SECTION 164/166 – ASSESSMENT OF TRUST WHERE
SHARE OF BENEFICI­ARIES UNKNOWN

910. Assessment of discretionary trusts under section 164/166 – Correct procedure therefor

CLARIFICATION 1

1. Attention is invited to Board’s Instruction No. 45/78/66/ITJ(5), dated 24-2-1967 [printed here as Clarification 2] on the subject of assessment made under section 41(2) of the 1922 Act/section 166 of the 1961 Act. In spite of the clear instructions to the effect that neither section 41 which give an option to the department to tax either the representative asses­see or the beneficial owner of the income nor the parallel provi­sions of the 1961 Act contemplated assessment of the same income both in the hands of the trustees and the beneficiaries, in­stances have come to the notice of the Board of such double as­sessment.

2. According to the Scheme of the 1961 Act, even as it was under the 1922 Act, the general principle is to charge all income only once. The Board desire to reiterate the earlier instructions in this regard. In order that there is no loss of revenue, the Income-tax Officer should keep this point in view at the time of raising the initial assessment either of the trust or the benefi­ciaries and adopt a course beneficial to the revenue. Having exercised his option once, it will not be open to the Income-tax Officer to assess the same income for that assessment year in the hands of the other person (i.e., the beneficiary or the trustee).

Circular : No. 157 [F.No. 228/8/73-IT (A-II)], dated 26-12-1974.

JUDICIAL ANALYSIS

EXPLAINED IN – The above circular was referred to in WTO  v. Sneh Kumar Gad­haiya [1984] 9 ITD 610 (Cal.). The Tribunal observed as follows:

“….Our attention was also drawn to Circular No. 157 [F. No. 228/8/73-IT (A-II)], dated 26-12-1974—in which it has been men­tioned that the general principle was to charge total income only once. Reiterating the earlier instructions in this regard, the Board directed the ITOs to keep the question of assessment under section 41(2) of the 1922 Act and under section 166 of the 1961 Act open at the time of raising the initial assessment either of the trust or the beneficiary, because once the option was exer­cised, it would not be open to the ITO to assess the same income for the assessment year in the hands of the other person, namely, the beneficiary or the trustee . . . .” (pp. 614-615).

“6. It was argued on behalf of the department that the assessee had not disclosed in any of his returns that he was the sole beneficiary of the trust, and, therefore, the property and income of the same was liable to be included in his individual assess­ment of wealth/income. The present instructions of the Board and the authorities on the subject would not help the assessee inas­much as the exercise of option by the departmental authorities could be only relevant when they had the full facts before them. Since the ITO/WTO assessing the present assessee did not know about the fact of the assessee being also the sole beneficiary from a trust, it cannot be said that he had exercised the option to exclude the said income/wealth from the  assessee’s personal assessments. We, however, are of the opinion that at least the ITO/WTO assessing the trust could have entered into this inquiry. After all when the said officer knew that the assessee was the sole beneficiary of the trust in question, he could have informed the ITO/WTO about the assessment of the income/wealth of the trust of which the assessee was the sole beneficiary and should have held up his hands till then as has been advised by the circulars of the Board referred to. Since he had not chosen to do so, there appears to be force in the assessee’s contention that it is not open to the department now to add the same income/wealth in the personal assessments of the assessee.” (pp. 614-616).

CLARIFICATION 2

1. Recently an interesting case came to the notice of the Board. The assessee was one of the beneficiaries in the trust. The shares of the beneficiaries were known and determinate. The Income-tax Officer raised an assessment on the trustees taxing the income of the trust in their hands at the appropriate rate and to the amount which would have been recoverable in the hands of the beneficiaries. While dealing with the case of one of the beneficiaries of the trust, the Income-tax Officer again included for rate purposes his share in the income of the trust. The reason advanced by him was that the amount of tax leviable should be the same whether the income from the trust is assessed in the hands of the trustees or in the hands of the beneficiaries and if the proportionate income from the trust is not included for rate purposes in the hands of the beneficiary, his income other than the income from the trust would be taxed at a rate lower than that which would have been applicable if the trust income were assessed directly in his hands.

2. The Board have been advised that the approach of the Income-tax Officer is not correct. Section 41 of the 1922 Act (corre­sponding to section 166 of the 1961 Act), gave an option to the department to tax either the representative assessee or the bene­ficial owner of the income. Once the choice is made by the de­partment to tax either the trustee or the beneficiary, it is no more open to the department to go behind it and assess the other at the same time. The inclusion of the share income from the trust in the total income of the beneficiary for rate purposes would virtually amount to an assessment of the income which has already been assessed and subjected to tax. According to the scheme of the Act, if certain income is to be included for rate purposes in the total income, a specific provision in that behalf is made in the Act. In the absence of any such express provision, the general principle to charge all income only once would be applicable in such a case.

3. The position under the 1961 Act is also identical. In order that there is no loss to the revenue, the Income-tax Officers may keep this point in view while raising the initial assessment on the trust/beneficiaries.

Letter : F. No. 45/78/66-ITJ (5), dated 24-2-1967

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