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Income Tax Appellate Tribunal, BANGALORE BENCH A, BANGALORE
Before: SHRI. SUNIL KUMAR YADAV & SHRI. ABRAHAM P. GEORGE
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IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER I.T.A No.1594/Bang/2014 (Assessment Year : 2008-09) Mrs. Sharon Nayak, 203, Inland Exotic Apt, 14, Benson Road, Bangalore 560 046 .. Appellant PAN : ABKPN7007P v. Deputy Commissioner of Income-tax, Circle – 5(1), Bangalore .. Respondent Assessee by : Shri. S. Ramasubramaniyan, CA Revenue by : Dr. P. K. Srihari, Addl. CIT Heard on : 05.05.2016 Pronounced on : 27.05.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by the assessee it has altogether taken nine grounds of which grounds 1 & 9 are general in nature needing no specific adjudication.
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Through its ground nos.2 to 8, assessee assails addition of Rs.91,01,821/- considered by the CIT (A) as income falling within the purview of Section 56 (2)(vi) of the Income-tax Act, 1961 (‘the Act’ in short).
Chequered history of the case is that the assessee earning salary and professional income had filed his return for the impugned assessment year declaring income of Rs.91,01,821/- from twelve trusts floated by assessee’s employer M/s. Lintas Employees Financial Assistance Trust (‘LEFAT’ in short). Twelve trusts together had made payment of Rs.91,01,821/- to the assessee during the relevant previous year. Claim of the assessee before the AO was that the trust concerned had paid taxes on the income declared by it and the sum of Rs.91,01,821/- received by her was distribution of the surplus among the trust beneficiaries who were employees of LEFAT. AO however did not accept this contention and held that assessee being an employee of LEFAT the sum received from the trust should be considered as emanating from her employer-employee relationship with LEFAT. As per the AO, it was on account of employer-employee relationship that the money was received by the assessee from the various trusts floated by
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LEFAT. He held it to be profits in lieu of salary u/s.17(3) of the Act and brought it to tax.
Assessee had moved in appeal before the CIT (A) who upheld the order of AO. CIT (A) also held that in case it was not considered as income taxable u/s.17(3) of the Act, it was definitely taxable u/s.56(2)(vi) of the Act.
Thereafter assessee moved this Tribunal against the order of CIT (A). This Tribunal after considering various submissions made and the records available, held that the clauses in the various trust deeds established the trust to be discretionary trusts. As per this Tribunal in the remand report AO had also admitted that the trusts were discretionary trusts. Tribunal observed that though there was a connection of employment between the settler of the trusts and the assessee, there was no direct nexus between the payment effected by the trusts to the assessee. Thus as per the Tribunal, the amount received by the assessee would not fall within the meaning of profits in lieu of salary. However with regard to the alternative finding of the CIT (A) that the same would be chargeable u/s.56(2)(vi) of the Act, this Tribunal held that CIT (A) ought have issued a show-cause notice to the assessee and sought her explanation before coming to such a
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conclusion. The Tribunal therefore remanded the issue of taxability of the sum u/s.56(2)(vi) of the Act, back to the CIT (A) for consideration afresh.
Accordingly, CIT (A) took up the issue once again. Submission of the assessee before the CIT (A) was that the amounts received by her from the trusts were nothing but encashment of pre-existing rights as a beneficiary in such trusts. As per the assessee, Section 56(2)(vi) of the Act did not apply to encashment of pre-existing rights. Just because the trustees could receive contribution from others would not mean that the sum distributed by the trusts to the beneficiaries would fall u/s.56(2)(vi) of the Act. As per the assessee, by virtue of section 161 of the Act, character of income in the hands of the trusts as well as the beneficiaries was always the same. Assessee pointed out that the income earned by the trusts was assessed in the hands of the trust as capital gains and income from other sources. Assessment under income from other sources was u/s.56(2)(i) and not 56(2)(vi) of the Act. Thus according to the assessee sum received by her from the trusts could not be considered in her hands as income u/s.56(2)(vi) of the Act.
