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Commissioner of Income-tax Vs. Karelal Kundanlal Trust - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case Nos. 409, 414 and 415 of 1974 and 3 of 1981
Judge
Reported in[1984]148ITR412(MP)
ActsIncome Tax Act, 1961 - Sections 160, 160(1), 161, and 161(2)
AppellantCommissioner of Income-tax
RespondentKarelal Kundanlal Trust
Appellant AdvocateB.K. Rawat, Adv.
Respondent AdvocateM.M. Sapre and ;Y.S. Dharamadhikari, Advs.
Excerpt:
.....(vi of 1913), receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees '7. it is in this context that the term 'representative assessee 'has to be understood in sub-section (1) of section 161, which reads as under :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 it has been further provided that such assessment..........in the status of an association of persons (aop). it was pleaded before the ito that, in a trust, the trustees were bound to fulfil the purpose of the trust and to obey the directions of the author of the trust given at the time of its creation.3. on appeal before the aac, a similar contention was advanced by the trustees and the aac repelled the contention and maintained the order passed by the ito. the assessee preferred an appeal before the tribunal and the tribunal accepted the appeal and came to the conclusion that the assessment on the trustees could not be made as on ' an association of persons ', but could only be made as on a representative assessee representing the share of the beneficiary. the tribunal, therefore, held that the trustees could only be assessed as a.....
Judgment:

G.L. Oza, J.

1. This reference has been made by the Income-tax Appellate Tribunal, Jabalpur, in accordance with the orders of this court in M.C.C. Nos. 409/74, 414/74 and 415/74 pertaining to assessments for different years and the common question which has been referred for our answer is as under :

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment of this trust as an AOP was misconceived and unsustainable in law and in setting aside the assessment with a direction to make separate assessment on the managing trustee under Section 161(1) of the Income-tax Act in respect of the income of the share of each of the three beneficiaries on the basis of three returns filed '

2. The facts are that for three assessment years under consideration, the ITO assessed Karelal Kundanlal Trust in the status of an AOP (association of persons). According to the ITO, the settlor executed a trust deed on October 24, 1950, conveying certain movable and immovable properties to the trustees named therein. The ITO, therefore, made the assessment in the hands of the trustees to whom the properties had been conveyed in the status of an association of persons (AOP). It was pleaded before the ITO that, in a trust, the trustees were bound to fulfil the purpose of the trust and to obey the directions of the author of the trust given at the time of its creation.

3. On appeal before the AAC, a similar contention was advanced by the trustees and the AAC repelled the contention and maintained the order passed by the ITO. The assessee preferred an appeal before the Tribunal and the Tribunal accepted the appeal and came to the conclusion that the assessment on the trustees could not be made as on ' an association of persons ', but could only be made as on a representative assessee representing the share of the beneficiary. The Tribunal, therefore, held that the trustees could only be assessed as a representative assessee under Section 161(1) of the I.T. Act in respect of the income, i.e., 1/3rd share of each of the three beneficiaries. Against this judgment of the Tribunal, the Department presented an application to this court under Section 256(2) of the I.T. Act, 1961, and this court directed the Tribunal to make a reference and, hence, this reference has been made by the Tribunal for answering the question quoted above.

4. Learned counsel appearing for the Department contended that the law on the subject has been stated in Kanga and Palkhivala's Law and Practice of Income-tax, seventh edn., vol. I, at p. 947, wherein it has been observedthat the Department has the option to make an assessment on the representative assessee or a direct assessment on the person beneficially entitled to the income. It was contended that thus the ITO and the AAC were right in assessing the trustees as an association of persons and the view taken by the Appellate Tribunal was not justified in law. Learned counsel for the Department placed reliance on CIT v. Smt. Kamalini Khatau : [1978]112ITR652(Guj) .

