B.K. Mehta, J.
1. The relevant assessment year with which we are concerned in this reference is 1969-70, corresponding to the accounting year ending on March 31, 1968. The assessee derives income from dividend, interest and receipts from a number of trust which are as many as 18, in 4 of which she is the sole beneficiary while in 14 others she happens to be one of the several beneficiaries. The question with which are concerned in this reference is pertaining to trust No. 4 which is known as 'Pallavi Mayor Trust No.4 '. In the said trust, there were some sales of shares which resulted in capital gains. It was contended before the ITO that the capital gains should be assessed in the hands of the trust and not in the hands of the assessee. The ITO, on reading the relevant clauses in the trust deed in question, held that the assessee was entitled to the income from the trust funds for her life. He further found that the trust income could either be given to that assessee or to her mother, Smt. Geeta Mayor. The power contained in clause 2(b) of the said trust deed empowering the trustees to spend a portion of the corpus of the fund for maintenance, support and education of the assessee also weighed with the ITO, who also noted that the assessee had shown the income from the trust as her own income under s. 164 of the I.T. Act, 1961, but she had not taken into account the capital gains on sale of the shares of Swastik Oil Mills on the ground that the corpus of the trust funds belonged to the trust since she was entitled only to the income of the trust. The ITO, however, was not impressed by the claim made by the assessee that the capital gains should be taxed in the hands of the trust. He, accordingly, after allowing the permissible deduction under s. 80T from the capital gains of Rs. 12,443 on the sale of the said shares, taxed Rs. 2,605 in the hands of the assessee with the result that the matter was taken in appeal at the instance of the assessee before the AAC who also was not impressed by the contention advanced on behalf of the assessee, and held that her net income was liable to include capital gains and be subject to tax in her hands as was done by the ITO. He, therefore, dismissed the appeal of the assessee. Before the Appellate Tribunal also, the appeal of the assessee met with the same fate. Since according to the Tribunal capital gains would certainly form part of income and according to the trust deed it was liable to be taxed as income of the trust, and since s. 164 of the I.T. Act, 1961, permits the department to make a direct assessment of income-tax on the beneficiary, the ITO was perfectly justified in taxing the capital gains in the hands of the assessee as he did. The Tribunal also emphasised the fact in this context that the trustees were authorised to utilise out of the corpus of the trust fund and had in fact given amounts to the assessee far in excess of her credit balance in the income and expenditure account of the trust. In that view of the matter, the Tribunal rejected the appeal of the assessee.
2. The assessee, therefore, sought reference to this court and the following question of law has been referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the inclusion of 'capital gains' earned by the Pallavi Mayor Trust No.4 in the total income of the assessee under section 166 of the I.T. Act ?'
3. The CIT also requested the Tribunal to refer the following question to us for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amounts received by the assessee from the discretionary trust cannot be taxed in the hands of the assessee under section 166 of the Act ?'
It should be noted that the question at the instance of the Commissioner was required to be referred to us in the following circumstances : As stated above, the assessee is also a benecificiary in 14 other trusts which are in the nature of discretionary trusts. It is an admitted position that out of the income of these 14 discretionary trusts some income has been distributed amongst the discretionary trusts' beneficiaries. The ITO included this income given to her under the discretionary trust as her income for this very assessment year 1969-70. In appeal before the AAC, this order of the ITO was confirmed. However, when the matter was taken to the Appellate Tribunal at the instance of the assessee the Tribunal deleted this income from the assessment year following its earlier decision in I.T.A. Nos. 1602 and 1603 (Ahd) of 71-72 dated November 26, 1973, in the case of Smt. Kamalini Khatau v. ITO. It is in this background that the Commissioner has sought the reference which has been granted by the Tribunal by its order of July 23, 1974.
4. So far as the question referred to us at the instance of the Commissioner is concerned, we are of the opinion that the question is concluded in view of the decision of the majority view of a Full Bench of this court in CIT v. Smt Kamalini Khatau [1978] 122 ITR 652. The question, at the instance of the commissioner should, therefore be answered in the affirmative, in favour of the assessee and against the revenue.
