1. This set of three appeals relate to the assessment years 1976-77 to 1978-79, which are filed by the assessee against the Order of the AAC.As all these appeals involve common grounds and contentions they are taken up together and disposed of by this combined Order for the sake of convenience. The controversy centres round the inclusion of income from interest earned on deposits made by the beneficiaries in the hands of the assessee-trust as indicated hereunder :Assessment year Interest Rs.1976-77 36,3801977-78 52,8001978-79 51,123 The assessee is a private discretionary trust created on 28-2-1958 by H.H. Maharaja Fatesinghrao Gaekwad of Baroda in favour, benefit and maintenance of the descendants of Maharaja Sayajirao Gaekwad of Baroda and born before the creation of the said trust. The trustees are empowered to apply the whole or accumulation of income for any year or years for the benefit and maintenance of the beneficiaries. Amongst the heirs of the settlor, the trust shall divide corpus of the trust funds together will all accumulation of income, if any, amongst the heirs of the settlor according to the law of intestate succession amongst the Hindus. During the relevant accounting years, the ITO noticed that the trust had advanced the undermentioned amounts to the beneficiaries who in their turn deposited the said amounts with private concerns and earned interest as indicated in the following table :--------------------------------------------------------------------Name of the Amount of Date of Where Interest earnedbeneficiary advance advance invested by beneficiary upto 31-31977--------------------------------------------------------------------Smt. Shanta- Rs. Gaekwad Rs.devi 2,00,000 4-7-1975 Investors 17,862 Rs Rs.devi 2,00,000 15-7-1975 Investors 17,128 ------------ The ITO observed that there was no provision in the trust deed for advancing the amounts free of interest to the beneficiaries. Therefore, it was clear that instead of trustees depositing the funds with their parties and earning the interest directly, the deposits of funds were made through the agency of the beneficiaries who had earned interest.
The interest earned on deposits, therefore, as made in the name of the beneficiaries was nothing but constructive receipt of interest by the trust. It could also be said that the beneficiaries were allowed to appropriate interest which was nothing more than the application of income of the trust. In this view of the matter, the ITO was of the view that the amount of interest as aforesaid was taxable in the hands of the beneficiaries. The ITO, therefore, called upon the assessee as to why the above amount of interest should not be included in the hands of the trust. The representative of the assessee objected to the inclusion of the said amount of interest in the hands of the trustees firstly, on the ground that the assessee-trust had not received any income on interest-free loans advanced to the beneficiaries, Secondly, as the interest free-advances were made to the beneficiaries, they were entitled to the benefit of the trust fund in terms of the trust deed of the assessee-trust. The income from interest was in fact and truth earned by the beneficiaries which was brought to tax in their individual assessments. Thirdly, the interest received by the beneficiaries as partners in the firm Gaekwad Investors has been disallowed in the firm's assessment as the said amount has been brought to tax in the hands of the firm and lastly, the said income which has already been brought to tax should not be again taxed in the hands of the trustee. The ITO rejected these contentions firstly, on the ground that there was constructive receipt of interest by the assessee.
Secondly, accordingly to the terms of the trust deed the beneficiaries were not entitled to the benefit of interest-free loans. All that they were entitled to was the income from the trust fund according to the discretion of the trustees. If the income was assessable in the hands of the trustees on the above footing, it was immaterial whether the beneficiaries have been taxed in respect of the same income. Lastly, the disallowance of interest was made only in case of one of the beneficiaries and, therefore, the argument in this regard was not tenable. In this view of the matter, the ITO brought to tax a sum of Rs. 36,380 (wrongly mentioned as Rs. 36,300 in the computation) in the hands of the assessee-trust for the assessment year 1976-77.
2. For the same reasons he brought to tax a sum of Rs. 52,800 for the assessment year 1977-78 and Rs. 51,123 for the year 1978-79, respectively in the hands of the trustees.
3. Being aggrieved the assessee carried the matter in appeal before the AAC. He observed that the amounts advanced to the beneficiaries were initially lying deposited with Gaekwad Investment Corpn. (P.) Co. Ltd. in which the Gaekwad family had control/substantial interest. These deposits were income yielding assets of the trust. The trust withdrew these interest bearing deposits from the said company and advanced the amounts free of interest to the beneficiaries who in turn deposited the amount with a firm styled Gaekwad Investors who in turn deposited the amount with the said company. Now the said company had paid interest on these deposits to the said firm who in turn paid interest to the beneficiaries. Thus, the beneficiaries earned interest for the respective years, as indicated above, on the interest-free advances made by the trust. Now the learned representative of the assessee reiterated the same contentions as were raised before the ITO and pointed out that the trustees had discretion to use the income or accumulated income for the benefit of the maintenance of the beneficiaries. Secondly, the trustees had discretion to alienate and reinvest the profits in the manner indicated in the trust deed.
