Narayana Pai, J.
1. In this reference under section 256(1) of the Income-tax Act, 1961, relating to the assessment of the income of C. R. Nagappa of Bangalore for the assessment year 1962-63, the facts which from the basis for the questions referred are briefly the following :
The assessee, C. R. Nagappa, who owned several immovable properties in Banagalore, executed on 14th April, 1955, seven trust deeds for the benefit of his children, one each for the benefit of his six minor sons, and one for the benefit of his one unmarried daughter. Specific immovable properties were transferred upon trust to four trustees, viz., the two wives, one married daughter of the assessee and the assessee himself. Of these, the assessee was to be the managing trustee. Under the terms of the trust deeds, only a portion of the income arising out of the trust property was to be utilised immediately for the benefit of the beneficiaries and the balance accumulated for their benefit to be handed over to them at a future date specified in the deeds.
In connection with Nagappa's assessments for the years 1956-57 to 1958-59, questions arose as to whether and, if so, how much of the income arising out of trust property should be added to the assessable income of the assessee. The matter ultimately came up before this court on a reference under section 66 (1) of the Indian Income-tax Act, 1922, which governed those assessments. In its answer made on 13th August, 1962, to the question then referred, this court held that the situation was governed by section 16 (3) (b) of the Indian Income-tax Act, 1922, and that on proper application of the said provision, only so much of the income arising out of the trust property as was utilised for the benefit of the beneficiaries could be added to the assessable income of the assessee. One of the questions then referred was whether section 41 of the Act of 1922 was a bar to the inclusion of the trust income in the total assessable income of the assessee. That question was answered in the negative. But while dealing with it, this court referred to the opinion expressed by it an earlier reference (I. T. R. C. 11 of 1960 to the effect that the expression 'on behalf of' occurring in section 41 of the Act of 1922, must be given the same meaning and effect as the expression 'for the benefit of' occurring in section 16 (3) (b) and observed as follows :
'If our interpretation of section 41 (1) in I. T. R. C. 11/60 is the correct interpretation, then the present case must definitely come within section 16 (3) (b) as well as within section 41. But as between the two, the former provision being a special provision, it should prevail over the latter. Section 41 (1) covers all trusts, whereas section 16 (3) (b) covers only trusts wherein the beneficiaries are the wife or the minor children of the settlor.'
2. In dealing with the assessment for the year now under reference (1962-63), the Income-tax Officer applied the above decision of this court and added the trust income used for the immediate benefit of the beneficiaries to the assessable income of the assessee and assessed the remaining income directed to be accumulated as income assessable in the hands of the beneficiaries. But while doing so, he appears to have overlooked the fact that the Income-tax Act of 1961, which governed the assessment, had made a definite change while re-enacting the provisions of section 16 (3) (b) of the 1922 Act in section 64 (v) of the 1961 Act. The new provision, section 64 (v) of the 1961 Act, made it clear that the income arising out of transferred assets to be included in the total income from such transferred assets is for the immediate or deferred benefit of his spouse or minor children (not being a married daughter) or both. In view of this obvious mistake, the Commissioner of Income-tax, acting under section 263 of the Act of 1961, cancelled the assessment and directed the Income-tax Officer to make a fresh assessment by including in the total income of the assessee the deferred benefit accruing to the beneficiaries under the relevant trusts.
3. The assessee thereupon appealed to the Income-tax Tribunal and contended that the new Act of 1961, has taken away the effect of the decision of this court in the previous reference not only in respect of the extent to which the income arising out of transferred assets could be added to the total income of the settlor but also in respect of the relative field of operation of sections 16 (3) (b) and 41 of the 1922 Act, now replaced by sections 64(v) and 161 of 1961 Act. As to the former, we have already indicated the difference. The difference pointed out as to the latter is the following :
'The main provisions of sub-section (1) of section 41 of the 1922 Act are re-enacted in sub-section (1) of section 161 of new Act, with the difference that, instead of enumerating various persons in the position of trustees, receivers, managers, etc., the new Act uses the compendious expression 'representative assessee' and defines it separately in another section 160. In actual effect, there is no difference between the first sub-section of old and new section. But whereas sub-section (2) of old section 41 stated that nothing in the first sub-section would prevent direct assessment of income in the hands of the person on whose behalf the same hand been received by the representative assessee or the recovery of the tax directly from such person, the second sub-section of the new section 161 is slightly differently worded.' We give below the full text of both the sub-sections of the new section 161 :
'161. (1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.
