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Trustees of Anandani Family Trust Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Nagpur
Decided On
Judge
Reported in(1984)9ITD174(Nag.)
AppellantTrustees of Anandani Family Trust
Respondentincome-tax Officer
Excerpt:
1. these appeals of the assessee relate to the assessment years 1981-82 and 1982-83 and arise out of the orders of the commissioner passed under section 263(1) of the income-tax act, 1961 ('the act'), dated 23-11-1983. the aforesaid appeals involve a common issue and are, therefore, heard together and disposed of by a common consolidated order for the sake of convenience. common grounds have been taken in both the aforesaid appeals by the assessee, namely: (i) the order passed by the commissioner is illegal, invalid and without jurisdiction, (ii) the order passed by the commissioner is unjustified and unwarranted. (iii) the commissioner erred in directing that the tax should be charged in the hands of the assessee at the normal rate prescribed for the aop.2. the brief facts of the case.....
Judgment:
1. These appeals of the assessee relate to the assessment years 1981-82 and 1982-83 and arise out of the orders of the Commissioner passed under Section 263(1) of the Income-tax Act, 1961 ('the Act'), dated 23-11-1983. The aforesaid appeals involve a common issue and are, therefore, heard together and disposed of by a common consolidated order for the sake of convenience. Common grounds have been taken in both the aforesaid appeals by the assessee, namely: (i) The order passed by the Commissioner is illegal, invalid and without jurisdiction, (ii) The order passed by the Commissioner is unjustified and unwarranted.

(iii) The Commissioner erred in directing that the tax should be charged in the hands of the assessee at the normal rate prescribed for the AOP.2. The brief facts of the case are as under: The assessee is a private family trust settled by Smt. Pewandbai, wife of Mulchand Anandani, resident of Jharipatka, Nagpur, by a duly executed instrument in writing whereby she appointed two trustees, viz., Shri Chandumal, son of Hundrajmal, resident of Jharipatka, Nagpur, and Shri Mahesh, son of Jodharam, resident of Jharipatka, Nagpur, for the benefit of six beneficiaries as under: 2. That for effectuating the settlement, the settlor doth hereby transfer and assign unto the trustees all the said sum of Rs. 11,500 by cash and her beneficial interest in the said sum and to have hold the said sum and income thereof upon trust and for the purpose hereinafter declared of and concerning the same.

3. That it is hereby agreed and declared between the parties to these presents that the trusteed shall stand and be possessed of the said sum of Rs. 11,500 and which sum and such shares, stocks and securities and other investments, businesss, properties be submitted or added in the execution of the said trust (hereinafter designated as the trust fund) upon the trust for a period of 20 years from this date unless otherwise determined in pursuance of these presents to receive the annual or other income thereof themselves or pay and discharge all the costs and expenses incurred in or about the administration of the trust and including also all outgoings and municipal or other rates, assessments, and duties and cost of ordinary repairs to any immovable property, if any, for part of the trust fund.

And subject thereto, the trustees shall divide the residue of such annual or other income into cash or kind in parts mentioned hereunder and pay such part to each of the beneficiaries or credit to his or her respective personal account in the books of the trust.** ** ** Subject to the above provisions and other conditions of this deed, the shares of each beneficiary in the annual or other income and assets of the trust at any time is as follows: 4. That the trustees may engage in and carry on any business or businesses for and on account of the trust established by this deed and may invest any part of the fund or asset of the trust fund in such business or businesses in their names or in the name of any one of them or in the name of trust ....

5. ... If the trust fails or is held to be invalid for any reason, there shall be no resulting trust in favour of the settlor, but the assets of the trust shall be divided in proportion amongst all the beneficiaries their legal representatives in corpus or trust fund at any time as mentioned in para 4 of this deed.

6. ... And without prejudice to the generality of the foregoing provisions, the trustees may invest any fund requiring investments ....

(vi) In any business which may be carried on by the trustees for and on behalf of the trust hereby established.

3. The trustees of the trust filed returns of income for the assessment years in question. In the two assessment years, the assessee had shown the status as 'association of persons' (AOP). The returns were accompanied by a letter wherein it was stated that the shares of the beneficiaries in the trust are determinate and known. The six beneficiaries also filed the returns of income simultaneously in the status of 'individual' showing the share income from the trust. The ITO completed the assessments for the aforesaid two assessment years in the status of an AOP. In the column--Status--the words 'AOP' (Determinate Private Trust) appeared. In the assessment order the ITO further observed that the shares of the beneficiaries are determinate and known and, therefore, the same will be assessed at their hands direct, and, therefore, no demand is being raised in this case. He distributed the income of the trust amongst the beneficiaries in accordance with the shares held by them.

4. The Commissioner by a notice dated 18-11-1983 directed the assessee to show cause as to why the orders passed by the ITO could not be held as erroneous and prejudicial to the interests of the revenue as though the ITO correctly determined the status as an 'AOP', his action in distributing the income amongst the various beneficiaries is not warranted by law. According to him, the trust deed clearly shows that the two trustees were appointed to carry on the business for and on account of the trust and since the business is carried on for the benefit of all the six minors jointly, there is no warrant for making an assessment on the shares of the beneficiaries under Section 161 of the Act as the representative assessee, since the said six beneficiaries jointly constitute an AOPs/BOIs. The Commissioner in the said notice further opined that the ITO has misapplied the provisions of Section 164 of the Act and the opposite does not follow where the shares are determinate. On the other hand, according to him, Section 161 lays down that the representative assessee is assessable to the same extent and in the like manner as the person represented. In the instant case, the person represented is the BOI consisting of all the beneficiaries and as such assessment is to be made in the hands of the AOPs. The assessee was directed to appear before him on 22-11-1983 or to make written submissions. In response to the aforesaid notice the assessee filed written reply objecting to the proposed action mainly on the following grounds: 1. The order passed by the ITO is neither erroneous nor prejudicial to the interests of the revenue.