Further contention of the assessee before the CIT (A) was that assessment of a discretionary trust could be made either on the trustee or on
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the beneficiary. As per the assessee, AO having exercised the option to assess the trust, beneficiaries could not be assessed thereafter. Reliance was placed on the judgments in the following cases : CIT v. Smt. Indramma [ITA No.2785/2005]- Kar.HC CIT v. Trustees of Gargiben Trust Trust and Others [130 ITR 479]- Bom HC Chaturbhuj Ragnavji Trist v. CIT (A) [50 ITR 693]- Bom HC
Argument of the assessee was that the trust and beneficiaries were not two different entities and for this reliance was placed on the judgment of Hon’ble Supreme Court in the case of CIT v. Managing Trustee, Nagore Dargha [57 ITR 321]. Assessee also relied on circular No.549, dt.31.10.1999, which inter alia stated that when notice u/s.143(2) of the Act was not served with the time specified in the said section, an assessee could consider the return filed by it as final. In other words, contention of the assessee was that no notice having been served on the trusts before the expiry of the time limit specified in Section 143(2) of the Act, the returns filed by the trust had become final. Thus as per the assessee, assessments were completed on the trusts before notice u/s.143(2) of the Act, was served on the assessee.
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CIT (A) after going through the contention of the assessee, relying on his predecessor’s order, held that the judgment in the case of Smt. Indramma (supra) of the Hon’ble jurisdictional High Court was not applicable on facts. As per the CIT (A), income received by the trustees of various trusts fell within Section 164(1)(iv) of the Act. In his opinion, a discretionary trust had to be considered as Association of Persons for the purpose of charging tax. CIT (A) also noted that assessee’s contention regarding double taxation of both the trust and the beneficiary could not be accepted. He cited an example of dividend income which was received by the company after paying the tax on profits. As per the CIT (A) such dividend was again taxed in the shareholder’s hand. CIT (A) noted that the income of the trust had passed on to the assessee and just because the trust had paid tax would not mean that such income was exempt in the hands of the beneficiary. In so far as pleading of the assessee that tax paid by the trust / fund should be given credit in the hands of the beneficiary employees, CIT (A) was of the opinion that this also could be not accepted since tax due from the assessee was in her own capacity as a separate taxable entity. He thus rejected the contention of the assessee and held that the amount was taxable u/s.56(2)(vi) of the Act.
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Now before us, Ld. AR strongly assailing the order of CIT (A) submitted that Section 56(2)(vi) of the Act would apply only when a sum of money was received without consideration. Argument was that the receipt of a beneficiary from trust funds was nothing but encashment of a pre-existing right. Relying on Section 161 of the Act, Ld. AR submitted that trustees had no separate existence from that of the beneficiaries. Trustees were holding the property and funds only in a fiduciary capacity and the trust property and income always belonged to the beneficiaries. Receiving something which was belonging to a person could not be considered as a gift or a receipt without consideration. Ld. AR pointed out that the trusts filed return on 31.07.2008 and intimation u/s.143(1) of the Act was issued by the AO on 18.03.2010. As per the Ld. AR, assessee had filed her return for the impugned assessment year on 07.10.2008 and notice u/s.143(2) of the Act was issued on 20.08.2009. Further as per the Ld. AR, trusts had filed their respective returns after paying due taxes on the income. Once the AO had exercised the option of assessing the trust, as per the Ld. AR, he could not once again assess the beneficiary. Strong reliance was placed on the decision of Hon’ble jurisdictional High Court in the case of Smt. Indramma (supra). As per the Ld. AR, Hon’ble Mumbai High Court in the case of Trustees of Gargiben Trust & Others (supra), had
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also upheld such option. Relyng on the judgment of Hon’ble Mumbai High Court in the case of Chaturbhuj Raghavji Trust (supra), Ld. AR submitted that it mattered little as to whether a different AO was assessing the trust and the beneficiary.
