1. This appeal is directed against an assessment made on a private trust in the status of 'Association of Persons'.
2. By an indenture of trust declared on 27-5-82, Shri L. Narayana Iyer, the author of the trust, set up a trust with a sum of Rs. 1,500 for the benefit of Shri L. Muthukrishnah, Smt. M. Thrayambika Devi, Minor M.Sathishkumar and Shri K. Kuppusamy, the first three to have 1/15th share and the last 12/15th share. Shri Muthukrishnan, Shri K.Balasubramanian and Shri K. Kuppusamy were appointed as trustees. The instrument directed the trustees to augment the corpus with all gifts, donations, etc. received and any prize money received on lottery tickets as well as 2/3rd share of the net interest earned from investments made by the trustee. The trust deed provided that the corpus of the trust shall not be divided or distributed among the beneficiaries until the duration of the trust which was to be a period of 15 years or such time as may be determined by the trustees or if extinguished sooner by the beneficiaries unanimously. The beneficiaries were to receive only 1/3rd share of the net interest income each year according to the shares mentioned in the instrument. The trustees were empowered to carry on business and invest the funds of the trust and any loss was to be deducted from the corpus. For the assessment year 1983-84, corresponding to the previous year ended 31-3-1983, the trustees filed a return of income on 22-11-1985 showing an income of Rs. 780 under "Other Sources" in the status of representative assessee of the beneficiaries. They also claimed a refund of tax deducted at source amounting to Rs. 3,75,000 out of a sum of Rs. 15,00,000 received by them as a lottery prize under the U.P. State Lottery Scheme in January, 1983. The I.T.O. was of the opinion that the entire amount received should be treated as income and assessed in the hands of the trustees in the status of "Association of Persons". He thus determined the gross income at Rs. 14,79,204 being net lottery income Rs. 14,76,870 and interest income Rs. 2,334 and after the deduction Under Section 80TT the net taxable income at Rs. 7,38,270. On appeal, the CIT (Appeals) confirmed this assessment on the ground that the provisions of Section 164 were not applicable to this case.
3. In the further appeal before us it was contended on behalf of the assessee that the trustees could be assessed only as representative assessees only to the same extent and in the same status as the beneficiaries and since the beneficiaries were not liable to tax, there cannot be an assessment on the trustees either. It was submitted that there cannot be an assessment outside the scope of Section 164 especially when the share of the beneficiaries were known and determinate. It was also argued that even if the trustees were given the power to carry on business they were not carrying on any business on behalf of the beneficiaries so as to be assessed in the status of 'Association of Persons'. It was also submitted that there was no provision for assessing the trustees directly and independently of the beneficiaries. Thus it was claimed that the assessment was untenable and should be cancelled.
4. On the other hand, it was contended on behalf of the revenue that since the income has been earned by the trust it was assessable in its hands directly before it was applied and distributed to the beneficiaries. It was submitted that the assessment of the income was different from the assessment of wealth where different considerations may apply. It was also submitted that the provisions of Section 164 were not applicable to this case. According to the revenue, even if the amount received by the trustees were to be capitalised the beneficiaries had a vested interest therein and, therefore, liable to be taxed in respect of that income. It was argued that the trust deed cannot affect the character of the receipt which remained income when it arose and merely because the whole of it or part of it was capitalised later, it cannot escape the tax net.
5. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed.
6. Prior to the coming into force of the Income-tax Act, 1961, there was a doubt i whether the revenue had an option to choose to tax the beneficiary directly or to tax the trustee, especially when he is carrying on business so as to impose a higher rate of tax on the total income unaffected by the circumstance that such total income belonged to several beneficiaries having definite shares. But courts elucidated the correct principle underlying the representative assessment, viz.