2. The proposed action is contrary to the Supreme Court's decision in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 and the said decision is a good law under the 1961 Act also.

In support of the aforesaid proposition the assessee relied upon the decision of the Gujarat High Court in the case of Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747.

3. It is not correct to say that the trustees are carrying on the business for all the six minors jointly.

4. The trustees derived the status of the beneficiaries and in this case since there were six beneficiaries assessable separately in the status of individual, there is no warrant for assessing them as 'AOP'. The decision of the Supreme Court in the case of TV. V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 was relied upon by the assessee.

5. There is no question of misapplication of the provisions of Section 164 as the case of the assessee is covered by the decision of the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555.

5. The Commissioner rejected the contentions raised on behalf of the assessee for the reasons given in detail in Annexures 'A' and 'B' of his order. The Commissioner observed that the Supreme Court decision in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra) was rendered on a finding of fact recorded that the single trust deed is in fact a trust in respect of each beneficiary and should be construed as several trust deeds in their favour. He observed that the Supreme Court had confirmed the Madras High Court decision in the case of N.V. Shanmugham & Co. (supra) which in turn had disagreed with the conclusion of the Bombay High Court's decision in the case of CIT v-Balwantrai Jethalal Vaidya [1958] 34 ITR 187. According to him, there is no dispute regarding the applicability of Section 161 and the assessment of the trustees as representative assessees, but Section 161(1) does not say that the tax should be levied to the same extent as that is leviable upon the beneficiaries. The Commissioner further observed that the business is being carried on under the trust for the benefit of a group of beneficiaries and, therefore, the person represented by the trustee is not individual beneficiary but the group itself. There is no specific provision for assessing such units as in the case of registered firms, companies, etc. The tax has to be levied at the normal rate. According to him, in the present case the trustees should be an AOP and the ITO has also correctly held that the status of the assessee is an AOP. He directed that the ITO should charge the assessee to tax as an AOP at the normal rate of tax applicable to the AOP instead of allocating the income at the hands of the various beneficiaries. It is this order of the Commissioner which is in appeal before us.

6. The learned advocate for the assessee, Shri Dewani, besides filing a paper book in the usual course, has filed at the time of hearing before us a five paged compilation giving the facts, the reasons as to why the beneficiaries do not constitute any group or body and the gist of the decisions which were relied upon and considered relevant. The contentions of Shri Dewani appearing on behalf of the assessee are as under: 1. Section 161 is mandatory. The aforesaid position, according to him, is well recognised as back as in 1958 by the Bombay High Court in the case of Balwantrai Jethalal Vaidya (supra). Referring to the pages 195 and 197 of the report, it was contended that even though the income is to be assessed at the hands of the trustee, the same must be put in one of the heads mentioned in Chapter III of the Act relevant to the computation of income and Section 41 of the Indian Income-tax Act, 1922 ('the 1922 Act') 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 this stage that Section 41 issues a mandate to the taxing authorities that when they are dealing with an income of a trustee, they should levy the tax and recover the same in the manner laid down in Section 41. Similar is the view taken by the Andhra Pradesh High Court in the case of Trustees of Sahebzadas of Sarf-e-Khas Trust v. CAT [1962] 44 ITR 332. The counsel asserted that though these decisions are under the provisions of the 1922 Act, the Supreme Court has in terms held that the observations in Balwantrai Jethalal Vaidya's case (supra) on the scheme of Section 41 of the 1922 Act also apply to the interpretation of Section 161 of the 1961 Act. He relied upon the Supreme Court's decision in the case of C.R. Nagappa v. CIT [1969] 73 ITR 626 and the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra).

Thus, according to Shri Dewani, the provisions of Section 161 are mandatory and there is no option left with the revenue.

2. The beneficiaries of the trust do not constitute an AOP. It was contended that the words 'AOP' have received interpretation in the various cases decided by the Supreme Court. He then referred to the decision of the Supreme Court in the case of CIT v. Indira Balkrishna [1960] 39 ITR 546 and stated that the word 'associate' means to join in common purpose or to join in an action. He then referred to the three other decisions, namely, the decision of the Supreme Court in the case of CAIT v. Raja Ratan Gopal [1966] 59 ITR 723, the decision of the Orissa High Court in the case of Sri Ladukishore Das v. State of Orissa [1973] 87 ITR 555 and the decision of the Supreme Court in the case of G. Murugesan & Bros. v. CIT [1973] 88 ITR 432. While referring to the decision of the Supreme Court in G. Murugesan & Bros.' case (supra)' he pointed out that the Supreme Court has considered the decision in the case of N.V. Shanmugham & Co. (supra) and it has observed that in the decision in N. V. Shanmugham & Co.'s case (supra) it had relied upon the decision in the case of Indira Balkrishna (supra) and, therefore, the law laid down by the Supreme Court in the case of Indira Balkrishna (supra) is followed in G. Murugesan & Bros.' case (supra).

Referring to the decision of the Supreme Court in the case of N.V. Shanmugham & Co. (supra), heavily relied upon by the revenue, it was contended vehemently by the learned advocate for the assessee that the aforesaid decision is distinguishable on account of the following: (a) Joint endorsement of the Court in the said case that profit, if any, earned from September 1956 will be treated as an asset of the firm.

(b) The erstwhile partners have acquiesced in the continuation of the business.

(c) On the facts proved, it must be held that in law the erstwhile partners of the firm carried on the business through their representatives.

