Niti Trust and ors. Vs. Commissioner of Income Tax - Court Judgment

B.C. Patel, J.

1. Petitioners in these petitions challenge the notices under ss. 263 of the IT Act, 1961 (hereinafter referred to as 'the Act'), inter alia, contending that the trust is not an AOP, but is an individual and, therefore, the Assessing Officer (AO) has assessed the tax in accordance with law and the issuance of the notices under s. 263 is contrary to the provision of law and not in consonance with the decision rendered by this Court in the case of CIT vs . Deepak Family Trust No. 1 : [1995]211ITR575(Guj) and by the Calcutta High Court in the case of in CIT vs . Shri Krishna Bandar Trust : [1993]201ITR989(Cal) .

In all these petitions, there is a common point and at the request of the learned Advocates, we have disposed of these matters by a common judgment.

2. We have taken the facts from Special Civil Appln. No. 829 of 1996 which are as under :

Petitioner-assessee is a private discretionary trust. The beneficiaries of the said trust are individuals. For the asst. yr. 1993-94, assessee submitted its return in the status of an individual, disclosing therein the long term capital gain. The AO charged tax on the said capital gain at 20% in accordance with the provisions of s. 112(1)(a)(ii) of the Act on 28th March, 1994, a copy of which is annexed to the petition. The CIT, on 29th Jan., 1996, issued notice under s. 263 of the Act, indicating that the trust is an AOP and that the AO has charged tax on long-term capital gain at the rate of 20% instead of 30% applicable to assessees other than individual and HUF erroneously, which is also prejudicial to the interest of the Revenue.

3. Mr. Shelat, learned counsel appearing for the Revenue, submitted that a show cause notice has been issued and the Court should not interfere at this stage, as the CIT is going to decide the matter after considering objections that may be raised by the assessee. He further submitted that had it been the contention that the petitioner is entitled to benefit claiming as an individual under s. 80L of the Act, then it can be said that the case is covered by the judgments referred to hereinabove, but in the instant case, the question is of determination of tax in special cases as found in Chapter XII of the Act. Section 112 of the Act pertains to tax on long-term capital gains. Said section reads as under :

'112(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head 'Capital gains', the tax payable by the assessee on the total income shall be the aggregate of -

(a) in the case of an individual or an HUF, -

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent :

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent; (b) in the case of a company -

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of forty per cent :

Provided that in relation to long-term capital gains arising to a venture capital company from the transfer of equity shares of venture capital undertakings, the provisions of sub-clause (ii) shall have effect as if for the words 'forty per cent', the words 'twenty per cent' had been substituted; (c) in any other case, -

(i) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of thirty per cent.......'

Mr. Shelat, learned counsel, submitted that the case of the assessee would fall in clause (c) of sub-s. (1) of s. 112 and not clause (a). Section 2(31) defines 'person', which reads as under :

'(i) an individual;

(ii) an HUF;

(iii) a company;

(iv) a firm;

(v) an AOP or a BOI, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses;'

According to Mr. Shelat, assessee would fall in the category of an AOP and, therefore, clause (c) of sub-s. (1) of s. 112 will be attracted.

4. Mr. Shah, learned counsel for the assessee, submitted that a discretionary trust must be considered to be an individual for all purposes. Mr. Shah drew our attention to the following portion of the decision of the case in the case of CIT vs. Deepak Family Trust (supra) :

'It is now well settled that the word 'individual' does not necessarily and invariably always refer to a single natural person. A group of individuals may as well come in treatment as an individual under the tax laws if the context so requires. The word 'association' means 'to join in any purpose' or 'to join in action'. Therefore, 'AOP' as used in s. 2(31)(v) of the IT Act, 1961, means an association in which two or more persons join in a common purpose or common action. The association must be one the object of which is to produce income, profits or gains. In the case of a discretionary trust, neither the trustees nor the beneficiaries can be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust. The trustees derive their authority under the terms of the trust deed. They are merely in receipt of 'income'. The mere fact that the beneficiaries or the trustees, being representative assessee, are more than one, cannot lead to the conclusion that they constitute an AOP. The trustees of a discretionary trust have to be assessed in the status of 'individual' and, consequently, deduction under s. 80L of the IT Act, 1961 is allowable to them.'