5. It was the question at the instance of the assessee which has been strongly debated before us. A short but neat question of law arises, whether s. 164 of the I.T. Act, 1961, is attracted in the present case. If it is attracted in the present case, as contended by the assessee, we must agree with the learned advocate for the assessee before us that the Tribunal was clearly in error of law in upholding the order of the ITO including the capital gains earned by Pallavi Mayor Trust No. 4 in the total income of the assessee under s. 166. We have, therefore, to answer, in the first instance, whether s. 164 is attracted in the present case. The scheme of assessment of different categories of representative assessees is to be found in ss. 160 to 167 of the I.T. Act, 1961. Section 16(1) is a machinery section and enabling provision. Under this section, th e tax to be realised from a beneficiary, etc., can be levied upon and recovered from a rep-resentative assessee in the like manner and to the same extent as it would be leviable upon and recoverable from th e person represented by him [vide Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Hira Lal : [1958]33ITR245(SC) and CIT v. R. D. Aggarwal and Co. : [1965]56ITR20(SC) ]. It is also implicit in the terms of s. 161(1) that the ITO can assess a representative assessee, but he is not bound to do so. He may assess either the representative assessee or the person represented by him. This implicit provision is made explicit by s. 164 of the Act [vide C. R. Nagappa v. CIT : [1969]73ITR626(SC) and Premier Automobiles Ltd. v. S. N. Shrivastava : [1970]76ITR1(SC) ]. Section 164, however, is more or less in the nature of an exception to s. 161. Consequently, therefore, if s. 164 is attracted, the assessment of income has got to be made in the hands of the trustees. We have, therefore, to read s. 164 which was in force at the relevant time, the material part of which reads as under :
'164. Charge of tax where share of beneficiaries unknown. - 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 specially 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 (which persons are hereinafter in this section referred to as the beneficiaries) 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 rates applicable to the total income of the beneficiary is such course would result in a benefit to the revenue.'
6. Section 164 would, therefore, be attracted in two contingencies, as has been clarified by a Division Bench of the Bombay High Court in B. P. Mahalakshmiwala v. CIT : [1954]26ITR177(Bom) . Section 164 is in pari materia with the two provisos to s. 41(1) of the 1922 Act. Chief Justice, Chagla, as he then was, speaking for the Division Bench, construed the main s.41(1) and the two provisos thereto in the following terms (p. 180) :
'... the main section 41(1) makes the income of a beneficiary taxable in the hands of the trustee to the same amount and in the like manner as the beneficiary himself would have been taxed. But the first proviso imposes a heavier liability upon the income received from a trust under the circumstances mentioned in that proviso, and the circumstances are that if the income is 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, then the tax shall be levied and recoverable at the maximum rate. Therefore, the proviso clearly contemplates two cases. One case is where the trust is in favour of one beneficiary and if the trustees do not receive the income specifically for that person, then the liability is that the tax shall be paid at the maximum rate. The other case contemplated is where the beneficiary is more than one person and in such a case if the trustees do not receive the income for the beneficiaries in specific shares, then also the liability is to be taxed at the maximum rate. Therefore, the scheme of the proviso is clear that if there is one beneficiary no question of share arises and the income must be received specifically on behalf of that individual. But where there are more than one beneficiary, then the question of their shares arises and those shares must be determined and known.'
7. This court also has in CIT v. Arvind Narottam : [1969]73ITR490(Guj) quoted with approval the construction placed by the Division Bench of the Bombay High Court on the provisos to s. 41(1) of the 1922 Act while considering the scheme contained in the 1961 Act pertaining to assessment of representative assessee. Bhagwati C.J., as he then was, speaking for the Division Bench, observed as under (p.496) :
'We are not directly concerned with the interpretation of section 164 and it is, therefore, not necessary to analyse that section with a view to arriving at its true interpretation, but it is sufficient to state that the section contemplates two cases : one where there is only one beneficiary and the other where there are more beneficiaries than one; in the former, income or any part thereof is not receivable by the sole beneficiary and in the latter, income or any part thereof is receivable by the representative assessee for the benefit of the beneficiaries but the individual shares of the beneficiaries are indeterminate and unknown; and the section states that, in either case, tax shall be charged in the hands of the representative assessee as if such income or such part thereof were the total income of an association of persons : vide the observations of the Bombay High Court in Mahalaxmiwala v. Commissioner of Income-tax : [1954]26ITR177(Bom) , which, though made in reference to the proviso to section 41(1), are also applicable in the construction of section 164. That part of the income - which may be either the whole of the income of the trust or a part of it - in respect of which it cannot be predicated that a particular beneficiary is beneficially entitled to it either wholly or in any determinate and known share so as to attract the applicability of the last part of section 161(1), would have to be taxed in the hands of the trustees as if it were the total income of an association of persons.'
