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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: KAMALINI KHATAU
Court Name: Supreme Court of India Judge(s): M. N. Venkatachaliah, S. P. Bharucha, S. C. Agarwal Title: COMMISSIONER OF INCOME-TAX vs KAMALINI KHATAU Case No.:Civil Appeal No, 2145 of 1978Civil Appeals Nos. 2147, 2148, 2151 to 2153, 2155
and 2156 of 19 Date of Judgment:1994-05-09 Reported As: 1995 PTD 690 Result: Appeals allowed Judgment ORDER S. P. BHARUCHA, J.---An interesting question arises in these appeals. It is this: has the Revenue an option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust when the income thereof is distributed and received by the beneficiaries in the accounting year? The appeals have been heard together and may be disposed of by a common judgment, taking, as illustrative, the facts of the lead appeal (Civil Appeal No,2145 of 1978---CIT v. Mrs. Kamalini Khatau). The relevant assessm ent year is 1969-70, the previous year being the calendar year 1968. The assessee was the beneficiary of nine trusts. In respect of three of these she was the sole beneficiary, and there is no dispute about their income. In regard to the other six trusts, the assessee was one of the beneficiaries thereunder. In each of these six trust deeds the clause relevant for our purpose read thus: "From and after the date hereof (i,e, the date of the trust d) and during the periods mentioned in this clause, the trustees m either accumulate the net income of the trust or at their discretion pay the same to the persons as mentioned therein or to any one or more of them to the exclusion of others or other of them for their, his or her absolute use or benefit in such proportion and in such manner as the trustees may in their absolute discretion think fit..." During the accounting year relevant to the assessment year 1969-70, the assessee received the amounts set out hereafter. The amounts were received pursuant to the resolutions of the trustees to distribute the same from out of the income of the six trusts for the accounting year: Name of the trust Amount
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(Rs.) 1. Geeta Mayour D.---T rust No.1 ... 1,600 2. Ambalal Sarabhai D.---T rust No.4 ... 6,200 3. Manorama Sarabhai (K.8.) D---T rust ... 1,000 4. Saraadladevi Sarabhai (G.15) D-T rust ... 1,400 5. Manorama Sarabhai D.---T rust No.1 ... 7,300 6. Anand Sarabhai (J-9) D.---T rust ... 500 ... 18.000 The assessee contended before the Income Tax Officer that the said amount of Rs,18,000 was not liable to be taxed in her hands. The payment of income under the said six trusts to any one or more of the beneficiaries thereof depended upon the discretion of the trustees; accordingly, the shares of the beneficiaries thereof were indeterminate and unknown. The income of the trusts was, therefore, taxable only in the hands of the trustees thereof, having regard to the provisions of section 164 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The Income Tax Officer rejected the assessee's contention and assessed the said amount of Rs,18,000 in her hands. In doing so he relied upon the provisions of section 166 of the Act. The assessee preferred an appeal. The Appellate Assistant Commissioner affirmed the view taken by the Income Tax Officer. The assessee preferred a second appeal before the Income Tax Appellate Tribunal. The Tribunal held that no part of the income of the said six trusts was receivable on behalf of or for the benefit of any of the beneficiaries thereof. The provisions of section 164 were, therefore, attracted. The Tribunal rejected the Revenue's contention that section 166 was applicable. Accordingly, the Tribunal allowed the assessee's appeal. At the behest of the Revenue, the Tribunal referred to the High Court of Gujarat for its opinion the following question: "Whether on the facts and in the circumstances of the case, various amounts totaling Rs,18,000 received by the assessee out of the income, of the six discretionary trusts are liable to be taxed in the hands of the assessee?" A Division Bench of the High Court referred the matter to a larger Bench, and it was heard by a Bench of three learned Judges (see (1978) 112 ITR 652). The order of the Tribunal was upheld by the majority judgment, the third learned Judge dissented. We shall have occasion to refer to the majority and dissenting judgments. It is convenient now to set out those provisions of the Act which have a bearing on the issue that we are called upon to decider Section 4 imposes the charge; it says that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate, income-tax at that rate shall be charged for that year, in accordance with and subject to the provisions of the Act, in respect of the total income of the previous year of every person. Section 5 defines the total income of a person resident in India to include "all income from whatever source derived which-- "(a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year." Chapter XV of the Act is titled "Liability in special cases". Part B thereof sets out the general provisions applicable to representative assessees. 'Section 160 defines a representative assessee for the purposes of the Act to mean in respect of the income of a non-resident specified in subsection (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163 in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot in respect of income which the Court of Wards, the Administrator-General the Official Trustee or any receiver or manager (including any person, whatever his designation, who in fact
