1. The assessees before us are private discretionary trusts. A single common issue arises for consideration in these cases. And that is whether the assessee-trusts are entitled to deduction under Section 80L of the Income-tax Act, 1961.
2. The Assessing Officer took the line, first, that the status of the assessees must be taken as that of 'Association of Persons' and, secondly, that the assessees are not entitled to deduction under Section 80L of the Act.
3. Thereupon, the assessees moved the CIT (Appeals), contending that their status must be taken as that of 'Individual' and that consequently, they were entitled to deduction under Section 80L of the Act. In this regard, reliance was placed on the following orders of the ITAT : 'D' 30-6-1980 ITA Nos. 790 & 791/Mds/ 795 & 796 and 797/Mds/79. 'B' 6-7-1982 ITA Nos. 1666 to 1668/Mds/80.
The CIT (Appeals) held that the status of the assessees must be taken as that of "artificial juridical person" and that consequently, they were not entitled to deduction under Section 80L of the Act. In this regard, he was impelled by the consideration that while Section 2(31) of the IT Act, 1961 defined the term "person" as including "every artificial juridical person, not falling within any of the preceding sub-clauses", the 1922 Act did not contain sucha mention of "artificial juridical person" and it was, therefore, that under the old Act, the assessments of even deities had to be completed in the status of 'individual', although the expression 'Individual' should clearly apply to natural or living persons.
Thus, he confirmed the denial by the Assessing Officer of the assessee's claim for deduction under Section 80L of the Act, though for different reasons.
5. Before us, Shri K.R. Ramamani, the learned counsel for the assessees, contended that the lower authorities misdirected themselves in law as respects the true status to be assigned to the assessees.
This, in turn, led them into the further error of holding that the assessees are not entitled to deduction under Section 80L of the Act.
According to Shri Ramamani, the reference in Section 164 to maximum marginal rate applicable in relation to the highest slab of income in the case of Association of Persons has a narrow focus, namely, the rate of tax to be applied to the income of the trust. Its focus cannot be widened so as to hold that the status of the trust should also be taken as that of Association of Persons. In this connection, he referred to and relied upon the ruling in the Bombay High Court case of CIT v.Marsons Beneficiary Trust [1991] 188 ITR 224. It should, therefore, follow that the Assessing Officer was not justified in treating the assessee-trusts as Association of Persons and in disallowing, on that basis, their claim for deduction under Section 80L of the Act.
6. The second limb of Shri Ramamani's argument was that the CIT (Appeals) was not justified in treating the assessee-trusts as artificial juridical persons. In the context in which it appears, this term is suijuris and not ejusdem generis. It is, therefore, properly applicable to such entities like deities and not to trust/trustees.
7. The third limb of Shri Ramamani's argument was that, properly interpreted, the provisions of Section 164(1) read with those of Section 2(31) can lead to only, one conclusion, namely, that in the cases of discretionary trusts of the type under consideration, the status can only be that of an 'Individual' and that consequently, the benefit of Section 80L is available to the assessees before us.
According to Shri Ramamani, even if there were to be a plurality of trustees, the status can be taken only as 'Individual' because, in such cases, the trustees constitute a single unit.
In support of his contention, besides referring to and relying upon the orders of the Tribunal that had been cited before the CIT (Appeals), Shri Ramamani referred to and relied upon the following further orders of the Tribunal:(1) ITA No. 2158/Mds/87 Bench 19th September,'89.
and 'D' batch.(2) ITA No. 378/Mds/87 'A' Bench 29th September, '89.
and batch.
1148/Cal/86 Calcutta (S.B.) 9th March, 1989. (Srikrishna Bhandar Trust) 8. In view of the foregoing, therefore, contended Shri Ramamani, the assessees are entitled to succeed.
9. On his part, Shri Bose, the learned Departmental Representative, strongly supported the impugned orders of the CIT (Appeals). According to him, the status of the assessee-trusts cannot be 'Individual', because that status can be applied only to living persons, that is to say, natural human beings. For this proposition, he sought to derive support from the provisions of Sections 54 to 64 of the Act. He also referred to and relied upon certain passages occurring on page 444 of Sarnpathlyengar's Income-tax, Vol. I, Eighth Edition.
10. Shri Bose's next thesis was that if the status of the assessee-trusts cannot be 'Individual', it can only be artificial juridical person which, in a manner of speaking, is a residuary clause of Section 2(31) of the Act. In this regard, he contended that an artificial juridical person is one who can sue and be sued, can own property, earn income, etc. The discretionary trusts before us possess all the above characteristics and that consequently, the CIT (Appeals) could not be faulted when he took the status of the assessee- trusts as artificial juridical persons.