That the primary liability for payment of tax was that of the beneficiary and that the assessability of representative trustee was only a vicarious liability designed to facilitate collection, since the representative is the person ordinarily handling the income of the beneficiary. (See CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187 (Bom.) and A.W. Williams v. W.M.G. Singer 7 TC 387 (HL). Thereafter, the Law Commission in its 12th Report at pages 425 and 426 recommended as under: - ' Persons liable as representative assessees, especially the trustees, guardian or manager (i.e., the assessees governed by existing Sections 40 and 41) are at present, liable to be charged directly under Section 3 also. In any case, the absence of a specific provision lends support to the opinion expressed by some commentators that the Act leaves an option with the Department to assess the trustee, etc. either under Section 3 or under Section 40 or 41. Since assessment under Section 3 might be more onerous than under Section 40 or 41, it seems desirable to make it clear that it is obligatory on the Department to apply the provisions of Sections 40 and 41 in cases where they are applicable, leaving the general liability under Section 3 to be applied only in cases which are outside Sections 40 and 41. The draft-sub-clause under discussion is intended to achieve this object.
Accordingly Section 161 has been enacted in the Income-tax Act, 1961 with the consequence that it is no longer permissible for any income received by a representative assessee as defined in Section 160 to be taxed under the general charging Section 4. The corresponding provision of the Wealth-tax Act, namely Section 21, came up for consideration before the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555. The Supreme Court has held that this section was mandatory and every assessment on a trustee must necessarily fall under this section and he cannot be assessed apart from and without reference to the provisions of that section. The Supreme Court has also explained that under this section it is the beneficial interest which has to be taxed in the hands of the trustees in a representative capacity and the liability of the trustee cannot be greater than the liability of the beneficiaries. It has further explained that the assessment of the trustee in the like manner and to the same extent as the beneficiary means that "there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary, that the assessment of the trustee would have to be made in the same status as that of the beneficiary and the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly.
7. It was argued on behalf of the revenue that the provisions of the Income-tax Act were different from Wealth-tax Act and if a representative assessee has income which is not assessable Under Section 161, there is no bar to his direct assessment under some other provision. These arguments have been considered and rejected by the High Courts. In the case of Trustees of Putlibai R.F. Mulla Trust v.CWT [1967] 66 ITR 653, the Bombay High Court pointed out that there is no difference between income-tax and wealth-tax with regard to the question whether the share of the beneficiary is determinate or not.
The Madhya Pradesh High Court has pointed out in the case of CIT v.Karelal Kundanlal Trust [1984] 148 ITR 412 that the legal position is now well-settled in the light of the pronouncement of the Supreme Court that it is no longer open to the department to levy a tax on the trustee in the same way as on an assessee who does not fulfil the character of a trustee. The cases relied on by the revenue such as (SC) and Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal [1958] 33 ITR 245 (SC) to show that a representative assessee can be independently assessed refer to other representatives such as an agent of the non-resident when the non-resident cannot be reached and do not apply to cases of a trust. Similarly, the decisions of the Tribunal in the case of Mrs. A. K Rajani Reddy v. ITO [1985] 11 ITD 1 (Hyd.) and Dharamdas Hargovandas v. First ITO [1985] 11 ITD 544 (Hyd.) relied on by the revenue are distinguishable. In both the cases the Tribunal concluded that the income was not that of the beneficiary and, therefore, upheld the independent assessment of the trustee.
8. Section 164 however provides that where the shares of the beneficiaries are indeterminate or unknown, tax shall be charged on the relevant income at the maximum marginal rate. It was argued on behalf of the revenue that because part of the income earned by the trustees was being capitalised the shares must be taken to be indeterminate or unknown and reliance was placed on the decisions in the cases of Moti Trust v. CIT [1987] 165 ITR 367 (Raj.), CIT v. Trustees to the Trust Estate of Tarun Kumar Roy [1974] 94 ITR 361 (Cal.) and Nirmala Bala Sarkar v. CIT [1969] 74 ITR 268 (Cal.). In these decisions it was factually found that the trustees had a discretion to set apart as much as they like and distribute only the balance as the income to the beneficiaries. In the present case the trustees have no such discretion because the trust deed itself prescribes what is to be distributed and what is to be accumulated. Besides, the share of the beneficiaries is clearly known even in respect of the undivided share because their interest in the corpus is also a vested interest and not a contingent interest as pointed out in those cases.
