TMI Blog1977 (12) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... een the parties regarding the income from those three trusts. The dispute in this case centres round income from other six trusts which are all discretionary trusts during the year of account, that is, calendar year 1968, the assessee received the following amounts from the said six discretionary trusts in terms of the resolutions of the trustees of the respective trusts as distribution out of the income which the trustees of those six different trusts received during 1968 :-- S. No. Name of the trust Amount Rs. 1. Geeta Mayor D. Trust No. 1 1,600 2. Ambalal Sarabhai D. Trust No. 4 6,200 3. Manorama Sarabhai (K. 8) D. Trust 1,000 4. Sarladevi Sarabhai (G. 15) D. Trust 1,400 5. Manorama Sarabhai D. Trust No. 1 7,200 6. Anand Sarabhai (J. 9) D. Trust 500 -------------- 18,000 -------------- The assessee was not the sole beneficiary in any of these six trusts but in each case she was one of the group of beneficiaries in each of the said trusts. The relevant clause conferring discretion on the trustees of these six different trusts was identical in each case and the clause runs as follows: From and after the date hereof (i.e., the date of the trust deed) and du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion. This reference first reached hearing before a Division Bench consisting of two of us (Divan C.J. and P. D. Desai J.) on or about February 13, 1976, and as it was felt that the legal position in this behalf was not free from doubt and that the whole problem requited reconsideration, the matter was referred to a larger Bench. Hence this matter was placed before a Full Bench consisting of three of us. After the arguments were heard some time before June, 1976, but before the judgment could be delivered, one cf us (Divan C.J.) was transferred from this High Court to the High Court of Andhra Pradesh and it was directed that the matter should not be treated as part heard it seems that no other Full Bench took up the matter during the intervening period and it was only in September, 1977, that all the three of us having once again assembled in this High Court, the matter could be taken up for final hearing. In the order of reference it was pointed out that the following passage at page 497 from the decision of a Division Bench of this court in Commissioner of Income-tax v. Arvind Narottam [1969] 73 ITR 490 regarding the scope of section 164 required reconsideration : " But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench of this court approved of the decision of the Bombay High Court in Trustees of Chaturbhuj Raghavji Trust v. Commissioner of Income-tax [1963] 50 ITR 693 and it was felt by the Division Bench which referred the matter with which we are dealing in the instant case to a larger Bench, that in Panna Sanjay. Trust's case, the decision in Trustees of Chaturbhuj Raghavji Trust case was approved and followed and in view of what was decided in Trustees of Chaturbhuj Raghavji Trust's case, the question requires to be reconsidered. In order to follow the decisions rendered on this branch of the law it is necessary to refer to the relevant provisions of the Indian Income-tax Act, 1922 (hereafter referred to as " the Act of ) 922 "), and compare them with the analogous provisions in the Income-tax Act, 1961 (hereinafter referred to as " the Act of 1961 "). Section 40 of the Act of 1922 was included in Chapter V which dealt with " Liability in special cases ". Sections 40 and 41, which are material for the purposes of this case, provided for cases of " Guardians, trustees and agents " and with cases of " Courts of Wards, etc.". Under section 40, sub-section (1), where the guardian or trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The rest of the provisions of section 41 are not material for the purposes of this judgment. Chapter XV of the Act of 1961 deals with " Liability in special cases ". In Chapter XV there are several groupings of sections under the head A, B, C, etc. Head "A" deals with " Legal representatives " and is not material for the purposes of this judgment. That head consists only of section 159. Section " B " deals with " Representative assessees-General provisions " and section 160 defines " Representative assessee ". For the purposes of this case we are concerned with clause (iv) of sub-section (1) of section 160 and under that clause, " Representative assessee " mean, in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (VI of 1913), receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees. Under sub-section (2) of section 160, every representative assessee shall be deemed to be an assessee for the purposes of the Act of 1961. Section 161, sub-section (1), whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upplied by us). Section 166, which is also material for the purposes of this judgment, provides : " 166. 