PANNA SANJAY TRUST Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference raises a short but very interesting question of construction of S. 164 of the IT Act, 1961. The reference arises out of an assessment made on the trustee of a trust called Panna Sanjay Trust for the asst. year 1962 63, the relevant account year being Samvat year, 2017. This trust was created by Kasturbhai Lalbhai by executing a deed of trust dt. 18th March, 1961, for the benefit of the wife, children and grand children of his son, Shrenik. The period of distribution of the trust estate provided under the trust deed was thirty years from the date of the trust deed and until the date of distribution arrived, the income of the trust estate was to be applied at the sole discretion of the trustees for the benefit of the wife, children and grand children of Shrenik. During the relevant year of account, the income of the trust estate was Rs. 6,977 and that was the income returned by the trustees of the trust. Now out of this income of Rs. 6,977 a sum of Rs. 3,000 was paid by the trustees to Kalpana, who was one of the beneficiaries under the trust. Since the income of Kalpana from other sources amounted to Rs. 35,973 the ITO thought that it would be more beneficial to the Revenue to tax the sum of Rs. 3,000 received by Kalpana under the trust in the hands of Kalpana rather than to tax it in the hands of the trustees. The ITO accordingly included the sum of Rs. 3,000 in the total income of Kalpana and directly assessed her in respect of that amount. That left a balance of Rs. 3,977 to be assessed in the hands of the trustees and, since the individual shares of the beneficiaries under the trust were indeterminate or unknown, the ITO proceeded to assess the trustees as representative assessee in the status of AOP under S. 164 and charged tax on the balance of Rs. 3,977 at the rate applicable to the income of Rs. 6,977. The trustees were aggrieved by the application of the rate appropriate to the total income of Rs. 6,977 and they carried the matter in appeal to the AAC. The AAC accepted the contention of the trustees that the rate at which tax was liable to be charged was the rate applicable to the total income of Rs. 3,977 and allowed the appeal. The Revenue thereupon preferred a further appeal to the Tribunal and before the Tribunal, the Revenue succeeded in restoring the view taken by the ITO. The Tribunal took the view that, even though the total income taxable in the hands of the trustees was Rs. 3,977 by reason of the sum of Rs. 3,000 having been directly assessed in the hands of Kalpana, the rate applicable for determining the tax chargeable on the trustees was the rate applicable to the total income of Rs. 6,977. This view taken by the Tribunal is challenged in the present reference.

(2.) THE controversy between the parties lies in a very narrow compass and in order to arrive at its proper determination, it is necessary to refer to a few sections of the Act. Sec. 160 defines who is a representative assessee for the purposes of the Act and enumerates four categories of representative assessees who are assessable in respect of income which does not beneficially belong to them but belongs beneficially to another. Clause (iv) of Sub S. (1) of that section describes the fourth category of representative assessee by saying that in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise, receives or is entitled to receive on behalf or for the benefit of any person, such trustee shall be a representative assessee. Sec. 161 imposes a substantive liability to assessment on the representative assessee in the following terms :

(3.) NOW , where income is not receivable or received by the representative assessee specifically for the benefit of a single beneficiary or where the beneficiaries are more than one, the individual shares of the beneficiaries are indeterminate or unknown, the last part of S. 161(1) which prescribes that tax shall be levied upon the representative assessee in the like manner and to the same extent as it would be leviable upon the person represented by him, would not be applicable. How then is the assessment on the representative assessee to be made in such a case ? Sec. 164 provides the answer to this question. It says :