9. The argument of the revenue that because the beneficiaries have a vested interest even in the amount which is added to the corpus they should be deemed to have earned that income, begs the question. This is because the real crux of this case is whether the income arising from the investments made by the trustees could be said to be income arising to the beneficiaries disregarding the provision in the trust deed that only 1/3rd of such income should be distributed as income to the beneficiaries. In other words, the question is whether the income arising from investments made by the trustees could be said to be income earned by the trustees on behalf of the beneficiaries. The answer to this question has to be in the negative since it has been held by the Supreme Court in the case of W. O. Holdsworth v. State of Uttar Pradesh [1958] 33 ITR 472 that a trustee cannot be regarded as an agent of the beneficiary. To quote the Supreme Court: A trustee is the legal owner of the trust property and the property vests in him as such and the beneficiary has only a right against the trustee as owner of the trust property. The trustee no doubt holds the trust property for the benefit of the beneficiaries but he does not hold it on their behalf. The expressions "for the benefit of and "on behalf of are not synonymous and convey different meanings: the former connotes a benefit which is enjoyed by another thus bringing in a relationship as between a trustee and a beneficiary or cestui que trust; the latter connotes an agency which brings about a relationship as between principal and agent between the parties, one of whom is acting on behalf of another.
The Supreme Court has no doubt explained in the case of CWT v.Kripashankar Dayashanker Worah [1971] 81 ITR 763 that this distinction may not apply to assets held by the trustee because Parliament while enacting Section 21(2) of the Wealth-tax Act, 1957, proceeded on the basis that for the purposes of that Act the trustee is holding the trust property on behalf of the beneficiaries. But we do not find such a departure from the general concept enunciated by the Supreme Court in the case of W.O. Holdsworth (supra), extracted above, in Section 161 of the Income-tax Act, 1961. This section provides only for the assessment of the income of the beneficiary in the hands of the trust. Such income can arise to the beneficiary only in terms of the trust deed. What is earned by the trustee from the investments of all the trust funds can only be income earned for the benefit of the beneficiaries and not on their behalf, whereas the income that accrues to the beneficiary can only be such part of the income as could be distributed to the beneficiary under the terms of the trust deed. The Gujarat High Court has held in the case of Addl. CIT v. M.K. Doshi [1980] 122 ITR 499, though in a different context of Section 64, that the income that is to be accumulated by the trustees in terms of the trust deed cannot be regarded as the income of the beneficiaries since it loses its character of income. May be they had vested right in the corpus because unlike the cases of CWT v. Anarkali Sarabhai [1971] 81 ITR 375 (Guj.) and CWT v. Master Jehangir H.C. Jehangir [1982] 137 ITR 48 (Bom.) the beneficiaries or their legal heirs were entitled to receive the share of the corpus on the determination of the trust. Yet, in the previous year relevant to this assessment year, they are not entitled to receive any part of the corpus as if it were their income. What cannot be assessed in the hands of the beneficiary cannot be assessed in the hands of their trustees as representatives of the beneficiaries either.
It is also not possible to make an assessment in the status of 'Association of Persons' merely because there is more than one trustee or that they have been empowered to carry on business because such a carrying on a business is only for the benefit of the beneficiaries and not on their behalf. We may also refer to two circulars of the Department No. 157 dated 26-12-74 and No. 45/78/66-ITJ(5) dated 24-2-1967 which have noted that inspite of clear instructions to the effect that neither Section 41 (of the 1922 Act) which gave an option to the department to tax either the representative assessee or the beneficial owner of the income nor the parallel provisions of the 1961 Act contemplated assessment of the same income both in the hands of the trustees and the beneficiaries, instances have come to the notice of the Board of such double assessment. This also indicates that the department is also well aware that there is no question of the assessment of the trustee apart from the assessment of the beneficiary because the income which can be assessed in the hands of the trustees can only be the income that could be assessed in the hands of the beneficiary. There can be no other income which is liable to tax. In this view we find that the assessment in the present case was misconceived. We, therefore, set aside the assessment and direct the Income-tax Officer to frame fresh assessment in accordance with law.