High Court Of Kerala
CIT vs. T. A. V. Trust
Sections 161(1A)
Asst. Year 1988-89, 1989-90
G. Sivarajan & K. Balakrishnan Nair, JJ.
IT Ref. Nos. 19 & 72 of 1999
28th March, 2003
Counsel Appeared
P.K.R. Menon & George K. George, for the Revenue : P. Balachandran, for the Assessee
JUDGMENT
G. SIVARAJAN, J. :
The matter arises under the IT Act, 1961, for short “the Act”. The scope and ambit of s. 161(1A) of the Act arises for consideration.
2. These two references are at the instance of the CIT, Thiruvananthapuram. Though the orders of the Income-tax Appellate Tribunal (for short, “the Tribunal”) are separate, the question of law referred in both these cases is the same. The respondent-assessee in both these cases is also the same. The only difference is that they relate to two different assessment years, viz., 1988-89 and 1989-90. The following question of law is referred in both these cases for decision by this Court : “Whether, on the facts and in the circumstances of the case and also in view of the provision contained in s. 161(1A) of the IT Act, the Tribunal is right in law and fact in holding that the income from the trust properties has to be assessed in the hands of the beneficiaries ?”
The brief facts necessary for the decision of these cases are as follows : The respondentassessee is a trust. It is carrying on business in the manufacture and sale of umbrellas. The trust had income from business as well as income from house property. In the assessment under the Act for the years 1988-89 and 1989-90, the assessee claimed deduction in respect of rental income received from the building owned by the trust. The AO disallowed the claim of the assessee holding that the building in question was an asset of the trust and the income therefrom has to be considered in the hands of the trust. The AO accordingly treated the assessee as representativeassessee under s. 161(1A) of the Act and tax was charged on the whole of the income at the maximum marginal rate applicable. In appeal by the assessee the CIT(A), Thiruvananthapuram, allowed the appeal, inter alia, relying on the decision of this Court in CWT vs. Thiruvenkata Reddiar (1981) 128 ITR 689 (Ker). This was confirmed by the Tribunal in the appeal filed by the Department. Hence, these two references at the instance of the Revenue.
Sri P.K.R. Menon, learned senior Central Government standing counsel for taxes appearing for the applicant, submitted that the building from which the rent is received is an asset of the assessee-trust and the income therefrom has to be considered in the hands of the trust. The senior counsel also submitted that the building is standing in the name of the trustees and not in the name of the beneficiaries and so the beneficiaries do not own the property in question and as such the question of taxing the property income in the hands of the beneficiaries does not arise. The senior counsel also submitted that in view of the special provisions contained in s. 161(1A) of the Act since the income of the assessee-trust includes income from profits and gains of business, tax has to be charged on the whole of the income of the trust at the maximum marginal rate. Senior counsel accordingly submitted that both the appellate authorities erred in relying on the decision of this Court in CWT vs. Thiruvenkata Reddiar (supra).
Sri P. Balachandran, learned counsel for the respondent-assessee, on the other hand, submitted that the rental income obtained by the assessee-trust has to be assessed in the hands of the beneficiaries as property income since all the beneficiaries as co-owners of the property have a definite share in the property. He relied on the Statement of Objects and Reasons for the introduction of s. 161(1A) w.e.f. 1st April, 1985, and submitted that private parties having business income were taking advantage by creating private trusts and that it is only to plug this loophole that s. 161(1A) is enacted. He also submitted that the object of the amendment was to bring business income alone for taxation at the maximum marginal rate. Counsel also submitted that the use of the expression “whole of the income” in s. 161(1A) means business income alone and no other income can be subjected to the maximum marginal rate.