11. Shri Bose then turned his attention to the Special Bench decision of the ITAT in the case of Srikrishna Bhandar Trust [supra) and highlighted the fact that there the only question that was considered was whether the lower authorities were justified in taking the status of the assessee-trust as an Association of Persons. The Special Bench held that the status must be taken as 'Individual'. In that case, no arguments based on Section 2(31)(vii) were advanced and that consequently the Special Bench did not have any occasion to consider the question whether a private discretionary trust could be regarded as an artificial juridical person.
12. At this stage of the hearing, we specifically elicited the response of both the counsel for the assessee and the Departmental Representative to the following propositions: (A) Under the scheme of the Act, the income of a private discretionary trust is brought to tax in the hands of the trustee(s) in his/their character of representative assessee, the rate of taxation applicable being the maximum marginal rate as defined in Explanation 2 to Section 164, or, as the case may be, in Section 2(29C). In such a statutory milieu, is it at all necessary to assign a specific status to such trustee(s)? (B) In such a statutory milieu, again, will it not suffice to make the assessment in the name(s) of the trustee(s) in his/their representative character, taking his/their status as "Representative Assessee"? (C) Section 2(31) contains an inclusive definition of the word "person". In this context, if the answer to proposition No. (A) above is 'yes', cannot one travel beyond the seven categories enumerated by and under the said section and hold that, in cases of the type under consideration, having particular regard to the mode and mechanics of assessing private discretionary trusts incorporated in Section 164 of the Act, it would suffice if the assessment is made in the name of the trustees and in the status or representative assessees? 13. The response of the learned counsel for the assessee was that it was necessary to accord a status, even while assessing a private discretionary trust and that the status can only be 'Individual, even if there were to be a plurality of trustees.
14. Secondly, the scheme of the Act is to bring to charge not gross receipts or even gross total income, but total income which can be arrived at only after applying the provisions of Chapter VIAof theAct.
Itshould, therefore, follow that the assessees before us are entitled to the benefit of Section 80L.
In this regard, the learned counsel for the assessee highlighted the fact that Section 164 does not preclude the grant of any deduction/allowance enumerated under Chapter VIA of the Act.
Thirdly, no doubt, Section 2(31) contains an inclusive definition of the term "person". Even so, apart from the consideration that the definition contained in Section 2 are to be adopted or applied unless the context otherwise requires, there is the further significant consideration that if one were to travel beyond the seven categories enumerated therein one might face difficulties in administering the Act. One difficulty readily suggested itself and that was that the Finance Act does not prescribe the rate of taxation for any category other than the seven categories enumerated in Section 2(31) of the Act.
Therefore, the fact that Section 2(31) contains an inclusive definition of the term "person" should not impel one to so extend the definition as to make the taxation of income impossible.
15. Responding to the propositions propounded by the Bench, Shri Bose contended that it would suffice to accord the status of "Representative Assessee" to the trustee(s) of a private discretionary trust. For more than one reason. First, the entire thrust of Section 164(1) is on the "relevant income" of the trust which is chargeable to tax at the maximum marginal rate as defined in Explanation 2 to Section 164/section 2(29C). In other words, when the "relevant income" of the trust is known and when the "maximum marginal rate" is prescribed, the calculation of the tax payable by the assessee-trusts is a simple arithmetical exercise.
Secondly, under the scheme of the Act, status is relevant for purposes of (0 determining the deduction/allowance/relief admissible to the assessee and (ii) determining the rate of tax to be applied. In the case of discretionary trusts, Section 164(1) does not contemplate any deduction other than those that will have to be allowed in the process of computing the income of the trust under various heads such as 'Income from property', 'Profits and gains of business or profession', 'Capital Gains', 'Interest on Securities' or, as the case may be, 'Income from Other Sources'. It does not in terms authorise any deduction under Sections 80C, 80L and the like.
Further, as pointed out earlier, the rate of taxation applicable to discretionary trusts are already statutorily fixed.
In this connection, Shri Bose referred to the 1980 amendment of Section 164 and the Notes on Clause 27 of the Finance (No. 2) Bill, 1980 and contended that the intention of Parliament was that the income received by the trustees of a discretionary trust would be chargeable in its entirety at the rate of income-tax including surcharge applicable to the highest slab of income of an Association of Persons, as specified in the Finance Act of the relevant assessment year.