(d) The business had been continued with the consent of all the owners.

The learned advocate contended that the facts of the Supreme Court's decision in N.V. Shanmugham & Co.'s case (supra) is very much different. It was a case where: A firm, consisting of three partners and a minor admitted to the benefits of partnership, was carrying on business in the manufacture and sale of snuff. The deed of partnership provided that the firm could not be dissolved before August 31,1955, but it was open to the partners to continue the partnership or enter into a fresh partnership. On September 17, 1956, one of the partners filed a suit in the Civil Court for the dissolution of the firm with effect from August 31, 1956, and for taking of accounts. He also applied for the appointment of a receiver. On September 21,1956, the Court appointed three receivers two of whom were partners and the third was an advocate. Since the business had been stopped from September 1 to 21 the Court directed the receivers 'to reopen and conduct the snuff business for the purpose of winding up', subject to the terms, inter alia, that the receivers could carry on the business normally, that the profits if any earned will be treated as an asset of the firm subject to be divided between the parties in the manner set out in the partnership deed, and that the receivers will pay every month certain specified amounts to the partners. Some time later the Court appointed a Commissioner for taking accounts and for arranging the sale of the business as a going concern. The business yielded for the assessment years 1958-59 and 1959-60 profits of Rs. 93,739 and Rs. 1,54,393 respectively, and the question was whether the profits could be assessed in the hands of the receivers in the status of an 'Association of persons': The Supreme Court held that the representative assessee derives the status from the person represented and, therefore, the assessment against the representative assessee has to be made in the status of all the persons represented who in that case were held to be an AOP. He contended that the facts of the present case are entirely different and it cannot be said that the trustees in this case are carrying on the business on behalf of the beneficiaries. For the proposition that the beneficiaries cannot constitute an AOP, three more decisions have been relied upon by the learned Counsel, the first one being the decision of the Patna High Court in the case of Khan Bahadur M. Habibur Rahman v. CIT [1945] 13 ITR 189. It was a case of waqf where the income of the business was dedicated with ultimate benefit to the poor and for maintenance and support of waqf, his family, children and descendants. The waqf deed provided that the beneficiaries should be benefited concurrently and in the same proportion. The dedication was in respect of the income from the business. On these facts it was held that the first proviso to Section 41(1) was inapplicable and the assessee should, therefore, be taxed on the basis of profits falling to the share of each beneficiary and not on the footing of all the beneficiaries constituting an AOP. The next decision relied upon was a Supreme Court's decision in the case of W.O. Holds-worth v. State of U.P. [1958] 33 ITR 472. The paragraph from page 481 was strongly relied upon by the counsel. It was submitted that though the decision is rendered under Section 11(1) of the U.P. Agricultural Income-tax Act, 1948, it decides as to whether the beneficiaries in a trust can be said to be 'jointly interested' in the property or income of the trust and whether the trustees of the trust can be said to hold the property and income of the trust on behalf of the beneficiaries. It was stressed that the Supreme Court has directly decided this issue in the aforesaid case wherein it is held that the expression 'for the benefit of and 'on behalf of are not synonymous with each other.

They convey different meanings. The former connotes a benefit which is enjoyed by another, thus, bringing in a relationship as between a trustee and a beneficiary or cestui qui trust, the latter connotes an agency which brings about a relationship as between principal and agent of the parties, one of whom is acting on behalf of another.

Relying upon the aforesaid decision, it was contended that the trustees in the present case do not hold the property or income on behalf of the beneficiaries but for the benefit of the beneficiaries and the beneficiaries of the trust cannot be said to be 'jointly interested' in the property or income of the trust. The third decision relied upon by the counsel is the decision in the case of State of Madras v. Pattammal [1966] 62 ITR 485 (Mad.). It is necessary that the essential requirements for constitution of an AOP have to be proved and it must be proved that the persons themselves had associated together and decided upon the common exploitation.

This was a case where: A person owning extensive properties, executed five settlements settling different properties on five different persons. Even after the settlement all the lands continued to be managed and cultivated as usual with the same agents by the settlor, some lands under pannai cultivation and some on waram. The waram was received in common from all the lands and the income was pooled together and brought to a common day-book and ledger. It was not possible to find out from the accounts the income from the lands given to each of the beneficiaries. All the income arising as per the account books was deposited in a bank in the joint names of the settlor and another person. There was also nothing in the accounts to show that the profits were ever distributed to the trustees for the beneficiaries or deposited in a bank in the. names of trustees. From these circumstances, the assessing officer as well as the Assistant Commissioner of Agricultural Income-tax came to the conclusion that the several beneficiaries under the five documents were liable to be assessed as an association of individuals on their agricultural income. In the opinion of the Tribunal, there was nothing to show that the document were not genuine or that they had not been acted upon and the Tribunal held that there could not be any inference about an association of individuals through the mere fact of common management, that the documentary evidence showed that the settlements enured to the benefit of the beneficiaries inescapably and there was nothing to show that the beneficiaries engaged themselves in a joint enterprise for the purpose of producing income from the lands; and that the beneficiaries could not be assessed as an association of individuals: The Madras High Court held that the Tribunal was right in holding that the beneficiaries could not be assessed as AOP. 3. The assessment of a trustee of a trust where the shares of the beneficiaries are known and determinate is to be completed under Section 161(1). He stated that the position of law is now settled and there is hardly any room for any dispute. According to him, where the income of the assessee is from business or otherwise does not make any difference. He laid stress on the observation of the Bombay High Court in the case of Balwantrai Jethalal Vaidya (supra) at page 197. He also referred to the Calcutta High Court decision in the case of A, Razzak v. CIT [1963] 48 ITR 276 and the decision of the same High Court in Birendra Kumar Datta v. CIT [1961] 42 ITR 661. According to the counsel, the law is now well settled in view of the Supreme Court's decision in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra) wherein their Lordships of the Supreme Court at page 595 have stressed the application under Section 21(1) of the Wealth-tax Act, 1957 ('the 1957 Act'), which is analogous to the provisions of Section 161(1) of the 1961 Act, and have laid down the consequences which follow on the application of the aforesaid section. He stated that the decision of the Supreme Court in the case of N.V. Shanmugham & Co.