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manages property on behalf of another) appointed by or under any order of a Court, receives or is entitled to receive, on behalf or for the benefit of any person, such Court of Wards, Administrator- General, Official Trustee, receiver or manager; (iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913) receives or is entitled to receive on behalf, or for the benefit of any person, such trustee or trustees; (v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf, or for the benefit, of any person, such trustee or trustees." At the relevant time section 161 reads thus: "Liability of representative assessee---(1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessm ent shall be deemed to be made upon him in his representative capacity only, And the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. (2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act." Section 162 entitles every representative assessee who, as such, pays any sum under the Act to recover it from the person on whose behalf it is paid or to retain an amount equal to the sum so paid out of moneys that are or may come to him in his representative capacity. As it stood at the relevant time section 164 read thus: " Charge of tax where share of beneficiaries unknown.---Where any income in respect of which the persons mentioned in clauses (iii) and (iv) of subsection (1) of section 160 are liable as representative assessees or any part thereof, is not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable (which persons are hereinafter in this section referred to as 'the beneficiaries') are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total income of an association of persons, or, where such income or such part thereof is actually received by a beneficiary, then at the rate or rates applicable to the total income or total world income of the beneficiary if such course would result in a benefit to the Revenue." Section 166 read thus: "Direct assessm ent or recovery not barred.---Nothing in the foregoing sections in this Chapter shall prevent either the direct assessm ent of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income." We may now paraphrase, and thus emphasise, the provisions of Chapter XV that are most material to our discussion. By reason of section 160 trustees appointed under a trust deed or will who receive or are entitled to receive on behalf or for the benefit of any person any income are representative assessees in respect of such income. Under section 161 every representative assessee is, as regards the income in respect of which he is a representative assessee, subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially and he is liable to assessment in his own name in respect thereof. Such assessm ent, however, is deemed to be made upon him only in his representative capacity and tax
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can be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. A representative assessee may not, in such capacity and in respect of income received by him as a representative assessee; be assessed under any provision of the Act other than Chapter XV. Section 164 sets out how tax is to be charged where the share of the beneficiaries is unknown. It applies when the persons mentioned in clauses (iii) and (iv) of subsection (1) of section 160 are liable as representative assessees. It, therefore, applies in the case of trustees who receive or are entitled to receive income on behalf or for the benefit of any person. Where income in respect of which the trustees are liable as representative assessees "is not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown" tax shall be charged as if that income were the total income of an association of persons. Section 164 itself, therefore, sets out what a discretionary trust for the purposes of the Act is. A discretionary trust is a trust whose income is not specifically receivable on behalf or for the benefit of any one person or wherein the individual shares of the beneficiaries are indeterminate or unknown. The rate of tax payable by trustees upon the income of a discretionary trust is that which would be paid upon such income by an association of persons. Where, however, such income or a part thereof is actually received by a beneficiary, tax shall be charged thereon at the rate applicable to the total income of the beneficiary if this benefits the Revenue. Section 166 states that nothing in sections 160 to 165 shall prevent the direct assessm ent of the person on whose behalf or for whose benefit income therein referred to is receivable or the recovery from such person of the tax payable in respect thereof. Some analogous provisions of the Indian Income-tax Act, 1922, may also be noted. Section 40 stated that where the guardian or trustee of any person being a minor, lunatic or idiot was entitled to receive on behalf of such beneficiary or was in receipt on behalf of such beneficiary of any income, profits or gains chargeable under that Act, tax would be levied upon and recoverable from such guardian or trustee in like manner and to the same amount as it would be leviable upon and recoverable from any such beneficiary if of full age or sound mind and in direct receipt of such income, profits or gains. More relevant are the provisions of section 41, which read thus: "Courts of Wards, etc.