Continuing his arguments Ld. AR, submitted that a question was raised before the Hon’ble jurisdictional High Court in the case of Smt. Indramma (supra), whether an assessment could be considered as passed on an assessee on filing of the return and on issue of intimation u/s.143(1) of the Act, Ld. AR pointed out that the Hon’ble jurisdictional High Court had answered this question in the affirmative. Ld. AR reiterated the contention taken before the CIT (A) that the trustees had to be assessed in the like manner and to the same extent as it would be leviable upon the beneficiaries. According to the Ld. AR, view taken by the CIT (A) that Section 164(1)(iv) of the Act applied was incorrect, since case of the assessee fell under Section 161 of the Act. Further as per the Ld. AR, view taken by the CIT (A) that trust and beneficiary were two legal entities were incorrect by virtue of the judgment of Hon’ble Apex Court in the case of Managing Trustees, Nagore Durgha (supra). Thus as per the Ld. AR, trustee always received income on behalf of the beneficiary and the same
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income when distributed amongst the beneficiaries could not be taxed in the hands of the latter.
For buttressing his stand further. Ld. AR submitted that the AO was very well aware that assessments of the trust stood completed before the assessment was made on the assessee u/s.143(3) of the Act. In any case, as per the Ld. AR, if at all the assessee was found to be taxable for the income received from the trust, then credit should be given for the proportionate share of her tax, in the tax paid by the respective trusts. As per the Ld. AR, tax liability of the trustees could not be more than the aggregate liability of the beneficiaries. Ld. AR submitted that taxing the amount distributed by the trust to the beneficiary would result in taxing the same income twice. Reliance was placed on the judgment of Hon’ble Apex Court in the case of ITO v. Kewal Ram [60 ITR 74]. Thus according to him, direction given by the CIT (A) to tax the sum u/s.56(2)(vi) of the Act, had to be set aside.
Per contra, Ld. DR strongly supporting the order of CIT (A) submitted that reliance placed by the assessee on the judgment of Hon’ble jurisdictional High Court in the case of Smt. Indramma (supra) was incorrect. According to him in the said case there was an assessment
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already done on the trust and it was due to this reason the Hon’ble jurisdictional High Court held that the beneficiaries to be not assessable.
We have perused the orders and heard the rival contentions. The main plank of argument of the assessee is that by virtue of Hon’ble jurisdictional High Court in the case of Smt. Indramma (supra), once the AO exercised the option to assess the trust, the same income could not be assessed in the hands of the beneficiary of the trust. In the said case also AO had passed an order of assessment in the hands of beneficiary invoking jurisdiction vested on him u/s.166 of the Act. Facts of the said case appearing in para 7 of the judgment show that the return of income was filed by the trust on behalf of the assessee, who was the beneficiary, disclosing therein the interest of the beneficiary. The beneficiary had also filed return in the status of an individual for the said period. She had appended a note to such return wherein it was mentioned that the share of the beneficiary income was not included since the said income was assessable in the hands of the trustee. Facts are better encapsulated from para 11 of the judgment which is reproduced hereunder :
The returns filed by the Trustee under Section 161 in respect of the assessee beneficiary was assessed. For the very assessment year the assessee beneficiary filed her return under Section 139 which was also assessed.
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However, the assessee has appended a note to the returns filed by her as follows:
"NOTE ON EXCLUSION 1. The assessee is a beneficiary in M/s. A.S.K. Bros. Family Trust, No. 44, Race Course Road, Bangalore - 560 001 bestowed with 54/411 share of beneficial interest. The share of beneficial income for the Assessment Year 1992-93 has been excluded from the above computation of Total Income as the said income is assessable in the hands of the Trustee in respect of each of the beneficiary in terms of Sec 161(1) of I.T. Act, 1961.
The assessee is 8 beneficiary in M/s. A.S. Chinnaswamy Raju Bros. Family Trust No. 44, Race Course Road, Bangalore -1 bestowed with 50/420 share of .beneficial interest. The assessee had been credited with Rs. 13,635/- as her share of beneficial income. The said i n c o m e i s e x c l u d e d f r o m t h e a b o v e Computation of Total Income as the Income of the said Trust had suffered tax at maximum marginal rate." The assessing officer came to the conclusion that there is no change of opinion by the assessing officer. That the Department has not taken any stand prior to the reassessment. That the mere processing of a return on an intimation being sent does not amount to taking opinion. Section 143(1) prohibits taking an opinion and requires the Department to compute the taxes collectable where two opinions are possible: He was of the opinion that the provisions of Section 161 provides only for taxing the income in the hands of the representative assessee whereas Section 166 enabled the assessing officer to assess the beneficiary directly. That the choice to assess either the Trustee or the beneficiary directly can be exercised by the assessing officer. Therefore, the assessing officer has exercised his option of assessing the beneficiary under Section 166. Section 161 of the Act deals with the liability of the representative assessee.