(supra) has also been taken note of by the Supreme Court and approving the said decision, their Lordships observed that the assessment of the trustee has to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. Three recent decisions where the assessability of the income of the trust at the hands of the trustee is considered were also relied upon by the learned Counsel. The two of the decisions therefrom related to the income from business. These decisions of the Gauhati High Court in the case of CIT v. Gangadhar Sikaria Family Trust [1983] 142 ITR 677, the Kerala High Court in the case of CIT v. V.S. Kumaraswamy Reddiar Trust [1982] 138 ITR 808 and the Madhya Pradesh High Court in the case of CIT v. Karelal Kundanlal Trust 1983 Tax LR 1539 laid down that where the shares of the beneficiaries are known and determinate, the assessment has to be made under Section 161(1). Holding so, the aforesaid High Courts have directed that the assessment made and the tax payable be determined on the footing that each beneficiary is liable for a separate assessment. On this issue he also strongly relied on the decision of this Bench of the Tribunal in the case of Vivek Trust [TT Appeal No. 271 (Nag.) of 1980, dated 4-4-1981], and stated that the contentions of the revenue in this case have already been considered and even the decision in the case of N. V. Shanmugham & Co. (supra), which is the backbone of contention of the revenue, is also considered. He stressed that the case of the assessee is fully covered by the aforesaid decision and the aforesaid decision has taken note of all the points and the authorities now relied upon by the Commissioner and, therefore, there is no reason or compelling circumstances to deviate from the view earlier taken by the Tribunal. He clarified that the revenue has not filed any reference against the aforesaid decision of this Bench of the Tribunal.

4. In case the trustees carry on the business, the business itself is a property held under the trust. He relied upon the three decisions of the Bombay, Gujarat and Kerala High Courts in the cases of CIT v. Pruthivi Trust [1980] 124 ITR 488, K.T. Doctor v. CIT [1980] 124 ITR 501 and V.S. Kumaraswamy Reddiar Trust (supra), respectively. He stressed that the business itself being a property held under a trust is like any other property held under the trust.

Therefore, according to him, there cannot be any differential treatment in respect of a business held as a property under the trust.

5. The Commissioner erred in holding that the Supreme Court's decision in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra) was based on a finding of fact that the single trust deed constituted, in fact, a trust in respect of each beneficiary. He relied on the part of the said judgment at pages 600 and 601 to show that the Supreme Court after holding the applicability of Section 21(1) held that it is unnecessary to pursue the question whether a single deed constituted several trusts.

6. The assessment of the trustee in the case of a trust, where the shares of the beneficiaries are specified, can be made only in accordance with the mode of assessment laid down by the Supreme Court in the decision of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust's case (supra) namely, that there have to be as many assessments as there are beneficiaries. Though for the sake of convenience there may be one assessment and the tax due may be computed treating that each of the beneficiary is separately assessable in respect of his income.

7. There is no difference in treatment in assessability of a trustee on account of the fact that the business is carried on by the trustee. Application of Section 161 comes into play only after the income is computed. The nature and source of income is not material.

The sum and substance of the contentions made by the learned advocate for the assessee are as under: (c) Where the beneficiaries of a trust are known and determinate and their shares are also known and determinate, the assessment cannot be made on the footing that the beneficiaries constitute an AOP. (d) The business as such when carried on by the trustees is as much a property of a trust and the income from the said property is the income from property held under trust and, therefore, the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra) is applicable.

In addition to the aforesaid arguments Shri Dewani had two other alternative contentions which, according to him, make the order of the Commissioner passed under Section 263 as invalid. He stated that the beneficiaries of the trust are separately assessed to tax and when once the revenue has exercised an option to assess the beneficiaries, it is no longer open to the revenue to make an assessment against the trustees in respect of the same income. In this context he relied upon the Board's circular, a copy of which is placed before us. For the aforesaid proposition, he relied upon the decision of the Bombay High Court in the case of Trustees of Chaturbhuj Raghavji Trust v. CIT [1963] 50 ITR 693. It was further contended that the order under Section 263 is invalid as there is no error found in the order passed by the ITO. The ITO has made the assessment consistent with a view taken by the High Court and the Tribunal. According to him, if an assessment is made consistent with any such decision and even if there are two views possible, no action can be taken under Section 263. Thus, according to him, the order passed by the Commissioner is not sustainable on merits as well as on application under Section 263.

7. There were two other matters involving the same issue fixed for hearing which were represented by two other representatives on behalf of the assessee. Since common issues are involved, we have heard Shri C.J. Thakar, advocate and Shri M.M. Jain, chartered accountant. The two representatives supported the arguments advanced in this case and also advanced some other arguments in support of the assessee's case which are as under: (i) Shri Thakar submitted that the trustee of a trust does not hold the property or income on behalf of the beneficiaries but he holds only for the benefit of the beneficiaries. Therefore, according to him, there is no question of formation of an AOP by the beneficiaries.