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." The comparison of the first proviso to section 41(1) of the Act of 1922 and section 164, which the analogous section of the Act of 1961, clearly brings out this distinction that whereas under the Act of 1922 the words were " the tax shall be levied upon and recoverable " ; under the Act of 1961 the words are " tax shall be charged ". Similarly, it is to be borne in mind that under section 161 of the Act of 1961 the words are " the tax shall ... be levied upon and recovered from him (representative assessee) in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him ". The corresponding words in section 41(1), main portion, were " the tax shall be levied upon and recoverable from ... in the like manner and to the same amount ". Thus, though the language of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court in Saifudin Alimohamed's case [1954] 25 ITR 237 observed at page 247 of the report in that case in dealing with the case in which the trustees appointed by the civil court in a suit were carrying on the business in behalf of two minors: "...... it was open to the department to have assessed the income of the guardian under section 10 on the basis that the particular business was carried on by the guardians in their own right, and the taxing department could have taken up the stand that they had no concern with what the guardians did with the profits, after they had paid the tax on the income from the business; or it was open to the department to proceed against the guardians under section 41 and to tax in their hands only that income which they had received on behalf of the minors." In connection with this passage from Saifudin Alimohamed's case [1954] 25 ITR 237 (Bom), Shah J. in C. R. Nagappa's case [1969] 73 ITR 626 (SC) observed at pages 631 and 632 of the report : " It was apparently assumed that it was open to the Income-tax Officer either to assess and tax the guardians as if they were owners of the business and of the income accruing therefrom, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arge by using the words " tax shall be charged " and now there is no question of the court exalting the provisions of any particular section into a quasi-charging section. In C. R. Nagappa's case [1969] 73 ITR 626 the Supreme Court was dealing with a case arising under the Act of 1961 and the main question was whether in a case falling under section 161, sub-section( 1), the application of section 64, clause (v), of the Act of 1961 was to be excluded. The Supreme Court there pointed out that it was implicit in the terms of section 161(1) that the Income-tax Officer may assess a representative assessee as regards income in respect of which he is a representative assessee, but he is not bound to do so. He may assess either the representative assessee or the person represented by him ; that is expressly so enacted in section 166. Section 161(2) does not purport to deny the Income-tax Officer the option to assess the income in the hands of the person represented by the representative assessee; it merely enacts that when a representative assessee is assessed to tax in exercise of the option of the revenue, he shall be assessed under Chapter XV and shall not in respect of that income b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 (SC), the question was again of an agent in India of a non-resident principal and it was pointed out that section 40 of sub-section (2) was a machinery section and that was also mentioned in Aggarwal Chamber of Commerce case [1958] 33 ITR 245 (SC). It was, therefore, contended that section 161, sub-section (1) corresponding to section 40, sub-section (2), was also a machinery section and not a charging section. In Commissioner of Income-tax v. Manilal Dhanji [1962] 44 ITR 876, the Supreme Court was dealing with a case of a trustee where the settlement was of a sum of money for accumulation with interest to the beneficiary who was a minor until the minor attained majority. There it was not a case of discretionary trust of the kind that is before us and at pages 886, 887 the Supreme Court observed : " Under section 41 of the Income-tax Act it was open to the department either to tax the trustees of the trust deed or to tax those on whose behalf the trustees had received the amount. The true position of the assessee in this case was that he was a trustee and not the sole beneficiary under the trust deed. He held the income on trust for himself, his wife and his children. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo provisions are identically worded. Hence, the decisions rendered under section 41(1) of the Indian Income-tax Act, 1922, have a bearing on the question arising for decision in this case '." In view of this pronouncement of the Supreme Court it is clear that the provisions of section 21 of the Wealth-tax Act being almost in identical language and being analogous to the provisions regarding representative assessee as enacted in section 161 and section 164 of the Income-tax Act, the decisions under the Wealth-tax Act will also have their impact in interpreting section 161 and section 164 of the Act of 1961. Section 21(1) of the Wealth-tax Act is analogous to section 161 of the Act of 1961 and section 21(4) of the Wealth-tax Act is analogous to section 164 of the Income-tax Act, 1961. At page 593 of the report in [1977] 108 ITR 555, Bhagwati J., speaking for the Supreme Court, explained the scheme of sections 21 and 21(4) of the Wealth-tax Act as follows: " It must also be noted that the assessment which is contemplated to be made on the trustee under sub-section (1) or sub-section (4) of section 21 is assessment in a representative capacity. It is really the beneficiaries who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso where beneficiaries are more than one, and their shares are indeterminate or unknown, the trustees would be assessable in respect of their total beneficial interest in the trust properties. Obviously, in such a case it is not possible to make direct assessment on the beneficiaries in respect of their interest in the trust properties, because