7.-ms
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The Trustee has furnished the returns of income in respect of the beneficiary, namely, the representative assessee for the relevant period under Section 161. For the very same period the assessee has filed her individual returns wherein she has dearly mentioned in the Note which has been submitted along with the return with regard ;ta her beneficial interest. The Revenue contends that the power under Section 166 overrides the provisions of Section 161 in as much as, notwithstanding the return of income being filed under Section 161, the assessing officer in terms of Section 166 can assess either the beneficiary or the Trustee Under these circumstances, the assessment has been reopened.
Interpretation of the sections applicable to assessment of a discretionary trust and its beneficiaries appears at para 12 to 13 of the same judgment which is reproduced hereunder :
12(a) The Trustee has filed the return in respect of the beneficiary disclosing the beneficial income therein on which the assessment has taken place on the one hand and on the other hand the return filed by the beneficiary indicating the beneficial interest has also been assessed. It is therefore not open to the assessing officer to reopen the assessment in terms of Section 166 of the Act. The citations relied upon by the Revenue to contend that the assessing officer has the power under Section 166 to assess either the beneficiary or the Trustee does not require any elaboration. The returns have been filed for the year 1992-93 both by the Trustee as well as b) the beneficiary. The assessments have taken place for both the returns. Having accepted the returns filed by making an assessment, the assessing officer cannot subsequently invoke Section 166 of the Act and choose to reassess either the Trust or the beneficiary. It is undisputed that the assessing officer has an authority under Section 166 to exercise his discretion to assess either the Trustee or the
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beneficiary, provided however, the same discretion has not been exercised earlier. In the present case, the assessment of the Trustee as well as the beneficiary having been concludec1the discretion is not available to the assessing officer at this point of time. The discretion as envisaged wider Section 166 could have been exercised prior o any assessment by the assessing officer. Having assessed both the returns, the assessing officer is not authorized in law to re-exercise his discretion under section 166. It is to be further noticed that the trustee has filed (b) the returns disclosing the beneficial interest of the beneficiary and the same has been assessed to tax arid tax has been paid thereon. Hence, the beneficial income has been taxed. Under these circumstances, the assessing officer has committed an error in bringing to tax the very same amount that has since suffered tax in the returns of the Trustee. It needs no elaboration that income cannot be taxed twice. The very income that has already suffered tax in terms of the return filed by the Trustee, is now sought to be taxed in the hands at the beneficiary. This is not permissible. Hence fo, this reason also, the order passed by the assessing authority cannot be sustained. Consequently, the view taken by the Appellate Authority and the Tribunal is just and proper and in accordance with law. In the returns filed under Section 139(1) by the (c) beneficiary a note was appended to it. In terms of the note as extracted hereinabove at para-11, the beneficiary has clearly stated that the very same income is assessable in the hands of the trustee which forms part of the return filed by the trustee under Section 161(1) of the Act. While processing the returns under Section 139 the assessing officer is bound to consider tile said note. The note filed along with the return has to be treated as part and parcel of the return filed, especially when the assessee has mentioned with regard to that particular income, The Note clearly mentions that the beneficial interest has been taxed in the return filed under Section 161 by the trustee and
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therefore the issuance of a notice reopening the assessment is erroneous. When the assessing officer was well aware of the said disclosure a notice for re- assessment would be wholly opposed to law.
(d) In view of the various anomalies being brought about with regard to the interpretation of Section 161 and 166 by the assessing officers, the CBDT has issued a Circular No.157, dated 26th December, 1974 which reads as follows:- “[2527] Assessment of discretionary trusts u/s. 1641166 of the Income-tax Act, 1961-correct procedure ‘Attention is invited to Board Instruction No. 45/78/66-ITJ(5), dated 24th February, 1967, on the subject of assessment made under section 41(2)/166 of the income-tax Act, 1922/1961. In spite of e clear instructions to the effect that neither section 41 of the Income-tax Act, 1922, which gave an option to the department to tax either tie representative assessee or the beneficial owner of the income nor the parallel provisions of the Income-tax Act, 1961, contemplated assessment of the same income both in the hands of the trustees and the beneficiaries, instances have come to the notice of the Board of such double assessment. 2. According to the scheme of the Income-tax Act, 1961, even as it was under the Income-tax Act of 1922, the general principle is to charge all income only once. The Board desire to reiterate the earlier instructions in this regard. In order that there is no loss of revenue the Income-tax Officer should keep this point in view at the time of raising the initial assessment either of the trust or the beneficiaries and adopt a course beneficial to the revenue Having exercised his option once, it will not be open for the Income- tax Officer to assess the same income for that
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assessment year in the hands of the other Person (ie, the beneficiary or the trustee).’