(ii) Shri M.M. Jain, chartered accountant, submitted that the law is now well settled and interpretation of provision in a taxing statute rendered years back, accepted and acted upon by the department should not be easily departed. For the aforesaid proposition, he relied upon the decision of the Supreme Court in the case of CIT v. Balkrishna Malhotra [1971] 81 ITR 759. He further relied upon the decision of the Madhya Pradesh High Court in the case of Karelal Kundanlal Trust (supra), where the finding given by their Lordships of the Madhya Pradesh High Court is directly on the point in issue.

He, therefore, contended before us that since there is no other decision contrary to the decision of the Madhya Pradesh High Court, mentioned supra, the Tribunal is bound to follow the aforesaid decision in view of the decision of the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589.

8. Shri Charles, the senior departmental representative, appearing on behalf of the revenue, in reply confined himself to only three issues.

Firstly, he submitted that the circular of the Board, relied upon by the assessee, does not apply to the case of the assessee. It related to a case where the trustee having been assessed, the same income was being added for rate purposes in the hands of the beneficiary. It is in this context that the Board has issued the aforesaid circular.

Secondly, he justified the action of the Commissioner under Section 263 as, according to him, there is still a difference of opinion with regard to the point in issue and it cannot be said that the law on this point is well settled. He further submitted that the words 'persons represented' appearing in Section 160(1)(iv) of the Act and Section 161 does not necessarily mean beneficiary. According to him, when the assessment is made on an AOP, there is no provision for application of a different rate of tax than the one prescribed in the Finance Act.

Thirdly, he submitted that the decision of the Madhya Pradesh High Court in the case of Karelal Kundanlal Trust (supra), relied upon by the assessee, does not apply to the facts of this case as, according to him, the ratio in the aforesaid decision, namely, that the department can assess the trustees jointly, has flown from the contention of the department.

Shri Chhotare, the IAC, also made certain submissions on behalf of the revenue. He submitted that the return of income was filed in the status of an AOP and the ITO has rightly taken the same status and determined the total income. According to him, there is no provision in the Act by which an ITO can apply different rates for taxing the said income. He relied upon the decision of the Supreme Court in the case of Esthuri Aswathaiah v. CIT [1966] 60 ITR 411, in support of his plea. He further contended that Section 164 is a charging section and Section 161(2) is the same as Section 161(1). He submitted that all the representative assessees, mentioned in Section 160 should be considered on the same footing and no special treatment be given to the representative assessee who is the trustee of a trust. He, therefore, contended that the ratio laid down by the Supreme Court in the case of N.V. Shanmugham & Co. (supra) fully applied to the facts of the case in question as the only difference between the aforesaid case and the case in question is that in the former the representative assessee is a receiver whereas in the latter case the representative assessee is a trustee. He further submitted that the decision in the case of W.O. Holdsworth (supra) is overruled by the Supreme Court by implication in the case of CWT v.Kripashankar Dayashanker Worah [1971] 81 ITR 763, and in support of his contention he referred to pages 767 and. 768 of the report. He next referred to the decision in the case of CIT v. Nandlal Agarwal [1966] 59 ITR 758 (SC) to say that the similar was the position under Section 41(1) of the Act. The case of N.V. Shanmugham & Co. (supra), according to him, is a case directly applicable to the facts of the case in question as in that case also the business was carried on and the business requires unity. Elaborating the powers of the beneficiaries in a trust, he contended that the beneficiary has a right to stop the trustee from carrying on the business or extinguish the trust and, therefore, it is not as if the business is carried on by the trustee without the assistance of the beneficiary. He further added that Section 161 cannot be applied in isolation and has to be applied as read with Section 28 of the Act. Referring to the facts of the present case, he contended that the volition is implied by the conduct of the persons who were pocketing the profits. According to him, when once the volition is established by implication, it is immaterial whether the shares of the beneficiaries are determinate or not. It is the earning of a unity of a business and not the ultimate destination of income which is assessable. He further submitted that the decision of the Bombay High Court in the case of Balwantrai Jethalal Vaidya (supra) is not approved by the Supreme Court as the Madras High Court decision in the case of CIT v. N.V. Shanmugam & Co. [1966] 62 ITR 701 did not approve the said decision of the Bombay High Court and the Supreme Court has ultimately affirmed the decision of the Madras High Court.

With regard to the applicability of the decision of the Tribunal in the case of Vivek Trust (supra), he distinguished the aforesaid decision and stated that the same was given in the context that the trustees derive the share income from the firm and the Tribunal might have thought that the income in that case was an income from same investments. According to him, the decision of the Tribunal in the case of Arvind Pattiwar Children Trust [IT Appeal No. 474 (Nag.) of 1982], is directly applicable to the case as the said case decided the issue of status of persons. He concluded his arguments by saying that the action of the Commissioner is justified as the beneficiaries were assessable as an AOP.Shri P.N. Chandurkar, the learned standing counsel for the department, concluded the case on behalf of the revenue by addressing his arguments on a few specific points. He referred to the provisions of Section 3(42) of the General Clauses Act, 1897, wherein the word 'person' is defined. He stressed that when once it is considered that there is an AOP, one has to fix the assessee in the category of persons defined in Section 2(31) of the Act. He contended that the trust deed is a mechanism adopted for bringing the beneficiaries together by an artificial creation of trust. He stated that unfortunately the decision of the Bombay High Court in the case of Balwantrai Jethalal Vaidya (supra) did not reach the Supreme Court as otherwise the ratio in the aforesaid case could have been subjected to approval or dissent by the Supreme Court. As to the specific question put to the counsel by the Bench to point out the difference between the two decisions of the Supreme Court in the case of N.V. Shanmugham & Co. (supra) and in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra), he pointed out that the only difference he finds is that the decision in N.V. Shanmugham & Co.'s case (supra) applies to a case of business and the decision in Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust's case (supra) applies to a case where the income is not from business. Referring to the definition of the AOP, he pointed out that the assessee could also be covered by the word 'BOI'.