---(1) In the case of income, profits or gains chargeable under this Act which the Courts of Wards, the Administrators-General, the Official Trustees or any receiver or manager (including any person whatever his designation who in fact manages property on behalf of another) appointed by or under any order of a Court, or any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including the trustee or trustees under any Wakf deed which is valid,under the Mussalman Wakf Validating Act, 1913), are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such Court of Wards, Administrator-General, Official Trustee, receiver or manager or trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly: Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate, but, where such persons have no other personal income chargeable under this Act and none of them is an artificial juridical person, as if such income, profits or gains or such part thereof were the total income of an association of persons: Provided further that when part only of the income, profits and gains of a trust is chargeable under this Act, that proportion only of the income, profits and gains receivable by a beneficiary from the
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trust which the part so chargeable bears to the whole income, profits and gains of the trust shall be deemed to have been derived from that part. (2) Nothing contained in subsection (1) shall prevent either the direct assessment of the person on whose behalf income, profits or gains therein referred to are receivable, or the recovery from such person of the tax payable in respect of such income, profits or gains." We may now revert to the High Court's judgment. The majority judgment laid emphasis upon the word "charge" in the marginal note to section 164 and upon the word "charged" in the body thereof. The charge created by section 4 was in accordance with and subject to the provisions of the Act and it was held that, therefore, the charge in the case of the special class of representative assessees created by section 164 prevailed over the charge created by section 4. In cases falling under section 164 one had to look only to its provisions rather than to the provisions of section 161. The word "receivable" in the context in which it occurred in section 164 indicated that it was the trust deed that one had to look at and not the actual exercise of the discretion by the trustees in the course of the year. Section 166 permitted the direct assessment of the beneficiary when it could possibly be done under the provisions of sections 160 to 169 in Chapter XV. What was crucial was not section 166 but section 164; because if, under section 164, it was not open to the Revenue to proceed against the beneficiary, it was not open to the Revenue to treat the income of the trust except as the income of a fictional association of persons. The last portion of section 164 only gave an option as to the rates at which the tax was to be levied. The interest of a beneficiary under a discretionary trust was merely his right to be considered by the trustees. Because of the impossibility of dealing with income in such cases the Legislature had made the special provision of section 164. The question was, accordingly, answered by the majority judgment in the negative, that is, in favour of the assessee and against the Revenue. The dissenting judgment noted that tax liability arose on the last date of an accounting year. It was, therefore, permissible to tax a beneficiary under a discretionary trust provided that, upon exercise of the discretion conferred upon the trustees under the trust deed before the last date of the accounting year in which the income was received, they had indicated that a part or the whole thereof was of the beneficial ownership of one or more of the beneficiaries. The money in question, so soon as the discretion was exercised in favour of one or more beneficiaries, was receivable by them in fulfilment of the disposition made by the trust deed and what was merely a right to be considered as a potential recipient of a benefit became a vested right to receive the income or part of it according to the exercise of the discretion by the trustees. The money in question, as soon as the discretion was exercised, was held in trust for the respective beneficiaries and they became entitled to receive the same. In other words, before the accounting year ended and the tax liability arose, the beneficiaries were the persons in whom a vested right to receive and control the income arose. There was, therefore, no reason why, on principle, the resulting payment upon the exercise of discretion could not be taxed optionally in the hands of the beneficiaries for they were the persons in actual receipt and control of the income. Section 164 was no more than an enabling section similar to section 161(1) and nothing more or less could be read therein. In cases covered by section 161(1) the option could be exercised on the strength of the trust deed itself since the income in such cases was specifically receivable by the trustees on behalf of or for the benefit of a single beneficiary or, where there were more beneficiaries than one, the individual shares of the beneficiaries were determinate and known. So far as cases covered by section 164 were concerned, the exercise of the option became possible only upon the discretionary trustees allocating amongst the beneficiaries the whole or part of the income in the exercise of their discretion during the accounting year for, upon the happening of such event, the income was received by the beneficiaries in fulfilment of the disposition made by the trust deed and such income became chargeable to tax in the hands of the beneficiaries in view of the provisions of
