T.V. Rajagopala Rao, Judicial Member - (1.) THE assessee is common and the points involved in these appeals also are common and hence for the sake of convenience they can be taken up together and disposed of by this common order. THE question at issue in both these appeals is whether the sums of Rs. 1,27,475 for the assessment year 1985-86 and Rs. 1,69,565 for the assessment year 1986-87 are liable to be included as business income of the assessee for these years by virtue of the newly inserted provisions of Section 161(1 A) introduced with effect from 1-4-1985, which are as follows :- Notwithstanding anything contained in Sub-section (1), where any income in respect of which the person mentioned in Clause (iv) of Sub-section (1) of Section 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.
(2.) The assessee is a private trust which came into existence under the provisions of the trust deed dated 1-4-1982 executed by Smt. SAP Lakshmi Achi, widow of Shri Palaniappan Chettiar. The trust was executed for the benefit of six beneficiaries, the first of the beneficiaries being one SAP Annamalai, the trustee of M/s Kumudam Endowments, which was a trust under the indenture dated 1-1-1971. The second beneficiary is his son Shri A. Jawahar Palaniappan, who is now said to be a nonresident and working as a cardiologist in USA. The third and fourth beneficiaries under the trust deed are minor son and daughter of Shri Palaniappan. The fifth and sixth beneficiaries under the deed are the sons of Shri P.V. Parthasarathy, one of the trustees appointed under the deed. The second trustee Shri Swamynarayanan is the brother of Parthasarathy, the first of the trustees. Each of the beneficiaries are given the corresponding shares shown against them in the table below :- JUDGEMENT_7882_TLIT0_19910.htm Thus under the trust deed the number of beneficiaries are known and their beneficial interest are also known. The objects clause of the trust deed would show that the income of the trust after deduction of all necessary outgoing expenses shall be divided and credited to the accounts of the beneficiaries and shall be utilised for the general welfare, education, marriage and maintenance expenses of the second, third, fourth, fifth and sixth beneficiaries and for purposes of making payments for the maintenance expenses of and for carrying out of the objects of the first beneficiary trust out of income so credited to their accounts till the extinguishment of the trust. Shri Parthasarathy and his brother Shri Swamynarayanan were made trustees under the deed. Listing out the powers of the trustees in para 4 Clause (f) the board of trustees were given full liberty to carry on any business under whatever name or names they may determine and the trustees were also given full choice to make the trust join as a partner in any partnership firm carrying on any business. Clause 7 of the deed would say that the duration of the trust is 15 years from the date of the deed or till the demise of the last surviving beneficiary or till the trustees unanimously decide to determine the trust, whichever event happens earlier. As long back as on 15-4-1982 the assessee trust was appointed as a distributor for Kumudam, Kalkandu and Malaimathi publications by Kumudam Publications Pvt. Ltd., for certain areas like Alwarpet, T. Nagar, Mint in Madras, Coimbatore, Bangalore, Trichy, Madurai and VT and Dadar in Bombay. The terms and conditions on which the assessee trust was appointed as distributor for the above publications were provided at page 2 of the paperbook-II filed by the assessee before us. The reverse of page 2 contains the terms and conditions for sale of the distributorship of the above publications which were in force on and from 1-6-1980. It may here itself be stated that Kumudam Publications Pvt. Ltd. was the publishers of Kumudam and Kalkandu weeklies and Malaimathi a bi-weekly. They are popular journals familiar with the reading public in the whole of Tamilnadu as well as in pockets of Bombay. Kumudam Publications itself is a closely held private limited company having only 4,300 equity shares. Shri SAP Annamalai, the trustee of the Kumudam Trust who is the first beneficiary under the assessee trust holds 1000 shares as an individual and 2,600 shares as a Hindu undivided family in Kumudam Publications Pvt. Ltd. So also Smt. SAP Lakshmi Achi, the author of the assessee-trust held 300 shares and Smt. Meena Jawahar Palaniappan, wife of Jawahar Palaniappan, one of the beneficiaries held 100 equity shares out of the total 4,300 shares of Kumudam Publications Pvt. Ltd. It is significant that till 1984-85 assessment year the assessee-trust was doing business as the distributor of the magazines published by Kumudam Publications Pvt. Ltd. In the accounting year relevant to the assessment year 1985-86 more exactly under the terms of the agreement dated 1-4-1984 the distributorship rights of the assessee-trust were made over to a partnership firm M/s Varalakshmi Agencies, in which Shri Parthasarathy and Shri Jawahar Palaniappan were the only two partners. A copy of the said agreement is provided at pages 17 to 19 of the paperbook-I. Under the terms of the deed Varalakshmi Agencies should pay Rs. 10,000 per month as consideration for taking over the distribution rights of Kumudam, Kalkandu