The Circular therefore very dearly states that even though the assessing officer has a discretion under Section 166, the same can be invoked only at the time of raising an initial assessment either by the Trust or the beneficiary and whichever may be beneficial to the Revenue. Having once exercised the option it will not be open to the ITO to assess the same income for the same period in the hands of other persons namely the beneficiary or the Trustee. As stated earlier, having accepted the assessments made by the Trust and the beneficiary, the exercise of discretion as vested under Section 166 of the Act is not available to the assessing officer once again Moreover the sad income has suffered tax by the returns filed by the trustee under Section 161. The same income is now sought to be taxed in the hands of the beneficiary in the returns filed under section 139. Under these circumstances, there has been a gross violation of the Circular issued by the Board. In the facts and circumstances of this case, we hold that the Tribunal was Justified in holding that the Assessing Officer cannot pass an order of assessment in the hands of the assessee beneficiary by invoking the jurisdiction under section 166 of the Act. For the aforesaid reasons the first substantial question of law is answered in favour of the assesee and against the revenue. 13. The second question of law is as to whether the Tribunal was correct in holding that an order of assessment has been passed when only a return has been submitted and when an intimation under section 143(1) of the Act has been issued.
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The first difference we note from the facts as available in the assessee’s case from that of the judgment in the case of Smt. Indramma is that the trustees in the case of Smt. Indramma had filed the returns and the intimation u/s.143(1) of the Act, was passed prior to the assessment of the beneficiaries. In the case of the assessee here, admittedly, intimation u/s.143(1) of the Act, were issued to the respective trusts numbering twelve, only on 18.03.2010. Well prior to that, notice u/s.143(2) of the Act was issued on the assessee. Such notice was issued to the assessee in August, 2009. Second difference is with regard to the manner in which beneficiaries’ income was shown. Copies of the returns filed by the respective trusts floated by LEFAT have been placed before us vide paper book pages 1 to 100. Computation of income in the case of one of the trusts, namely, Lintas Employees Sports Trust, is taken as an example. It gives a detailed computation of the long-term and short- term capital gains and income from other sources as under :
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The return filed by the trustees of Lintas Employees Sports Trust, does not disclose the extent of beneficial interest of the beneficiary in such income. Ld. AR has not placed anything on record to show that assessee in her return or compilation had disclosed the receipt of money from the various
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discretionary trusts, claiming it as exempt or not taxable. Thus there were at least two distinctive features taking assessee’s case out of the compass of the judgment in the case of Smt. Indramma (supra). Proceedings to assess the assessee here on the sum received from the trust had started well prior to intimation u/s.143(1) of the Act was issued to the Trust. As for the argument of the Ld. AR that acknowledgement for filing of return, when there is no issue of notice u/s.143(2) of the Act, could be deemed as an assessment, we are unable to accept. This argument is contrary to the view taken by the Hon’ble Apex Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd [291 ITR 500]. It was held by their Lordships that processing of return u/s.143(1) of the Act, was only clerical or ministerial act, and could not be considered as making of an assessment.
A reading of the judgment of Hon’ble jurisdictional High Court in the case of Smt. Indramma (supra), relied on by the assessee, clearly show that their Lordships has upheld the power of the AO to make a choice to assess either the trustee or the beneficiary by virtue of Section 166 of the Act. In the case before us, since intimation u/s.143(1) of the Act, was issued to the trust after commencing of proceedings u/s.143(2) of the Act on the assessee, we can definitely say that the option stood exercised by the AO to assess the assessee and not the trust. It was not the case of reopening of assessment in terms of Section 166 of the Act. What
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the Hon’ble jurisdictional High Court had laid down was that AO, once he had exercised an authority to assess either the trustee or the beneficiary, the same discretion could not be available, once exercised.
