COMMISSIONER OF INCOME TAX, GUJARAT, AHMEDABAD vs. SMT. KAMALTNI KHATAU

CIVIL APPEAL No. 2145/1978Supreme Court[1994] 3 S.C.R. 94209 May 1994Bench: 3 JudgesAuthor: M.N. VENKATACHALIAH, S.C. AGRAWAL, S.P. BHARUCHA COMMISSIONER OF22 pages
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What were the facts?

The assessee, Smt. Kamalini Khatau, was a beneficiary of six discretionary trusts. During the accounting year relevant to Assessment Year 1969-70, she received Rs. 18,000 from these trusts, distributed by the trustees. The assessee contended that this income was taxable only in the hands of the trustees under Section 164 of the Income Tax Act, 1961. The Income Tax Officer, however, taxed it in her hands, relying on Section 166. The Appellate Assistant Commissioner and the Income Tax Appellate Tribunal upheld the assessee's contention, stating Section 164 was attracted, not Section 166. The Gujarat High Court, by a majority, affirmed the Tribunal's view. The Revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that Section 164 of the Income Tax Act, 1961, is not a code in itself for the taxation of discretionary trusts. It refers back to Section 161 for the liability of representative assessees, including trustees. Section 161 provides protections to the representative assessee, stating they shall not be assessed under any other provisions of the Act. However, Section 164 does not grant these protections. The Court found that Section 166 is clarificatory and does not empower assessment or recovery on its own, but clarifies that Sections 160-165 do not prevent direct assessment of the beneficiary if permissible under other provisions. The Court ruled that income of a discretionary trust distributed and received by a beneficiary within the accounting year falls within the definition of 'total income' under Section 5 and is thus subject to assessment and recovery under Section 4. Therefore, the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries in respect of such distributed and received income. The appeals were allowed, and the High Court's judgment was set aside.

What were the issues?

1. Whether Section 164 of the Income Tax Act, 1961, is a self-contained code for the taxation of discretionary trusts, precluding assessment of beneficiaries on distributed income. - Assessee's contention: Section 164 applies, and the income is taxable only in the hands of the trustees. - Revenue's contention: The income is taxable in the hands of the beneficiary. 2. Whether the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust when income is distributed and received by the beneficiaries in the accounting year. - Assessee's contention: The Revenue does not have this option; assessment is restricted to the trustee under Section 164. - Revenue's contention: The Revenue has the option to assess either the trustee or the beneficiary.

Which sections of the Income-tax Act were involved?

Section 4,Section 5,Section 160,Section 161,Section 161(1),Section 161(2),Section 162,Section 163,Section 164,Section 165,Section 166

AI-generated summary — verify with the full judgment below

A COMMISSIONER OF INCOME TAX, GUJARAT, AHMEDABAD v. SMT. KAMALTNI KHATAU MAY 9, 1994 B [M.N. VENKATACHALTAH, CJ., S.P. BHARUCHA AND S.C. AGRAWAL, JJ.J Income Tax Act 1961-Sections 4, 5, 160, 161, 162, 163, 164, 165, and 166-Beneficiary of discretionary trust-Held, revenue has the option to assess C and recover tax from either the trnstee or the beneficiaries in respect of such income as has been distributed and received by the beneficiarie.1 in the course of the accounting year.

The Respondent-assessee was a beneficiary in respect of six: trusts.

Each of the six trusts gave a discretion to the Trustees to accumulate the D net income of the Trust and at their discretion pay the same to the named beneficiaries. During the accounting year relevant to the Assessment Years 19~9-70, the assessee recovered a total amount of Rs. 18,000 from the six tru~s, in pursuance of resolution of the trustees to distribute the same fro0: out of the income of the six trusts for the accounting year. E Before the Income Tax Officer the assessee contended that the said amount of Rs. 18,000 was not liable to be taxed in her hands, but was taxable only in the hands of the trustees in

The order continues below.

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