(2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee he shall not, in respect of that income, be assessed under any other provision of this Act.'
4. The argument based on the language of this section was that whereas this court in the previous reference has stated that section 16 (3) (b) would prevail over section 41 of the old Act, the position as under sub-section (2) of the new section 161 would be exactly the reverse.
5. The contentions of the assessee were rejected by the Appellate Tribunal and, at his instance, the Tribunal has now referred to this court the following two questions of law :
'(i) Whether, having regard to the provisions of sub-section (2) of section 161, section 64(v) of the Income-tax Act was applicable to the assessee's case for computing the assessee's case for computing the assessee's income for the assessment year 1962-63
(ii) Whether the assessments on the minor beneficiaries for the assessment year 1962-63 are a bar for assessing the income assessed in the hands of the minor beneficiaries, in the hands of the assessee for the same assessment year 1962-63 ?'
6. It will be seen that the first question fully states the contention on behalf of the assessee. The second question is really consequential on the first question, because it is only if the assessee succeeds in showing that sub-section (2) of section 161 makes it impossible to assessee the trust income in the hands of the settlor as part of his assessable income, it will be possible for him to urge that the completed assessments in respect of the income of the beneficiaries themselves would operate as a bar to the department invoking section 64(v) against the assessee, settlor.
7. The arguments in support of the assessee's case, both before the Tribunal as well as before us, are based largely, if not exclusively, on the opinion expressed by this court in the previous reference. It is not denied, nor can it be, that the direct decision rendered by this court on the last occasion was, however, that the trust being in favour of the minor sons and unmarried daughter of the settlor came directly within the language of section 16 (3) (b) of the 1922 Act. But what is relied upon is that the further opinion expressed by this court that section 16 (3) (b), being a special provision would exclude the operation of the general provisions contained in section 41 must be regarded as one of the basic considerations in support of the view that the situation is governed by section 16 (3) (b).
8. Although the argument is possible, we are not persuaded either that the main decision of this court to apply section 16 (3) (b) of the 1922 Act is not possible of support on the language of section 16 (3) (b) alone or that the possibility of section 41 of the old Act also applying to the situation would have led to a different conclusion.
9. For the view that section 16 (3) (b) is a special provision whereas section 41 is a general provision, the reason stated was that, whereas section 41 covered trusts of every description, section 16 (3) (b) was limited to trusts under which the beneficiaries were the spouse or minor children of the author of the trust.
10. Now section 41 enables an assessment being made on a trustee in respect of income, the beneficial interest in which belongs, not to him, but to the beneficiary under the trust. In actual event, therefore, what is assessed is not the income of the trustee but the income of the beneficiary. Such an assessment of a trustee, according to section 41 (1), could be made only in the like manner and to the same amount as would be leviable upon and recoverable from the beneficiary and all the provisions of the Act were to apply accordingly. Where, however, according to any of the provisions of the Act, a certain item of income, the beneficial interest in which belongs to the beneficiary, is not open to assessment in the hands of the beneficiary as income belonging to him and liable to tax in his hands, the said item could not have been assessed in the hands of the trustee under section 41. The position would be the same if an item of income apparently or actually that of the beneficiary is treated by some provision of the Act as income of another person assessable to tax in the hands of that other person; such was the position under section 16 (3) (b) which stated that though under the trust a certain item of income belongs to the beneficiary, the said item shall be treated as income of the settlor. Obviously, an item of income cannot belong exclusively to two different persons simultaneously. That, in our view, is the underlying reason for the expression of opinion in the previous reference that section 16 (3) (b) is a special provision which excludes the operation of the general provision of section 41. It may also be regarded as special because it is included in that part of the scheme of taxation under the Act, which deals with the basic questions of liability to tax and the ascertainment of taxable income, whereas section 41 belongs to the machinery part and is in the nature of an enabling provision. That is how the last opinion expressed by this court should be understood.