16. Shri Bose then referred to and relied upon the Calcutta High Court case of Surendranath Gangopadhyaya Trust v. CIT[1983] 142 ITR 149 in which it has been held that, when the shares of the beneficiaries were indeterminate, "tax should be levied at the rate of 65 per cent as laid down in the IT Act itself, without allcwing the basic exemption as laid down in the Finance Act". According to Shri Bose, the rationale behind the said ruling is equally applicable to the cases before us. In other words, the assessee-trusts before us are not entitled to deduction under Section 80L of the Act.
17. The final point made by Shri Bose was that the ruling given by the courts of law under the Wealth-tax Act, 1957 to the effect that the word "Individual" was wider enough to include a group of persons forming a unit cannot be imported into the Income-tax Act. This was because, under the Wealth-tax Act, wealth-tax is chargeable only in respect of the net wealth of only three specified entities, namely, (i) Individual, (ii) Hindu undivided family and (iii) Company. Further, unlike the Income-tax Act, the Wealth- tax Act does not contain any definition of the term 'person'. It was, therefore, that the courts have, while dealing with cases falling under Section 21(4) of the Wealth-tax Act, held that even if there was a plurality of trustees, the status must be taken as that of an "Individual". The position under the Income-tax Act, however, is different and under that Act, "Individual" can only be a living person, that is to say, a natural human being. It should, therefore, follow that in any event, the assessee-trusts before us cannot be assessed to tax in the status of an "Individual".
18. In his reply, the learned counsel for the assessee contended that the Calcutta case of Swendranath Gangopadhyaya Trust [supra] is not applicable here because in that case, no deductions as such were admissible to the assessee under the Finance Act.
19. The learned counsel for the assessee made yet another point and that was centered on the ruling in the Madras High Court case of Haresh Anitha Tyust v. CWT [1988] 173 ITR 103. In that case, the net wealth of the assessee-trust was less than the minimum chargeable to wealth-tax.
This meant that no wealth-tax was exigible under the Schedule to the Wealth- tax Act. Even so, relying on the provisions of Section 21 (4) of the Wealth- tax Act, the Tribunal held that wealth-tax was exigible.
On reference to the High Court, at the instance of the assessee, the High Court held that Section 21(4) of the Wealth-tax Act, 1957 cannot be construed as a charging provision as it deals with a liability to assessment in certain cases. The learned counsel sought to draw support from the said ruling for the proposition that Section 164 could not be regarded as a charging section and that consequently, the provisions of that section notwithstanding, the status of the assessees before us must be taken as "Individual".
20. In view of the foregoing, therefore, urged the learned counsel for the assessee, the assessees are entitled to succeed.
21. We have looked into the facts of the case. We have considered the rival submissions.
22. In the case before us, the status to be adopted is the bone of contention. The said issue has arisen not as an academic issue but in the context of the deduction available under Section 80L of the Act.
That section allows certain deductions in respect of certain securities, dividends, etc. There is one point that is noteworthy and that is that the deduction under the said section is available only to the following three categories of the assessees: (c) Association of Persons or Body of Individuals consisting, in either case, only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu.
It would atonce be clear that the deduction under the said section is not available to those categories of assessees which fall under Clauses (iii), (iv), (v), (vi) and (vii) of Sub-section (31) of Section 2 of the IT Act. It is, therefore, that while the assessee-trusts before us claim that their status should be taken as that of 'Individual', the Department resists that claim by contending that the assessees' status should be taken either as that of 'Association of Persons' or of 'artificial juridical person'.
23. The CIT (Appeals) Has held that the correct status to adopt in these cases is 'artificial juridical person'. We may clear the decks as it were by pointing out that purely from the point of view of jurisprudence, the trustees of the trusts before us cannot be regarded as artificial juridical person.
24. The question that then arises for consideration is: "Whether the status of the assessee-trusts before us should be taken as that of an 'Individual', as contended by the learned counsel for the assessee, or whether it would suffice if the more generic status of 'representative assessee' is adopted? 25. Income-tax is a tax on income". Under Section 4 of the Act, income-tax is charged or levied on the person by whom the tax is payable. And as already noted, Section 2(31) of the Act contains an inclusive definition of the term "person". The statute thus fastens on the person who carries on business etc. The liability to pay tax on the profits earned by him regardless of their destination or enjoyment.