8. In view of this settled legal position, so far as this court is concerned, it cannot be said, much less urged successfully, as has been sought to be done by the learned Government pleader for the revenue, that s. 164 would be attracted only in cases where beneficiaries are more than one. That would not be a correct reading of the section, because that interpretation does not give full effect to the words employed by the Legislature as the first set of contingency in s. 164. To emphasise, the first set of contingencies in which s. 164 would be attracted is when income or any part thereof is not specifically receivable on behalf of or for the benefit of any one person. The submission of the learned Government pleader that s. 164 is attracted only in those cases where beneficiaries are more than one does not give full effect to the words 'where any income...or any part thereof is not specifically receivable on behalf of or for the benefit of any one person'. In other words, s. 164 is attracted in that set of contingency where, as observed by Chagla C.J. in Mahalakshmiwala's case : [1954]26ITR177(Bom) , the beneficiary is one under the trust deed or deed of settlement. The crux of the problem, therefore, is, whether it can be said, on the facts and in the circumstances of this case, as has been sought to be urged by the learned Government pleader for the revenue, that capital gains being income as defined in the I.T. Act, 1961, can be said to be specifically receivable on behalf of or for the benefit of the assessee before us. Section 164, as pointed out by the Bombay High Court, as well as this court, would be attracted, inter alia, when income or any part thereof is not specifically receivable on behalf of or for the benefit of any one person. In other words, s. 164 would not be attracted, if income or any part thereof is specifically receivable by the trustees on behalf of or for the benefit of any one person. We have, therefore, in order to answer the question referred to us, look to the relevant clauses in the trust deed which is executed on October 10, 1958, and the relevant clauses material for the purposes of this reference are cls. 1, 2(a), 2(b), 2(c) and 3. The settlor of the trust is Bhartidevi Sarabhai, who happened to be the sister of the mother of the assessee. The settlor had, out of natural love and affection for the assessee, who happened to be the daughter of her sister, Geeta Mayor, desired to create a trust of the moneys, shares and investments more particularly described in the trust deed for the benefit of her sister's daughter, Pallavi - the present assessee before us - in manner contained in the said deed. By clause 1 of the trust deed in question, the settlor had transferred and assigned to the trustees the moneys, shares and investments specified in the Schedule to the deed which included, inter alia, 43 shares of Swastik Oil Mills Ltd., Bombay, the sale of which together with the bonus shares received thereafter has given rise to the capital gains in question. The trustees were to hold these trust funds comprising of moneys, shares and investments as specified in the schedule, and also sale proceed thereof for the purpose and subject to the powers and provisions contained in the deed of trust. Clause 2 provided as under :
'2. (a) During the lifetime of the said Pallavi, the trustees shall hold the turst funds upon trust and utilise the net income thereof for the maintenance, support and education of the said Pallavi and in particular to defray her living and personal expenses including travelling and medical expenses in such proportion and in such manner and at such time or times as the trustees may think fit provided however that during the minority of the said Pallavi the trustees shall be at liberty either to utilise the net income of the trust funds for the said Geeta Mayor, mother of the said Pallavi, as the gurdian of the said Pallavi for the said purposes and in the said manner and the receipt of the said Geeta Mayor as the gurdian of the said Pallavi for the met income shall be a valid and effectual discharge to the trustees and they shall not be liable to see the application thereof.
(b) Notwithstanding anything hereinabove contained, the trustees shall have power to have recourse to and utilise any portion or portions of the corpus of the trust funds for the maintenance, support and education of the said Pallavi or on the occassion of her serious illness or emergency in such manner and in such proportions and at such time or times as the trustees may in their absolute discretion think fit, and the decision of the trustees under this clause for having recourse to the corpus of the trust funds shall be final and conclusive and shall not be liable to be challenged by any person whatsoever.
(c) from and after the death of the said Pallavi, the trustees shall hold the trust funds upon trust for all the children of the said Pallavi in equal shares and if there be only one child for such child absolutely provided however that if there be no child of the said Pallavi the trustees shall hold the trust funds for such person or persons, object or objects, purpose or purposes as the Pallavi may by deed or by will or codicil appoint without transgressing the provisions of sections 13 and 14 or the Transfer of Property Act or sections 113 and 114 of the Indian Succession Act and in the absence of or default of such appointment and in so far as such appointment shall not extend upon trust for the said Geeta Mayor absolutely and if the said Geeta Mayor shall not be alive at the date of death of the said Pallavi the trustees shall hold the trust funds upon trust for the other child or children of the said Geeta Mayor if more than one in equal shares absolutely.'