their shares are indeterminate or unknown and that is why it is provided that the assessment may be made on the trustee as if the beneficiaries for whose benefit the trust properties are held were an individual. The beneficial interest is treated as if it belonged to one individual beneficiary and assessment is made on the trustees in the same manner and to the same extent as it would be on such fictional beneficiary. It will, therefore, be seen that in this case too, it is the beneficial interest which is assessed to wealth-tax in the hands of the trustee and not the corpus of the trust properties. " (Emphasis supplied by us). In this decision in the Trustees of Nizam's Family Trust's case [1977] 108 ITR 555 the Supreme Court approved the earlier decision of this High Court in Commissioner of Wealth-tax v. Kum. Manna G. Sarabhai [1972] 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of the beneficiaries in the trust properties. It is, therefore, apparent that once assessment is made on the trustees in respect of the interest of the beneficiaries in the trust properties under sub-section (4), the beneficiaries cannot be again assessed directly in respect of their interest in the trust properties. The interest of the beneficiaries in the trust properties having suffered assessment to wealth-tax in the hands of the trustees in a representative capacity, cannot again be assessed to wealth-tax in the hands of the beneficiaries. " Mr. S. P. Mehta for the assessee in the instant case before us is right when he contends that the precise question which has arisen for determination before us has not arisen in a single case so far, namely,whether it is open to the tax authorities to proceed against the beneficiary under a discretionary trust who has actually received some amount from the trustees in exercise of their discretion in view of the language of section 164. The cases uptil now arising in Commissioner of Wealth-tax v. Kam. Manna G. Sarabhai [1972] 86 ITR 153 (Guj) or in Panna Sanjay Trust case [1969] 74 ITR 396 (Guj) were cases where income in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the child ceases to be contingent and becomes vested. Whether the money is paid to the child, or to the guardian of the child, or to the school master, or to the tailor or other person who supplies the wants of the child, it is paid to or to the use of the child and is income of the child." The other three decisions which we have referred to above merely follow the principle laid down in Drummond v. Collins [1915] 6 TC 525 (HL). We are reluctant to follow uncritically and without a full analysis the provisions of the English law and especially what has been stated in Drummond v. Collins [1915] 6 TC 525 (HL) and the three other English decisions' because, as has been pointed out by the Supreme Court in Commissioner of Income-tax v. Vazir Sultan Sons [1959] 36 ITR 175 and reiterated by Subba Rao J. (as he then was) in Commissioner of lncome-tax v. A. Gajapathy Naidu [1964] 53 ITR 114, 117 (SC) : " While considering the case law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes, it is less elaborate in many ways, subject to fewer refinements and in arrangement and language it differs greatly from the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries are determinate and known. Therefore, even the provisions of section 161(1) which by necessary implication give an option to the tax authorities to proceed either against the representative assessee or against the beneficiary but qua the representative assessee authorized the tax authorities to levy the tax and recover it from the representative assessee in the manner and to the same extent as it would be leviable upon and recoverable from the beneficiary, are to yield to other provisions of Chapter XV. When one comes to section 164, the only departure that is made from the scheme of section 21(4) of the Wealth-tax Act is that instead of creating the fiction that the body of beneficiaries is a single individual, under section 164 the fiction is created that the income received by the representative assessee in the case covered by section 164 is "as if the income were the total income of an association of persons ". It is to be borne in mind that unlike the fiction in section 21(4) of the Wealth-tax Act, the fiction under section 164 is that the income is deemed to be the income of an association of persons and the tax has to be charged as if the income of the trust were the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61(1) that " tax shall ...... be leviable upon and recoverable from the person represented by him " and in section 164 " tax shall be charged " and looking to the fact that section 164 is an exception to the provisions of section 161(1), and as even section 161(1) says , " Subject to the other provisions contained in this Chapter ......" and section 164 is the provision of exception to section 161, it is clear that the provisions of section 161(1) cannot govern the case of a representative assessee when the facts bring the case of a particular representative assessee within section 164. In our opinion, in view of the clear language of section 4 which says that the charge shall be subject to and in accordance with the provisions of the Act and in view of the fact that there is also an exception contained in section 161(1) it is only the provisions of section 164 which govern the case of a representative assessee when the facts bringing the case within the operative part of