TMI Blog1997 (8) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... V. Shanmugam clearly applies to the assessee's case. 2.4 The CIT(Appeals) has failed to appreciate that by an implied mandate the trustees carry on the business on behalf of the beneficiaries, which is collectively an association of persons involved in the conduct/earning of income for the trust, viz-a-viz, beneficiaries." 2. The brief facts of the case are that the trust, "Manilal Bapalal Family Benefit Trust" was created by one Smt. Joiti Bai, wife of late Bapalal B. Mehta Jain, on 26-10-1981. The trust was valid for a period of ten years from the date of creation. The trustees were given discretion to extend the period of ten years also. Smt. Joiti Bai transferred a sum of Rs. 50,000 to the trust for the benefit of 30 beneficiaries mentioned in para 13(a) of the trust deed. Five trustees were appointed by the settlor. These trustees are: 1. Sri Surendra M. Mehta, s/o Manilal Mehta, 2. Sri Harindra M. Mehta, s/o Manilal Mehta, 3. Sri Suresh B. Mehta, s/o Bapalal Mehta, 4. Sri Naresh M. Mehta, s/o Manilal Mehta, and 5. Sri Tushar S. Mehta, s/o Surendra Mehta. All the four trustees other than Sri Naresh M. Mehta were residing in Madras at the relevant time as per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee, on the other hand, supported the order of the CIT(Appeals) and argued that the status of the trust should be taken as Individual. He relied on the Hyderabad Special Bench decision of the Tribunal in the case of Mohammed Omer Family Trust v. ITO [1991] 40 ITD 1. It is also stated by the learned counsel for the assessee, that the beneficiaries have all been assessed to tax and once the beneficiaries are assessed to tax then the income cannot be assessed in the hands of the trustees. He relied on the decision of the Kerala High Court in the case of CIT v. Dr. David Joseph [1995] 214 ITR 658. It is also stated by the learned counsel for the assessee that the income has been charged at the maximum marginal rate in the hands of the beneficiaries and it would not make any difference even if the income is charged in the hands of the trustees, but since the income is charged in the hands of the beneficiaries it would be double taxation if the income is again charged in the hands of the trustees. The learned counsel also referred to the provisions of section 166 and stated that the provisions of the said section override the provisions of section 161A. The learned counsel the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declared by him. For the purpose of the new provision, the term "maximum marginal rate" shall have the same meaning as in Explanation 2 to section 164 of the Income-tax Act. The proposed amendment will take effect from 1st April, 1985, and will, accordingly apply in relation to the assessment year 1985-86 and subsequent years...." Pp. 166 to 168 Memorandum:--- "Taxation of business profits of private trusts at maximum marginal rate of Income-tax. 44. Trustees of a private trust are ordinarily not expected to carry on any business because, implicit in the nature of business is the possibility of incurring loss and no prudent trustee would risk the trust's property in business venture. However, it has come to notice that taxpayers are increasingly conducting business through the medium of private trusts. Such arrangements are entered into for purposes of tax avoidance, the main object being to avoid payment of the registered firm's tax which would become payable if the business is carried on in partnership. 45. In order to counteract such attempts at tax avoidance, it is proposed to make a provision in the Income-tax Act, that where any income in respect of which any pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was created bona fide exclusively for the benefit of the relatives of the settlor or where the settlor is a Hindu Undivided Family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance; (iv) the trust has been created bona fide by a person carrying on business or profession exclusively for the benefit of his employees. The Bill seeks to provide that the aforesaid provisions will not apply in a case where the income of the discretionary trust consists of or includes, profits and gains of business. In such cases, the entire income of the trust would be charged at the maximum marginal rate of tax, except in cases where the 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. In such cases, the income of the discretionary trust would be charged to tax at normal rates applicable to individuals and not at the maximum marginal rate of income-tax. 47. The proposed provisions will take effect fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al rate in the hands of the trustees on the whole of the income in respect of which such trustees are liable. Under section 160(1)(iv) "representative assessee" means, in respect income of which a trustee/trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise, receives or is entitled to receive on behalf or for the benefit of any person. 