High Court Of Gujarat
Neo Trust vs. ITO
Section : 164, 161
Jayant Patel And S.H. Vora, JJ.
IT Appeal Nos. 20 & 141 Of 2001
IT Reference Nos. 74 & 141 Of 1996, 28, 42 To 44 Of 2000 & 25 Of 2003
January 16, 2015
JUDGMENT
Jayant Patel, J. – As in the present group of appeals, substantial questions of law, to some extent, are interconnected and they are also common in certain group, they are being considered simultaneously. We may record that in order to appreciate the respective questions formulated in the respective matters, the questions can be reformulated and thereafter based on the answer, in facts of each case, the ultimate decision can be recorded.
2. In our view, mainly two substantial questions of law would arise in the present group of matters as referred to hereinafter and to be specific in the first group of matter, comprising of Tax Appeal No.20 of 2001, ITR No.28 of 2000, ITR No.25 of 2003, ITR No.74 of 1996 and ITR No.141 of 1996, following question would be required to be considered:—
“Whether on facts and circumstances of the case, the Appellate Tribunal has substantially erred in law in holding that since some or all beneficiaries of the Trust are discretionary Trust, to the extent of share of beneficiary as discretionary Trust, the tax can be charged at the maximum marginal rate under Section 164 and not under Section 161 of the Income Tax Act, 1961 (hereinafter referred to as the, ‘Act’).”
3. Whereas, in the second group of ITR No.42 of 2000, ITR No.43 of 2000, ITR No.44 of 2000 and Tax Appeal No.141 of 2001, the substantial question of law which may be required to be considered, would be as under:—
“Whether on facts and circumstances of the case, the Tribunal was right in taxing income of the Assessee holding it as real income of the Assessee?”
4. The relevant facts in brief in each of the group can be summarized as under:—
Tax Appeal No.20 of 2001
The appeal is preferred against the order of the Tribunal dated 18.04.2000 in ITR Nos.2795 and 2772/Ahd/1986. Initially, A.O. assessed the appellant – Trust as discretionary Trust under Section 164 of the Act and charged the tax at the maximum marginal rate. The matter was carried in appeal before the CIT (A) who confirmed the order of A.O. The matter was further carried in appeal before the Tribunal and the Tribunal held that the income to the extent of 60.5% which was allocated to the beneficiary Trust can be taxed at the maximum marginal rate while the income to the extent of 39.5% which was allocated to the another beneficiary is to be treated in tax under Section 161 of the Act. Against the said decision of the Tribunal, the present appeal.
ITR No.28 of 2000
The A.O., after examining the various aspects of the case, held the status of the Assessee to be discretionary Trust and assessed the tax at the maximum marginal rate by applying provisions of Section 164(1) of the Act. The matter was carried in appeal and the CIT (A) confirmed the order of A.O. The matter was further carried in appeal before the Tribunal and the Tribunal reversed the order of the first Appellate Authority and directed the A.O. to treat the Assessee as specific Trust against which, the present reference by the Revenue.
ITR No.25 of 2003
The A.O. found that the Assessee Trust is a discretionary Trust and, therefore, charged tax at the maximum marginal rate under Section 164 of the Act. The matter was carried in appeal and the CIT (A) confirmed the order passed by the A.O. The matter was further carried in appeal before the Tribunal and the Tribunal held that Section 164 of the Act would not apply and found that the Trust is still specific and consequently, for the purpose of tax, the effect of the order of the Tribunal is that tax will be leviable under Section 161 of the Act. Under the circumstances, the present reference before this Court for applicability of Section 164 or 161 of the Act to the Assessee.
ITR No.74 of 1996
The A. O. held that the Trust cannot be treated as Specific Trust and will have to be regarded as discretionary Trust liable to tax at the maximum marginal rate. The matter was carried in appeal before CIT(A) and CIT(A) confirmed the order of the A.O. The matter was further carried before the Tribunal and the Tribunal dismissed the appeal by confirming the order passed by the CIT(A). Under these circumstances, the present appeal by the Assessee before this Court.
ITR No.141/1996
The A.O. found that the Assessee cannot be treated as Specific Trust and will have to be regarded as discretionary Trust liable to tax at the maximum marginal rate. The matter was carried in appeal before the CIT(A) and CIT(A) confirmed the order of the A.O. The matter was further carried before the Tribunal and the Tribunal dismissed the appeal of the Assessee, by confirming the order passed by the CIT(A). Under these circumstances, the present appeal by the Assessee before this Court.