section 164 exist and it must be borne in mind that the word " receivable occurring in section 164 must, as pointed out by Kotval C.J. in Commissioner of Income-tax v. Lady Ratanbai Mathuradas [1968] 67 ITR 504 (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate and unknown the trustees are assessable in respect of the benefit and in such a case obviously it is not possible to make direct assessment on the beneficiaries because their shares are indeterminate and unknown and that is why it is provided that the assessment may be made on the trustees, that is, the representative assessee, as if the income in the hands of the representative assessee were the income of an association of persons. In our view, after the decision of the Supreme Court in Trustees of Nizam's family Trust case [1977] 108 ITR 555, there is no scope for any difficulty posed by the language used in Arvind Narottam's case [1969] 73 ITR 490 (Guj) that the income in the hands of the beneficiary when the beneficiary receives the income in exercise of the discretion of the trustees under a discretionary trust would be charged to income-tax. Section 166 merely permits direct assessment of the beneficiary or of the representative assessee when it can possibly be done under any of the provisions of Chapter XV, that is, preceding section 166, that is, sections 159 to 165 both inclusive. Section 166 permits either the direct assessment of the beneficiary or the recovery fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has an 'interest' : the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion ' fairly ' or ' reasonably ' or ' properly ' that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund's income : it may be a right, with some degree of concreteness or solidity, one which attracts the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be taxed." This passage, in our opinion, succinctly brings out the nature of the interest of a beneficiary under a discretionary trust and it is because of this nature the beneficiary's interest under a discretionary trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eached by a process of reasoning found favour with English courts. It is said that on the basis of proper commercial accounting practice, if a transaction takes place in a particular year, all that has accrued in respect of it, irrespective of the year when it accrues, should belong to the year of transaction and for the purpose of reaching that result closed accounts could be reopened. Whether this principle is justified in the English law, it has no place under the Indian Income-tax Act." It is clear in the light of these observations and particularly in the light of the provisions of section 164 which we have examined above that the doctrine of relation back which was a doctrine of retrospectivity in effect which was considered by the Supreme Court in the context of provisions of company law in Commissioner of Income-tax v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 (SC) and followed by this High Court in subsequent cases, cannot apply to the case before us, viz., to the receipt of income by a beneficiary under a discretionary trust. We may point out that the minutes of the tenth meeting of the Direct Taxes Advisory Committee held on December 23, 1967, at Ahmedabad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion, which has been referred to us for our opinion together with the relevant facts, has been set out in the judgment of the learned Chief justice. The circumstances under which the matter has come up before the Full Bench have also been adverted to. The principal question, which arises for our consideration, is whether the revenue has an option to tax in the hands of the beneficiary under a discretionary trust the amount actually received in the course of the previous year by him from the trustees in exercise of their discretion, in view of the relevant provisions contained in Chapter XV of the Income-tax Act, 1961 (hereinafter referred to as " the Act "). Since the answer to this question appears to be concluded in favour of the revenue by certain observations in the decisions of the Division Bench of this court in Commissioner of Income-tax v. Arvind Narottam [1969] 73 ITR 490 (Guj) and Panna Sanjay Trust v. Commissioner of Income-tax [1969] 74 ITR 396 (Guj), the subsidiary question which arises for consideration is whether those observations correctly decided the point. Before proceeding to consider these questions, I wish to clearly demarcate the field of controversy and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of the learned Chief Justice and I need not reproduce them. I shall confine myself only to analysing those provisions. The Act, under Chapter XV, makes certain persons liable to be taxed in respect of income received by them, although such income has not in fact beneficially accrued or arisen to them. The persons in respect of whom such special liability is created are called " representative assessees ". There are four categories of representative assessees and we are concerned herein with one of them, namely, a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise. Such trustee is a representative assessee in respect of income which he receives or is entitled to receive " on behalf or for the benefit of any Person " [underlined supplied]: (section 160(1)(iv)). Such a representative assessee is deemed to be an assessee for the purposes of the Act [section 160(2)]. In other words, by a fiction, the Act treats him as