5. Learned counsel for the assessee, on the other hand, contended that Section 161 of the I.T. Act, 1961, provides for assessment in a representative capacity and what is a representative assessee, has been defined in Section 160(1)(iv). It was contended that the note put by the learned author in Kanga and Palkhivala's Income-tax Act about the Department's option only means that the Department has the option either to assess the representative assessee or a direct assessment on the person who is beneficially entitled to the income. It was, therefore, contended that it does not mean that the Department can assess the trustees individually and, as they are more than one, they could be treated as an association of persons as was done in this case by the ITO and maintained by the AAC. Learned counsel relied on a decision reported in CIT v. V. S, Kumaraswami Reddiar Trust : [1982]138ITR808(Ker) , where the question has been considered in detail. He also placed reliance on the decision in C.R. Nagappa v. CIT : [1969]73ITR626(SC) , where their Lordships of the Supreme Court have considered Section 161 of the I.T. Act, 1961. It was, therefore, contended that the Tribunal was right in setting aside the assessment of the trustees as an association of persons.

6. Section 160(1) of the I.T. Act, defines 'Representative assessee' and in respect of a trust, Clause (iv) of this section is material, which reads as under:

' (iv) 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 '.

7. It is in this context that the term 'representative assessee ' has to be understood in Sub-section (1) of Section 161, which reads as under :

' 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 containedin 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'.

8. It clearly lays down that in regard to income in respect of which he is a representative assessee, he will be subject to the same duties, responsibilities and liabilities as if the income were the income received by or accruing to or in favour of him beneficially and, therefore, he shall be liable to assessment in his own name in respect of that income. It has been further provided that such assessment shall be deemed to be made upon him in his representative capacity only and the tax shall, subject to other provisions contained in this Chapter, be levied upon and recovered from him in the like manner and to the same extent as it would be leviable and recoverable from the person represented by him.

9. It is, therefore, clear that on a reading the definition of ' representative assessee ' in Clause (iv) of Section 160(1), it is clear that the trustee could be assessed in respect of the income which is meant for the beneficiary whom he represents. It is also clear that the extent of the tax liability would be the same as could be levied upon and recovered from a person represented by him and in the case of a trust, it will mean the beneficiary.

10. If in the context of the language of Section 160(1)(iv) and Section 161, the note on which reliance has been placed by the learned counsel for the Department is read, it does not mean what was suggested. The note on which reliance is placed is in these terms :

'Sections 160 and 161 are enabling sections. Department's option is to assess representative assessee or person beneficially entitled to income. Section 166 makes it clear that Sections 160 and 161 are enabling sections, i.e., the Department has the option to make an assessment on the representative assessee or a direct assessment on the person beneficially entitled to the income......'.

' It is, therefore, clear that either the assessment should be made on the representative assessee, i.e., a trustee, or directly on the beneficiary, but it is clear that it could only be with regard to the income to which the beneficiary is entitled and the liability will only be to that extent. Under these circumstances, this note could not be used to justify an assessment on the trustees in their personal capacity and as they are more than one, assess them as an association of persons.

11. Section 166 of the Act also makes the position further clear. It is as under:

' 166. Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whosebenefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income '.

12. It only says that nothing in the foregoing sections, i.e. Sections 160 and 161, shall prevent either the direct assessment of the person on whose behalf, or for whose benefit, income therein is referred to is receivable or the recovery from such person of the tax payable in respect of such income. This section starts with the heading 'Representative assessee Miscellaneous provisions'. This, therefore, only provides that an assessment could be made either on the trustee as a representative assessee, as contemplated under Section 161, or directly on the beneficiary who is entitled to the income as indicated in the trust. Under these circumstances, therefore, the observation made by the author could not lead to the inference which, it appears, that the learned ITO and the AAC tried to draw. There is no option on the Department in the case of a representative assessee to assess the representative personally. He could only be assessed as a representative assessee or the assessment could be made on the beneficiary directly.