ITR No.42 of 2000 with ITR No.43 of 2000 with ITR No.44 of 2000:—
The facts are common inasmuch as the A.O. found that the Assessee Trust cannot be treated as Specific Trust but are discretionary Trust liable to pay tax at the maximum marginal rate. The matter was carried in appeal before the CIT(A) and CIT(A) confirmed the order of the A.O. The matter was further carried before the Tribunal. However, before the Tribunal, additional ground was raised that the amount paid in advance to the Assessee by the Society with whom the agreement was entered into could not be treated as income in the debit entry and the said amount be permitted as if ‘no income’. The Tribunal rejected the said contention. Under these circumstances, the present Reference before this Court on the point as to whether the Tribunal was right in taxing the aforesaid amount as real income of the Assessee or not.
TAX APPEAL No.141 of 2001
The A.O. found that the Assessee Trust be treated as discretionary Trust and liable to tax at the maximum marginal rate. The matter was carried in appeal before the CIT(A) and CIT(A) set aside the order of A.O., and remanded the matter to A.O. The A.O., thereafter reconsidered the matter and found that the income of Rs.1,60,790/- was real income of the Assessee. The matter was once again carried in appeal before the CIT(A), who confirmed the order of A.O., and dismissed the appeal. The matter was further carried in appeal before the Tribunal and the Tribunal concurred with the view of the CIT(A) and the A.O., and dismissed the appeal of the Assessee. Under these circumstances, the present appeal by the Assessee before this Court for the limited point as to whether the amount of Rs.1,60,790/- could be treated as real income of the Assessee or not for the purpose of tax.
5. We have heard Mr.S.N. Soparkar, learned Sr. Counsel with Mr.B.S. Soparkar, learned Counsel in the Tax Appeals and Reference(s) made by the Assessee and we have also heard Mr.Manish Bhatt, learned Sr. Counsel, Mr.Nitin Mehta, Mr.Varun Patel and Mr.P.G. Desai, learned Counsel appearing for the Revenue in the respective matters namely; wherever the Assessee has preferred Tax Appeal or Reference, they have appeared for the Revenue and in the matters where Reference is made by the Revenue, they have appeared for the Revenue as per the appearance is filed in the respective matters.
6. DISCUSSION FOR THE FIRST SUBSTANTIAL QUESTION OF LAW AS MENTIONED IN PARAGRAPH 2 REFERRED TO HEREIN ABOVE:—
6.1 It is undisputed position that all Assessees are Trusts created by the Trust-Deed. In order to consider the question, we may refer to the relevant statutory provisions under the Indian Trust Act, 1882 (hereinafter referred to as the “Trust Act”) and also the relevant provisions of Income Tax Act (hereinafter referred to as ‘the Act’). Section 4 of the Trust Act provides for creation of Trust for any lawful purpose. Since the factum of creation of Trust is not in dispute, nor is under challenge, we find that no further discussion may be required in this regard. Section 9 of the Trust Act provides that every person capable of holding the property can be beneficiary. Chapter III of the Trust Act provides for the duties and liabilities of the Trustees. Section 11 of the Act provides that the Trustee is bound to fulfill the purpose of the Trust and to obey the direction of the author of the trust unless modified by consent of all the beneficiaries being competent to contract. Section 13 of the Act creates an obligation upon the Trustees to protect the title of the Trust properties. Section 14 provides that the Trustee must not himself or another set up any title to the property adverse to the interest of the beneficiaries. An obligation is created upon the Trustees by Section 15 to deal with the trust properties as carefully as a man of ordinary prudence as if the properties were belonging to him. Section 17 of the Act provides the role of the Trustees to be impartial when the beneficiaries are more than one. By virtue of Section 18 of the Act, obligation is created upon the Trustees to prevent the waste. Section 23 of the Act provides the liability upon the Trustees, if any breach of the trust is made. As we are not concerned with the other provision under this Chapter, the same need not be discussed in detail, save and except stated hereinafter. Chapter VI provides for the rights and liabilities of the beneficiaries. As per Section 55, the beneficiary has a right to the rent and the properties of the Trust. Section 56 provides for the right of the beneficiary to ensure the execution of the intention of the author of the Trust to the extent of beneficiaries’ interest. Section 57 provides for the right of the beneficiaries to inspect and take copies of the instruments of the Trust. The beneficiary has also right to transfer the beneficial interest as per Section 58. Section 60 provides for the right with the beneficiary that the Trust properties are properly protected and held by the persons and by the proper number of such person. Section 61 provides that the beneficiary has a right that the Trustees are compelled to perform a particular act of duty and are restrained from committing any contemplated or probable breach of the Trust. We need not discuss the other provisions of the Act.