an assessee for the purposes of assessment, that is to say, in respect of the whole procedure for imposing liability of tax in respect of the income received by him in his representative capaci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trustee shall be assessed in a representative capacity as representing the beneficiary. This, however, does not mean that the revenue cannot proceed to make direct assessment on the beneficiary in respect of the portion of the income to which he is beneficially entitled. The beneficiary would always be assessable in respect of the income receivable or received by the trustee on his behalf or for his benefit, since such income must be taken to have accrued to him and would form part of his total income. The right of the revenue to make direct assessment on him in respect of such income stands unimpaired by the provision enabling assessment to be made on the trustee in a representative capacity. As pointed out by the Supreme Court in C. R. Nagappa v. Commissioner of Income-tax [1969] 73 ITR 626, this right, in the first place, is implicit in the terms of section 161(1) and, in the next place, it is expressly provided for in section 166 which enacts that nothing in the preceding sections of Chapter XV 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es it amply clear that the liability of a trustee to income-tax is co-extensive with that of the beneficiary and that in any case it cannot be a larger or wider liability. The option given to the revenue to assess the trustee does not extend so far as to treat the income received by the trustee as his own income and even though he is being assessed, the assessment must proceed in the manner laid down in section 161(1), that is to say, the tax is not liable to be levied under any other provision of the Act (See Nagappa's case [1969] 73 ITR 626 (SC). Having thus cleared the ground in respect of the taxability of income specifically receivable by the trustee on behalf or for the benefit of a single beneficiary or where there are more beneficiaries than one, the individual shares of the beneficiaries are determinate and known, the question may be examined in respect of the taxability of the income which is not specifically receivable by the trustee on behalf or for the benefit of any one person, or where individual shares of the persons on whose behalf or for whose benefit such income is receivable are indeterminate or unknown. Tax, in such cases, is to be " charged " as if such inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the person in actual receipt and control of the income which it is sought to reach. The object of the Acts is to secure for the State a proportion of the profits chargeable, and this end is attained (speaking generally) by the simple and effective expedient of taxing the profits where they are found." It would thus appear that the underlying object both of section 161(1) and section 164 is to tax the person in actual receipt and control of the income which is sought to be taxed. Under our income-tax law, the tax liability arises at the latest on the last day of the accounting year and it would be permissible, therefore, to tax the beneficiary under a discretionary trust, provided by the exercise of discretion conferred upon them under the trust deed before the last day of the year of account in which such income was received, the trustees have indicated that a part or the whole of the income was of the beneficial ownership of one or more of the beneficiaries. The money in question, as soon as the discretion was exercised in favour of one or more beneficiaries, was receivable by them in fulfilment of the disposition made by the instrument of trust itself and what was merely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of such income are also inextricably engrafted upon section 164, for a representative assessee is "liable" within the meaning of section 164 to be taxed in respect of such income only by virtue of the provisions contained in section 161 (1). Not only this, but section 161(2), which prohibits the assessment of a representative assessee under any other provision of the Act in respect of any income assessable in his hands under Chapter XV, will also have to be read along with section 164. Even section 161 (1), second part, which provides for levy and recovery of tax (subject to the other provisions contained in Chapter XV) from the representative issessee in like manner and to the same extent as it would be leviable upon and recoverable from the person whom he represents, has to be read with section 164 having regard to the words set out above in the bracketed portion. It would thus appear that the provisions of sections 160, 161 and 164 will have to be read together and some portions of sections 160 and 161 will have to be read into section 164 in order to make the said section workable. Indeed, even apart from this compulsion of context, construction ex visceribus actus is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 164 are concerned, the exercise of option becomes possible only upon the discretionary trustees allocating amongst beneficiaries the whole or part of the income in the exercise of their discretion during the year of account, for, upon the happening of such event, the income is received by the beneficiaries in fulfilment of the disposition made by the instrument of trust itself and such income becomes chargeable to tax in their hands in view of the provisions contained in sections 4 and 5 of the