That Revenue has an option to assess and recover the tax from either the trustees or the beneficiaries of a discretionary trust in respect of the income which has been distributed and received by the beneficiaries in the course of the accounting year, is also the law laid down by the Hon’ble Apex Court in the case of CIT v. Smt. Kamalini Khatau [209 ITR 0101]. Para 8 of the said judgment is reproduced hereunder, which lucidly laid down the law with regard to assessment of a discretionary trust :
There are three judgments of this court which have a bearing on these appeals. In C. R. Nagappa v. CIT [1969] 73 ITR 626 (SC), the assessee had executed several trust deeds settling specific properties for the benefit of his minor children. Under each deed he had settled certain properties for the benefit of a named minor child and had vested the properties in four trustees, namely, himself, his two wives and a married daughter. Under each of the trust deeds a portion of the income was to be utilised immediately for the benefit of the beneficiary and the balance was to be accumulated and handed over to the beneficiary upon a stated date. It was contended on behalf of the appellant that the Income-tax Officer was bound to assess the income under each trust deed separately in the hands of the trustees as representative assessees and, by reason of section 161(2), was incompetent to assess the income in the hands of either the appellant or the beneficiaries. This court held that it was implicit in the terms of section 161(1) that the Income-tax Officer could assess a representative assessee as regards the income in respect of which he was a representative assessee, but he was not bound to do so. He could assess either the
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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 that when a representative assessee was assessed to tax in the exercise of the option of the Revenue, he could be assessed only under the provisions of Chapter XV and under no other provisions of the Act. It was pointed out that section 161(2) had been enacted to remove the conflict of judicial opinion which had arisen in regard to the interpretation of the analogous provisions of sections 40 and 41 of the 1922 Act. The observations of Chagla C. J. of the Bombay High Court in the case of CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187, 195, which dealt with the scheme of section 41 of the 1922 Act, were approved. They read (at page 633) : " . . . . it is clear that every case of an assessment against a trustee must fall under section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III. . . . Section 41 only comes into play after the income has been computed in accordance with Chapter III. Then the question of payment of tax arises and it is at that stage that section 41 issues a mandate to the taxing Department that, when they are dealing with the income of a trustee, they must levy the tax and recover it in the manner laid down in section 41. "
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The same considerations applied to the interpretation of section 161(2). It merely enacted that when income was assessed in the hands of a representative assessee in his own name, the assessment would be deemed to be made upon him in the representative capacity only and tax could be levied and recovered in the manner provided in section 161(1). In Jyotendrasinhji v. S. I. Tripathi [1993] 201 ITR 611 (SC), a Bench of two learned judges of this court founded their judgment principally upon C. R. Nagappa's case [1969] 73 ITR 626 (SC) and concluded that by virtue of section 166 the Revenue had an option in the case of the income of a discretionary trust either to make an assessment upon the trustees or to make an assessment upon the beneficiaries. In CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 (SC), this court was dealing with the provisions of the Wealth-tax Act, 1957, analogous to sections 160 to 166 of the Act and sections 40 and 41 of the 1922 Act. Section 21(1) of the Wealth-tax Act stated that in the case of assets chargeable to tax thereunder which were held, inter alia, by a trustee appointed under 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 166½ 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
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of the respective beneficiaries. The matter reached the High Court upon a reference by the Income-tax Appellate Tribunal and thereafter this court. The question that was considered was whether assessment could be made on the trustees under section 3 apart from and without reference to section 21. The answer was seen to depend upon the true meaning and effect of sections 3 and 21 and the interrelation between them. Section 3 was the charging section and it levied the charge of wealth-tax on the net wealth of the assessee on the relevant valuation date. "Net wealth" was defined in section 2(m) to mean "the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on the valuation date". It was clear from this definition that any property, wherever located, "belonging to" the assessee on the relevant valuation date would be includible in the net wealth of the assessee assessable to wealth-tax. An argument was advanced on behalf of the trustees that assets held by a trustee in trust for others could not be said to be assets "belonging to" the trustee so as to be included in his net wealth. The assets so held were not the trustee's