Commissioner of Income-tax Vs. Marsons Beneficiary Trust, - Court Judgment

sujata V. Manohar, J.

1. In all these applications, there are certain basic facts which are common. The income-tax applications pertain to the assessment to income-tax of the trustees of a trust in which, under the deed of trust, the settlor has given to the trustees a power to carry on business. Under the deed of trust in each application, the income of the trust including its business income is required to be distributed amongst specified beneficiaries in shares which are determinate. The questions which have been posed in these applications relate to the manner of assessment to tax of the business income of the trust.

2. All these applications relate to the assessment years which are prior to the date when Section 161(1A) was inserted in the Income-tax Act, 1961. This amendment has been inserted by the Finance Act, 1984, with effect, from April .1, 1985. We are, therefore, concerned with the relevant provisions of the Income-tax Act prior to that date.

3. Chapter XV of the Income-tax Act, 1961, deals with tax liability in certain special cases. This includes, inter alia, the liability of representative assessees. The relevant portions of the sections in Chapter XV are as under :

'Section 160 : Representative assessee.--(1) For the purposes of this Act, 'representative assesses' 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 (VI of 1913)), receives or is entitled to receive on behalf, or for the benefit, of any person, such trustee or trustees.

161. Liability of representative assessee.--(1) Every representative assessee, as regards the income in respect of which he is a 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 ...

164. Charge of tax where share of beneficiaries unknown.--(1) Subject to the provisions of Sub-sections (2) and (3), where any income in respect of which the persons mentioned in Clauses (iii) and (iv) of Sub-section (1) of Section 160 arc liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as 'relevant income', 'part of relevant income' and 'beneficiaries', respectively), tax shall be charged---

(i) as if the relevant income or part of relevant income were the total income of an association of persons, or

(ii) at the rate of sixty-five per cent., whichever course would be more beneficial to the revenue .,

166. Direct assessment or recovery not barred.--Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax pay able in respect of such income.'

4. Our High Court, in the case of CIT v. Balwantrai Jethatal Vaidya : [1958]34ITR187(Bom) , was required to construe the provisions of Section 41 of the Indian Income-tax Act, 1922, which is in the same terms as Section 161(1) of the present Income-tax Act. Our High Court said that Section 41 is mandatory and the assessment of the income returned by a trustee, whether it is derived from property held by him or from a business carried on by him or from the ownership of shares, can be made only in accordance with the special provisions laid down in that section. It is not open to the Department to ignore the provisions of Section 41 and levy tax on a trustee in the same way as on an assessee who does not fulfill the character of a trustee. The court further observed that even though the income to be assessed is the income of a trustee, it must be assessed under one of the heads mentioned in Chapter III of the Act and the provisions laid down with regard to the computation of that, income must be carried out. Section 41 will come into play after the income has been so computed.

5. The Department had contended that business income stood on a different footing from income from property or income from other sources. This contention was negatived by the court in the above case. It held that the nature of the income made no difference as far as Section 41 was con corned. The court said (at p. 197) :

'The sole question, which should be easy to answer, would be : Is the assessment being made upon a trustee or not If the assessment is made upon a trustee, whatever the nature of the property, whatever the nature of the income, whatever the mode of computation, his liability to pay tax must be determined in accordance with Section 41.'

6. This decision of our court has been quoted with approval by the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam 's Family (Remainder Wealth) Trust : [1977]108ITR555(SC) . The Supreme Court in that case was required to consider the provisions of Section 21(1) of the Wealth-tax Act, 1957, relating to the assessment of wealth of a trust. This section is similar to Section 161(1) of the Income-tax Act, 1961. The Supreme Court said that Section 21 makes a special provision for assessment of a trustee of a trust. Therefore, whenever assessment is made on a trustee, it must be made in accordance with the provisions of Section 21. Every case of assessment of a trust must necessarily fall under Section 21 and a trustee cannot be assessed apart from and without reference to the provisions of that section.