6.2 In our view, the Scheme of the Trust Act shows that the creation of the Trust is recognized and the provisions made for rights and liabilities of the Trustees and also of the beneficiaries show that there is a jural relation for enforcement of such rights and liabilities between the Trustees of any Trust and the beneficiaries of a Trust. The breach of trust by the Trustees in respect of any properties of the Trust can be enforced by the beneficiaries against the Trustees.
6.3 We may now refer to the Act. Section 161 and Section 164 of the Act, which are relevant for the purpose of consideration, are as under:—
“Liability of representative assessee.
Section 161. (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 assessment 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.
[(1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate :
Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared 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.”
[Charge of tax where share of beneficiaries unknown.
164. (1) 60[Subject to the provisions of sub-sections (2) and (3), where] any income in respect of which the persons mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of 61 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 (such income, such part of the income and such persons being hereafter in this section referred to as “relevant income”, “part of relevant income” and “beneficiaries”, respectively), 62[tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate63 :]
Provided that in a case where –
[(i) none of the beneficiaries has any other income chargeable under this Act exceeding the maximum amount not chargeable to tax in the case of an 65[association of persons] or is a beneficiary under any other trust; or]
(ii) the relevant income or part of relevant income is receivable under 66[a trust declared by any person by will and such trust is the only trust so declared by him]; or
(iii) the relevant income or part of relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the 67[Assessing] Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance; or
(iv) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession, tax shall be charged [on the relevant income or part of relevant income as if it] were the total income of an 69[association of persons] :
[Provided further that where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, the preceding proviso shall apply only if such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.]
[(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, 72[or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2,] 73[or which is of the nature referred to in sub-section (4A) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11 74[or section 12], as if the relevant income not so exempt were the income of an association of persons :
[Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]]
[(3) In a case where the relevant income is derived from property held under trust in part only for charitable or religious purposes 77[or is of the nature referred to in sub-clause (iia) of clause (24) of section 2] 78[or is of the nature referred to in sub-section (4A) of section 11,] and either the relevant income applicable to purposes other than charitable or religious purposes (or any part thereof) 79[is not specifically receivable on behalf or for the benefit of any one person or the individual shares of the beneficiaries in the income so applicable are indeterminate or unknown, the tax chargeable on the relevant income shall be the aggregate of –
(a) the tax which would be chargeable on that part of the relevant income which is applicable to charitable or religious purposes (as reduced by the income, if any, which is exempt under section 11) as if such part (or such part as so reduced) were the total income of an association of persons; and
(b) the tax on that part of the relevant income which is applicable to purposes other than charitable or religious purposes, and which is either not specifically receivable on behalf or for the benefit of any one person or in respect of which the shares of the beneficiaries are indeterminate or unknown, at the maximum marginal rate :]
Provided that in a case where –
[(i) none of the beneficiaries in respect of the part of the relevant income which is not applicable to charitable or religious purposes has any other income chargeable under this Act exceeding the maximum amount not chargeable to tax in the case of an association of persons or is a beneficiary under any other trust; or]
(ii) the relevant income is receivable under 81[a trust declared by any person by will and such trust is the only trust so declared by him]; or
(iii) the relevant income is receivable under a trust created before the 1st day of March, 1970, by a non-testamentary instrument and the 82[Assessing] Officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust, to the extent it is not for charitable or religious purposes, was created bona fide exclusively for the benefit of the relatives of the settlor, or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance, tax shall be charged 83[on the relevant income] as if the relevant income (as reduced by the income, if any, which is exempt under section 11) were the total income of an association of persons :]
[Provided further that where the relevant income consists of, or includes, profits and gains of business, the preceding proviso shall apply only if the income is receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him :
Provided also that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]]
[Explanation 1. – For the purposes of this section, –
(i) any income in respect of which the persons mentioned in clause (iii) and clause (iv) of sub-section (1) of section 160 are liable as representative assessee or any part thereof shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed ;
(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed.