property in any real sense. They were the property of the beneficiaries and the beneficiaries were the true owners. The trustee could not, therefore, be assessed to wealth-tax in respect of the trust properties under section 3. It was for this reason, went the argument, that special provision had to be made in section 21 for assessing the trustee and hence assessment on the trustee could only be made in accordance with such special provision. Prima facie, this court observed, there seemed to be force in the argument but it was not thought necessary to express any final opinion since there was an alternative argument advanced on behalf of the assessee which left no room for doubt. For this purpose, it was assumed that the trustee of a trust could be assessable in respect of the trust properties under section 3 even in the absence of section 21. But section 3 imposed the charge of wealth-tax subject to the other provisions of the Act and these other provisions included section 21. Section 3 was, therefore, made expressly subject to section 21 and had to yield to that section in so far as the latter made special provision for the
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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. It had also to be noted that the assessment which was to be made on a trustee under section 21 was an assessment in a representative capacity. It was really the beneficiaries who were sought to be assessed in respect of their interest in the trust properties through the trustees. Section 21 provided that in respect of the trust properties held by a trustee, wealth-tax could be levied upon him in the like manner and to the same extent as it would be leviable on the beneficiary for whose benefit the trust properties were held. This provision could apply only where the trust properties were held by the trustee for the benefit of a single beneficiary or, where there were more beneficiaries than one, the individual shares of the beneficiaries in the trust properties were determinate and known. Where such was the case, wealth-tax could be levied on the trustee in respect of the interest of any particular beneficiary under the trust properties in the same manner and to the same extent as it would be leviable upon the beneficiary and in respect of such interest in the trust properties, the trustee would be assessed in a representative capacity as representing the beneficiary. This did not mean that the Revenue could not make a direct assessment on the beneficiary in respect of the interest in the trust properties which belonged to him. The
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beneficiary would always be assessable in respect of his interest in the trust properties, since such interest belonged to him and the right of the Revenue to make direct assessment on him in respect of such interest stood unimpaired by the provisions enabling assessment to be made on the trustee in a representative capacity. Sub-section (2) made this clear. What was important to note was that in either case what was taxed was the interest of the beneficiary in the trust properties. Where the beneficiaries were more than one and their shares were indeterminate or unknown, the trustee would be assessable in respect of their total interest in the trust properties. Obviously, in such a case, it was not possible to make direct assessment on the beneficiaries in respect of their interest in the trust properties, because their shares were indeterminate or unknown and that is why it was provided that the assessment could be made on the trustee as if the beneficiaries for whose benefit the trust properties were held were an individual. The 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.
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Thus we do not have any hesitation in upholding the order of the CIT (A) that the AO had the power to assess the assessee on the amounts received by him from the trust as a beneficiary therein.
Now the question that remains to be answered is whether the amount received by the assessee from the discretionary trust could be considered as his income u/s.56(2)(vi) of the Act. Section 56(2)(vi) of the Act, is reproduced hereunder :
56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head "Income from other sources", namely:-- (i).... (ii)... (iii).. (iv)... (v)... (vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006, @@but before the 1st day of October, 2009 the whole of the aggregate value of such sum : Provided that this clause shall not apply to any sum of money received (a) from any relative ; or(b) on the occasion of the marriage of the individual ; or(c) under a will or by way of inheritance ; or(d) in
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contemplation of death of the payer ; or(e) from any local authority as defined in the Explanation to clause (20) of section 10 ; or(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 ; or(g) from any trust or institution registered under section 12AA. Explanation For the purposes of this clause, "relative" means-
(i) spouse of the individual ; (ii) brother or sister of the individual ; (iii) brother or sister of the spouse of the individual ; (iv) brother or sister of either of the parents of the individual ; (v) any lineal ascendant or descendant of the individual ; (vi) any lineal ascendant or descendant of the spouse of the individual; (vii) spouse of the person referred to in clauses (ii) to (vi).
