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TMI Blog1994 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... e was one of the beneficiaries thereunder. In each of these six trust deeds the clause relevant for our purpose read thus: "From and after the date hereof (i.e., the date of the trust deed) and during the periods mentioned in this clause, the trustees may either accumulate the net income of the trust or at their discretion pay the same to the persons as mentioned therein or to any one or more of them to the exclusion of others or other of them for their, his or her absolute use or benefit in such proportion and in such manner as the trustees may in their absolute discretion think fit....." During the accounting year relevant to the assessment year 1969-70, the assessee received the amounts set out hereafter. The amounts were received pursuant to the resolutions of the trustees to distribute the same from out of the income of the six trusts for the accounting year: Name of the trust Amount (Rs.) 1. Geeta Mayour D.--Trust No. 11,600 2. Ambalal Sarabhai D.--Trust No. 46,200 3. Manorama Sarabhai (K. 8.) D--Trust 1,000 4. Saraladevi Sarabhai (G.15) D--Trust 1,400 5. Manorama Sarabhai D.--Trust No. 17,300 6. Anand Sarabhai (J-9) D.--Trust 500 18,000 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the previous year of every person. Section 5 defines the total income of a person resident in India to include "all income from whatever source derived which-- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year". Chapter XV of the Act is titled "Liability in special cases". Part B thereof sets out the general provisions applicable to representative assessees. Section 160 defines a representative assessee for the purposes of the Act to mean: "(i) in respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163; (ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot; (iii) in respect of income which the Court of Wards, the Administrator-General, the Official Trustee or any receiver or manager (including any person, whatever his desig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rate or rates applicable to the total income or total world income of the beneficiary if such course would result in a benefit to the Revenue." Section 166 read thus: "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 payable in respect of such income." We may now paraphrase, and thus emphasise, the provisions of Chapter XV that are most material to our discussion. By reason of section 160 trustees appointed under a trust deed or will who receive or are entitled to receive on behalf or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll prevent 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 payable in respect thereof. Some analogous provisions of the Indian Income-tax Act, 1922, may also be noted. Section 40 stated that where the guardian or trustee of any person being a minor, lunatic or idiot was entitled to receive on behalf of such beneficiary or was in receipt on behalf of such beneficiary of any income, profits or gains chargeable under that Act, tax would be levied upon and recoverable from such guardian or trustee in like manner and to the same amount as it would be leviable upon and recoverable from any such beneficiary if of full age or sound mind and in direct receipt of such income, profits or gains. More relevant are the provisions of section 41, which read thus: "Courts of Wards, etc.--(1) In the case of income, profits or gains chargeable under this Act which the Courts of Wards, the Administrators-General, the Official Trustees or any receiver or manager (including any person whatever his designation who in fact manages property on behalf of another) appointed by or under any order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons rather than to the provisions of section 161. The word "receivable" in the context in which it occurred in section 164 indicated that it was the trust deed that one had to look at and not the actual exercise of the discretion by the trustees in the course of the year. Section 166 permitted the direct assessment of the beneficiary when it could possibly be done under the provisions of sections 160 to 169 in Chapter XV. What was crucial was not section 166 but section 164; because if, under section 164, it was not open to the Revenue to proceed against the beneficiary, it was not open to the Revenue to treat the income of the trust except as the income of a fictional association of persons. The last portion of section 164 only gave an option as to the rates at which the tax was to be levied. The interest of a beneficiary under a discretionary trust was merely his right to be considered by the trustees. Because of the impossibility of dealing with income in such cases the Legislature had made the special provision of section 164. The question was, accordingly, answered by the majority judgment in the negative, that is, in favour of the assessee and against the Revenue. The dissen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of sections 4 and 5 of the Act. As regards the use of the word "charge" in the marginal note and the body of section 164 in contradistinction to the use of the expression "levied upon and recovered from" in section 161, the difference in the choice of language was of no significance. The word "charged" in section 164 could only be construed as conveying the meaning "levied and recovered". Section 166 was attracted in cases covered by section 164 where the beneficiaries had received the income or part thereof pursuant to the exercise of discretion by the trustees of a discretionary trust in the course of the same accounting year. Even assuming that the word "receivable" in section 164 had to be interpreted to mean "receivable under the trust deed" and that it was the trust deed that one had to look at, this interpretation did not come in the way of holding that even a discretionary beneficiary, pursuant to the exercise of discretion in his favour and upon his receiving his share of the income in the course of the accounting year in which it was received by the trustees, was liable to be assessed and taxed in respect thereof. The dissenting judgment, therefore, answered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on because it was never the object or intention of the Act to charge tax upon anybody other than the beneficial owner of the income. Having created the fiction of beneficial receipt, protection was given to the representative assessee by providing that the tax in his hands would 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. It was implicit in this that the tax could be leviable upon and recoverable from the person represented by the representative assessee. In the submission of Mr. Salve, learned counsel for the assessee, section 161 dealt generally with the taxation of all representative assessees, including trustees, whereas section 164 was a special provision applicable to discretionary trusts and was a complete code which laid down not only the mode and manner of taxation but also prescribed the basis and extent of the charge of tax. Section 164, therefore, excluded the application of section 161 wherever it became applicable on account of the existence of the circumstances therein