7. Section 21(4) of the Wealth tax Act is analogous to Section 164 of the Income-tax Act, 1961.' Analysing Section 21(1) and 21(4) of the Wealth tax Act, the Supreme Court observed that the provisions of the Wealth-tax Act are similar to those of the Income-tax Act. Hence, by a parity of reasoning, whenever an assessment is made on trustees under the Income-tax Act, Section 161(1) is necessarily attracted. Under Section 161, the tax shall be levied upon and recoverable from a trustee in a like manner and to the same extent as it would be leviable and recoverable from the person represented by him. In other words, income which comes to the share of a beneficiary has to be assessed as if it were the income of the beneficiary, and tax has to be levied accordingly. Section 161(1) makes no distinction between the business income of a trust and any other income of a trust (N. B. Section 161(1)(a) was not then in existence). Hence, all kinds of income of a trust have to be assessed under Section 161(1). Section 164 comes into operation where the individual shares of the beneficiaries are indeterminate or Unknown. In that case, the income is taxed in the hands of the trustees as one unit.

8. In the applications which are before us, the shares of the beneficiaries in the trust income are known and determinate. There can, therefore, be no question of Section 164 being attracted. Looking to Section 161(1) and the decisions of our High Court and the Supreme Court, the income of the trust, whether it is business income or any other income, will therefore, have to be treated as if it were distributed to the beneficiaries. Tax on the share of each beneficiary will have to be separately calculated as if it formed a part of the beneficiary's income. Tax payable by the trustees will be the sum total of the tax so calculated on the share of each beneficiary. In fact, under Section 166, the Revenue has the option to assess the beneficiary directly. This does not make any difference to the quantum of tax which is liable to be paid. But the income cannot be taxed in the hands of the trustees as one unit under Section 161(1).

9. It was submitted by Dr. Balasubramaniam and Mr. Jetley who appeared on behalf of the Department in these applications that the beneficiaries must be looked upon as an association of persons. Hence, the entire income accruing to the beneficiaries must be taken as one unit. Both of them relied upon the decision of the Supreme Court in the case of N. V, Shanmugam and Co. v. CIT : [1971]81ITR310(SC) . In that case, a suit had been filed for dissolution of partnership and accounts. One of the partners applied for the appointment of a receiver. By consent of parties, receivers were appointed. The receivers were directed to run the business of the partnership for the purpose of winding up. The terms of appointment provided that the receivers could run the business normally, that the profits, if any earned, will be treated as an asset of the firm subject to be divided between the parties in the manner set out in the partnership deed, and that the receivers will pay every month certain specified amounts to the partners. The court held that the fact that there' were three receivers did not make them an association of persons. But the business was carried on by the receivers on behalf of the erstwhile partners with their consent. The control and management in the hands of the receivers was a unified one. The receivers were acting on behalf of the persons who were the owners of the business. The receivers, therefore, when they joined in a common purpose and acted jointly were acting on behalf of the erstwhile partners with their consent. Hence, the earnings were on behalf of an association of persons and were liable to be taxed as such.