26. If a person, in his own right, receives or has the right to receive income falling under any one or more of the heads enumerated under Section 14 of the Act, no difficulty arises. Difficulty, however, arises in cases where persons who have no proprietary or other right in the income chargeable to tax receive such income on behalf or for the benefit of other persons. To deal with such cases, the Income-tax Act renders them liable to pay the tax for no other reason than the convenience of assessment and collection. The rationale behind such a mode of assessment is, to quote Viscount Cave Williams v. Singer 7 Tax Cases 387: The object of the Acts is to secure for the State a proportion of the profits chargeable and this end is attained (speaking generally) by the simple and effective expedient of taxing the profits where they are found.
27. Thus, under the IT Act, 1922, trustees, guardians, Administrator General, Court of Wards, Receiver, agent of non-resident etc. were made responsible in an assessment of income of another person such as the beneficiary, a minor and the like. The provisions relating to such assessments were contained in different sections such as Sections 40, 41 or 42 of the old Act.
28. Paying heed to the complaint that the old Act was complicated, illogical in its arrangements and in some respects obscure, the Government of India decided to simplify the Act and, with that end in view, referred the matter of revision of the Act to the Law Commission of India. The Twelfth Report of the Commission, which dealt with the IT Act, 1922, was submitted in the last quarter of 1958.
29. As the first step in the simplification of the Act, the Commission made "a fairly logical re-arrangment and re-grouping of the sections of the Income-tax Act", each Chapter dealing with a particular topic. In certain areas, it also made "changes of substance".
30. As already pointed out, the provisions relating to the assessment of guardians, trustees, agents of non-residents, Court ofWards, Administrator General and Official trustee were scattered all over the old Act and under various sections. The said feature of the old Act naturally attracted the attention of the Commission. The Commission found that in all such cases, the assessment was being made in the hands of the above cited persons but on behalf of the "represented", namely, the incapacitated persons, non-residents, beneficiaries under trust, etc. It also noticed that while assessing the guardians etc., the old Act invariably stipulated that income received by guardians etc. on behalf of the incapacitated persons etc. should be assessed in the like mariner and to the same extent as the incapacitated persons etc. According to the Commission, the best way to simplify the assessment of guardians etc. was to collect under one Chapter the related provisions, in so far as the'rules applicable are common to all these cases. Towards this end, taking a leaf out of the South African Income-tax Act, 1941, the Commission coined a new expression "representative assessee" and introduced a scheme of assessment of "representative assessees". In the process, the Commission- (i) defined the term 'representative assessee' as meaning guardians etc., (iii) rendered the representative assessee personally liable in cases where he parts with the estate after the tax has become payable, (iv) gave the representative assessee the right to recover the tax paid by him (in such capacity) from the beneficiaries etc.
31. It also made it clear that the assessment of the representative assessee would be made in his name but in a representative capacity.
According to the Commission, if it is made clear that as respects the income belonging to the persons represented by the representative assessee, the assessment is made in the name of the representative assessee but in a representative capacity, it would remove one lacuna existing in the old Act. To quote the Commission : The words 'representative capacity' will, incidentally, remove one lacuna existing in the present Act. When a trustee is charged in respect of income of the trust in his hand, the question might arise whether his individual income derived from his personal properties can be included in the same assessment. In other words, the question is, whether the assessment of trustee/qua-trustee is to be kept completely separate from his assessment in his private capacity. On principle the two should be kept separate as the capacities are different, but there is no provision in the present Act giving clear guidance on this point. The words 'representative capacity only'. as used in the draft sub-clause under discussion, will make the position clear.
32. Under the old Act, persons such as guardian, trustee or a manager could be assessed either under the special provisions applicable in such cases (sections 40, 41 etc. of the old Act) or under the normal charging provisions of Section 3. The Commission felt that such representative assessees should not be assessable under Section 3 but only under the special provisions applicable to them.
33. As regards the assessment to tax of the income received by a trustee in cases where the shares of the beneficiaries are unknown, or where the income is not received on behalf of a particular beneficiary, the Commission suggested that the tax on such income in the hands of the trustee must be charged "at the rate applicable to an association of persons".
- the trust income being brought to charge at the rate applicable to an association of persons.