Explanation 2. – [Omitted by the Direct Tax Laws (Amendment) Act, 1987″
7. If Section 161 is read with Section 164 of the Act, it appears that in case where individual share receivable by the beneficiary is indeterminable or unknown, the charge of tax shall be at the maximum marginal rate as per Section 164, but if the share of the beneficiary is determined or a fixed specific share on each beneficiary is provided, Section 161 would be applicable and the tax chargeable would be as per the normal rate provided. Therefore, the distinction between Section 161 and Section 164 can be summarized as that in the case of a Trust, where specific share of the beneficiaries are provided (hereinafter referred to as ‘Specific Trust’ for the sake of convenience), the rate of tax shall be as per the schedule, but in the case of a Trust where the shares of the beneficiaries is unknown or indeterminable (hereinafter referred to as ‘Discretionary Trust’ for the sake of convenience), tax chargeable shall be at the maximum marginal rate.
8. The another aspect is that the Assessee is in capacity as the representative Assessee of the beneficiary of the Trust and not in his individual capacity of himself. To say in other words, the Trustees of the Trust are to be treated in representative capacity of the beneficiary and they are identified as representative Assessee. There is substance in the contention of the learned Counsel for the Revenue that when the Trust in representative capacity through its Trustees are to be assessed, the Assessing Officer may examine the aspects of beneficiaries of a particular Trust. Such is apparent because the Trustees are to represent the Trust property and the beneficiaries of the Trust are to enjoy and get the benefits of the Trust property. However, the same is subject to two limitations; one is that while undertaking the exercise to find out as to whether a particular Trust can be said as specific Trust or a Discretionary Trust, one has to examine the contents of the Trust-deed for processing a particular share of the beneficiary, if provided by the Trust-deed. If the share of the beneficiary/s is determined and specified, such Trust can be termed as specific Trust, but if the share is not determined or uncertain depending upon the decision of the Trustees as they may take from time to time, then such Trust can be termed as Discretionary Trust. The second aspect for the purpose of application of the Act is concerned, as the Trustees are in representative capacity, representing the interest of the beneficiary in the Trust for the purpose of tax liability the competent authority under the Act may examine as to whether the income of a particular beneficiary treated individually is liable for the higher slab of income tax or not. If it is found that the tax liability of the amount receivable or received by the beneficiary of his share individually in the hands of the beneficiary is higher , option would be available to the Assessing Officer to assess the tax at the higher level and then to finalize the assessment. To say in other words, if a specific Trust is having its beneficiaries, few as individual and few as discretionary Trusts, but the share of each of the individual as well as discretionary Trusts is specific, while undertaking the task of assessment the Assessing Officer for the purpose of share of the individual beneficiaries may take into consideration the normal tax treated chargeable for such purpose, but while taking into consideration the share of each of the discretionary Trust, who are beneficiary, may consider the applicable tax rate for the discretionary trust and thereafter may assess the tax of the representative assessee. But such option may be available only if some of the beneficiaries of the Trust are discretionary trust, though their shares are specific as per the trust-deed. In absence of any discretionary Trust being beneficiary and if the shares of each of the beneficiaries is specific, the liability of the representative assessee shall be as per Section 161 of the Act at the normal rate of tax.
9. Attempt was made by the learned Counsel for the Revenue to contend that it is not that the assessing officer can look upon the status of the beneficiaries of a particular trust for finding out as to whether it is a discretionary trust or a specific trust, but it was submitted that if the beneficiary of such discretionary trust, though its share is specific but if the share of beneficiary of that particular trust, which is a beneficiary of the parent trust is uncertain, the specific Trust which is a beneficiary of another parent specific Trust can also be assessed as a discretionary Trust. Alternatively, it was submitted that once the principle is accepted that for assessing any representative assessee the capacity of the beneficiary is to be considered as if discretionary or specific Trust for the purpose of chargeability of the tax, it can reach to any beneficiary of the beneficiary Trust at any level and if the ultimate beneficiary, may be at the second level Trust or third level Trust, is found to be a discretionary Trust, or the shares of the beneficiary is found to be uncertain, the first level Trust can be assessed as discretionary Trust for the chargeability of the tax and if the assessment is not considered accordingly, one can easily get away from the liability to pay tax at the maximum marginal rate, though the shares of the ultimate beneficiaries may be uncertain or unknown.