mentioned. The assessment of beneficiaries, even where their shares were unknown, was u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o do so. He could assess either the representative assessee or the person represented by him, and this was expressly so enacted in section 166. The Income-tax Officer could assess the person represented in respect of the income of the trust property and the appropriate provisions of the Act relating to the computation of his total income and the manner in which the income was to be computed would apply to such assessment. The Income-tax Officer could also assess the representative assessee in respect of that income and limited to that extent and tax could be levied and recovered from the representative assessee to the same extent as it was leviable upon and recoverable from the person represented by him. The contention raised by the appellant's counsel that since the trustees were assessable in respect of the income of the beneficiaries under section 161(1), that income could not by virtue of section 161(2) be assessed in the hands of the beneficiaries was contrary to the plain terms of section 166. Section 161(2) did not purport to deny the Income-tax Officer the option of assessing the income in the hands of the person represented by the representative assessee. It merely enacted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a trust deed, wealth-tax "shall be leviable upon and recoverable from the....trustee...in the like manner and to the same extent as it would be leviable upon and recoverable from the person on whose behalf the assets are held.... Sub-section (2) stated that nothing contained in sub-section (1) would prevent either the direct assessment of the person on whose behalf the assets were held or recovery from him of the tax payable in respect thereof. This was a case in which the late Nizam of Hyderabad had created several trusts. For the purposes of the judgment it was sufficient that the provisions of what was called "the family trust" were referred to. By the trust deed, the Nizam had transferred a corpus of rupees nine crores to the trustees to be notionally divided into 175 equal units, of which 166 1/2 units were allotted to the relations mentioned in the Second Schedule to the trust deed in the manner specified therein, the number of units allocated to each relation being mentioned there. The Wealth-tax Officer assessed only the value of 13 units in the hands of the trustees and the value of the other units in the hands of the respective beneficiaries. The matter reached the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial provision for the assessment of a trustee of a trust. Section 21 was mandatory in its terms. It was clear on a combined reading of sections 3 and 21 that whenever assessment was made on a trustee, it had to be made in accordance with the provisions of section 21. Every case of assessment on a trustee would necessarily fall under section 21 and he could not be assessed apart from and without reference to that section. To take a contrary view, giving option to the Revenue to assess the trustee under section 3 without following the provisions of section 21, would be to refuse to give effect to the words "subject to the other provisions of this Act in section 3", to ignore the maxim "generalia specialibus non derogant" and to deny mandatory force and effect to the provisions of section 21. The court noted that in C. R. Nagappa's case [1969] 73 ITR 626, the observations of Chagla C. J., quoted above had been approved and the court went on to state that the same consideration must apply in the interpretation of section 161(2). It had, therefore, to be held uncontrovertible that whenever a trustee was sought to be assessed that assessment had to be made in accordance with section 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e beneficial interest was treated as if it belonged to one individual beneficiary and assessment was made on the trustee in the same manner and to the same extent as it would be made on such fictional beneficiary. In this case too it was the beneficial interest which was assessed to wealth-tax in the hands of the trustee. It may be added that this court in the case of CWT v. Kirpashankar Dayashanker Worah [1971] 81 ITR 763 (SC), has held that section 21(1) of the Wealth-tax Act, 1957, was analogous to section 41(1) of the 1922 Act, the only difference being that whereas the former dealt with assets, the latter dealt with income and, subject to this difference, the two provisions were identically worded. Hence, the decisions rendered under section 41(1) of the 1922 Act had a bearing upon the interpretation of section 21(1) of the Wealth-tax Act. Mr. Salve drew our attention to the judgment of this court in CWT v. Arvind Narottam [1988] 173 ITR 479, where the trust deed provided for payment to the beneficiary of a minimum sum and left it to the discretion of the trustees whether or not any further distribution of income should be made. There were similar provisions in relation to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city and also that tax may be levied upon and recovered from him only in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. Section 161(2) gives the representative assessee a further measure of protection by making it explicit that "he shall not, in respect of that income, be assessed under any other provisions of this Act". This is of significance for "any other provisions of this Act" must plainly mean any provision of the Act other than section 161. Section 164 states that where any income in respect of which a trustee is liable as representative assessee 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 part thereof is receivable are indeterminate or unknown, tax shall be charged as if such income were the total income of an association of persons or where such income or part thereof is actually received by a beneficiary, then at the rate applicable to the total income of the beneficiary if such course benefits the Revenue. Put differently, section 164 states that tax shall be levied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting different from that of the beneficiary of a specific trust ? It is true that the language of section 166 does not avail the Revenue because it states that sections 160 to 165 do not 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 payable in respect of such income". The section is clearly clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that sections 160 to 165 do not bar the direct assessment of the person on whose behalf or for whose benefit the income is receivable or the recovery from such person of the tax payable thereon, provided that is permissible under any other provisions of the Act. Even so, since the word used in section 166 is "receivable", it cannot apply to a discretionary trust for it cannot be said that the income thereon is "receivable" for one or more beneficiaries, it being left to the discretion of the trustees whether or not the income should be distributed to one or more of the beneficiaries or not at all. But that is not to say that the beneficiary of a discretionary trust, because h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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