Given the scheme of assessment of trustees in such cases as recommended by the Commission, it is not surprising that the Commission did not think it necessary to make any reference whatsoever to the status in which the trustee in such cases is to be assessed. The trust income is known. The rate at which the said income is to be taxed, namely, the rate applicable to an association of persons, is also known. The assessment is also to be made in a representative capacity and in the name of the trustee. Under the scheme recommended by the Commission, therefore, in such cases where the shares of the beneficiaries are unknown or where the income is not received on behalf of a particular beneficiary, it is unnecessary to attach to the trustee any status other than that of a representative assessee.
34. There is yet another 'change of substance' made by the Commission that needs to be noticed and that is the substitution of the word 'person' for the words 'Individual', 'Hindu undivided family', etc.
occurring in Section 3 of the old Act and the consequential amplification or widening of the definition of' person' in Section 2(9) of the old Act. In this regard, the Commission stated that the use of the word 'person' in the charging section and the amplification of the definition "person" would- - do away with the problem of assessment of Corporations other than companies; - obviate the need to resort to an artificial interpretation of the word 'Individual' so as to tax entities like cooperative banks, Bar Councils, Corporations Sole; and - get round the necessity to bring deities in whose favour private religious trusts had been created under the heading 'Individual" by a strained construction of that word, when in law deities are properly artificial juridical persons.
35. The IT Act, 1961 came to be passed by and large on the basis of the aforesaid Twelfth Report of the Law Commission.
36. In the cases before us, the assessees are private discretionary trusts. It would, therefore, suffice to note the provisions of the IT Act, 1961 relating to the assessment of trusts in general and of private discretionary trusts in particular.
37. The general provisions relating to 'representative assessees' are contained in Part B of Chapter XV of the IT Act, 1961. Section 160(1), in so far as it is relevant to the discussion on hand, reads as follows: Representative assessee: 160. (1) For the purpose of this Act,- 'representative assessee' means- (iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913), receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees; 38. Section 160(2) states that every representative assessee shall be deemed to be an assessee for the purposes of this Act.
39. Section 161 of the Act details the liabilities of representative assessee. The section reads as follows: 161. (1) Every representative assessee, as regards the income in respect of which he is representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only and the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.
(1A) Notwithstanding anything contained in Sub-section (1), where any income in respect of which the person mentioned in Clause (iv) of Sub-section (1) of Section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is liable at the maximum marginal rate: Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance and such trust is the only trust so declared by him.
Explanation: For the purposes of this sub-section, 'maximum marginal rate' shall have the meaning assigned to it in Explanation 2 below Sub-section (3) of Section 164.
(2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act.
40. We may at this stage adumbrate the legal consequences of the aforesaid provisions. A trustee of the type referred to in Section 160(1)(iv) of the Act is a representative assessee in respect of income which he receives or is entitled to receive "on behalf or for the benefit of any person". Such a representative assessee is deemed to be an assessee for the purposes of the Act. In other words, by a fiction, the Act treats him as an assessee for the purposes of assessment, that is to say, in respect of the whole procedure for imposing liability of tax in respect of the income received by him in his representative capacity as a trustee. Every representative assessee, as regards the income in respect of which he is a representative assessee, is made subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially and he is liable to be assessed in his own name in respect of that income. By yet another fiction, therefore, the income received by a representative assessee, although it does not truly belong to him, is treated as income received by or accruing to or in favour of him beneficially. On the basis of this fiction, in respect of such income, the representative assessee is liable to assessment in his own name and all duties, responsibilities and liabilities in respect of such assessment are foisted upon him. The assessment on the representative assessee in respect of such income, however, is deemed to be made upon him in his representative capacity only and the tax, subject to the other provisions contained in Chapter XV, is to be levied upon and recovered from him "in like manner and to the same extent" as would be leviable upon and recoverable from the person represented by him. In other words, the appropriate provisions of the Act relating to the computation of the total income and the manner in which the income is to be computed will apply to such assessment and tax may be levied and recovered from the trustee to the same extent as may be leviable and recoverable from the beneficiary. In the course of such assessment on the trustee, all exemptions, deductions, abatements and refunds will be required to be given as the beneficiary would have been entitled to in case of direct assessment.
41. In such cases, the interposition of the trustee does not, therefore, ordinarily affect the incidence of tax on the beneficiary.
42. To sum up : As pointed out by the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family Trust [1977] 108 ITR 555, the assessment of a trustee in such cases has three consequences. First, 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 income of each beneficiary.
Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. And lastly, 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.
The provisions of Section 161(1) can obviously apply only when income is specifically receivable by a trustee on behalf or for the benefit of a single beneficiary, or, where there are more beneficiaries than one, the individual shares of the beneficiaries are determinate and known.