In support of the aforesaid contention he relied upon the decision of the Andhra Pradesh High Court in the case of Deccan Wine & General Stores v. CIT [1977] 106 ITR 111. Shri Dewani, the learned Counsel for the assessee, at this stage objected to the aforesaid ground being permitted to be advanced. According to him, the assessment was made as an AOP and the Commissioner under Section 263 has also directed for the tax being charged against an AOP and, therefore, it is not permissible for the revenue at this stage to contend that there could be a BOI. The proceedings were not initiated against the BOI and, therefore, according to him, these arguments cannot be permitted to be advanced at this stage. Shri Chandurkar fairly conceded to the objection raised by Shri Dewani and discontinued this line of arguments. He concluded his argument by contending that evasion of tax has taken place by formation of trust and the trust with paltry sums is carrying on with huge businesses. He, therefore, submitted that the Commissioner was justified in initiating proceedings under Section 263.

9. In reply Shri Dewani submitted that there is no conflict between the two decisions of the Supreme Court in the case of N.V. Shanmugham & Co.

(supra) and in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra). He read out a passage from Kanga and Palkhivala's Law and Practice of Income-tax, Seventh edition, Volume I, page 953 which, according to him, clarified the two decisions. The case of N.V. Shanmugham & Co. (supra) decides the issue of status of representative assessee. A representative assessee derives the status from the beneficiary and if a beneficiary is an AOP, the person represented, that is the trustee, shall be an AOP. He gave an example of a trust consisting of three individuals and one AOP as the beneficiaries. According to him, the assessment in respect of the three beneficiaries will be completed as individual and in respect of an AOP the trustees shall be assessed as an AOP. According to him, there is no conflict between the two decisions and if any conflict is assumed, the latter decision of the Supreme Court in Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust's case (supra) shall prevail. He next referred to the provisions of Section 164 as the same stood before the amendment in 1971. According to Shri Dewani, if the contention of the revenue is accepted, there will be no difference between the provisions of Section 161 and Section 164 as they stood before the amendment of 1971. There was no amendment to Section 161 at any point of time. He, therefore, contended that it cannot be said that the Legislature enacted the section for the same effect and consequence. An identical situation cannot be said to be covered by two sections rendering the other as superfluous. Thus, according to him, this is sufficient indication of the intention of the Legislature about the effect of the provisions of Section 161. He reiterated and laid stress on the issue that the trustees and the receivers are not the same persons. A trustee, according to him, is governed by the provisions of the Indian Trusts Act, 1882, and the receiver is governed by the Code of Civil Procedure, 1908. Referring to the two decisions of the Supreme Court in the case of W.O. Holdsworth (supra) and in the case of Kripashankar Dayashanker Worah (supra), he stressed that the receivers hold the property and carry on the business on behalf of the persons for whose property they are appointed as receivers, whereas the trustees hold the property and the income in their own right though for the benefit of the beneficiaries. He, therefore, emphasised that the beneficiaries of the trust cannot be said to constitute an AOP. He again referred to the decision of the Bombay High Court in the case of Balwantrai Jethalal Vaidya (supra) and pointed out that the said decision has received the approval from the Supreme Court in the two decisions in the case of C.R. Nagappa (supra) and in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra). He pointed out that since the matter is concluded by the Supreme Court decision, it is not open for the revenue to reopen the issue or context on the ground that the particular aspect or the ground was not addressed or argued before the Supreme Court and, therefore, the Supreme Court had not decided the matter from that angle. For the aforesaid proposition he relied on the decision of the Karnataka High Court in the case of CJT v. Jagadish Jakati & Co. [1979] 119 ITR 19. He concluded his arguments by saying that the case of the assessee is fully covered by the various authorities and also the decision of the Tribunal and there are no compelling circumstances or reasons for deviating from the view taken earlier. He further referred to the two page statement of admitted facts and the reasoning placed on record to show that the beneficiaries do not constitute an AOP and, therefore, the order passed by the Commissioner under Section 263 is illegal. The only way to make the assessment, according to him, is the one which the ITO has made. He again stressed that the circular of the Board applied to the facts of this case. He, therefore, contended that the order passed by the Commissioner deserves to be quashed.

10. Sari M.M. Jain, in reply submitted that the trustee by the nature of obligation is obliged to distribute the income amongst the beneficiaries and having regard to the nature of the obligation, the income gets diverted at source and, therefore, the Commissioner's order can be vacated on this ground itself.

11. We have carefully considered the facts and circumstances of the case and the arguments advanced by the learned Counsels for the assessee and the standing counsel. We have carefully gone through the records of this case. At the outset we may point out that we had an occasion to consider an identical issue in the case of Vivek Trust (supra), whereafter considering the various arguments advanced by both the parties, we held that in the case of a private family trust where the shares of the beneficiaries are known and determinate, the trustees cannot be assessed as an AOP. Since the facts in the case decided by us are identical to the facts of this case, it is not possible for us to take a different view. Further, it may be pointed out that we have a direct decision on the point in issue decided by the Madhya Pradesh High Court in the case of Karelal Kundanlal Trust (supra), where their Lordships of the Madhya Pradesh High Court, after considering the various authorities on the issue, held that the trustees of a family trust, where the shares of the beneficiaries are determinate and known, have to be assessed as provided in Section 161 and that they cannot be assessed in the status of an AOP. Since the aforesaid decision is the only decision on the point in issue and there being no contrary decision of any other High Court, judicial propriety demands that the Tribunal being a subordinate authority is bound to follow the decision of the Madhya Pradesh High Court. It was held by the Bombay High Court in the case of Smt. Godavaridevi Saraf (supra) that the Tribunal is bound to follow the decision of a High Court even though it may be of a different State. In this view of the matter we are inclined to hold that the trustees in this case are not liable to be assessed in the status of an AOP. This aspect itself is sufficient to decide the appeals in favour of the assessee. However, since lengthy arguments have been advanced by both the sides and since various authorities have been cited, we have reconsidered the issue and we discuss below the submissions of the parties and our reasoning for arriving at the conclusion which we did.