Mr. Shah, learned counsel, has placed reliance on the decision of Calcutta High Court in CIT vs. Shri Krishna Bandar Trust (supra). Since the determination of the status of an assessee is a part of the process of computation of income, it is necessary to look into the general principles for determining whether the status of the trustees of a discretionary trust can be taken to be as 'AOP' or as 'individual'. The AO has first to ascertain before proceeding with the assessment whether the person filing a return would fall in which category of person as defined in s. 2(31) of the Act, meaning thereby the AO is required to determine the status of a person and that would be the first step to be taken for assessment proceedings. After determining the status of a person as an individual or an AOP, as the case may be, he will have to proceed further and will have to determine the liability of the assessee. For considering whether it would be an AOP or an individual, this Court in the case of CIT vs. Deepak Family Trust (supra) considered several decisions of the apex Court as well as of other High Courts. The Courts have considered that the representative assessee in the case of a discretionary trust must be regarded as an individual and as a consequence of that status, if any benefit is made available under the Act, the same is to be granted to that assessee and accordingly Calcutta High Court as well as this Court granted benefit under s. 80L of the Act.

5. Mr. Shelat's contention is that though for the purpose of s. 80L the assessee may be treated as in individual, but if it is a discretionary trust, then assessee is not necessarily an individual as contemplated under s. 112(1)(a) and assessee would be assessed according to clause (c) of sub-s. (1) of s. 112. Thus, according to him, the assessee would be 'individual' for one provision and would be 'AOP' for another provision. It is not possible to accept this argument for the simple reason that the AO is required to determine the status of an assessee first and only after determining the status of the assessee, the AO shall proceed further with the assessment. He cannot proceed ahead without determining the status of an assessee and that is not the scheme of the Act. Wherever it is necessary, separate provisions are made for different slabs of taxes. With regard to s. 112, it would be noticed that for individual and HUF, the amount of income-tax on long term capital-gain is to be calculated at the rate of 20%. However, a provision is made with respect to a company, another category of assessee, at the rate of 40% and other than individual or HUF and company, all other cases are covered under clause (c) of sub-s. (1) of s. 112 and the person falling in this category is to be charged on long-term capital gain at the rate of 30%. But once the status of an assessee is determined as an individual, then in that case clause (a) of sub-s. (1) of s. 112 will be made applicable. The AO, without making a reference to the judgment, on facts has come to the decision, which is correct, in our view, and there is no question of apparent error in view of the settled legal position. The view of the Calcutta High Court as well as of Gujarat High Court appears to be that the trustees of a discretionary trust are to be assessed in the status of individual and benefit of s. 80L is thus consequential benefit of conferring status to a trust of an individual.

The Calcutta High Court has observed as under in the case of CIT vs. Shri Krishna Bandar Trust (supra) :

'It will have to be held that the representative assessee in the case of a discretionary trust must be regarded as an individual and thus would be entitled to the benefit of deduction under s. 80L of the Act.'

It is not that for the purpose of s. 80L the Courts have taken the view that the trust would be considered as an individual. In view of this, it is clear that the trust is to be assessed as an individual for all the purposes and, therefore, the AO has rightly assessed the assessee. There is, therefore, no question of apparent error on the part of the AO and there is no question of prejudice to the Revenue and, therefore, the orders passed by the AO are in accordance with law and legal.

6. Mr. Shah, learned Advocate, in answer to a question about maintainability of the petition raised by Mr. Shelat, submitted that notice is without jurisdiction. In support of his submission, he has relied upon the decision of the apex Court in the case of East India Commrl. Co. vs . Collector of Customs : 1983(13)ELT1342(SC) , wherein the apex Court has held as under :

'We, therefore, hold that the law declared by the highest Court in the State is binding on authorities or tribunals under its superintendence, and that they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. If that be so, the notice issued by the authority signifying the launching of proceedings contrary to the law laid down by the High Court would be invalid and the proceedings themselves would be without jurisdiction.'

7. In the result, the petitions are allowed. The impugned notices are quashed and set aside. Rule made absolute accordingly in each of the matters with no order as to costs.