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sections 4 and 5 of the Act. As regards the use of the word "charge" in the marginal note and the body of section 164 in contradistinction to the use of the expression "levied upon and recovered from" in section 161, the difference in the choice of language was of no significance. The word "charged" in section 164 could only be construed as conveying the meaning "levied and recovered". Section 166 was attracted in cases covered by section 164 where the beneficiaries had received the income or part thereof pursuant to the exercise of discretion by the trustees of a discretionary trust in the course of the same accounting year. Even assuming that the word "receivable" in section 164 had to be interpreted to mean "receivable under the trust deed" and that it was the trust deed that one had to look at this interpretation did not come in the way of holding that even a discretionary beneficiary, pursuant to the exercise of discretion in his favour and upon his receiving his share of the income in the course of the accounting year in which it was received by the trustees, was liable to be assessed and taxed in respect thereof. The dissenting judgment, therefore, answered the question that was posed in the affirmative, that is to say, in favour of the Revenue and against the assessee. The learned Solicitor-General appearing for the Revenue submitted that when income was received on behalf of a beneficiary of a trust, the beneficiary could be directly assessed under section 5. The Act did not intend to levy tax except in relation to the person who received income beneficially. Sections 160 to 166 were enacted to take care of a situation where the recipient of the income was not the person entitled to the beneficial enjoyment thereof and they created the concept of a "representative assessee" as also the fiction that he received the income beneficially. At the same time, it was made clear that the representative assessee's liability did not extend beyond the limit of the direct assessee, implicitly recognizing the liability of the direct assessee to be assessed. When the beneficiaries of a trust or their shares therein were indeterminate or unknown, the first part of section 161 applied for the liability of the trustee of a discretionary trust flowed from section 161. The second part of section 161, namely, levy and recovery in like manner and to the same extent, was inherently inapplicable to the situation and it was here that section 164 made special provision as to the status in which and the rate at which the tax was to be levied and recovered from the trustee. No judgment stated that the income of a trust must only be assessed in the hands of the trustee. What was stated was that where the assessment was made in the hands of the trustee, it could only be made in terms of the provisions of sections 160 to 166, or the equivalent provisions of sections 40 and 41 of the 1922 Act. Even where the trustee was taxed it was the beneficial interest which was taxed. There was and could be no dispute that in the case of a specific trust the Revenue could assess and recover the tax from the beneficiary even though the trustee was the first recipient of the income and had legal title thereto. On a parity of reasoning, there was no impediment to taxing the beneficiary of a discretionary trust when he had received the income in the accounting year. Section 161 made the representative assessee subject to the same duties, responsibilities and liabilities as if the income was received by him beneficially. It was necessary to create this fiction because it was never the object or intention of the Act to charge tax upon anybody other than the beneficial owner of the income. Having created the fiction of beneficial receipt, protection was given to the representative assessee by providing that the tax in his hands would be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. It was implicit in this that the tax could be leviable upon and recoverable from the person represented by the representative assessee. In the submission of Mr. Salve, learned counsel for the assessee, section 161 dealt generally with the taxation of all representative assessees, including trustees, whereas section 164 was a special provision applicable to discretionary trusts and was a complete code which laid down not only the mode and manner of taxation but also prescribed the basis and extent of the charge of tax.
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Section 164, therefore, excluded the application of section 161 wherever it became applicable on account of the existence of the circumstances therein mentioned. The assessment of beneficiaries, even where their shares were unknown, was unworkable because there could not be a fragmented assessm ent, partly on the trustees and partly on the beneficiaries. The tax was on the accrual of income upon the person who was in direct control thereof. The point at which the tax was levied was when the income accrued to the trustees. The distribution of income did not clothe the sum received by the beneficiary with the character of income which could be taxed once again on its receipt. The argument that there were two limbs to section 161 was misconceived because the trustees were liable to tax as owners and a beneficial interest in the income was not a condition essential to make the income taxable. Any person in effectual control of income could be taxed thereon, the subsequent deployment being irrelevant. It was conceivable that in certain circumstances, e.g., in the case of a specific trust in which a specific beneficiary was in direct receipt or control of specified income, the beneficiary could be directly assessed on general principles. Section 166…
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