12. The only point for consideration in these appeals is whether the beneficiaries in the present case constitute an AOP. It is now well settled that for forming an AOP, the members of an association must join together for the purpose of producing income. An AOP can be formed only when two or more individuals voluntarily come together for certain purpose. Hence, volition on the part of the members of the association is an essential ingredient. This is well recognised by the Supreme Court in the case of Indira Balkrishna (supra). The ratio laid down in the aforesaid case was followed by the Supreme Court in the case of G.Murugesan & Bros, (supra). This decision also takes note of the earlier decision of the Supreme Court in the case of N.V. Shanmugham & Co.

(supra). There does not appear to be any conflict between the Supreme Court decision in the case of G. Murugesan & Bros, (supra) and in the case of N.V. Shanmugham & Co. (supra). The decision rendered by Supreme Court in the case of N.V. Shanmugham & Co. (supra) was rendered on its own facts. The facts of the case were that a firm, consisting of three partners and a minor admitted to the benefits of partnership, was carrying on business in the manufacture and sale of snuff. One of the partners filed a suit in the civil court for dissolution of the firm from 31-8-1956 and for taking of accounts. He also applied for the appointment of a receiver. The Court appointed three receivers, two of whom were partners and the third was an advocate The business carried on by the firm was thereafter carried on by the receivers, two of whom where the earlier partners with the consent of all the parties. It is amply clear from the facts of the said case that the business was continued with the consent of all the owners. On the facts proved, it was held that the erstwhile partners of the firm carried on business through their representatives, that is the receivers. The Supreme Court in unambiguous terms stated that the business was continued with the consent of all the owners. When this decision was pointed out to the Supreme Court in the case of G. Murugesan & Bros. (supra), the Supreme Court clarified that its earlier decision in the case of Indira Balkrishna (supra) was relied upon in the case of N.V. Shanmugham & Co.

(supra) and the decision was rendered considering the said decision.

Thus, it is now settled by the Supreme Court that for formation of an AOP, the members of the association must join together for the purpose of earning the income and the volition on the part of the members of association is an essential ingredient. Applying the ratio laid down by the Supreme Court in the aforesaid cases to the facts of the case in question, can it be said that the beneficiaries of the trust consented to the starting, or continuation of the said business by the trustees The revenue has not brought an iota of evidence to show whether any such consent was there. There cannot be a consent in the instant case as the beneficiaries were all minors and were not competent to give consent. Therefore, it cannot be said that the beneficiaries of the trust in question constituted an AOP.13. The next question that arises for consideration is whether the beneficiaries of the trust in question can be said to be joint for whom business was carried on by the trustees. The two authorities cited on behalf of the assessee, namely, the decision of the Supreme Court in the case of W.O. Holdsworth (supra) and the decision of the Madras High Court in the case of Pattammal (supra) clearly show that the beneficiaries cannot be said to be persons 'jointly interested' in the property or income of the trust. The relevant portion of the judgment of the Supreme Court in the case of W.O. Holdsworth (supra) reads as under: These definitions emphasize that the trustee is the owner of the trust property and the beneficiary only has a right against the trustee as owner of the trust property. The trustee is thus the legal owner of the trust property and the property vests in him as such. He no doubt holds the trust property for the benefit of the beneficiaries but he does not hold it on their behalf. The expression 'for the benefit of'' and 'on behalf of' are not synonymous with each other. They convey different meanings. The former connotes a benefit which is enjoyed by another thus bringing in a relationship as between a trustee and a beneficiary or cesti que trust, the latter connotes an agency which brings about a relationship as between principal and agent between the parties, one of whom is acting on behalf of another....

The beneficiaries are also not necessarily persons who are jointly interested in such land or in the agricultural income derived therefrom. The term 'jointly interested' is well-known in law and predicates an undivided interest in the land or in the agricultural income derived therefrom as distinguished from a separate or an individual interest therein. If on a true reading of the provisions of the deed of trust the interest which is created in the beneficiaries is a separate or individual interest of each of the beneficiaries in the land or in the agricultural income derived therefrom, merely because they have a common interest therein, that cannot make that interest a joint interest in the land or in the agricultural income derived therefrom. The words 'jointly interested' have got to be understood in their legal sense and having been used in a statute are not capable of being understood in a popular sense as meaning a common interest or an interest enjoyed by one person in common with another or others.

The aforesaid decision came up for consideration before the Supreme Court again in the case of Kripashankar Dayashanker Worah (supra), wherein the Supreme Court has clearly approved the decision in the case of W.O. Holdsworth (supra), and laid down the difference between the receiver and the trustee. The relevant portion to be considered is as under: ... While interpreting that clause this Court held that a trustee is not a person who can be equated to a receiver or an administrator inasmuch as those persons hold the property on behalf of other persons whereas trustee is the legal owner of the trust property. In that decision this Court also observed that there is a fundamental difference between a property being held on behalf of others and property being held for the benefit of others....