For bringing a sum of money to be taxable under the above section, it is required that the money should have been received by an assessee without consideration. The question before us is whether the money received by the assessee from thirteen trusts as a beneficiary could be considered as amounts received without consideration. In a trust, whether discretionary or otherwise, the trustees hold the property and income for the benefit of the beneficiaries. Hon’ble Apex Court in the case of Managing Trustees, Nagore Dargha (supra), has clearly held that the trustee or a receiver, managed the property for the benefit of others. Or in
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other words, the trust as such is not having a separate legal existence, but represents only its beneficiaries. Income of the trust is the income of the beneficiary. The trustees in a discretionary trust only have the power to decide when and how much money to distribute among the beneficiaries. This does not mean that they are the owners of the income. At this juncture, the judgment of Hon’ble Apex Court in the case of Managing Trustees, Natore Dargha (supra), is very pertinent. Their Lordships held as under at page 234 of their judgment : In general law the property does not vest in a receiver or manager but it vests in a trustee, but both trustees and receivers are included in section 41 of the Act. The common thread that posses through all of them is that they function legally or factually for others, they manage the property for the benefit of others. That the technical doctrine of vesting is not imported in the section is apparent from the fact that a trustee appointed under a trust deed is brought under the section though legally the property vests in him. In the case of a Muslim Wakf the property vests in the Almighty; even so the mutawallis are brought under the section. A reasonable interpretation of the section is that all the categories of persons mentioned therein are deemed to receive the income on behalf of another person or persons or manage the some for him or their benefit. None of them has any beneficial interest in the income; he collects the income for the benefits of others,
Thus what was received by the assessee as a beneficiary from the thirteen trusts were nothing but his own income in his status as a beneficiary of the said trust. What has flown from the trustee to the
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beneficiary is the income the trustee collected on behalf of the beneficiaries. That the character of income in the hands of the beneficiary remains the very same, is clear from the judgment of Hon’ble Apex Court in the case of Managing Trustees, Nagore Durgha (supra). Character of the income in thehands of the thirteen trusts were under the heads capital gains and / income from other sources. The nature of ‘income from other sources’ was dividends and interest and not the type of income falling u/s.56(2)(vi) of the Act. Once the character of the income in the hands of the beneficiary takes the same colour as that of the income in the hands of the trust, and once it is accepted that trust as such is not having a persona different or distinct from that of the beneficiary, it naturally flows that such income or receipt is not received without consideration. What is taxable u/s.56(2)(vi) of the Act, is receipt of money without consideration. We are therefore of the opinion that money received by the assessee from various trusts could not have been taxed u/s.56(2)(vi) of the Act. At best it could have been considered under the same heads in which the concerned trusts had received the income. Para 7.1 of the Written submissions filed by the assessee before us, reproduced hereunder, admits this position : “7.1 The appellant has established that the income received from the trust cannot be taxed under the head “Salaries”. The
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income in the hands of the appellant will have the same characteristics as that of the trust. Since the trust has been assessed under the head “capital gains” and income from other sources”, the amount received from the trust by the appellant should also be assessed under the same heads. The amount received by the appellant can be apportioned in the same ratio as such income bears to the total income of the Trust.” Accordingly we set aside the orders of the CIT (A) and remit the issue regarding appropriate classification of the income in the hands of the assessee and apportioning it in the same ratio as such income bears to the income of the various trusts under different heads, to the file of the AO. AO shall proceed after giving a due opportunity to the assessee.
Before leaving, it would be inappropriate if we do not deal with the claim of the assessee that credit for proportionate tax paid by the trust has to be given. What we find is that the thirteen trusts had filed its return of income voluntarily after paying tax. What was done was only a processing of such return u/s.143(1) of the Act. It is true that the amounts paid to the assessee by various trusts were out of the balances which remained after paying taxes. However, if the assessee feels that taxes paid by the trust were refundable since the taxes were assessed in the hands of the beneficiary, it can move the appropriate authority for getting the relief. In seeking such relief assessee can very well place reliance on the judgment of
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Hon’ble Apex Court in the case of Kewal Ram (supra). However, there is no enabling provision in law which would empower this Tribunal to direct the AO to give credit for taxes paid by the trusts, which had separately filed their returns.
In the result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the open court on 27th day of May, 2016.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN*
Copy to: 1. The assessee 2. The Assessing Officer 3. The Commissioner of Income-tax 4. Commissioner of Income-tax(A) 5. DR 6. GF, ITAT, Bangalore By Order
Assistant Registrar
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