Act. In my opinion, therefore, the option which is implicit in section 161(1) must also be read into section 164. There is nothing in the language of section 164 which debars the revenue from taxing the beneficiaries in respect of income which, pursuant to the exercise of discretion by the trustees, the beneficiaries have received during the course of the year of account. This very implication finds expression in section 166 and, therefore, even the said section would be attracted in such cases. It is said, however, that in enacting Chapter XV, the legislature has advisedly followed a special scheme and while enacting section 164, it has deliberately chosen its language which make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) not reported) wherein the learned judge held that the liability was definitely and finally created by the charging section and the subsequent provisions as to assessment and so on were machinery only for the purpose of quantifying the liability. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 1TR 767 (SC) the effect of section 3 of the 1922 Act was considered. The said section was in terms similar to section 4 of the present Act and it provided that where any Central Act enacts that income-tax shall be charged for any year at any rate or rates, tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the said Act. It was observed that though the expression " charged " was used both in the case of the Central Act, i.e., the Finance Act, and the Income-tax Act, it could not have been the intention of the legislature to charge the income to income-tax under two Acts. Necessarily, therefore, the term " charged " was used in two different senses. The charging section was only section 3 and the Finance Act only gave rate for quantifying the tax. In Motilal Ambaidas v. Commissioner of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and levying of tax and the machinery for the assessment of tax but the charge of tax is under section 4 of the Act of 1961." (Underlining supplied). On the basis of this reasoning, it was held that section 41(1)was not the charging section and, therefore, the principle of strict construction could not be invoked in construing the said section. It would thus appear to be well settled on the authority of the highest courts as also of this very court that section 4 read with section 5 is the only charging section in the Act and that the sections next following are merely machinery sections for computation and levy of tax. It may be that in some of those machinery sections the word " charge " in its grammatical variations is used. However, the use of such word cannot raise those machinery sections to the pedestal of charging or quasi-charging sections. The said word has different shades of meaning and when it is used in the machinery section it has to be understood, in the context of our income-tax law, as conveying the meaning " levy and recovery ". The word " charge " as used in those sections has not the same meaning as the word " charge " in section 4. In the light of this set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees were directed under a trust deed to pay to the settlor's wife, Champavahoo, after his death, such amount out of the income of the trust as they might think proper for the use and benefit of herself and her children till the youngest son attained the age of 18. The trustees went on paying to her annually certain amount in pursuance of this direction. For four years preceding the assessment year 1955-56, the amount was assessed in the hands of Champavahoo and was excluded from the income of the trust in the hands of the trustees, but in assessment year 1955-56, Champavahoo was assessed on the sum received by her and the trustees were also assessed on the entire income of the trust (including the sum which was disbursed to Champavahoo) at the maximum rate under the first proviso to section 41(1) of the Indian Income-tax Act, 1922. The trustees challenged their liability to be assessed in respect of the income disbursed to Champavahoo and the said challenge was upheld in the following words : " Under sub-section (2) of section 41, it is permissible for the income-tax authorities to make direct assessment on the person on whose behalf income, profits, and gains from a trust are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, assumes a different complexion, though sitting in the Full Bench, we may not still be bound by it. In Arvind Narottam's case [1969] 73 ITR 490(Guj) the Division Bench of this court was not concerned directly with the question of interpretation of section 164, as pointed out at page 496. However, the Division Bench, while dealing with the said question, made the following observations which support the aforesaid view: " But even here, when ' such income ', that is income which falls within the main part of section 164 or any part of 'such income' is paid by the representative assessee to the beneficiary, the beneficiary can always be assessed directly in respect of such amount since such amount would, on receipt by the beneficiary, form part of his total income and would be assessable in the hands of the beneficiary. Here too, section 166 operates to make it clear that the provision enacted in section 164 for assessment of ' such income ' in the hands of the representative assessee as an association of persons shall not prevent direct assessment of the beneficiary in respect of any part of 'such income ' received by him. The revenue has thus two