However, there was no bar in making investments in the manner other than what was indicated in the trust deed. The trustees had full discretion to employ the funds of the trust in the manner they liked and lastly, it was not open to the ITO to indicate the method and manner in which the trust funds should he employed. In any case, the burden was on the ITO to establish that the income earned by the beneficiaries was in fact and truth earned by the trustees. The ITO who was present before the AAC, on the other hand, contended that the trustees had made an arrangement by which they transferred income without transfer of source in favour of the beneficiaries. In other words, the trustees had kept the control over the asset while they had parted with the income therefrom as a result of which the provisions of Section 60 of the Income-tax Act, 1961 ('the Act') would clearly come into play. That apart the provisions of Section 60 were wide enough to cover any arrangement made for transfer of income without transfer of source of income or assets. The AAC after considering the above submissions observed that there was no dispute that the amounts as they were advanced by the assessee-trust to the beneficiaries formed a part of the corpus of the trust deed. It was also not in dispute that the amounts in question were deposited initially with Gaekwad Investment Corpn. (P.) Co. Ltd. from which the trust used to earn income from interest. The trustees had made an arrangement, the AAC observed, Under which the income which could have been earned by the trustees was sought to be transferred in favour of the beneficiaries who were shown as the recipient of income. Such a transfer of income without transfer of source of income was clearly hit by provisions of Section 60. That apart the trustees had tried to divert the income which could have been legitimately earned by them. That apart the trustees were not authorised to make such interest-free advances in favour of the beneficiaries. It is true that the ITO could not step in the shoes of trustees. All the same, it was open to the ITO to bring to tax the income in the hands of the trustees if the provisions of the statute empowered him to do so. In this view of the matter, therefore, the AAC rejected the contentions as raised on behalf of the assessee and upheld the decision of the ITO to bring to tax the income from interest as aforesaid for all the years under appeal.
4. Being aggrieved the assessee has come up in appeal before us. Shri Patel, the learned counsel for the assessee, contended that the assessee is admittedly a discretionary trust. He next pointed out that the revenue has tried to tax the income from interest in the hands of the assessee-trust firstly, on the ground that there was a constructive receipt in the hands of the trust. Secondly, that the trust has advanced the amount free of interest to the beneficiaries with the object of avoiding the tax liability and lastly, that the trustees had no authority to make such advances free of interest. Taking the last ground first, Shri Patel submitted that the advances free of interest were made as a mode of trust management and there was discretion in the hands of the trustees to employ the funds of the trust in the manner they liked. Now so far as the first point is concerned Shri Patel's submission was that there was no question of constructive receipt because the amount in question was never received by the trustees in their own right. The concept of constructive receipt postulates receipt of money on behalf of the assessee by some person other than the assessee. Therefore, though the amount was ostensibly received by another person, in law such receipt could be said to have been constructively received by the assessee. This was not the case in the present proceedings. The trustees had admittedly advanced the money free of interest, therefore, they had no right to receive any interest on advances made to beneficiaries. In other words, the beneficiaries had employed the funds received from trustees in their own right and had earned the income which belong to them and not to trustees. As regards the second point Shri Patel's submission was that provisions of Section 60 cast a vicarious liability on the trustees and, therefore, the provisions of Section 60 have to be strictly construed. In this connection he relied on the decision of the Supreme Court in the case of CIT v. Prem Bhai Parekh  77 ITR 27. He pointed out that the object of the above transaction was to avoid tax liability has not been proved. There was no nexus established and the burden which lay heavily on the department has not been discharged. In fact, the interest paid to the beneficiaries has been disallowed in the hands of the firm in which they had made capital contribution out of tax free loan Under provisions of Section 40(b) of the Act. The beneficiaries were assessed on the income that they had received from the firm and there was no question of making any double assessment in respect of the same amount.