10. Whereas on behalf of the Assessee, it was contended that when any assessment is to be made of the representative Assessee, the Assessing Officer has to find out whether the shares of the beneficiaries are specific or not as per the Trust-deed. If the shares of the beneficiaries are specific, irrespective of the fact that whether it is discretionary Trust or any specific Trust or any individual person, the assessment can be under Section 161 of the Act and cannot be under Section 164 of the Act. It was submitted that it is not open to the Assessing Officer to look at the status of the beneficiaries of the Trust or a beneficiary of a second level or third level Trust, whether discretionary or a specific Trust and it was, therefore, submitted that the lower authorities have committed error and have not properly construed the statutory provisions of the Act.
11. In order to appreciate the contention we find that the same can better be explained by giving example. For example, First Level Trust has three beneficiaries; one individual, one discretionary Trust and one specific Trust; Second Level Trust, which is discretionary Trust and is beneficiary of the First Level Trust has its beneficiaries, providing for specific shares for individual person(s) as well as discretionary Trust. Third Level Trust, which is a discretionary Trust but all its member-beneficiaries are individual, but shares of the beneficiaries are uncertain.
12. The contention on behalf of the Assessee is that the First Level Trust, wherein the share of each of the beneficiaries is specific, is required to be assessed under Section 161 and Section 164 of the Act would not be applicable. Whereas the contention of the revenue is that while assessing First Level Trust, the Assessing Officer can reach up to Third Level Trust and its beneficiaries to find out as to whether the share of the beneficiaries at the Third Level Trust is specific or not.
13. If the contention of either side is strictly examined in light of the provisions of the Trust Act independently, one may say that the composition of the First Level Trust and its beneficiaries, wherein the share of each of the beneficiaries is specific share or not is only required to be considered. But if considered in light of the provisions of the Act for the purpose of chargeability of the tax keeping in view that the trustees of the First Level Trust are to be considered as representative Assessee and they represent the share of the beneficiary, which is a specific Trust, in order to see that there may not be avoidance of tax, more particularly when the option is made available under Section 164 of the Act, the A.O. can examine as to whether the discretionary Trust of the First Level Trust is discretionary Trust or not and if the beneficiary of First Level Trust is discretionary Trust, the Assessing Officer can assess the income of such beneficiary of the First Level Trust at the maximum marginal rate as per Section 164 of the Act to the extent of the respective share of such beneficiary trust and can assess the income of the First Level Trust by segregating the income of each of the beneficiary separately, whether, individual beneficiary or a beneficiary Trust, which is a discretionary Trust and not specific trust. But if the Second Level Trust, which is a beneficiary of the First Level Trust is found to be specific, then the assessment of the First Level Trust should rest there.
14. Attempt to contend that if the beneficiary of Second Level Trust is a discretionary Trust or the shares are uncertain of the beneficiaries of Second Level Trust, the beneficiary of the First Level Trust can also be taxed at the maximum marginal rate under Section 164 of the Act, in our view cannot be accepted because the relationship between the Trustees in representative capacity and the answerability of the Trustees to the beneficiary is limited to the beneficiary of a particular Trust as per the Trust Act and it cannot be stretched or reached to the beneficiaries of the beneficiary and then again beneficiaries’ beneficiary. If such an interpretation is made, it would not only result into stretching the jural relation or legal relation between the Trustees and the beneficiaries beyond the scope of the Trust Act, but it may also create a chaotic and uncertain situation. As observed earlier in normal circumstances, once the specific share of each of the beneficiaries is already distributed by the Trustees amongst the beneficiaries, the revenue can say that even if the income is in the hands of the beneficiary, the charegability of tax is not lost, because the assessment is in representative capacity, but the Trustees of the First Level Trust cannot be said to be representing the interest or the share of beneficiaries of its beneficiaries. Not only that but if the contention is accepted for the sake of consideration, the resultant situation in law would be that the beneficiaries of the Third Level Trust would be in a position to enforce their rights not only against its own Trustees, who are at Third Level Trust but also against the Trustees of the First Level Trust. Such would create endless chaotic situation which in our view can not be said as conceived by the Trust Act.
