1. This is an appeal filed by Shri Dharamdas Hargovandas of Bombay against the order of the AAC for the assessment year 1978-79.
2. The assessee is an individual and derives income from property, interest and deposits and had also made long-term capital gains to the extent of Rs. 34,024 on sale of two ownership flats during the relevant accounting year. The assessee had claimed set off against this profit a long-term capital loss of Rs. 75,000 determined in the case of Bai Harkorebai Gordhandas Trust, of which he is the sole beneficiary. This loss was determined in the hands of the trustee for the assessment year 1976-77. The ITO did not allow the claim, but all the same allowed set off of Rs. 34,024 out of long-term capital gains determined in the assessee's own case for the assessment year 1977-78. The result was that the long-term capital gains were nil, a result which the assessee himself wanted. But the assessee is not satisfied with the order because the capital loss determined for the assessment year 1977-78 got reduced by Rs. 34,024 to Rs. 60,751. It appears, that the assessee has long-term capital gains in a later year and the decision taken by the ITO is likely to affect such other assessments, and consequently, the assessee's liability to tax. It is for this reason that the assessee preferred an appeal requiring that the set off should be of the loss determined in the trust's case for the assessment year 1976-77 as against the set off of loss in the assessee's own case for the assessment year 1977-78. The reason for the disallowance of the assessee's claim in the assessment was that the ITO considered that the trust's assessment, being different from the one of the assessee, there could not be a set off of the loss in one case against the income in the other. He also pointed out that the assessment in the hands of the trustee was in the status of an AOP, inasmuch as there was more than one trustee. The AAC confirmed the assessment. According to him, the trust's loss can be carried forward only in the trustees' case and cannot be set off in the assessee's hands. The assessee is, therefore, in second appeal.
3. The learned representative for the assessee took us over the two trust documents which were initially meant for the benefit of the assessee and his brother and a subsequent agreement dated 6-5-1962 between the trustees of the deeds of the trust, whereby the properties under the trust were bifurcated, subject, of course, to the same benefits to the respective beneficiaries on same terms. The result is that the assessee was the sole beneficiary during his lifetime of the income from certain properties in pursuance of the agreement, dated 6-5-1962. The income was also assessed for income-tax purpose in the assessee's personal assessments. But the capital loss on sale of property in trust on 8-5-1975 was determined at Rs. 75,000 in the trustee's hands for the assessment year 1976-77. The learned representative for the assessee took us over the terms of the trust as well as the statutory provisions, relating to assessment on representative-assessees. He pointed out that the assessment on a representative-assessee is an optional one. This assessee had been taxed in the past on the income of the trust property in his own case.
The fact that the capital loss was determined in the trustees' hands for the assessment year 1976-77 is good enough, according to him, to justify the set off of such loss against long-term capital gains, whether such capital gains are sought to be assessed in the hands of the trustee or the beneficiary. He pointed out that the liability of the representative-assessee is 'in like manner and to the same extent' even as statutorily provided under Section 161 of the Income-tax Act, 1961 ('the Act'). He also referred to Sections 166 and 167 of the Act in the same chapter relating to assessment on representative-assessees, to show that the assessment could be in either hands, and that the ultimate liability will not be different wherever the assessment is made. He also relied on the decision of the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust  108 1TR 555, wherein the Supreme Court has pointed out the significance of the words 'in the like manner and to the same extent'.
He also pointed out that this decision has held that the status to be assigned in an assessment on the trustee should be that of the beneficiary. It is in this context, he urged, that the fact that the trust's assessment was styled as one on AOP wrongly, should not make any difference as the assessee was undisputably the sole beneficiary and was, therefore, responsible solely for the capital loss or gains in respect of the trust property. He, therefore, urged that the authorities were wrong in trying to deprive the assessee of the benefits of carry forward loss conferred by the statute by preferring a later loss in the assessee's case to an earlier one in a preceding assessment, though determined in the trustee's case.
4. The learned departmental representative, on the other hand, would rely upon the orders of the authorities below. Apart from the arguments cited by them, he would point out the assessee had no immediate interest in the corpus of the property. In fact, his interest was only for his own lifetime. Capital loss would deplete the corpus, while capital gains, if any, would add to the same. Since there was no present interest of the beneficiary in the corpus, he claimed that the capital gains or loss could be considered only in the trustee's hands and that it is not a case where any choice is available either to the assessee or to the ITO to assess such capital gains or determine the capital loss either in the hands of the trustee or in the hands of the beneficiary. It. can be considered only in the hands of the trustee. It means that it can be carried forward only in his hands to be set off against future profits, which arise to the trustee in the same manner.