9. We have set out clause 2 in extenso as both the sides have laid emphasis on the above sub-clause in support of their rival contentions. Clause 3 is a usual clause authorising the trustees to invest the trust funds or any moneys of the trust in any such securities or investments as the trustees may in their absolute discretion think fit irrespective of the fact whether such securities or investments are legally authorised for the investment of the trust funds, and they had been also authorised to vary or transpose any such investments for or into as they may from time time think fit. It should be recalled that the trustees have, in the relevant accounting year, sold 43 ordinary shares of Swastik Oil Mills, Bombay, together with the bonus shares which they must have earned in the course of time and gross capital gains of Rs. 12,443 had arisen as a result of the said transaction of sale. The short question, therefore, is, whether this capital gain can be taxed in the hands of the assessee, as has been sought to be done by the ITO, and ultimately upheld by the Tribunal. Can it be said that the capital gains is an income specifically receivable by the trustees on behalf of or for the benefit of the present assessee On behalf of the assessee, our attention was invited to the fact that the assessee was actually entitled to the net income of the trust funds under clause 2(a) of the trust deed and the trustees had a discretion to have recourse to and utilise any portion of the corpus of the trust fund for the maintenance, support and education of the assessee, or on the occassion of serious illness or emergency when the trustees may exercise their discretion as they may think fit and their decision under clause 2(b) has been described as conclusive and not open to challenge. It was, therefore, urged on behalf of the assessee that the gains which have been made on the sale of shares in question are capital accretions and, therefore, by no stretch of imagination without violence to the language, it can be said that it is an income specifically receivable on behalf of this particular beneficiary. On the other hand, on behalf of the revenue, this contention was sought to be repelled by making a two-fold submission. In the first lace, it was urged that even though it may be accretion to the capital, it would be income as defined in s. 2(24)(vi) of the I.T. Act, 1961, since 'income' includes, according to the said definition, any capital gains chargeable under s. 45. In any case, it was urged by the learned Govt. pleader that capital gains would be income even in the ordinary meaning of the term, though for purposes of the I.T. Act, the tax liability may vary according to the nature of the income. In the second place, it was urged that in no case it is conceivable that this capital gains or the capital accretion arising on the sale of shares would not be an income not specifically receivable by the trustees on behalf of or for the benefit of the beneficiary, which, in the present case, is only one, viz., the assessee. We are afraid, we cannot agree with the contention of the learned Govt. pleader for the revenue obviously for the following reasons :
10. In order that s. 164 is attracted in the present case, it should be found that the income or any part thereof is not specifically receivable by the trustees on behalf of or for the benefit of the present assessee. It is no doubt true that she has a right to the income of the trust as specified in clause 2(a) of the trust deed. However, it should also be recalled that she was entitled to the net income only. It cannot be gainsaid that she has not, as a matter of right, got a claim to the corpus of the trust funds or its accretion or variations. The learned Govt. Pleader was at plains to impress upon us that the trustees had power and were under an obligation to apply a portion of the corpus for the maintenance, support and education of the assessee generally whenever they think fit and in whatever proportion they think fit, and particularly in cases of her serious illness and emergency. He, therefore, emphasised that if the trustees had power and were under an obligation, the assessee, who is the sole beneficiary, would always be entitled to compel the trustees to apply the portion of corpus for the maintenance, support and education in general and in cases of her serious illness or emergency in particular. The corpus or its portion of accretion thereto, in the submission of the learned Govt. pleader, would necessarily be held by the trustees on behalf of and for the benefit of the sole beneficiary, namely, the present assessee. This is, in our opinion, too broad a submission which we are not inclined to uphold. It is no doubt true that the trustees have power to apply a portion of the corpus on specified occasions mentioned in clause 2(b), but that power is one which is to be exercised by the trustees whenever they think fit in their absolute discretion. It cannot be said that as a matter of right the present assessee can enjoin the trustees to utilise that portion in a particular manner. If that is the construction of the relevant clause 2, and we do not feel doubt in our mind, it cannot be urged successfully that the capital accretion which had arisen as a result of the sale of ordinary shares of Swastik Oil Mills Ltd., Bombay, would be an income received by the trustees specifically on behalf of or for the benefit of the assessee. A similar question arose before the Bombay High Court in CIT v. J. B. Wadia [1963] 48 ITR 135, where, for the assessment year 1955-56, the question was, whether a sum of Rs. 3,122-8-0 received by the trustees from B.E.S.T. Co. Ltd., being a part of Rs. 35,000 representing a distribution out of the accumulated profits of six previous years of B.E.S.T Co. Ltd. preceding its