15. It is true that for the purpose of tax, the provisions of the Act are to be considered and the Act provides for assessment in representative capacity, but the representative capacity of the Trustees of the First Level Trust is to represent the beneficial interest of the beneficiary of its Trust, it cannot reach to the Third Level Trust or the beneficiaries of the Third Level Trust as sought to be canvassed. Had the option been not available under Section 164 of the Act to the Assessing Officer, possibly the beneficiaries of Second Level Trust could also not be considered, but as such option is expressly made available under Section 164 of the Act, we are inclined to read and interpret that for the purpose of tax under the Act, the Assessing Officer may be in a position to find out the status of the beneficiaries of the First Level Trust and while finding out the status of the beneficiaries of the First Level Trust, he may look upon the taxable liability of the beneficiaries of Second Level Trust, who are the beneficiaries of First Level Trust and if the tax payable is higher, while making assessment of the First Level Trust, option may be resorted to under Section 164 of the Act to that extent only, but such cannot be permitted again to reach to the Third Level Trust and to find out the taxable liability of the beneficiaries of the Third Level Trust. Hence, the said contention to that extent of the Revenue cannot be accepted.
16. In the decision of the Apex Court in the case of CWT v. Trustees of H.E. H. Nizam’s Family, [1977] 108 ITR 555, in which the decision of the Apex Court begins at page 580, wherein at page 593, the Apex Court observed inter alia, relevant of which reads as under:
“The basic idea underlying 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.”
On the very page, it has been observed inter alia, as under:
“This Court also observed that “the same considerations must apply in the interpretation of section 161 (2) of the Income Tax Act, 1961″.”
17. At this stage, we may record that in the case of one of the assessee, viz., Neo Trust v. IAC [1992] 41 ITD 412 (Ahd.), at paragraph 11.3, had observed thus-
“We do not agree with the submission of the learned counsel for the assessee to the effect that the trustees of each oral discretionary trusts of first line were the real beneficiaries of the assessee trust and that under the law we are not entitled to inquire as to on whose behalf and for whose benefit those trustees had to receive part of the income from the assessee trust. We are of the opinion that substance of the matter is to be taken into account. We have to inquire as to who are the real beneficiaries of the assessee-trust as far as that part of the income is concerned. That inquiry will be wholly unreal and would be incomplete, if we accept ipse dixit that since the trustees of these 11 oral discretionary trusts of first line have been named as beneficiaries they should be regarded as beneficiaries.”
18. At this stage, we may also record that similar view was taken by Tribunal in I.T.A. No.1435/Ahd/1988 in the case of S.K. Patel Family Trust v. Asstt. CIT vide decision dated 04.01.1999 and it was held that the assessee Trust be assessed under Section 161 r/w section 166 of the Act and not under section 164 of the Act. It may also be recorded that the very order of the Tribunal was carried in Tax Appeal No.3/99 before this Court and the Division Bench of this Court (Coram : R. Baliya & A.R. Dave, J.J.) by its order dated 16.04.1999, did not find any questions of law to be considered and therefore, the appeals were dismissed.
19. If the principles of doctrine of merger is considered in light of the decision taken by this Court in the case Nirma Industries Ltd. v. Dy. CIT [2006] 283 ITR 402/155 Taxman 330, one may contend that the aforesaid view of the Tribunal in the case of S.K. Patel Family Trust (Supra) has been upheld by the High Court, but at the same time, it is true that there is no discussion on merits by this Court and hence, we have found it proper as per the observations made hereinabove to examine the questions before giving final answer to it.
20. In the decision of the Apex Court in the case of Wealth Tax v. Trustees of H.E. H. Nizam’s Family Trust (supra), the Apex Court had no occasion to further examine as to whether the assessing officer can reach to the beneficiary of the third level trust for making assessment of trustees of first level trust. Therefore, we find that the said decision would be of no help to the learned counsel Mr.Bhatt, appearing for the Revenue.
21. At this stage, we may also record that Mr.Soparkar, learned counsel appearing for the assessee did contend that the view was also taken by the Tribunal in the case KV Patel Family Trust v. CIT [2014] 49 taxmann.com 499 (Guj.) to the effect that the Trust could be termed as specific trust and the matter was carried in reference before this Court being ITR 67/95 and others, wherein this Court vide order dated 05.08.2014, has held that since the shares of the beneficiaries of that particular trust were specific, the trust is to be treated as specific trust and the question was answered in favour of the assessee against the Revenue.
22. However, Mr.Bhatt, learned counsel appearing for the Revenue contended that in the said case of S.K. Patel Family Trust (Supra), none of the beneficiary was discretionary trust nor there was any further inquiry that the beneficiaries of the beneficiary was discretionary trust and therefore, the said decision may not apply to the present question to be considered by this Court in the present group of matters.