9. In this connection we may refer to the decision of the Special Bench of the ITAT, Hyderabad in the case of Mohammed Omer Family Trust. Paragraphs 20 and 21 are reproduced below: "20. Now what is the departure that the non obstante clause has made with reference to the existing provision. Before we understand the departure made, we must know the existing provisions. Under the existing provisions without sub-section (1A) if a representative assessee receives income on behalf of the beneficiaries from profits and gains of business, tax has to be charged not at the maximum marginal rate. As pointed out in the memorandum explaining the provisions of the Bill, the trustees of the private trust are originally not expected to carry on any business because implicit in the nature of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of the income at the maximum marginal rate irrespective of the fact whether the income in the hands of the representative assessee, consisted of the income from the profits and gains alone or it is made up of income from some other heads like property, dividends and interest, etc. To put it differently, the expression "the whole of the income" refers to that part of the income which was received on behalf of a beneficiary by the trustee and not to the whole of the income of all the beneficiaries together. There is no warrant for the view that the expression "whole of income used here would encompass the aggregate incomes of all the beneficiaries in the hands of the trustees. The income of each beneficiary is his own income. How can the income of one beneficiary be clubbed with the income of another beneficiary which will be the outcome, if the interpretation of the revenue is accepted. To construe it differently would not only be against the very object with which this provision was introduced as explained in the memorandum of Finance Bill but also to the plain meaning of the words and also to the concept of taxing the trustee in respect of the income of the beneficiaries limiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is liable to be taxed in the hands of the trustee as representative assessee. In our considered opinion the view expressed by the Bangalore Bench did not correctly appreciate the law on the point. Therefore, the answer to the first question is that the assessments in this case have to be made only in the status of an 'Individual' and cannot be made in the status of 'association of persons', even while making the assessment under the provisions of sub-section (1A) of section 161. Consequently, the answer to the second question is that the tax at the maximum marginal rate has to be charged only in respect of the whole of the income of each beneficiary and not on the aggregate income of all the beneficiaries in the hands of the trustee." 12. Similarly, in the case of CIT v. Deepak Family Trust No. 1 [1995] 211 ITR 575/[1994] 72 Taxman 406, the Hon'ble Gujarat High Court held that discretionary trust must be considered to be an individual for the purpose of deduction under section 80L. In that case the Revenue's argument that status of the discretionary trust should be adopted as association of persons was rejected by the Gujarat High Court. It was held by their Lordships that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trustees on the whole of the income including profits and gains of business at the maximum marginal rate. Provisions of section 166 are general in nature and those provisions could be applied by the Assessing Officer where he found that due to some reason a representative-assessee is not traceable or due to some reason the assessment cannot be made in his hands. Power has been given to the Assessing Officer under section 166 to make direct assessment of the person on whose behalf or for whose benefit income is receivable and also to recover from such person the amount of tax due in respect of such income. The provisions of section 166 are applicable to every representative assessee including legal representative or agent of a non-resident, whereas the provisions of section 161(1A) is specifically applicable to representative assessees mentioned in section 160(1)(iv) of the Act, in respect of income which includes or consists of profits and gains of business. Therefore, the provisions of section 161(1A), which is a charging section, overrides the provisions of section 166 because the provisions of section 161(1A) are charging provisions and specific in nature whereas section 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als, these seven persons jointly as a unit-body of individuals-filed a return of income for the assessment year 1979-80 declaring a total income of Rs. 1,04,490. The ITO before whom this return was filed, without noticing the fact that the same income had already been assessed at the hands of the legal heirs, completed the assessment in the status of body of individuals and accepted the said return. The first appellate authority held that the assessment of the body of individuals was unsustainable. The Tribunal took the view that the appellate authority was in error in cancelling the assessment of the body of individuals. On a reference, the Hon'ble Kerala High Court held that neither the Assessing Officer nor the first appellate authority considered the real issue nor was it considered by the Tribunal. The Tribunal ought to have addressed the question as to whether the earlier assessments made on the "wrong person", for, only if it is found that the earlier assessments were made on the "wrong person" the assessing, authority will be clothed with the authority to make the assessment on the body of individuals. 18. Though in the present case, the assessments might have been comple ..... X X X X Extracts X X X X X X X X Extracts X X X X
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