10. It is submitted on behalf of the Department that the trustees, when they carry on business under the terms of the trust deed, should be equated with the receivers in the case of Shanmugam and Co. : [1971]81ITR310(SC) . According to the Department, the trustees carry on business on behalf of the beneficiaries just as the receivers did in Shanmugam's case : [1971]81ITR310(SC) . The Department also contends that the words 'on behalf of' and 'for the benefit of' have been considered as equivalent in Shanmugam's case : [1971]81ITR310(SC) ; This submission must be rejected, The trustees do not have any authority from the beneficiaries to carry on any business as the receivers had in Shanmugam's case : [1971]81ITR310(SC) . The trustees merely carry on business for the benefit of the beneficiaries. Shanmugam's case : [1971]81ITR310(SC) does not lay down that, in every case, the words 'for the benefit of' have to be considered as equivalent to 'on behalf of'. According to the Department, the beneficiaries must be deemed to have consented to the trustees carrying on business because they have not renounced their interest, in the trust. This proposition has to be stated only to be rejected. By receiving in come under a trust, a beneficiary does not authorise the trustees to carry on business. And a disclaimer by a beneficiary under section 9 of the Trusts Act is not withdrawal of consent to the trustees carrying on business. It was argued that a non-disclaimer by a beneficiary, i.e., a non-exercise of the right of disclaimer under section 9 by implication meant that the beneficiaries had consented to the trustees' carrying on business on their behalf. The argument is wholly misconceived. The right of disclaimer under Section 9 has no reference to any business carried on by the trustees. It is qua beneficiary's interest in the trust. By not renouncing his rights under a trust, a beneficiary does not consent to the trustees carrying on business.

11. We do not see how the trustees who are authorised to carry on business under the terms of a deed of trust can be considered in the same position as the receivers in Shanmugam's case : [1971]81ITR310(SC) . The beneficiaries have not come together with the object of carrying on business ; nor have they authorised the trustees to carry on any business, as was the case in the above decision. The trustees derive their authority to carry on business, not from the beneficiaries, but from the settlor under the terms of the deed of trust. They do not require the consent of the beneficiaries for exercising their authority under the deed of trust. The authority is conferred on them by the settlor. The beneficiaries are mere recipients of the income earned by the trust. They have not come together for a common purpose. They cannot, therefore be considered as an association of persons or a body of individuals in the same position as the erstwhile partners in Shanmugam's case [1971] 81 ITR 810 .

12. The Supreme Court, in the case of CIT v. Indira Balkrishna, : [1960]39ITR546(SC) , has said, while considering what constitutes an association of persons, that the word 'associate' means 'to join in common purpose, or to join in an action'. Therefore, 'association of persons', as used in section 3 of the Income-tax Act, means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.

13. In the present case, the beneficiaries cannot be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust nor have they authorised the trustees to carry on business. They are merely receivers of income from the trust. The ratio of Shanmugam's case : [1971]81ITR310(SC) , therefore, does not apply to the present case.

14. In view of the clear provisions of Section 161(1) of the Income-tax Act, as interpreted by our High Court and the Supreme Court, there can be no doubt that the trustees have to be assessed in the manner provided in Section 161(1) of the Income-tax Act, in respect of any income of the trust. Looking to the interpretation put by the Supreme Court on the term 'association of persons' also, there can be no doubt that the beneficiaries who are named in the trust as recipients of the income of the trust cannot be considered as an association of persons. Therefore, the trustees also cannot take on the character of an association of persons. There is no dispute that the trustees, in their own right, cannot be considered as an association of persons.

15. Looking to these clear provisions of law, therefore, in our view, there is no state able case or question which the Tribunal can be directed by us to refer to us for our determination, The points at issue are squarely covered by the authorities of our own High Court and the Supreme Court.

16. In Income-tax Application No. 157 of 1990, one of the points discussed by the Tribunal related to the question of double taxation. It seems that, in that case, some of the beneficiaries had already been separately assessed to tax in respect of the business income which they earned from the trust. The Tribunal held that, as the beneficiaries had already been assessed on their beneficial interest in the income of the trust fund in their individual assessments, that income cannot be assessed de novo in the hands of the trustees either as an association of persons or as a body of individuals. No question, however, has been framed on this aspect. Hence, we need not examine it any further.

17. In the premises, in our view, the questions which are sought to beraised are covered by the authorities of our High Court and the SupremeCourt. No purpose, therefore, can be served by asking the Tribunal to referthe questions to us.

18. Although questions have been framed in different language in each of these applications, the points at issue remain the same and the relevant facts are also similar. The rule issued in each of the applications is, there-fore, discharged. In the premises, there will be no order as to costs.