13. In C.R. Nagappa v. CIT : [1969]73ITR626(SC) , Section 161 of the I.T. Act has been considered by their Lordships of the Supreme Court and it was observed as under (p. 629) :

'It is implicit in the terms of Sub-section (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 which states ;

' 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'.'

14. This question was also considered in detail by the Kerala High Court in CIT v. V.S. Kumaraswamy Reddiar Trust : [1982]138ITR808(Ker) and it was observed as under (p. 813-814):

'The further contention that even if a valid trust is posited the assessee was liable to be assessed as an association of persons was also pressed before us. Passages from p. 949 of the 7th edn. of Kanga and Palkhivala on Income-tax were relied on by counsel for the Department. These passages are based on the decisions in Hotz Trust of Simla v. CJT [1930] 5 ITC 8 and J. V. Saldhana v. CIT [1932] 6 ITC 114. The two decisions themselves had been referred to and considered both by the AAC and the Tribunal. The subsequent development in the case law as also statutory developments, which ultimately led to the enactment of the new provision, Section 161(2), had been referred to by these taxing authorities.

The decisions in Hotz Trust of Simla, v. CIT [1930] 5 ITC 8 (Lah) and J. V. Saldhana v. CIT [1932] 6 ITC 114 (Mad) [FB], do not have any direct bearing on the question referred in this case. The correct principles to be applied in the case of an assessment of income in the hands of a representative assessee, had been considered by the Bombay High Court, while interpreting the analogous provisions of Sections 40 and 41 of the Indian I.T. Act, 1922, in CIT v. Balwantrai Jethalal Vaidya : [1958]34ITR187(Bom) . After referring to the observations made by that court in its earlier judgment in Saifudin Alimohamed v. CIT : [1954]25ITR237(Bom) , which, in turn, referred to the decisions in Hotz Trust of Simla v. CIT [1930] 5 ITC 8 (Lah) and J. V. Saldhana v. CIT [1932] 6 ITC 114 (Mad), the Bombay High Court declared that ' it is no longer open to the Department to levy a tax on a trustee in the same way as on an assessee who does not fulfil the character of a trustee'. That court further held that if the income is received by a representative assessee as defined in Section 160 of the Act, the Department is obliged to effect the assessment under Section 161(1) of the Act. The position of law as clarified in Balwantrai Jethalal Vaidya's case : [1958]34ITR187(Bom) , has been given statutory acceptance in the light of the recommendation of the Law Commission in its 12th Report and has been specifically approved by the Supreme Court as laying down the correct law. A combined reading of Sections 160 and 161 clearly establishes the position that a representative assessee is to be assessed only under s. 161(2) of the Act. This legal position is now well settled in the light of the pronouncements of the Supreme Court while interpreting the corresponding provisions--section 41 of the Indian I.T. Act, 1922 ; (vide CIT v. Nandlal Agarwal : [1966]59ITR758(SC) and C. R. Nagappa v. CIT : [1969]73ITR626(SC) , as also the analogous section (Section 21) of the W.T. Act: (vide CWT v. Trustees of Nizam's Family (Remainder Wealth) Trust : [1977]108ITR555(SC) ). The Tribunal having found that the assessee herein does satisfy the requirements of a representative assessee and the said finding having been affirmed by us in the earlier part of this judgment, we are clearly of the view that the assessment could only be one under Section 161(1) of the Act.'

15. It is, therefore, clear that the contention advanced by the learned counsel for the Department cannot be accepted. The Tribunal was right in setting aside the assessment made by the ITO and maintained by the AAC. Our answer to the question, therefore, is in the affirmative and the Tribunal was justified in holding that the assessment of this trust as anAOP was misconceived and unsustainable in law. This reference was madeas the same question arose for the assessment years 1963-64, 1964-65 and1965-66 out of which the three Misc. Civil Cases referred to in para. 1 ofthis judgment were filed in this court. Consequently, our answer to thequestion stated above shall govern the assessment for all these three years.In the circumstances of the case, parties are directed to bear their owncosts.


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