Case Law Details
M/s. Abad Trust Vs Asst. Director of Income tax -Exemption (ITAT Cochin)
The provisions of section 161(1) of the Act are similar to section 2 1(1) and (2) of the Wealth-tax Act. The Supreme Court in CWT v. Trustees of H. E. H. Nizam’s Family (Remainder Wealth) Trust [1977] 108 ITR 555 also held that : “the consequences of the provisions in section 21(1) of the Wealth-tax 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 Assessing Officer 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 [1981] 128 ITR 689 and by the Supreme Court in Trustees of H. E. H. Nizam’s Trust’s case [1977] 108 ITR 555 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 section 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 Assessing Officer 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. Section 161(1A) is an exception to the above rule. Under section 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 section 161(1) restricting the benefits where business income is involved. Under section 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 section 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 association of persons. These are the only three exceptions to the rule in section 161(1) of the Act. Section 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, In re [1997] 224 ITR 473 considered the scope of section 161(1A) of the Act and observed at page 541 thus, “It is true that section 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 page 510 under exception (a).
Thus by virtue of the provisions of section 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 section 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 section 161(1) of the Act. This intention of the Legislature is evident from the Statement of Objects and Reasons for the insertion of section 1 61(1A) of the Act vide the memorandum explaining the provisions of the Finance Bill (see [1984] 146 ITR (St.) 166 ), as also from the circular issued by the Central Board of Direct Taxes mentioned above.
The stand of the Department is that by virtue of the provisions contained in section 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 section 161 (1A) of the Act. If we accept the stand taken by the Department, it will result in arbitrariness and discrimination attracting article 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 section 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 section 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, sections 22 to 27 are provided. Section 26 of the Act deals with the property owned by the co-owners.
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