5. We have carefully considered the records as well as the arguments Where an assessee is a beneficiary of a trust, his income could be assessed either directly in his hands or in the hands of the trustee.
As pointed out by the learned representative for the assessee, the decision in Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust's case (supra) has clearly laid down that the result, whether a direct assessment is made on the beneficiary or on the trustee, should be the same inasmuch as the trustee is assessable 'in the like manner and to the same extent', as the beneficiary. The assessee is again right in pointing out that the assessment in the hands of the trustee as AOP was wrong and it should be treated as one made in the status of an individual, though in the hands of the trustee. The Supreme Court in the said case also pointed out that "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". It is this proposition, which the learned representative for the assessee repeatedly canvassed before us. He claimed that the settled position of law has been overlooked by the authorities below, when they chose to take a technical stand that the assessees were different. While agreeing with the assessee on the general proposition that the liability should be the same whether the beneficiary is assessed directly or the trustee is assessed, we are not in a position to say that the assessee is eligible for the relief claimed for the reasons stated hereinafter. It is a common ground that the settlement deeds made for the benefit of the assessee and his brother on 4-12-1924 and 6-11-1931, as bifurcated by the agreement dated 6-5-1961, conferred on the assessee only the right to the net income from the trust property.
The assessee does not have any further right, as other beneficiaries would succeed the assessee on his death, in pursuance of the terms of the trust or on determination of the trust on the happening of certain contingencies mentioned in the said documents. In other words, the assessee had during the relevant years only a life interest. We have perused the two original settlement deeds as well as the articles of the agreement dated 6-5-1960. It is clear from these documents that the assessee had only a life interest, i.e., right over the income of the trust during his lifetime. He had no right over the corpus. The agreement dated 6-5-1962 merely bifurcates the properties under settlement as between the two beneficiaries. The two earlier trusts, which set out the terms of the trust, have also clearly set out the condition that the beneficiary should have only the right over the income. Clause 5 of the trust deed dated 6-11-1931 sets out the following condition : 5. The trustees shall, at the direction in writing of the settlor during her life and may at their discretion after the death of the settlor at any time or times, sell the said land, hereditaments and premises or any part or parts thereof, either together or in parcel, and either by public auction or private contract, and, either with or without special stipulations, as to title, evidence or commencement of title or otherwise, and may buy in and rescind or vary any contract for sale and resale without being answerable for any loss occasioned thereby and may, for the purposes aforesaid or any of them, execute and do all such assurances and things as they shall think fit and shall, out of the moneys which shall arise from any such sale as aforesaid, pay the expenses incurred in or about the same or otherwise in or about the execution of any of the trusts or powers of these presents and shall invest the net sale proceeds in securities or investments hereby authorised.
It is clear, therefrom, that the beneficiary had no right to have the capital gains or any other part of the sale proceeds distributed either on the date of sale or even during his lifetime. It is a mere accretion to the corpus. The assessee had no right over the capital gains. The Gujarat High Court in the case of Kum. Pallavi S. Mayor v. CIT  127 ITR 701 was dealing with similar capital gains made by the trustees who held the corpus of the trust for the benefit of a sole beneficiary, as in this case. Though, the Tribunal had found, in that case, that the trustees had permitted the beneficiary to draw more than what she was entitled to by way of income and, therefore, had drawn from the corpus, the High Court was of the view that such excess drawing could be relevant only for the purposes of rate of tax on the beneficiary and would not justify an assessment of capital gains in the hands of the beneficiary. The High Court further pointed out that though capital gains would be 'income' for income-tax purposes, the beneficiary would have no right to such capital gains, if such beneficiary had only a life interest over the income from such trust property. In coming to this conclusion, it referred to a number of decisions, including those relating to representative-assessees rendered by the Supreme Court and the High Courts. This decision was followed by the Gujarat High Court in Anarkali Sarabhai v. CIT  138 ITR 437.
6. We had also occasion to consider a similar question in the case of Mrs. A.V. Rajani Reddy [IT Appeal Nos. 75 to 83 (Hyd.) of 1983, dated 30-7-1984] [since reported in  11 ITD 1 (Hyd.)], to which one of us was a party. We had pointed out there as under : It is doubtful whether there could be any inference of benefit during the year even if the trust had only 'accumulation' clause.
