cent share from the said firm was includible. He further erred in holding that such 50 per cent of 20 per cent share had been diverted by superior title by the deed of settlement dated 12-10-1978.
2. The learned Commissioner (Appeals) has erred in law and on facts in B2 holding that the share of loss derived by the assessee from Jayalaxmi Panchal Children Trust and Harilal Punjabhai Children Trust to be given set off against the business income of the assessee for the assessment year 1979-80. He further erred in holding that in the hands of the beneficiary assessee, the character of income will remain the same, i.e., the business income.
2. The assessee had 20 per cent share in certain firm but in the return of his income, he declared only 50 per cent thereof. His reason for doing so was that the assessee had created a trust and thereunder 50 per cent of that 20 per cent share in the firm was settled in favour of certain beneficiaries. The ITO rejected the assessee's claim on the ground that the decision of the Gujarat High Court in the case of CIT v. Nandiniben Narottamdas [1983] 140 ITR 16 has not been accepted by the department. The Commissioner (Appeals) has considered the trust deed and relying upon the said decision, allowed the assessee's appeal.
Following the said decision, we confirm the order of the Commissioner (Appeals) on this point.
3. Regarding the second ground, the assessee had claimed set off for the earlier business losses. The assessee was a beneficiary under a certain trust, which was a partner in a firm. The ITO assessed the income from this trust in the hands of the assessee under the head 'Income from other sources' and so did not allow the assessee's claim for set off. The assessee's contention was that the character of income in the hands of the trust was share from the firm and as such it ought to be treated as business income or loss in his hands. The Commissioner (Appeals) allowed the assessee's appeal.
4. Before us, the learned departmental representative argued that in the hands of the assessee, the source of income was the trust and not the business in which the trust was partner and, therefore, the income in the hands of the assessee would fall under the head 'Income from other sources'. He relied upon the decision in the case of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC).
5. The assessee's counsel, however, relied upon the following decisions : CIT v. H.E.H. Mir Osman Ali Bahadur [1966] 59 ITR 666 (SC), Shri R.[IT Appeal Nos. 3151 and 3152 (Bom.) of 1977-78], CWT v. Official Trustee of West Bengal for Trust Murshidabad Estate [1982] 136 ITR 162 (Cal.), CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187 (Bom.), Saifudin Alimohamed v. CIT [1954] 25 ITR 237 (Bom.) and Commentary on Income-tax Law by Chaturvedi and Pithisaria (Vol. 1.3, p. 3275).
He also relied upon the provisions of Section 161(1) of the Income-tax Act, 1961 ('the Act').
6. The learned departmental representative, on the other hand, replied that the cases relied upon by the assessee's representative concerned the assessment of the trustees and also that Section 161 dealt with the assessment of the trustees, whereas here we are concerned with the assessment of the beneficiaries. He argued that the converse of Section 161(1), regarding the assessment of the beneficiaries, was not correct and reiterated his argument that since the source of income for the beneficiaries was the trust deed, their income would fall under the category of 'Income from other sources'.
7. The cases relied upon by the assessee's representative decide only that application of Section 41 of the Indian Income-tax Act, 1922 is mandatory and that the liability of the trustees is co-extensive with that of the beneficiaries. This is a direct application of law that the trustees are to be taxed in the same manner and to the same extent as the beneficiaries. But from this, the converse does not follow and, as stated above, the said cases do not decide that the beneficiaries are to be taxed in the same manner and to the same extent as the trustees.
Really speaking, the income is of the beneficiaries and it is that income which is being assessed and after it is assessed, the tax can be levied and recovered from the trustees. Thus, the position is that the trustees are to be assessed in the same manner as the beneficiaries and not that the beneficiaries are to be assessed in the same manner as the trustees. In the case of Haji Abdul Hameed v. CIT [1971] 82 ITR 495 (All.), the High Court was concerned with a similar problem. In that case the facts were that : One Haji Lal Mohammad executed a deed of wakf in the year 1942. The beneficiaries under the deed of wakf were his two grandsons, Shakoor and Hameed. The property conveyed to the wakf consisted of a business in bidis. In the year 1947, Hameed became the sole mutawalli. Under the deed of wakf, Hameed and Shakoor were each entitled to one-half share in the income from the business owned by the wakf. For the assessment year 1957-58 the income from the business was fixed at Rs. 2,70,868. The shares of Hameed and Shakoor from this income came to Rs. 1,35,434 each. The question arose whether this income in the hands of the two beneficiaries was to be treated as their earned income. On this point, the Income-tax Officer found against the two assessees. It was held that these sums did not represent their earned income....
This view was upheld by the AAC and the Tribunal. The High Court observed as follows : It may be pointed out that in the present cases we are concerned with the receipts in the hands of the two assessees in their capacity as beneficiaries. The source of their receipts is a deed of wakf, dated March 14, 1942. The fact that certain business is being conducted on behalf of the wakf has no direct bearing on the nature of the receipts in the hands of the assessees....
The Allahabad High Court held that the receipts in the hands of the beneficiaries were not the immediate result of any personal exertion and so was not an earned income as defined. We, therefore, hold that the nature of the income in the hands of the assessee falls under the head 'Income from other sources' and, therefore, the set off of earlier business losses cannot be allowed in respect of the income from the trust. On this point, the appeal is allowed.