date of liquidation, was liable to inclusion in the total income of the respondent, who happened to be the beneficiary under a trust deed executed by his grandmother lady Aimai Wadia having regard to the provisions of s. 41(2) of the Indian I.T. Act, 1922, and clause 3 of the deed of settlement. Another question which arose was pertaining to the assessment year 1956-57, whether the profit of Rs. 907 made by the trust, created under the will of lady Aimai Wadia, on sale of shares was liable to inclusion in the total income of the assessee, who happened to be a beneficiary again under the said trust deed for the year 1956-57, having regard to the provisions of the will and s. 41(2) read with ss. 3 and 10 of the Indian I.T. Act, 1922. The Division Bench of the Bombay High Court answered both the questions in favour of the assessee. Desai J., speaking for the Division Bench, posed a question, whether the said amount of Rs. 3,122-8-0 being the amount distributed out of the accumulated profits, can be said to have been received by the trustees on behalf of the assessee so as to make him liable for the assessment in his hands under the provisions of s. 41(2) of the 1922 Act. The court held, on consideration of the relevant clause of the trust deed, as under (p. 142) :
'Now, under the trust deed what was given to the assessee was the interest, dividend and income from a moiety of the property. No part of the corpus itself was given to the assessee, which was to be disposed of after his death in the manner indicated in the deed. The investment in the B.E.S.T. shares was part of the corpus. The income resulting therefrom was no doubt to go to the assessee, but no part of the corpus or any accretion thereof or any amount realised by sale or other disposal of the corpus could be said to belong or to be receivable on behalf of the assessee....No doubt under the provisions of the Indian Income-tax Act, a part of the amount was to be deemed to be income for the purpose of taxation under the Act. That part, therefore, will no doubt attract the tax and the amount thereof will consequently be taxable in the hands of the trustees. These provisions of the Indian Income-tax Act, however, could not have the effect of entitling the assessee to the said amount or enabling the trustees to treat it is a payment or sum which will be payable by them to the assessee.'
10. The Division Bench, therefore, held that the amount of Rs. 3,122-8-0 could not be regarded as income of the assessee.
11. On the second question as to the capital accretion of Rs. 907 on sale of shares by the trustees, this is what the Division Bench said (pp. 142, 143) :
'It has, however, taken the view that although the paid profit could be taxable profit in the hands of the trustees, it could not be taxable in the hands of the present assessee because under the terms of the will, the said profit has not been received by the trustees on behalf of the assessee. As we have seen under the terms of the will, the trustees were directed to make investments in certain specified investments and they were given power to vary and transpose the said investments from time to time. The income from the said investments was to go to the assessee for his life. Under the powers with which the trustees were invested under the will, if they varied the investments, the proceeds obtained on the sale of the investments, they had to reinvest in other securities. The accretion arising on sale thus had to be treated as an accretion of the corpus to be reinvested again in the securities giving only the income resulting therefrom to the assessee....It may be that, under the Indian Income-tax Act, a part, which will be considered as an accretion of the capital under the ordinary law, may be treated as income for purposes of taxation. Such part of the income, however, could not be said to be receivable on behalf of the assessee, who was not entitled to it under the terms of the will.'
12. The Division Bench, therefore, on the second question also held in favour of the assessee that the capital accretion was not liable to be taxed in the hands of the assessee. With respect, we are in agreement with the view taken by the Division Bench of the Bombay High Court. If the trustees were to hold the corpus of the trust for the sole beneficiary, namely, the present assessee, and in her absence for those beneficiaries who have been specified in the trust deed, it cannot be said that accretion to such corpus would, merely because it may be income within the definition of the word 'income' under the I.T. Act, be virtually an income received by the trustees specifically on behalf of or for the benefit of the present assessee. In that view of the matter, therefore, we must hold that the Tribunal has committed an error of law in upholding the orders of the Commissioner has committed an error of law in upholding the orders of the Commissioner as well as the ITO that because capital gains would also be an income, it would be an income receivable specifically on behalf of the present assessee by the trustees. The learned Govt. pleader invited our attention to the finding of fact made by the Tribunal as well as the authorities below it that in relevant assessment year, the trustees had permitted the beneficiary to draw more than what she was entitled to by way of income and consequently, therefore, from the corpus itself. We are of the opinion that this is a relevant consideration for the purpose of rate only an for no other purpose and, therefore, should not have weighed with the Tribunal or the authorities below.
13. The result is that this reference is allowed and the question referred to us is answered in the negative, against the revenue and in favour of the assessee. The Commissioner shall pay the costs of this reference to the assessee.