modes of assessment availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the beneficiaries might also become time-barred. Why should we, under such circumstances, review the decisions in Arvind [1969] 73 ITR 490 (Guj) and Panna's [1969] 74 ITR 396 (Guj) cases and tread a new path ? What are the compelling reasons to do so? It is not shown that in this very court or in any other High Court a contrary view has been taken. It is also not shown that those decisions in question were given per incuriam. Even assuming that certain aspects of the question were not brought to the notice of the court which decided those cases, it would still be proper to decline to enter upon examination of the question since the decisions have been followed in other cases (see Md. Ayub Khan v. Commissioner of Police, AIR 1965 SC 1623 and T. Govindaraja Mudaliar v. State of Tamil Nadu, AIR 1973 SC 974). In Commissioner of Income-tax v. Balkrishna Malhotra [1971] 81 ITR 759 (SC) the question before the Supreme Court was as to what was the true meaning of the word " assessment " in section 34(3) of the 1922 Act. In that context, the Supreme Court observed as follows : " As long back as September 24, 1953, the High Court of Madras in Viswanathan Chettiar's case [1954] 25 ITR 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of stare decisis. In Special Civil Applications Nos. 1005 and 1531 of 1975 decided on April 14, 1971, by a Full Bench of this court, Bhagwati C.J. (as he then was), speaking for the court, rejected the contention of the petitioners in that case to review a decision rendered by the Bombay High Court about 15 years earlier although it was felt that if the point had arisen for decision before this court for the first time, it would have been most certainly inclined to accept the view canvassed by the petitioners. In Anandji Haridas Co. Pvt. Ltd. v. State [1977] 18 GLR 271 ; AIR 1977 Guj 140 [FB], speaking for another Full Bench, I expressed the view that a practice which had been prevalent in this court in the matter of taxing of costs for nearly a decade should be adhered to. It would thus appear that even a period of a decade or a decade and half has been considered sufficient to invoke the principle of stare decisis particularly when it appears that numerous cases have been decided following the earlier decision. As in the case before the Supreme Court, the provisions of section 164 and their effect on the incidence of tax have not remained static. The provisions have undergone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21(2). Whereas the reservation of option under section 21(2) is only in relation to cases covered by section 21(1) of the Wealth-tax Act, the reservation of option under section 166 is in respect of the cases covered by both sections 161(1) and 166. That this is the scope of section 21(2) of the Wealth-tax Act is indicated at page 594 in Nizam's case [1977] 108 ITR 555 (SC). The relevant observation in Nizam's case on which reliance is placed for canvassing the view that in cases covered by section 164, income, even if it is distributed amongst the beneficiaries, cannot be taxed in their hands, is as follows : " So also where beneficiaries are more than one, and their shares are indeterminate or unknown, the trustees would be assessable in respect of their total beneficial interest in the trust properties. Obviously, in such a case, it is not possible to make direct assessment on the beneficiaries in respect of their interest in the trust properties, because their shares are indeterminate or unknown and that is why it is provided that the assessment may be made on the trustee as if the beneficiaries for whose benefit the trust properties are held were an individual. The benefici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I am, however, not required to go into that delicate question inasmuch as, in my opinion, even on a plain reading of the relevant observations in Nizam's case [1977] 108 ITR 555 (SC), there is nothing in them which concludes the issue in the manner contended. It has been also said that section 166 cannot be pressed into service in cases covered by section 164, because, in the first place, on a true interpretation of section 164, it is not open to the tax authorities to proceed against the beneficiaries in cases covered by it since it is only charging section and, secondly, it is an enabling section and it merely states expressly what is implicit in section 161(1) and since section 164 is an exception to section 161(1), the provisions of section 166 cannot apply. As regards the first of these grounds, I have already expressed my view earlier. I am unable to read in section 164 anything which prevents the tax authorities from proceeding against a beneficiary who has already received the income or part thereof pursuant to the exercise of discretion by the discretionary trustees in the course of the same accounting year. As for the second ground, I have stated earlier that section 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, beneficiaries may not be able to say until the discretion is exercised that any part of the income belongs to them. This does not, however, mean that in the eye of law the trustees are the beneficial owners of income received by them in such cases. Though the legal title may vest in them, they still receive the income with an obligation annexed to hold the same for the benefit of persons in whose favour the discretionary trust is created and who become entitled to receive