The Supreme Court in the case of CIT v. Manilal Dhanji  44 ITR 876 has observed that in a case where income under trust is accumulated during minority, the income to be aggregated is only the income which 'accrues to him or he has beneficial interest income in the relevant year of account'. Though the decision was rendered in the context of Section 16(3)(a) and (b) and Section 41 of the 1922 Act, we do find that the trust is a similar one and that the inference on similar facts is that the beneficiary has no income accruing to him nor, has he any beneficial interest in the relevant year of account. The same view was repeated by the Supreme Court in Col. H.H. Sir Harinder Singh v. CIT  83 ITR 416 in the same context to the effect that benefit for aggregation should be a benefit in the year of account. Even after the introduction of the words in aggregation provisions to justify inclusion of deferred benefit, the Bombay High Court in the case of Yogendra Prasad N. Mafatlal v. CIT  109 ITR 602 considered the aggregation not possible as the interest was only 'contingent' and not vested in the light of Sections 19 and 21. The Gujarat High Court in Addl. CIT v. M.K. Doshi  122 ITR 499 held that the aggregation was not possible where the income was accumulated beyond minority though there was a possible discretionary benefit (not actually realised) in this case as in the case before us. Though these decisions were in the context of aggregation provisions, they were with reference to the issue whether the beneficiary had income during the year in circumstances which were either similar or even more favourable to the revenue. Apart from these decisions, there are the series of decisions of the Gujarat High Court starting from the decision in Kum, Manna G. Sarabhai's case (supra) where the provisions of the trust, as pointed out by the learned counsel for the assessee, were not dissimilar. This decision rendered for wealth-tax purposes was followed for income-tax purposes in Smt. Kamalini Khatau's case (supra) where it not only held that the income can be assessed in trustee's hands, but also stated how (at what rate) it should be assessed. This decision further pointed out that [decision in] Smt.
Kamalini Khatau's case (supra) [at page 668] was approved by the Supreme Court in the case of H.E.H. Nizam's Family (Remainder Wealth) Trust (supra). The further decisions of the Gujarat High Court in Kum. Pallavi S. Mayor's case (supra) and Anarkali Sarabhai's case (supra) also reiterate the same principle regarding assess ability of profit (capital gains) in such cases in the hands of the trustee and not the beneficiary, even where the assessee (in the later case) was a sole beneficiary of the trust as in this case, . . .
We have, therefore, to conclude that the assessee had no right to the capital gains in the relevant year of account when the capital loss was suffered, i.e., for the assessment year 1976-77. The assessment of capital gains or the determination of capital loss under the circumstances would be made only in the trustee's hands and not in the hands of the beneficiary. The trustee was, therefore, assessable and was assessed not as a representative-assessee but merely as the owner of the income in law. There is no inconsistency involved in the departmental action in assessing the trust income for earlier years in the hands of the beneficiary and considering the capital loss in the hands of the trustee. After all, only a life interest was offered and assessed, even for wealth-tax purposes in the hands of the beneficiary and not the entire corpus precisely for the same reason, as we have indicated here for our conclusion. If it had been a capital gain instead of the loss, we have no doubt that our conclusion would be the same, i.e., such capital gains cannot be considered in the assessee's hands but it had to be taxed only in the trustee's hands.
7. We have, however, yet to deal with another argument on behalf of the assessee that the words 'in the like manner and to the same extent' in Section 161 would entitle the assessee to have his liability determined, as though the assessment was all along on the beneficiary.
This argument is easily met. Only where an assessment is made on the trustee in his representative capacity, this provision could be invoked. Where no assessment on such capital is possible in the beneficiary's hands, it is not possible to apply the same rate of tax as on the beneficiary. It could possibly be argued that in such cases, the rate of tax is nil and that, therefore, capital gains cannot be taxed at all in the trustee's hands. If so, nor can any capital loss be determined. But, in our opinion, the correct view is that in respect of the capital gains, the trustee is assessable without any option to the ITO or the assessee to have it considered in the beneficiary's hands as the beneficiary had no right over the capital gains during this year.
The beneficiary has the right only over the income in the commercial sense and not over the income in its extended meaning to include capital gains. The trustee is assessable under the law, even on the basis of the principle enunciated by Viscount Cave in Williams v.Singer  7 TC 387, 411, wherein it was pointed out that any person in actual receipt and control over the income is liable to tax, as the principle and the object involved is "to secure in the Slate a proportion of the profit chargeable, and this end is attained (speaking generally) by the simple and effective expedient of taxing the profits where they are found". This principle has been approved by the Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. v. Ganpat Rai Him Lal  33 ITR 245, 251-252. Since no direct assessment is possible on this income in the hands of the beneficiary, the question of taxing the trustee 'in the like manner and to the same extent' does not arise. It is under these circumstances, that we are unable to agree with the argument of the learned representative for the assessee that the capital loss determined in the hands of the trustee should be set off against the capital gains made by the assessee in respect of his other assets, which did not form subject-matter of the trust.
8. In the result, the. order of the first appellate authority is upheld for reasons different from what has been stated by them. The appeal is dismissed.