TMI Blog2003 (3) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Tribunal (for short, "the Tribunal") are separate, the question of law referred in both these cases is the same. The respondent-assessee in both these cases is also the same. The only difference is that they relate to two different assessment years, viz., 1988-89 and 1989-90. The following question of law is referred in both these cases for decision by this court. "Whether, on the facts and in the circumstances of the case and also in view of the provision contained in section 161(1A) of the Income-tax Act, the Tribunal is right in law and fact in holding that the income from the trust properties has to be assessed in the hands of the beneficiaries?" The brief facts necessary for the decision of these cases are as follows: The respondent-assessee is a trust. It is carrying on business in the manufacture and sale of umbrellas. The trust had income from business as well as income from house property. In the assessment under the Act for the years 1988-89 and 1989-90, the assessee claimed deduction in respect of rental income received from the building owned by the trust. The Assessing Officer disallowed the claim of the assessee holding that the building in question was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xation at the maximum marginal rate. Counsel also submitted that the use of the expression "whole of the income" in section 161(1A) means business income alone and no other income can be subjected to the maximum marginal rate. The admitted facts are that the assessee is a private trust; it is carrying on business in the manufacture and sale of umbrellas; it also derived rental income from a building which stood in the name of the trust. The Assessing Officer has observed that since the beneficiaries do not own the property the question of taxing the property income in the hands of the beneficiaries does not arise. The first appellate authority also observed that "on going through the materials on record there is no doubt that the building is owned by the trust and the share of the beneficiaries are certain". The first appellate authority accordingly held that section 26 of the Income-tax Act which deals with computation of income under the head "Income from house property" overrides section 161(1A) of the Act which deals with the definition of a "representative assessee"; all the beneficiaries or co-owners of the property have a definite share in the property; following the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of which such person is so liable at the maximum marginal rate: Provided that the provisions of this sub-section shall not apply where such 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. Explanation.-For the purposes of this sub-section, 'maximum marginal rate' shall have the meaning assigned to it in Explanation 2 below sub-section (3) of section 164." This sub-section opens with a non obstante clause under which where any income in respect of which a representative assessee is liable consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. However, under the proviso to the said sub-section profits and gains 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 are excluded from the applicability of this sub-section. According to the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st and the shares of the beneficiaries are certain. It was also held that all the beneficiaries or co-owners of the property have a definite share in the property. The decision of the Division Bench of this court in Thiruvenkata Reddiar's case [1981] 128 ITR 689 was relied on. This court in Thiruvenkata Reddiar's case [1981] 128 ITR 689 mentioned earlier was concerned with a claim for deduction of the share in the fixed deposit under section 5(1)(xxvi) of the Wealth-tax Act, 1957. A minor assessee represented by her father was a beneficiary under a private trust called "Seematti Trust". She had interest to the extent of 18 per cent. in the income and assets of the trust. The trust had deposits in various banks. In the return filed under the Wealth-tax Act she claimed deduction under section 5(1)(xxvi) of the said Act in respect of 18 per cent. of the amounts lying in deposit in various banks as per the books of the trust. The Wealth-tax Officer did not grant the full relief. In appeal by the assessee the Income-tax Appellate Tribunal took the view that under sub-sections (1) and (2) of section 21 of the Act the Wealth-tax Officer was bound to treat the beneficiary of a trust like a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. And, lastly, the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly." It was also held that no part of the corpus of the trust properties can be assessed in the hands of the trustee. In view of the above, the reason stated by the Assessing Officer that the beneficiaries are not the owners of the building cannot be sustained. Hence, by applying the dictum laid down by this court in Thiruvenkata Reddiar's case [1981] 128 ITR 689 and by the Supreme Court in Trustees of H.E.H. Nizam's Trust's case [1977] 108 ITR 555 about the asset in question to the extent to which the beneficiary has a beneficial interest therein has to be deemed to be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus, "It is true that section 161(1A) provides for a tax at the maximum rate on the income from business in the hands of a trust." To the same effect is the observation made at page 510 under exception (a). Thus by virtue of the provisions of section 161(1) of the Act income from property received by the trust cannot but be treated as income from property in the representative assessment which has to be made on the trustee. This is so, notwithstanding the fact that the trust in which the appellant is a beneficiary is having income from profits and gains of business. In the case of a trust which is having income from business as well as income from house property, by virtue of the provisions of section 161(1A) of the Act, the income from the business earned by the trust shall be taxed at the maximum marginal rate treating it as a single unit and the income from house property has to be assessed in the hands of the trustee in the manner provided in section 161(1) of the Act. This intention of the Legislature is evident from the Statement of Objects and Reasons for the insertion of section 161(1A) of the Act vide the memorandum explaining the provisions of the Finance Bill, as also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which a representative assessee is liable consists of, or includes, income by way of profits or gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum rate. The income so liable referred to in the said sub-section is only the business income of the trust and not any other income. It is only the income by way of profits and gains of business that can be charged at the maximum marginal rate. Any other interpretation, according to us, is against the very scheme of the Act and further such an interpretation will make the provisions of sub-section (1A) of section 161 unconstitutional. It is a well settled position that if two constructions of a statute are possible, one of which would make it intra vires and the other ultra vires, the court must lean to that construction which would make the operation of the section intra vires (Johri Mal v. Director of Consolidation of Holdings, AIR 1967 SC 1568). We accordingly answer the question referred in the affirmative that is in favour of the assessee and against the Revenue. A copy of this judgment under the seal of this court and the signature of the Registrar shall ..... 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