They become unhelpful in cases where the trust income is not receivable on behalf or for the benefit of 'any one person'. Section 161 is also inapplicable even in cases where, even though the trust is in favour of a single beneficiary, the trustees do not receive the income specifically on behalf or for the benefit of that beneficiary. See the observations of Chagla, CJ., as he then was in the Bombay High Court case of B.P. Mahalamiwala v. CIT [1954] 26 ITR 177. The said section cannot also avail in cases where there is a plurality of beneficiaries whose identities are known but whose individual shares are indeterminate or unknown. Such special cases need special provisions.
And under the old Act, the first proviso to Section 41(1) covered such cases. What is more significant, the said proviso imposed a heavier liability upon the income received from a trust under the circumstances mentioned in that proviso. In such cases, the proviso stipulated that the tax shall be levied and recoverable at the maximum rate.
43. The same scheme was continued in the new Act also. Thus, Section 164 of the IT Act, 1961 (which occurs in "C-Representative assessees-special cases" of Chapter XV of the Act) imposes a heavier liability upon the trust income where the income 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 the trust income or any part thereof is receivable are indeterminate or unknown. Properly viewed, Section 164 is more or less in the nature of an exception to Section 161. It incorporates the general rule that in cases of discretionary trusts, tax shall be charged on trust at a higher rate.
An exception to the said general rule was also incorporated into the section. If the share of any beneficiary in the income even of a discretionary trust is determinate or known, the tax would be computed with reference to that share separately (as in the cases governed by Section 161) and the tax so computed would be the measure of the tax liability of the representative assessee.
We may now briefly notice the higher rate prescribed by Section 164 from time to time: (a) The said section, as enacted in 1961, stipulated that tax shall be charged on trust income as if such income were the total income of an association of persons.
(b) In Section 164(1) as substituted by the Finance Act, 1970, the income received by the trustees of a discretionary trust was chargeable at the rate of sixty five per cent or the rate which would be applicable if such income were the total income of an association of persons, whichever course is more beneficial to the revenue.
(c) Then came the Finance (No. 2) Act, 1980, which stipulated that income of discretionary trusts would be charged to tax at the maximum marginal rate, the term "maximum marginal rate" being defined as the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in case of an association of person as specified in the Finance Act of the relevant year.
44. Thus, under the new Act, the general rule of assessment of discretionary trusts is as follows : The assessment is made (a) in the name of the trustee(s), (b) but in a representative capacity, (c) the trust income being brought to charge at the maximum marginal rate as defined in Explanation 2 to Section 164/section 2(29C) 45. The question that then arises for consideration is whether, given the aforesaid scheme of assessment of discretionary trusts, is it at all necessary to ascribe a particular status to trustees of such trusts who are assessed in a representative capacity. As we see it, it is not necessary to do so. The income of discretionary trust is known. The "local habitation and name" of the trustees are known. It is also clear that the trustees will have to be assessed in a representative capacity. And lastly, the rate of tax to be charged, namely, maximum marginal rate, is also known. Therefore, is the assessment of the income of discretionary trusts in the hands of the trustees and in their name but in a representative capacity, there is no need to look around and locate a status to be ascribed to the trustees. The statutory label "representative assessee" is status enough.
46. We may at this stage usefully revert back to the mode and mechanics of making assessments under Section 161 of the Act which provides a study in contrast. That section stipulates that tax shall be levied upon and recoverable from the representative assessee in the like manner and to the same extent as it would be leviable upon and recoverable from the persons on whose behalf and for whose benefit such income is received by the representative assessee.
In the case of A.K. Gopala Pillai v. Agricultural ITO [1970] 75 ITR 120, the Madras High Court had an occasion to consider the provisions of Section 8(1) of the Madras Agricultural Income-tax Act, 1955, which are in pari materia with those of Section 161(1). There, the court was concerned with the income received by a receiver appointed by court.
After referring to Section 8(1) of the Act, the Court observed: ... Nothing can be clearer than this provision that the receiver has no status of his own for purposes of the Act, except that he represents as an agent or trustee of the estate of another. When the receiver is assessed, the status in which the assessment is to be made should follow the status of the person or persons who are entitled to or possess the lands and to receive the income therefrom, but actually, by virtue of his office, the receiver receives the income, that is the basis for assessing the receiver for convenience under the Act and he only reflects the status of the person whom he represents in relation to the estate and the income derived therefrom which is brought to charge.