The learned departmental representative, on the other hand, relying on the Orders of the authorities below pointed out that the assessee's case squarely fell within the mischief of Section 60. The said Section deals with cases where there is transfer of income without transfer of assets. In other words, when an assessee transfers its right to receive income without parting with or transferring the assets, by operation of Section 60, such income could be said to be deemed to arise to the transferor. In fact the scope of Section 60 was sufficiently wide. It takes into its sweep not only any settlement trust or covenant or agreement but also covers arrangement. This is amply clear if we look at the definition of expression 'transfer' as laid down in Section 63 of the Act. The facts of the case show that by an arrangement the trustees had advanced tax free loans to the beneficiaries who in turn had earned interest on such interest-free advance. Since the trustees had not parted with the right over the amount so advanced inasmuch as they had claimed the debt as a deduction in their wealth-tax assessments. This was a clear case of transfer of income without transfer of assets. In fact, the assessee had adopted a device by which it had alienated its income without transfer of source. It is true that provisions of Section 60 have to be strictly construed at the same time the fiction set out in Section 60 has to be given full effect to. The purpose of Section 60 was to disregard the transfer of income without transfer of source and to treat the income so arising as income of the transferor. In this view of the matter, therefore, this was a clear case of application of Section 60. The fact that the beneficiaries were assessed on the same income is of no consequence as the provisions of the statute have to be given effect to and the remedy, if any, would lie elsewhere in case the same amount is sought to be assessed twice over. There was another aspect of the matter, the learned departmental representative argued, that the trustees had no authority to make such an advance and, therefore, the income which is said to have arisen to the beneficiaries has to be treated as income of the trustees. In the above view of the matter, therefore, the decisions of the authorities below did not call for any interference.
5. We have carefully considered the rival submissions. Three points arise for our consideration. Firstly, whether the income from interest could be said to have been constructively received by the trustees.
Secondly, whether the trustees were empowered to make such interest-free advances and lastly, whether the provisions of Section 60 would come into play. Now so far as the first point is concerned, it may be stated that Section 5 of the Act brings to charge all income from whatever source derived which is received or deemed to be received in India in a previous year by or on behalf of the assessee. The scope of deemed income is limited to statutory income or the income which is so treated by operation of the Act-Keshav Mills Ltd. v. CIT  23 ITR 230 (SC). The receipts other than the deemed receipt fall into two categories (a) actual receipt and (b) constructive receipt. The concept of actual receipt does not require any elucidation. The scope of constructive receipt covers such receipts which are not actually received by an assessee but received by some other person on behalf of the assessee. But the material test is whether the assessee has a domain over the receipt. The instances of constructive receipts relate to the receipt by the agent of the assessee or under the authority of the assessee. But all the same the title or property qua such receipt rest with the assessee. Such a constructive receipt is includible in the hands of an assessee. Now the facts of the present case show that the assessee-trust had made certain interest-free advances to the beneficiaries. There was, therefore, no stipulation to receive any interest on the advances so made. The fact that the beneficiaries have utilised the advances for earning income from interest would not entitle the trustees to have a claim over such income from interest because as pointed out earlier there was no stipulation to receive any interest on the advances when they were so made to the beneficiaries.
In other words, the beneficiaries received interest on the advances which were made by the trustees in their own right and the trustees could not be said to have exercised any domain over the income from interest. The beneficiaries are not the agents of trustees and they cannot, therefore, be said to have earned income on behalf of the trustees. In other words, the beneficiaries could not be said to have been any receipt of any income which in general law would belong to the trustees. The principle of constructive receipt has been erroneously applied in the instant case, therefore, the revenue authorities were not justified in including the income from interest in the hands of the trustees on the above footing.
6. Now we turn to the material point which arises in this appeal and which relates to the applicability of Section 60. The said Section reads as follows All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income.
The scope of the above Section had come up for consideration before their Lordships of the Delhi High Court in the case of CIT v. Dr.
Rameshwar Lal Pahwa  123 ITR 681. Their Lordships have explained the scope of the above Section as follows : This section is merely declaratory of a principle which is well-settled under the income-tax law, namely, that profits on their coming into existence attract tax at that point and that the revenue is not concerned with the subsequent application of the profits. If a person has alienated or assigned the source of his income so that the source no longer belongs to him, he would not be liable to be taxed upon the income arising from that source thereafter unless some special statutory provisions such as Sections 61 to 64 are attracted. There may also be cases in which a person receives income in such circumstances that though he appears to be the owner of income and receives it, it cannot be really construed to be his income at all. These are what may be described as cases where income is divested by overriding title at the very point of accrual. But apart from these cases, where a person is entitled to receive certain income, the mere fact that he is constrained to apply it in a particular manner either under a statute or under certain contracts would not affect his liability to tax. This is expressed by saying that application or destination of profits or a charge which has been made on them by previous agreement or otherwise is immaterial for the purpose of taxation. The purpose for which such application is effected is also of no relevance. In all such cases of application of income the original recipient would continue to be liable in respect of the entire income which accrues to him.