23. We find that it is true that to classify the trust as specific trust or not is considered by this Court in the above referred decision. But, in the said decision, the question did not come up for consideration before this Court as to whether beneficiary of third level trust, even found to be discretionary trust or the share is found to be uncertain, the assessment of first level trust can be made under section 164 of the Act or not.
24. Mr.Mehta, learned counsel appearing for the Revenue in some of the matters did contend that as per the decision of this Court in the case of M.L. Family Trust v. State of Gujarat [1995] 213 ITR 152/82 Taxman 556 and another decision of this Court in the case of Niti Trust v. CIT [1996] 221 ITR 435/[1997] 90 Taxman 169, it has been held that the trustees are representative assessees and therefore, the assessing officer has to look upon the beneficiary for the purpose of assessment of tax.
25. In our view, even if such principle is considered, it would be to the extent of beneficiaries of first level trust to be independently taxed or for considering the tax liability, beneficiary of second level trust may be considered, but it would not be for the beneficiary’s beneficiary and beneficiary’s beneficiary’s to the extent of reaching beneficiaries of the third level trust as sought to be canvassed. Hence, the said decisions are of no help to the revenue.
26. At this stage we may make useful reference to the decision of the Apex Court in the case of Jyotendra Sinhji v. S.I. Tripathi [1993] 201 ITR 611/68 Taxman 59 and more particularly the observations made at pages 628 and 629, relevant of which reads as under:
“The only argument is that inasmuch these trusts are discretionary trusts, the, income therefrom must necessarily be taxed and can only be taxed in the hands of the trustees and not in the hands of the beneficiary. It is argued that the Revenue has no choice to tax either the trustees or the beneficiaries in such a case. We are unable to agree The trustees in the case of a trust declared by a. duly executed instrument in writing are treated as representative assessees (Section 160(1)(iv)). It is equally true that in the case of a discretionary trust, trustees are liable to be taxed in respect of the income received by them at the rate specified in Section 164(1).”
Further, on page 629, it was inter alia observed, after considering section 166 of the Act, as under:
“The Section states in unmistakable terms that nothing contained in the preceding provisions in the chapter shall preclude the Revenue from making a direct assessment upon the beneficiary and/or from recovering the tax payable from such person. The Revenue has thus been given an option to tax the income from a discretionary trust either in the hands of the trustees or in the hands of the beneficiaries.”
The aforesaid shows that the option is available to the assessing officer as observed earlier to tax the trustees or to the beneficiaries who receive the share in the trust property.
27. In view of the aforesaid observations and discussions, we find that on the first question, reproduced at paragraph No.2 hereinabove, the answer would be against the revenue and in favour of assessee, but with the option available to the assessing officer to resort to the provisions of section 164 of the Act in the event the beneficiary of the first level trust are discretionary trust to the extent of their respective shares, but such analogy or the mode would not be available by connecting the beneficiary of second level trust with third level trust even if they are discretionary trust or the shares of the beneficiaries are uncertain and such aspect may arise for consideration only if there is separate assessment of the trustees of second level trust or third level trust.
28. As in all the matters, being Tax No.20/01, ITR Nos.28/00, 25/03, 74/96 and 141/96, the question arise for reaching to the beneficiaries of the second level with third level trust for the assessment of first level trust, the impugned orders of the Tribunal cannot sustain for charging tax at the maximum marginal rate under section 164 of the Act. All appeals as well ITRs shall stand disposed of accordingly.
29. We may now consider the second question, as reproduced in para 3 hereinabove.
30. On the second question, the contention was raised by the learned counsel appearing for the assessee that once the amount credited in the books of account was on contingencies of the remuneration available, it could not be considered as real income.
31. Whereas, on behalf of the Revenue, it was contended that when as per the agreement, the remuneration was receivable and is received, it can be treated as real income and the same has been rightly considered by the Tribunal.
32. We may record that the Tribunal in the impugned common judgment, has observed at paragraphs 21, 22 and 23, as under:
“21. We will now consider the merits of the additional ground raised by the assessees. The assessees have contended that the income which was accounted for as their respective income in the P & L A/c. in the respective year should be treated as no real income having accrued in their favour in view of the notices received by the assessees from their respective societies. The learned counsel for the assessees stated that since these assessees did not carry out any work as per the agreements executed by them with their respective societies; these assessees in fact and in law and on the basis of true facts are not entitled to receive any such income. No real income has accrued in favour of these assesses. Merely because certain book keeping entries were passed in the books of accounts and such amounts were shown as income that cannot represent real income. The asssessees also relied upon various decisions cited supra.