47. The said observations highlight the fact that the status becomes a crucial factor only in assessments made on representative assessees under Section 161 of the Act. When it comes to Section 164, however, the entire complexion of the assessment changes. To the extent that the income of the trust is not specifically receivable by the trustee 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 is indeterminate or unknown, Section 164 clearly stipulates that the entire trust income would be charged to tax at the maximum marginal rate. In other words, whereas under Section 161 it becomes necessary to compute the tax attributable to the share of each beneficiary and then aggregate the taxes so computed for the several beneficiaries for the purpose of determining the tax liability of the representative assessee, no such need arises under Section 164 for the simple reason that the latter section has incorporated a totally different rule of assessment. It should, therefore, follow that whereas status becomes relevant under Section 161(1), it becomes irrelevant under Section 164.
That is why we have earlier said that even if it is assumed that some status must be attributed to the trustees of the trust before us, the statutory liable "representative assessee" would suffice.
48. The foregoing analysis will indicate that if regard be had to the general rule incorporated in Section 164 of the Act, it will be seen that travelling outside the inclusive definition contained in Section 2(31) but not outside the Act, it is possible to ascribe to the trustee(s) of a discretionary trust the status of "representative assessee". It should therefore, follow that in such cases, the benefit of Section 80L, which is restricted to the three entities enumerated therein, is not available to the trustee(s) of a discretionary trust assessed in the status of "representative assessee". We hold accordingly.
49. It may be recalled that one of the points urged on behalf of the assessees was that if one travelled outside the inclusive definition contained in Section 2 (31), one would face difficulties in administering the Act because the Finance Act does not prescribe the rate of taxation for any category other than the seven categories enumerated in Section 2(31) of the Act. Theoretically that may be so.
In the cases before us, however, we do not face any such difficulty because the rate of taxation (namely, the maximum marginal rate) is prescribed by Section 164 itself. In any event, it is for Parliament to supply the omission so as to meet contingencies contemplated by the assessee's learned counsel.
50. There is yet another aspect of the matter that is noteworthy. Let us sail with the learned counsel for the assessee when he says that we should not travel beyond the inclusive definition contained in Section 2(31). Clearly, in relation to discretionary trusts, the trustee(s) cannot be regarded as a Hindu undivided family, or as a company, or as a firm, or as a local authority, or even, purely from the point of view of jurisprudence, as an artificial juridical person. That leaves two categories, namely, an Individual; and an Association of Persons or a Body of Individuals, whether incorporated or not.
51. As pointed out earlier, one of the "Changes of substance" made by the Law Commission was to amplify the definition of the term "person".
In that regard, the Commission was impelled by the consideration that it was necessary to obviate the need to resort to an artificial interpretation of the word 'Individual' so as to tax entities like Co-operative Banks, bar Councils, Corporations Sole and deities in whose favour private religious trusts have been created. With the amplification of the definition, the present term 'Individual' used in Section 2(31) would signify natural human beings. Since even companies could be trustees of discretionary trusis, it would be clearly inappropriate to call them 'Individual' while making an assessment in their name but in a representative capacity. Conceptually speaking, therefore, the trustee(s) of a discretionary trust cannot be assigned the status of 'Individual' within the meaning of Section 2(31) of the Act.
52. The status of Association of Persons' is not also apposite because, as pointed out by the Supreme Court in the case of CIT v. Indira Balkrishna [1960) 39 ITR 546, the chief characteristic of an "association of persons" is that a group of persons must be associated in a common endeavour for producing taxable income. In the case of a trust, neither the trustees nor the beneficiaries satisfy the said basic criterion. Therefore, the status of "association of persons" is out.
53. That leaves the status "Body of Individuals". In the case of N.P.Saraswathi Ammal v. CIT [1982] 138 ITR 19 (Mad.), the jurisdictional High Court had adumbrated the nature of "Body of Individuals". After referring to the aforesaid Supreme Court case of Indira Balakrishna (supra) the Court went on to observe: Right from 1939, if not from 1922 onwards, the IT Act had known and recognised the distinct category of taxpayers going by the name of association of individuals, or association of persons. Although the expressions were left undefined, courts used to associate this class of persons with certain attributes, chief amongst which was their being associated in a common endeavour for producing taxable income.