The above principle has been statutorily enacted in Section 60 of the Act. This section provides that where an assessee purports to transfer income arising to him (but not the source of it) in such a way that under the instrument of transfer the income no longer arises to him or is received by him, such an arrangement is to be ignored for purposes of taxation. Though under the arrangement or transfer made by the assessee the income may in law arise to another person, it will be treated as continuing to arise to the transferor himself. A transfer of income alone without there being a transfer of the source of that income is a mere application of profits....(pp.678-88) This section deals with transfer of income without transfer of source of income. The above section would come into play when an assessee who is entitled to receive certain income purports to transfer such income without transfer of source then by fiction enacted in the said section such income is treated as income of the transferor. The material point for application of Section 60 is whether the assessee who is the owner of source of income is entitled to receive income therefrom. If there is no right to receive any income from the source then Section 60 would not come into play. To put it differently if an assessee transfers income which could have legitimately accrued to him to another person while retaining the source of it, viz., the asset from which such income accrues then Section 60 would become operative. However, the facts of the case show that the trustees had made interest-free advances, therefore, they were not entitled to receive any interest on the advances so made. The beneficiaries had received the loans interest-free as such it is the employment of funds by the beneficiaries which has resulted in accrual or receipt of income. Such income, therefore, accrued or received by the beneficiaries in their own right. Since there was no stipulation on the part of the beneficiaries to account for such income to the trustees and as such trustees were not entitled to receive any income from the loans so advanced. There is no question of applicability of Section 60. As rightly pointed out, the provisions of Section 60 though wide in scope cast a vicarious liability and, therefore, they have to be strictly construed. The source of income must be proximate and must form part of the same transaction. However, the facts of the case show that the trustees had initially deposited certain funds with the limited company on which interest was received from time to time. The trustees withdrew these deposits and granted interest-free advances to the beneficiaries who in turn invested the same either as capital or as deposit with another firm(s) and the firm(s) in turn made investment with the limited company. The interest on deposits so made with the limited company had accrued to the firm. It is out of that income interest was paid by the firm to the beneficiaries on their capital or deposits. The interest, therefore, was earned by the beneficiaries by employment of the funds obtained interest-free and, therefore, they had earned income from interest on capital or deposit in their own right and the income from interest, therefore, clearly accrued or was received by the beneficiaries. Fundamental principles of receipt of income is that the receipt must be considered at the first stage at which it is so received. Therefore, the test is to see as to who was in receipt of income from interest from the firm and the answer would clearly show that the beneficiaries had received the income from the interest. Now if by operation of law that is to say by application of Section 60 such income would be deemed to be received by the transferor, that is the trustees, then only the trustees could be made liable to pay tax thereon. But as pointed out earlier there was no obligation on the part of the beneficiaries to make any payment of interest to the trustees nor there was any stipulation attached to the advances that interest would accrue or would be received on such advances by the trustees.
There is no nexus between the advances made to the beneficiaries and their employment of the funds by the beneficiaries which resulted in earning of income. The concept of application of income postulates that income must accrue or must be received by the person who applies it in a particular manner. When the income so accrues to the transferor by operation of Section 60, his liability to tax remains unaffected. But when there is no accrual or receipt of income by the trustees the question of application of income does not arise at all. If this much is clear then we have no hesitation in coming to the conclusion that provisions of Section 60 cannot be invoked on the facts of the case.
The inclusion of income in the hands of the trustees on the above basis is clearly unsustainable, in our opinion.
7. It was also submitted before us that the trustees had no authority to make the above advances to the beneficiaries. Now if this submission is considered in the light in which it is made then provisions of Section 60 would not apply at all. Since the said provisions would apply to a valid transfer of income. Now if the trustees had no authority to make such advances and if it is so assumed even then we fail to see how the income from such advances could be said to be accrued to the trustees. This submission, therefore, does not advance the case of the revenue any further.
8. In light of the above discussion, therefore, we come to the conclusion that the inclusion of income from interest in the hands of the trustees for all the years under appeal was not justified. We, accordingly, delete the same. In the result, the appeals are allowed.