NAGAPPA C R Vs. COMMISSIONER OF INCOME TAX
LAWS(KAR)-1966-12-9
HIGH COURT OF KARNATAKA
Decided on December 15,1966

C.R. NAGAPPA Appellant
VERSUS
COMMISSIONER OF INCOME-TAX, MYSORE Respondents

JUDGEMENT

Narayana Pai, J. - (1.)IN this reference under section 256(1) of the INcome-tax Act, 1961, relating to the assessment of the income of C. R. Nagappa of Bangalore for the assessment year 1962-63, the facts which from the basis for the questions referred are briefly the following :
The assessee, C. R. Nagappa, who owned several immovable properties in Banagalore, executed on 14th April, 1955, seven trust deeds for the benefit of his children, one each for the benefit of his six minor sons, and one for the benefit of his one unmarried daughter. Specific immovable properties were transferred upon trust to four trustees, viz., the two wives, one married daughter of the assessee and the assessee himself. Of these, the assessee was to be the managing trustee. Under the terms of the trust deeds, only a portion of the income arising out of the trust property was to be utilised immediately for the benefit of the beneficiaries and the balance accumulated for their benefit to be handed over to them at a future date specified in the deeds.

IN connection with Nagappa's assessments for the years 1956-57 to 1958-59, questions arose as to whether and, if so, how much of the income arising out of trust property should be added to the assessable income of the assessee. The matter ultimately came up before this court on a reference under section 66 (1) of the INdian INcome-tax Act, 1922, which governed those assessments. IN its answer made on 13th August, 1962, to the question then referred, this court held that the situation was governed by section 16 (3) (b) of the INdian INcome-tax Act, 1922, and that on proper application of the said provision, only so much of the income arising out of the trust property as was utilised for the benefit of the beneficiaries could be added to the assessable income of the assessee. One of the questions then referred was whether section 41 of the Act of 1922 was a bar to the inclusion of the trust income in the total assessable income of the assessee. That question was answered in the negative. But while dealing with it, this court referred to the opinion expressed by it an earlier reference (I. T. R. C. 11 of 1960 to the effect that the expression "on behalf of" occurring in section 41 of the Act of 1922, must be given the same meaning and effect as the expression "for the benefit of" occurring in section 16 (3) (b) and observed as follows :

"If our interpretation of section 41 (1) in I. T. R. C. 11/60 is the correct interpretation, then the present case must definitely come within section 16 (3) (b) as well as within section 41. But as between the two, the former provision being a special provision, it should prevail over the latter. Section 41 (1) covers all trusts, whereas section 16 (3) (b) covers only trusts wherein the beneficiaries are the wife or the minor children of the settlor."

(2.)IN dealing with the assessment for the year now under reference (1962-63), the INcome-tax Officer applied the above decision of this court and added the trust income used for the immediate benefit of the beneficiaries to the assessable income of the assessee and assessed the remaining income directed to be accumulated as income assessable in the hands of the beneficiaries. But while doing so, he appears to have overlooked the fact that the INcome-tax Act of 1961, which governed the assessment, had made a definite change while re-enacting the provisions of section 16 (3) (b) of the 1922 Act in section 64 (v) of the 1961 Act. The new provision, section 64 (v) of the 1961 Act, made it clear that the income arising out of transferred assets to be included in the total income from such transferred assets is for the immediate or deferred benefit of his spouse or minor children (not being a married daughter) or both. IN view of this obvious mistake, the Commissioner of INcome-tax, acting under section 263 of the Act of 1961, cancelled the assessment and directed the INcome-tax Officer to make a fresh assessment by including in the total income of the assessee the deferred benefit accruing to the beneficiaries under the relevant trusts.
The assessee thereupon appealed to the Income-tax Tribunal and contended that the new Act of 1961, has taken away the effect of the decision of this court in the previous reference not only in respect of the extent to which the income arising out of transferred assets could be added to the total income of the settlor but also in respect of the relative field of operation of sections 16 (3) (b) and 41 of the 1922 Act, now replaced by sections 64(v) and 161 of 1961 Act. As to the former, we have already indicated the difference. The difference pointed out as to the latter is the following :

"The main provisions of sub-section (1) of section 41 of the 1922 Act are re-enacted in sub-section (1) of section 161 of new Act, with the difference that, instead of enumerating various persons in the position of trustees, receivers, managers, etc., the new Act uses the compendious expression 'representative assessee' and defines it separately in another section 160. In actual effect, there is no difference between the first sub-section of old and new section. But whereas sub-section (2) of old section 41 stated that nothing in the first sub-section would prevent direct assessment of income in the hands of the person on whose behalf the same hand been received by the representative assessee or the recovery of the tax directly from such person, the second sub-section of the new section 161 is slightly differently worded." We give below the full text of both the sub-sections of the new section 161 :

"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.

(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."

The argument based on the language of this section was that whereas this court in the previous reference has stated that section 16 (3) (b) would prevail over section 41 of the old Act, the position as under sub-section (2) of the new section 161 would be exactly the reverse.

(3.)THE contentions of the assessee were rejected by the Appellate Tribunal and, at his instance, the Tribunal has now referred to this court the following two questions of law :
"(i) Whether, having regard to the provisions of sub-section (2) of section 161, section 64(v) of the Income-tax Act was applicable to the assessee's case for computing the assessee's case for computing the assessee's income for the assessment year 1962-63 ?

(ii) Whether the assessments on the minor beneficiaries for the assessment year 1962-63 are a bar for assessing the income assessed in the hands of the minor beneficiaries, in the hands of the assessee for the same assessment year 1962-63 ?"

It will be seen that the first question fully states the contention on behalf of the assessee. The second question is really consequential on the first question, because it is only if the assessee succeeds in showing that sub-section (2) of section 161 makes it impossible to assessee the trust income in the hands of the settlor as part of his assessable income, it will be possible for him to urge that the completed assessments in respect of the income of the beneficiaries themselves would operate as a bar to the department invoking section 64(v) against the assessee, settlor.



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