This at once excluded from the category those who found themselves thrown together by the accident of their birth, by the accident of another's death, by the accident of testamentary dispositions and so on. This Was the ruling which the Supreme Court rendered in the year 1960 in Indira Balakrishna case [1960] 39 ITR 546.... By the time Parliament came to recodify the Act which was in 1961, the year after the Supreme Court decided Indira Balakrishna case [1960] 39 ITR 546, the idea of an AOP had become too well settled to need further clarification. If Parliament's intention in drawing up the relevant provision in the 1961 Act had been to make no changes in this class of assessees and to leave them well enough alone, it could have done so by the simple expedient of not adding anything to, or taking away anything from, the familiar phrase "association of persons'. As it happened, however. Parliament added the new class of body of individuals', while retaining the old expression 'association of persons'. The significance of this addition to the existing classification ought not to be lost on a court of construction. Legislative history in one other respect also points to the same conclusion. The expression 'association of persons' was adopted as a right expression when extensive amendments to the statute were made in the year 1939. The much earlier statutory term 'association of individuals' was given up by the Legislature for the reason that 'person' was thought wide enough to include artificial juridical person. To hold, therefore, that a 'body of individuals' must be equated to an 'association of persons' would be to disregard the stage-by-stage evolution of the statutory classification of the different kinds of taxpayers under Section 3(31) of the Act. The difference between an association and a body is too pronounced to be slurred over. While an 'association' might well connote an active element of combining or associating, a 'body' would include even a comparatively inert mass of people or institutions. The only essential attributes of a BOI are that there should be a plurality of individuals and they must, in the gross have a nexus to a source of income. This conception at once excludes the crucial characteristics which we associate with an AOP, such, for instance, as a common intention and a common activity to produce taxable income. In other words, persons who do nothing but stand and wait may not be an AOP; but they may yet be a BOI, if they stand together and wait for something to be shared between them.
54. As we see it, the status "Body of Individuals" will be more appropriate than the status "Individual" in the context of assessment of trustee(s) of discretionary trusts under Section 164 of the Act. In such cases, the beneficiaries of the trust constitute a plurality of individuals and they have, in the gross, a nexus to a source of income, namely, the income of a discretionary trust. Thus, they satisfy the basic characteristic of a "Body of Individuals" as adumbrated by the jurisdictional High Court. Since trust income is assessed in the hands of the trustee(s) in a representative capacity, even on the footing that the trustee(s) should take the status of the beneficiaries, the status "Body of Individuals" is the most appropriate one to ascribe to the trustee (s) of a discretionary trust.
55. This would mean that the benefit of Section 80L will not be available in the assessment of the trustee(s) in their representative capacity.
56. One of the points urged on behalf of the assessees, it may be recalled, was that the scheme of the Act is to bring to charge not gross receipts or even gross total income but total income arrived at after applying the provisions of Chapter VIA of the Act; and that, therefore, the assessees before us are entitled to the benefit of Section 80L. As a general proposition, the above contention is valid.
But the point to be noted here is that in the cases before us, we are concerned with the question whether after the gross total income as defined in Section 80B(5) of the Act is computed, the assessees are eligible for any deduction under Chapter VIA. Here, the deduction that is claimed by the assessees is the one under Section 80L. Since that section restricts the benefit available under it to the three categories specified by it and since we have held that the status of the trustees must be taken as that of "representative assessees" - a category not specified in Section 80L - the assessees are not entitled to the benefit under the said section. If the assessees are not entitled to the benefit under Section 80L, then the gross total income would itself become total income which is chargeable to tax. Hence the related contention is rejected.
57. Before taking leave of this matter, we may point out that the decisions rendered by the courts under the Wealth-tax Act cannot be applied to cases falling under Section 164 of the Act. For more reasons than one. First, wealth-tax is chargeable on the net wealth of every (a) individual, (b) Hindu undivided family and (c) Company. Secondly, the Wealth-tax Act does not contain any provision defining the term "person". Thirdly, Section 21 (4) of the Wealth-tax Act, which is analogous to Section 164 of the IT Act, 1961, specifically stipulates that in the cases covered by it, wealth-tax shall be levied and recovered in the like manner and to the same extent as it would be leviable upon and recoverable from an individual who is a citizen of India and resident in India for the purposes of the Act. It was, therefore, that in the wealth-tax assessments even of trustee(s) of discretionary trusts, the status was taken as that of an 'Individual'.
The scheme of the IT Act, however, is different and hence no reliance can be placed on the cases decided under the Wealth-tax Act.
58. In view of the foregoing, therefore, we decline to interfere with the impugned orders of the first appellate authority, though not for the reasons given by him.