1968 (8) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Construction of Section 164 of the Income-tax Act, 1961.
2. Assessment of income in the hands of trustees versus direct assessment on beneficiaries.
3. Determination of the rate applicable for tax on trustees' income.

Detailed Analysis:

1. Construction of Section 164 of the Income-tax Act, 1961:
The core issue revolves around the interpretation of Section 164 of the Income-tax Act, 1961. This section addresses the taxability of income in the hands of trustees when the individual shares of beneficiaries are indeterminate or unknown. The judgment clarifies that when income is not specifically receivable by the representative-assessee for the benefit of a single beneficiary, or when the beneficiaries' shares are indeterminate, tax should be charged as if such income were the total income of an association of persons.

2. Assessment of Income in the Hands of Trustees Versus Direct Assessment on Beneficiaries:
The judgment underscores the dual modes of assessment available to the revenue: either to assess the trustees in their representative capacity or to directly assess the beneficiaries. In this case, the Income-tax Officer chose to directly assess Kalpana for the sum of Rs. 3,000 received by her, thereby excluding this amount from the trustees' total income. The judgment affirms that once the income is taxed in the hands of the beneficiary, it cannot be taxed again in the hands of the trustees. This principle is supported by Section 166, which allows for direct assessment of the beneficiary without preventing the assessment of the trustee.

3. Determination of the Rate Applicable for Tax on Trustees' Income:
The crux of the dispute was the rate at which the remaining income of Rs. 3,977 should be taxed in the hands of the trustees. The Tribunal had ruled that the rate applicable should be based on the total income of Rs. 6,977, including the Rs. 3,000 already taxed in Kalpana's hands. The judgment, however, refutes this, stating that exclusion from chargeability to tax should also mean exclusion from the total income for determining the tax rate. The judgment cites the principle that the revenue cannot "seek to assess the one income twice," and concludes that the rate applicable should be based on the total income of Rs. 3,977, not Rs. 6,977.

Conclusion:
The judgment concludes that the rate at which tax was liable to be charged to the trustees should be the rate applicable to a total income of Rs. 3,977. The Tribunal's decision to apply the rate based on Rs. 6,977 was erroneous. The Commissioner was directed to pay the costs of the reference to the assessee.