and Malaimathi for all the territories over which the assessee-trust used to have the distributorship rights. The agreement is put in force for one year. M/s Varalakshmi Agencies undertook to bear all outgoings with reference to the distribution of the aforesaid publications including taxes due to the Government. There is a renewal clause to further extend the period of agreement. On such terms and conditions which the parties may agree upon. Again on 1-4-1985 the sub-distributorship created in favour of Varalakshmi Agencies was further extended for another year. Under the terms of this agreement dated 1-4-1985 it was stated that the assessee-trust was doing business of agency in distribution of Kumudam, Kalkandu and Malaimathi journals at Madras and other places and it offered to give the distribution rights to Varalakshmi Agencies over the territories of Madras city, Coimbatore, Bangalore, Bombay Dadar and VT, Madurai and Golden Rock for a consideration of Rs. 1.8 lakhs per annum. The amount should be paid at the rate of Rs. 15,000 per month for aperiod of one year. Varalakshmi Agencies only should be liable to incur all outgoings with reference to the distribution of the said publications including taxes due to the Government. For the assessment year 1985-86, for which the previous year ended by 31 -3-1985 the assessee returned a sum of Rs. 1,27,480 as income. This income has been allocated in the profit sharing ratio among the beneficiaries under the trust. It had shown the break-up of the total income of Rs. 1,27,480 as follows : JUDGEMENT_7882_TLIT0_19911.htm The assessee trust claimed that the consideration derived by it for appointing Varalakshmi Agencies as its sub-distributors of the above said periodicals was in the nature of income from other sources. It is the claim of the assessee-trust that since the trustees of the assessec-trust are only representing the beneficiaries and since their liability is co-extensive with that of the beneficiaries and they can be assessed only to the same extent to which the beneficiaries can be assessed if individual assessments are framed against them, the returned income should be assessed according to the profit sharing ratio of the beneficiaries. The Income-tax Officer rejected this contention and held by virtue of the newly inserted Section 161(1 A) by the Finance Act, 1984 with effect from 1-4-1985 the consideration received for appointing Varalakshmi Agencies as sub-distributors of the three periodicals mentioned above would represent nothing but exploiting income yielding asset and the amount derived from leasing out the distributorship is nothing but business income and it cannot be considered as income from other sources. Further by virtue of the provisions of Section 161(1 A) the whole of the business income is liable to be charged with maximum marginal rate since the provision of Section 161(1A) prevails notwithstanding anything contained in Section 161(1). Therefore there is no question of distributing the returned income among the beneficiaries under the trust and making the trustees liable to the same extent as that of the beneficiaries. Thus he brought the wholeofRs. 1,27,475 to tax at maximum marginal rateand levied a sum of Rs. 78,875 as tax under his assessment order dated 11-3-1987 framed under Section 143(3) for the assessment year 1985-86.
(3.) FOR the assessment year 1986-87 the assessee declared a net income of Rs. 1,69,565 under the head other sources. The assessee contended that the income received from Varalakshmi Agencies is to be assessed under the head other sources. During the assessment proceedings the Income-tax Officer served a letter dated 26-7-1988 calling upon the assessee as to why the income returned should not be treated as business income for the following three reasons: (1) The right to distribute the magazines published by Kumudam Publications under the agreement of distributorship obtained from M/s. Kumudam Publications Pvt. Ltd., was earlier exploited by the assessee itself and the income therefrom was returned and assessed as business income till the assessment year 1984-85. (2) The distributorship rights which was yielding business income was transferred to Varalakshmi Agencies by an agreement and hence the income received from Varalakshmi Agencies is business income. (3) Income derived from a source which is capable of being exploited for business purposes is business income only in view of the various decisions of the High Courts including the decision of the Calcutta High Court in Park Hotel (P.) Ltd. v. CIT [1987] 167 ITR 60. The assessee-trust gave a reply dated 25-8-1985 contending mainly that the trust was a mere recipient of lease amount and that it was not carrying on any activity or trade which involved various acts like placing order on Kumudam, take charge of copies, arrange for distribution and the other connected activities. The Income-tax Officer held that the income derived from transfer of distributorship is business income and brought the total income of Rs. 1,69,565 to tax at the maximum marginal rate and levied a sum of Rs. 84,785 as income-tax for the assessment year 1986-87 under the assessment order dated 15-3-1989. The assessments were made directly upon the trust treating its status as that of an association of persons.;