11. The character of old section 41 and the present section 161 as an enabling provision is also, in our opinion, a circumstance which furnishes the key to the proper understanding thereof. Ordinarily, under the Act, income is assessed in the hands of the person who receives it. A person may receive income either for his own beneficial enjoyment or for the beneficial enjoyment of someone else. But in majority of cases, a receipt of income is generally for one's own beneficial enjoyment. Income-tax is a tax which is paid out of the income and forms part of the income. Hence, its ultimate effect should be a burden borne by the person to whom the income belongs. When there are, therefore, two persons connected with the same income, one receiving it and the other actually enjoying it, section 41 of the old Act and section 161 of the new Act enable both of them to be treated as assessee for purpose of assessment and recovery of tax, but make it clear that the liability to tax and extent of the tax is to be ascertained on the footing that the income belongs to the person who has the beneficial interest in it.
12. At all times, even before the enactment of the 1961 Act, what the section was regarded as enabling the department to do was to choose either the trustee or the beneficiary as the assessee; but it did not permit an assessment on the trustee except in the manner and to the extent it was possible as against the beneficiary. The mandate of the section, therefore, was that the liability or the extent of the liability of the beneficiary, who is the real person liable, could not have been varied or enhanced by treating the income as part of the income of the trustee alone. For example, if there are several beneficiaries with distinct and different shares in the income collected by a single trustee, the liability of each one of them could not be enhanced by treating the entire income of all the beneficiaries as that of a single individual, the trustee, nor could an exemption or a lower rate available to a beneficiary have been denied to him if such an exemption or a lower rate was not available to the trustee, if the trustee himself should be regarded as the assessee in his individual capacity distinct from his representative capacity.
13. The present sub-section (2) of section 161 does not, in our opinion, do any more than state in clear terms the position as above and remove the possibility of any doubt being entertained in that regard.
14. We might add that the need for such clarification perhaps arose in view of certain expressions of opinion by the Bombay High Court in Saifuddin Alimohamed v. Commissioner of Income-tax, later explained away by the same High Court in Commissioner of Income-tax v. Balwantrai Jethalal Vaidya. The observations in Saifuddin's case were also applied to business income in the hands of a trustee by the Madras High Court in the case of Ramaswamy Iyengar v. Commissioner of Income-tax. These doubts have now been removed by the clear language of sub-section (2) of section 161 of the 1961 Act, and the original mandate contained in old section 41 reiterated.
15. In view of the foregoing discussion, our answer to the first question should be against the assessee.
16. As this answer would mean that section 64(v) was properly applied to the case of the assessee and that sub-section (2) of section 161 would make no difference whatever, the assessments on the minors or more accurately on the assessee as trustee and therefore representative assessee on their behalf under section 161 cannot operate as a bar to the inclusion of the trust income in the personal assessment of the assessee under section 64(v).
17. There is, however, one matter of which we should make a record. The result of our opinion mentioned above is that the entire trust income could be assessed as part of the income or an addition to the income of the assessee, C. R. Nagappa, himself under section 64(v). Hence, it is not available for assessment in the hands of the beneficiaries, nor could it be included in the assessment of the said Nagappa as their representative assessee. The assessments actually made, therefore, on the minors by the Income-tax Officer would be wrong and illegal. In the circumstance, the proper thing for the Commissioner of Income-tax to have done while acting under section 263 was to have cancelled those assessments while directing the reassessment of Nagappa by inclusion of the trust income in his total income. This is now conceded by the learned, it was stated that the assessments on the minors were allowed to stand as a protective assessment against the possibility of the Appellate Tribunal taking a view different from the one taken by the Commissioner. The appellate order of the Tribunal contains a statement to the effect that recovery of tax would not be made on account of the minors. It is now stated before us that recoveries have in fact since been made. The counsel on behalf of the Commissioner now states that steps will be taken to annual the assessments on the minors and to refund the tax, if any, recovered. We make a record of this undertaking.
18. Our answers to the questions referred are the following :
(1) Section 64(v) of the Income-tax Act, 1961, was rightly applied to the assessee's case for computing his income for the assessment year 1962-63. Sub-section (2) of section 161 of the Act does not make section 64(v) inapplicable to the case of the assessee.
(2) The assessments on the minor beneficiaries for the assessment year 1962-63, though in themselves illegal in view of the above answer do not in law operate as a bar for the application of section 64(v) to the case of the assessee, the illegality of the assessments on the minors being open to correction otherwise.