The admitted facts are that the assessee is a private trust; it is carrying on business in the manufacture and sale of umbrellas; it also derived rental income from a building which stood in the name of the trust. The AO has observed that since the beneficiaries do not own the property the question of taxing the property income in the hands of the beneficiaries does not arise. The first appellate authority also observed that “on going through the materials on record there is no doubt that the building is owned by the trust and the share of the beneficiaries are certain”. The first appellate authority accordingly held that s. 26 of the IT Act which deals with computation of income under the head “Income from house property” overrides s. 161(1A) of the Act which deals with the definition of a “representative-assessee”; all the beneficiaries or co-owners of the property have a definite share in the property; following the ratio of the decision in Thiruvenkata Reddiar’s case (supra), each one of the beneficiaries has to be treated like any other assessee; hence income from house property has to be computed in each case in accordance with ss. 22 to 25 of the IT Act. The Tribunal also held that in this case the shares of the beneficiaries are definite and ascertainable and therefore as per the provisions of s. 161(1A) of the Act the income from the trust properties has to be assessed in the hands of the beneficiaries. The Tribunal also relied on the decision in Thiruvenkata Reddiar’s case mentioned supra. Sec. 160 of the Act deals with representative-assessees. Under s. 160(1)(iv) a representativeassessee means 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 or trustees. Sub-s. (2) thereof states that every representative-assessee shall be deemed to be an assessee for the purposes of this Act. Sec. 161 deals with the liability of representative-assessee. Sub-s. (1) thereof provides that every representative-assessee, as regards the income in respect of which he is a representativeassessee, 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 be assessed 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. Sec. 161(1A) inserted by the Finance Act, 1984 (21 of 1984), w.e.f. 1st April, 1985, which is relevant for the purposes of this case reads as follows : “Notwithstanding anything contained in sub-s. (1), where any income in respect of which the person mentioned in cl. (iv) of sub-s. (1) of s. 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. Explanation.—For the purposes of this sub- section, ‘maximum marginal rate’ shall have the meaning assigned to it in Expln. 2 below sub-s. (3) of s. 164.”
This sub-section opens with a non obstante clause under which where any income in respect of which a representative-assessee is liable 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. However, under the proviso to the said sub-section profits and gains 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 are excluded from the applicability of this sub-section.
According to the Revenue, in view of this sub-section, the entire income received by a representative-assessee has to be treated as one unit or otherwise as income received by an AOP since income from profits and gains of business is included in the said income and the entire income of the trust has to be assessed to tax at the maximum marginal rate as provided under Expln. 2 below sub-s. (3) of s. 164. According to the assessee, having regard to the object with which sub-s. (1A) of s. 161 was inserted w.e.f. 1st April, 1985, only the income from profits and gains of business from all sources is liable to tax at the maximum marginal rate and property income which is otherwise liable to be assessed under the provisions of ss. 22 to 25 cannot be included in the income which is liable to be assessed at the maximum marginal rate. This according to the assessee is the scope of s. 161(1A).
The Finance Bill, 1984, was introduced in the Lok Sabha on 29th Feb., 1984. Clause 20 of the Bill is regarding the amendment of s. 161 by inserting s. 161(1A) w.e.f. 1st April, 1985. In the Memorandum Explaining the Provisions in the Finance Bill, 1984, in cl. 44 it is stated as follows : “44. Trustees of a private trust are ordinarily not expected to carry on any business because, implicit in the nature of business is the possibility of incurring loss and no prudent trustee would risk the trust’s property in business venture. However, it has come to notice that taxpayers are increasingly conducting business through the medium of private trusts. Such arrangements are entered into for purposes of tax avoidance, the main object being to avoid payment of the registered firm’s tax which would become payable if the business is carried on in partnership.”