22. It is true that mere existence or absence of book keeping entries will not determine the existence of real income. It will have to be determined on the basis of due consideration of entire evidence existing on records.
23. In the case of Shalini Organizer, a copy of the agreement dt. 14.1.1982 has been placed at Page 57 to 67 of the paper book No.1. Clause 17 of the said agreement reads as under:-
“17. As per this agreement, the amount of remuneration of the concerned year is required to be paid on completion of account year of the party of second part. As per this agreement, the account year of the party of second part completes at the end of February so the aforesaid amount of remuneration is required to be paid as under at the rate of 8% of Rs.65,00,000-00 i.e. at the rate of 3% of total amount of remuneration in first year and at the rate of 2% for the remaining two years. That amount comes to Rs.5,20,000/-. This amount is required to be paid every year at the end of February.
Dt . 28.2.1983 1,95,000
Dt. 29.2.1984 1,62,500
Dt. 28.2.1985 1,62,500
5,20,000
However, whenever financial necessity arise for both the parties, such financial transaction can be made with a view to help each other irrespective of such amount is due or not.”
Similar agreements have been executed by the respective Housing Societies and the other two assessee trusts specifying therein the amount of organisation fees payable by the respective societies to the assessee trusts, which will accrue in their favour on completion of their respective accounting years. The entries relating to such income by way of organisation fees receivable by the assessee trusts has been credited as income in the P & L A/cs. on the basis of such legally enforceable agreements executed between the societies and the assessee trusts. The income which had already accrued in favour of the assessee trusts on the completion of each accounting year of the respective assessee trusts, cannot be converted into “NO” income merely because the respective societies sent notices after a period of more than 5 years asking for refund of the aforesaid amount of income, which had already accrued by virtue of the aforesaid agreements on completion of each of the accounting year under consideration.”
Further, in paragraph 24, the Tribunal proceeded to observe, the relevant of which reads as under:
“A perusal of the respective balance sheets of Shalini Organiser submitted in the compilation at Pages 42 and 43 of the paper book No.1 inter alia shows that the assessee had incurred an expenditure of Rs.30,666/- in the accounting year ending on 28.2.1983. Likewise P & L A/c. of Astu Organiser placed at Page 20 of the paper book No.1 shows that the expenditure of about Rs.35,055/- was incurred by the said trust in the accounting year ending on 31.3.1983. In Sarav Organiser the trust had spent a sum of Rs.32,969/- in the accounting year ending on 31.3.1983. The figures of expenditure incurred in the subsequent years are not available. However, even as per the notices sent by the societies, it has inter alia been contended by them that work done by these trusts is not matching with the work done by them and therefore, they have stated that payment for organisation fees already made to them is excessive. All these facts reveal that the claim of the assessees about having not done any work whatsoever is not correct and the assessees’ contention that no real income in fact had accrued in the relevant accounting year under consideration, is also not sustainable on the facts of the case.”
33. If we consider the reasons recorded by the Tribunal in this regard, the same shows that the Tribunal after considering the terms of the agreement has recorded the finding of fact that as per the agreement, the income which had already accrued in favour of the assessee trust during the completion of accounting year cannot be treated as no income merely because the respective societies sent notices after many years demanding the refund of the aforesaid amount. Nothing is brought to our notice that the agreement expressly provided for the refund of the amount already paid by way of remuneration nor there is any adjudication by any authority that the assessee was under obligation to refund the amount. Under these circumstances, when the Tribunal has recorded ultimate finding of fact after considering the agreement on record that the refund as sought to be contemplated cannot be termed as no real income as contended by the assessee and the Tribunal has found that it can be termed as real income based on the terms and conditions of the agreement, we do not find that the same can be interfered with while undertaking the examination of the so called substantial questions of law. Whether a particular income was real income as per the terms and conditions of the agreement of the assessee or not in our view is essentially a question of fact which would be beyond the scope of judicial scrutiny in the present appeals before this Court. Same will be the position for examining references which would be limited to only substantial questions of law. Hence, we find that the second substantial question of law as sought to be canvassed by the respective appellants or the assessee would not arise for our consideration further as sought to be canvassed. Hence, the references as well as Tax Appeals against the order of the Tribunal to that extent cannot be accepted. Hence, shall stand disposed of accordingly.
34. All the Tax References as well as Tax Appeals shall stand disposed of in terms of the orders passed hereinabove.
[Citation : 372 ITR 546]