such income or part thereof in fulfilment of the disposition made by the settlor himself upon exercise of discretion by the trustees. It is not as if the trustees give to beneficiaries such cases the income or part thereof which they have received as beneficial owners. What the trustees really do, is to exercise their discretion as authorised by the trust deed in the matter of allocation, if any, of such income amongst the beneficiaries named by the settlor and upon the exercise of such discretion the beneficiaries receive the income by virtue of the settlement made by the author of the trust himself. Even a beneficiary under a discretionary trust has an interest in a certain sense in the income re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the deed of trust and that it is the instrument of trust that one has to look at, be it a testamentary document or a deed of settlement inter vivos, and not the actual exercise of discretion by the trustees in the course of the year. I do not think it is necessary to consider in this case whether it is the correct interpretation of the concerned word or whether these observations have to be read in the context of and confined to the facts of the said case. I am proceeding in the present case on the footing that regard being had to the terms of the trust deed, the assessee was merely a discretionary beneficiary. All that I am holding is that even being such a discretionary beneficiary, pursuant to the exercise of discretion in her favour and upon her receiving her share of the income in the course of the year of account in which it was received by her is includible in her total income and liable to be taxed in her hands under section 4 read with section 5 having regard to the option implicit in section 164 and expressly recognised by section 166. In taking this view, the decision in Lady Ratanbai's case [1968] 67 ITR 504 (Bom), in so far as it interprets the word " receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analogy from English statutes whose terms may superficially appear to be similar but on a deeper scrutiny may reveal differences not only in the wording but also in the meaning a particular expression has acquired in the context of the development of law in that country. Little help can, therefore, be gained by attempting to construe the Indian Income-tax Act in the light of decisions bearing upon the meaning of the income-tax legislation in England. I would rest my decision on this point independently of those decisions. Under section 5, subject to the provisions of the Act, the total income of any previous year of a person who is a resident includes 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. Now, it cannot be disputed that so far as cases covered by (a) above are concerned, it is the first receipt after accrual that is determinative for the purpose of taxation and that the same sum of money cannot be received by the person e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the matter, such provision will have to be given effect to. Bearing in mind this legal position, let us examine the validity of the rival contentions on this point. Now, on the view which I have taken, section 164 is no more than an enabling section similar to section 161(1). There is an option implicit in it, similar to the option implicit in section 161(1), to tax either the representative assessee or the beneficiary in those cases where the income received by the discretionary trustees is distributed amongst the beneficiaries during the year of its receipt. This very implication finds its expression in section 166 which, according to me, applies also in cases covered by section 164. These various provisions creating a special liability to assessment, that is to say, levy and recovery of tax, will have to be treated as overriding the principle of first receipt found in provisions of section 5(1)(a). To put it differently, section 5(1)(a) will have to be read subject to these provisions and the principle that it is the first receipt after the accrual of the income which must determine the liability to tax will have to be treated as being of no relevance in cases where those p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case, proceeded the argument, the receipt on the first occasion itself would be for and on behalf of the concerned beneficiary and there would be no question of tax being not levied on the income on the occasion of it first receipt within the meaning of section 5(1)(a). For the purposes of applying the doctrine of relation back, reliance was placed upon the decision of the Bombay High Court in Commissioner of Income-tax v. Aryodaya Ginning Manufacturing Co. Ltd. [1957] 31 ITR 145 and the decision of the Supreme Court in Commissioner of Income-tax v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566. On the other hand, it was argued with considerable vehemence that the doctrine of relation back does not fit in with the scheme of the Income-tax Act and that if this doctrine was introduced in the context of the income liable to be taxed under section 164, uncertainties and anomalies would be introduced. Strong reliance was placed in support of this argument on the decision of the Supreme Court in T. S. Srinivasan v. Commissioner of Income-tax [1966] 60 ITR 36. Though I am, prima facie, of the view that even this alternative argument has merit and that by the application of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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