11. The CBDT in Circular No. 387 dt. 6th July, 1984 [(1984) 43 CTR (TLT) 3 : (1985) 152 ITR (St) 1], had also explained the scope and effect of the need for sub-s. (1A) of s. 161 as above. As already noted the view taken by the AO is that the building is standing in the name of the trustees and not in the name of the beneficiaries; the beneficiaries do not own the property in question and therefore the question of taxing the property income in the hands of beneficiaries does not arise. The two appellate authorities have already found that the building is owned by the trust and the shares of the beneficiaries are certain. It was also held that all the beneficiaries or co-owners of the property have a definite share in the property. The decision of the Division Bench of this Court in Thiruvenkata Reddiar’s case (supra) was relied on. This Court in Thiruvenkata Reddiar’s case (supra) mentioned earlier was concerned with a claim for deduction of the share in the fixed deposit under s. 5(1)(xxvi) of the WT Act, 1957. A minor assessee represented by her father was a beneficiary under a private trust called “Seematti Trust”. She had interest to the extent of 18 per cent in the income and assets of the trust. The trust had deposits in various banks. In the return filed under the WT Act she claimed deduction under s. 5(1)(xxvi) of the said Act in respect of 18 per cent of the amounts lying in deposit in various banks as per the books of the trust. The WTO did not grant the full relief. In appeal by the assessee the Tribunal took the view that under sub-ss. (1) and (2) of s. 21 of the Act the WTO was bound to treat the beneficiary of a trust like any other assessee and when the beneficiary under a trust is directly subjected to an assessment to wealth-tax under s. 21(2) the assessee would be entitled to claim the full extent of exemption allowed by cl. (xxvi) of sub-s. (1) of s. 5. This Court upheld the said findings of the Tribunal and held as follows : “Sub-s. (1) of s. 21 lays down, inter alia, that in the case of assets chargeable to tax under the Act held by a trustee appointed under a trust declared by a duly executed instrument in writing, wealth-tax shall be levied upon and recoverable from the trustee in the like manner and to the same extent as it would be leviable upon and recoverable from the person on whose behalf or for whose benefit the assets are held. Sub-s. (3) of s. 21 lays down, inter alia, that where the guardian or trustee of any person being a minor holds any assets on behalf of or for the benefit of such beneficiary, the tax under the Act shall be levied upon and recoverable from such guardian or trustee, as the case may be, in the like manner and to the same extent as it would be leviable upon and recoverable from such beneficiary, if of full age, and in direct ownership of such assets. The aforesaid provisions make it clear beyond doubt that the assessment against the trustee in respect of assets held by him on behalf of the beneficiary is to be made on the basis of a statutory fiction that the assets concerned are held by the beneficiary in his direct ownership. The same fiction has to be applied while making an assessment directly against the beneficiary under sub-s. (2) of the section. Hence, when an assessment is made under s. 21 of the Act either against the trustee or directly against the beneficiary in respect of assets which form the subject-matter of a trust, the asset in question, to the extent to which the beneficiary has a beneficial interest therein, is to be deemed to be ‘held’ by the beneficiary.”
12. The provisions of s. 161(1) of the Act are similar to ss. 21(1) and (2) of the WT Act. The Supreme Court in CWT vs. Trustees of H.E.H Nizam’s Family (Remainder Wealth) Trust 1977 CTR (SC) 306 : (1977) 108 ITR 555 (SC) also held that: “the consequences of the provisions in s. 21(1) of the WT Act is that the trustee is assessable ‘in the like manner and to the same extent’ as the beneficiaries. In the first place, there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. And, lastly, the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly.” It was also held that no part of the corpus of the trust properties can be assessed in the hands of the trustee. In view of the above, the reason stated by the AO that the beneficiaries are not the owners of the building cannot be sustained. Hence, by applying the dictum laid down by this Court in Thiruvenkata Reddiar’s case (supra) and by the Supreme Court in Trustees of H.E.H. Nizam’s Trust’s case (supra) about the asset in question to the extent to which the beneficiary has a beneficial interest therein has to be deemed to be held by the beneficiary.
