Taxability Of Income From Trusts Under Section 166 of the Income Tax Act, 1961

HIGH COURT OF GUJARAT
H.H. Maharaja v. ACIT
TAX APPEAL NO. 224, 225 TO 229 OF 2002 WITH 1317 AND 1318 OF 2005

50. In CIT V/s. Kamalini Khatau, (1994) 209 ITR 101 (SC), the Hon’ble Supreme Court has held that Section 166 is clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that Sections 160 to 165 do not bar the direct assessment of the person on whose behalf or for whose benefit the income is receivable or the recovery from such person of the tax payable thereon, provided that is permissible under any other provisions of the Act. Even so, since the word used in Section 166 is “receivable” , it cannot apply to a discretionary trust, for it cannot be said that the income thereon is “receivable” for one or more beneficiaries, it being left to the discretion of the trustees whether or not the income should be distributed to one or more of the beneficiaries or not at all. But that is not to say that the beneficiary of a discretionary trust, because he does not fall within the ambit of Section 166, may not be assessed upon income received by him and tax recovered from him thereon if that is permissible under any other provisions of the Act for Section 166 is merely clarificatory. The Hon’ble Supreme Court has further observed in this decision that Section 5 of the Act defines the total income of any person to include income received by him or received on his behalf or which accrues or arises to him. A person may be directly assessed in respect of such income. The income of a discretionary trust which is within the accounting year distributed to and received by the beneficiary would, therefore, be subject to assessment in his hands and tax thereon would be recoverable from him. Such income would squarely fall within the broad sweep of total income under Section 5 and the beneficiary would be liable to assessment and recovery of tax thereon under Section 4.

51. In CIT V/s. Nipani Tobacco Stores, 145 ITR 128 (Patna), the Patna High Court has held1 that the initial burden, of proof which lay upon the assessee to prove a negative fact could be said to have been discharged by merely placing a preponderance of probabilities by the assessee. The facts relating to the explanation offered by the assessee with regard to the cash credits in question and the evidence adduced in that behalf were considered by the Tribunal. The Tribunal was right in holding that the onus shifted back to the revenue and it had not been discharged. In the present case also the facts relating to the explanation offered by the assessee with regard to the taxability of income from U.K. Trusts and the evidence adduced in that behalf were not properly considered by the Tribunal. Though the onus shifted back to the revenue, the said onus had not been discharged by the revenue. The Tribunal was, therefore, not right in holding that the income from U.K. Trusts was taxable in the hands of the assessee.

52. In Godhra Electricity Company V/s. CIT, 224 ITR 746 (SC), the Hon’ble Supreme Court has held that income tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize. Similarly in the present case, no income was accrued or received by the assessee from the U.K. Trusts. The note put up in the statement of income was conditional one. It nowhere suggests that the income has been received by the assessee. The deduction under Section 80-L was claimed only in case of a positive income. Despite the fact that the income was not received nor it was accrued to the assessee, simply on the basis of the note or similarity of facts, or on assumption of similarity of facts, which are not in effect, the income cannot be taxed in the hands of the assessee.

53. In CIT, Bombay City, 1 V/s. Messrs. Shoorji Vallabhdas and Company, 46 ITR 144 (SC), the Hon’ble Supreme Court has held that the income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Here in assessee’s case also, there is neither accrual nor receipt of income as the Trustees have not exercised their discretion to distribute the income of the Trust and hence, it cannot be said to have accrued or received by the assessee.

54. In light of the above legal and factual position, simply because the authorities below have erroneously come to the conclusion that the facts are identical with the facts of earlier years, it cannot be believed on close verification and proper examination of those facts that the same were identical. The statement of income of all these years are on record. The notes which were placed in these statements of income are also taken into consideration. At the time when the returns were filed, the decision of the Hon’ble Supreme Court was not available. The assessee was hopeful that he would succeed before the Hon’ble Supreme Court. Hence, such note was put stating that it was subject to the outcome of the decision of the Hon’ble Supreme Court. As far as income from U.K. Trusts is concerned, the Hon’ble Supreme Court has not given any specific finding in view of the fact that the assessee’s father as well as the assessee have shown the income from U.K. Trusts in their income-tax returns. The Hon’ble Supreme Court has not gone into the aspect of the interpretation of Clause 3 & 4 of the Trust Deed. On the contrary, at more than one places, the issue was kept open. Simply because the Settlement Commission has interpreted the said clause, it would not be binding on the Tribunal nor on this Court. So far as the years under appeals are concerned, the assessee has been seriously challenging inclusion of income from U.K. Trusts in his hands stating therein that neither distribution has been taken place nor the same has been received by him. The assessee has also produced the accounts of the Trusts wherein it is specifically stated that the income has been retained by the Trustees and it was brought forward to the next years. It was also stated in such statement of accounts that the tax has been paid by the Trustees of the U.K. Trusts on the income so earned in U.K. It appears that any of the authorities below, including the Tribunal has not considered this vital aspect of the matter and proceeded on the footing that the facts are identical and that the notes are similar to the notes of earlier years. If the income were retained by the Trustees and it has not been distributed, nor it has been received by the assessee and no evidence has been brought by the department to show that the same has been received by the assessee in India , such income cannot be taxed in the hands of the assessee. Section 5 of the Act has also no application. When the income has neither accrued nor received by the assessee, nor it has been received or accrued on his behalf either in India or outside India , such income cannot be taxed under Section 166 of the Act as it is not the income receivable. Section 166 of the Act can be invoked only when the income is received by the assessee. Unless and until the Trustees exercise the discretion and distribute the income in favour of any of the beneficiaries, i.e. the assessee, such income cannot be said to be received by the assessee. Taking any view of the matter, it cannot be said that the income has been either received by or accrued to the assessee.55. So far as the interpretation of Clauses 3 & 4 of the U.K. Trusts is concerned, it is an admitted position that neither the Settlor nor the present appellant has appointed any additional Trustee. It is also an admitted position that the sole Trustee appointed under the Trust at the time of its creation, is competent enough to take decision with regard to distribution of the income of the Trusts. It is nobody’s case that the sole Trustee has exercised such discretion and distributed the income in favour of the beneficiary. Merely on the basis of presumption, the interpretation of any Clause of Trust Deed cannot be made that under the Trust Deed, the Trustees are bound to exercise the discretion. Non-exercise of discretion is a matter of fact and an inference drawn .by the possible interpretation of Clauses 3 & 4 of the Trust Deeds that the distribution has taken place and assessee received an income, is not sustainable. On the basis of such presumption, income cannot be taxed in the hands of the assessee. Clause 4 of the Trust Deed starts with the opening words “subject as aforesaid” meaning thereby its operation is subject to the conditions precedent enumerated therein or the eventualities envisaged therein. All the authorities have proceeded on the footing that Clause 4 had come into operation and that on that ground, income was taxed in the hands of the assessee irrespective of the fact whether such income was received by the assessee or not. We.are, therefore, of the view that a close and combine reading of Clause 3 & 4 of the Trust Deed makes it abundantly clear that the sole Trustee has every power or authority to take decision with regard to the trust property and since it has been decided by the Trustee to retain the income of the Trust, it cannot be said that such income is being received by the assessee. We are also of the view that the applicability of Clause 4 is subject to the conditions of Clause 3 (2) and since sole trustee is administering the trust property and income and neither the late Maharaja nor the present appellant made appointment of discretion exerciser and the specified period is still not over, there is no question of invoking Clause 4 of the Trust and thereby taxing the income in the hands of the assessee. It is also important to note that the Trustees have paid the tax on the income earned by them in U.K. and hence, the same cannot be taxed twice over.