The aforesaid two decisions clearly establish that the trustees are not holding the property or income on behalf of the beneficiaries but only for the benefit of the beneficiaries and are holding in their own right. The beneficiaries cannot be considered as jointly interested in the property or income of the trust. Though Section 161 used both the words 'for the benefit' or 'on behalf of, the fiction created makes the trustee liable under Section 161(1), but the fiction cannot be extended to hold that the beneficiaries constitute an AOP. In view of the above position which is clear and settled, there is no scope for holding that the beneficiaries of the trust constitute an AOP.14. As to the applicability of the decision in the case of N.V.Shanmugham & Co. (supra), we find that the same is not applicable on account of the following: (i) The case related to the receivers who were carrying on the business on behalf of the erstwhile partners who earlier constituted a firm. It was a business earlier owned by the firm and later by the erstwhile partners. The erstwhile partners could not have any other status than the AOP. (ii) The receivers were carrying on the business on behalf of the erstwhile partners.

(iii) The joint endorsement of the parties in the Court stated that the profit, if any, earned from September 1956 will be treated as an asset of the firm.

(iv) The conclusion of the Supreme Court was based on the finding of consent of all the owners.

15, The next question that arises for determination is whether there is any conflict between the two Supreme Court decisions in the case of N.V. Shanmugham & Co. (supra) and in the case of Trustees of H.E.H.Nizam's Family (Remainder Wealth) Trust (supra). The question that came up for consideration in the case of N.V. Shanmugham & Co. (supra) was whether the erstwhile partners of the firm who were represented by the receivers constitute an AOP. The Supreme Court laid down that the representative assessee derived the status from the persons whom they represented. Since the persons represented constituted an AOP, it became a single beneficiary liable for assessment as an AOP. Against this the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra) was considering a case where there were five beneficiaries whose shares are known and determinate. The relevant observations of the Supreme Court in that case are reproduced hereunder: It is also necessary to notice the consequences that seem to flow from the proposition laid down in Section 21, Sub-section (1), that the trustee is assessable 'in the like manner and to the same extent' as the beneficiary. The consequences are three-fold. In the first place, it follows inevitably from this proposition that there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though, for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. This was recognised and laid down by this Court in N.V. Shanmugham & Co. v. CIT[1971] 81 ITR 310 (SC). And, lastly, the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly....

Applying the ratio laid down in the aforesaid two cases to the facts of the present case, it is impossible to hold that the beneficiaries of the trust constitute an AOP. When once we hold that the trustees of the trust represent beneficiaries whose shares are known and determinate, the case is squarely covered by the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra). We are not inclined to accept the contention of the learned standing counsel that the distinction between the two cases lies on the source of income, that is in case the business is carried on, the case will be covered by the Supreme Court's decision in N.V. Shanmugham & Co.'s case (supra) and where the business is not carried on, the case is covered by the decision of the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra). In the instant case we find that for carrying on the business there is an authorisation in the trust deed. On the basis of the authorities cited for the proposition, we hold that the business also is a property held under trust and if income is derived from such property including the business, the income is derived by the trustees for the benefit of the beneficiaries. Since we have already held that the beneficiaries do not constitute an AOP, the case squarely falls under the Supreme Court's decision in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra). The authorities quoted on behalf of the assessee also squarely apply. We cannot take it for granted that the Courts, including the Supreme Court, were not conscious of a situation where the beneficiaries of the trust carry on the business and while approving the Bombay High Court's decision in the case of Balwantrai Jethalal Vaidya (supra) the Supreme Court was not conscious of the observations made by the Bombay High Court which are as under: ...Whether the assessee carries on business or is the owner of a property or owns shares and receives dividend, if he is a trustee and if he is being assessed as a trustee then Section 41 must come into play and his liability to pay tax must be determined according to the provisions of Section 41....

16. It is also very relevant for the purpose of deciding the case under consideration before us to take note of the important proposition laid down by the Bombay High Court in the case of Balwantrai Jethalal Vaidya (supra) wherein it is held as under: ...Now in the first place, Section 41 gives no such option to the Taxing Department. If the assessment is upon a trustee, the tax has to be levied and recovered in the manner provided in Section 41. The only option that the Legislature gives is the option embodied in Sub-section (2) of Section 41, and that option is that the department may assess the beneficiaries instead of the trustees, or having assessed the trustees it may proceed to recover the tax from the beneficiaries. But on principle the contention of the department cannot be accepted that, when a trustee is being assessed to tax, his burden which will ultimately fall upon the beneficiaries should be increased and whether that burden should be increased or not should be left to the option of the department. The basic idea underlying in Section 41, and which is in conformity with principle, is that the liability of the trustees should be co-extensive with that of the beneficiaries and in no sense a wider or a larger liability....

We are, therefore, of the considered opinion that the beneficiaries in the case under consideration do not constitute an AOP and the trustees derived income for the benefit of the beneficiaries and represent the beneficiaries whose shares are known and determinate. Consequently, we hold that the ratio laid down by the Supreme Court in the case of Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra) follows, namely, there have to be as many assessments as there are beneficiaries though for the sake of convenience, there may be one assessment determining the tax payable in respect of each of the beneficiaries separately. In this case the beneficiaries have been directly assessed. In view of this there is no warrant for making any assessment against the trustees otherwise than provided under Section 161. We, therefore, hold that the Commissioner was not justified in directing the ITO to assess the trustees treating them as an AOP and subjecting them to tax payable by an AOP. The aforesaid finding is in conformity with the earlier finding given by us in the case of Vivek Trust (supra).

17. As we have decided the case on merits, we do not consider it necessary to decide the other issues raised by the counsel for the assessee while challenging the order passed by the Commissioner under Section 263. In view of the above, we hold that the orders passed by the Commissioner under Section 263 are not in accordance with law and are hereby quashed.


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