The position under s. 161(1) of the Act is that a trustee under a trust cannot be assessed on the aggregate income received by it as a single unit. The assessment in the name of the trustee in terms of the sub-section can be made in two ways. The AO may make as many assessments in the name of the trustee as there are beneficiaries and levy the tax appropriate to such income at the rate of tax applicable to total income of each beneficiary. The assessing authority, in the alternative, can make a single assessment on the trustee, but has to indicate in the order the share income of each beneficiary and tax attributable to it. Sec. 161(1A) is an exception to the above rule. Under s. 161(1A) this rule of apportionment and determination of proportionate tax attributable to the beneficiary will not apply to any income earned by the trustee as profits and gains of a business. The whole of such income shall be taxed at the maximum marginal rate. A similar proviso occurs in s. 161(1) restricting the benefits where business income is involved. Under s. 164(1) if the individual shares of the persons on whose behalf and for whose benefit the income is receivable are indeterminate or unknown, such income, gain, will be taxed at the maximum marginal rate. In certain other circumstances, set out in the proviso to s. 164(1), the relevant income will be assessable not at the maximum rate but at the rate applicable to it as if it were the total income of an AOP. These are the only three exceptions to the rule in s. 161(1) of the Act. Sec. 161 treats the assessee as having representative character. The assessment on the trustee is to be in like manner and to the same extent as if it were made on the beneficiary himself directly. The practical effect of this provision is to render the assessment of the trustee and the beneficiary identical in every respect. It was also held that in a case where the trustee received income by way of dividend, interest or capital gains, it cannot but be treated as dividend, interest or capital gains, respectively, in the representative assessment which is to be made on the trustee. The Authority for Advance Rulings in Advance Ruling P. No. 10 of 1996, XYZ, In re (1996) 136 CTR (AAR) 358 : (1997) 224 ITR 473 (AAR) considered the scope of s. 161(1A) of the Act and observed at p. 541 thus, “It is true that s. 161(1A) provides for a tax at the maximum rate on the income from business in the hands of a trust.” To the same effect is the observation made at p. 510 under exception (a). Thus by virtue of the provisions of s. 161(1) of the Act income from property received by the trust cannot but be treated as income from property in the representative assessment which has to be made on the trustee. This is so, notwithstanding the fact that the trust in which the appellant is a beneficiary is having income from profits and gains of business. In the case of a trust which is having income from business as well as income from house property, by virtue of the provisions of s. 161(1A) of the Act, the income from the business earned by the trust shall be taxed at the maximum marginal rate treating it as a single unit and the income from house property has to be assessed in the hands of the trustee in the manner provided in s. 161(1) of the Act. This intention of the legislature is evident from the Statement of Objects and Reasons for the insertion of s. 161 (1A) of the Act vide the Memorandum Explaining the Provisions of the Finance Bill, as also from the circular issued by the CBDT mentioned above.
15. The stand of the Department is that by virtue of the provisions contained in s. 161(1A) of the Act, in a case where a trust is having income by way of profits and gains of business, income from property, income from interest, income from dividend and also income from capital gains, the entire income so received has to be treated as one and tax has to be levied at the maximum marginal rate. This according to us, is against the very scheme of the Act as also beyond the scope of s. 161(1A) of the Act. If we accept the stand taken by the Department, it will result in arbitrariness and discrimination attracting Art. 14 of the Constitution also. The effect would be that a trust which is not having income by way of profits and gains of business but income under other heads will be entitled to the benefit of s. 161(1), while a trust which is having income by way of profits and gains of business and also the income falling under other heads of income is being treated differently with a higher burden to the trust, which will amount to clear discrimination. That apart under the scheme of the Act, under s. 14 of the Act, all income, for the purpose of charge of income-tax and computation of total income, is classified under different heads, salaries, income from house property, profits and gains of business, etc., and income from other sources. For each head of income separate computation provisions are also made. So far as the income from house property is concerned, ss. 22 to 27 are provided. Section 26 of the Act deals with the property owned by the co-owners. Now reverting to s. 161(1A) of the Act it must be noted the sub-s. (1A) only says, “notwithstanding anything contained in sub-s. (1)” : in other words, it does not say “notwithstanding anything contained in this Act”. Thus, though the provisions of sub-s. (1A) override the provisions of sub-s. (1) of s. 161, it does not have the effect of overriding the provisions of s. 26 of the Act and consequently computation of the income from house property has to be made under ss. 22 to 25 of the Act since the Tribunal had entered a categorical finding that the shares of the beneficiaries are definite. As already noted, as per sub-s. (1A), where any income in respect of which a representative-assessee is liable consists of, or includes, income by way of profits or 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 rate. The income so liable referred to in the said subsection is only the business income of the trust and not any other income. It is only the income by way of profits and gains of business that can be charged at the maximum marginal rate. Any other interpretation, according to us, is against the very scheme of the Act and further such an interpretation will make the provisions of sub-s. (1A) of s. 161 unconstitutional. It is a well settled position that if two constructions of a statute are possible, one of which would make it intra vires and the other ultra vires, the Court must lean to that construction which would make the operation of the section intra vires (Johri Mal vs. Director of Consolidation of Holdings AIR 1967 SC 1568).
We accordingly answer the question referred in the affirmative that is in favour of the assessee and against the Revenue.
[Citation : 264 ITR 52]
