G.L. Oza, J. - (1.) THIS reference has been made by the Income-tax Appellate Tribunal, Jabalpur, in accordance with the orders of this court in M.C.C. Nos. 409/74, 414/74 and 415/74 pertaining to assessments for different years and the common question which has been referred for our answer is as under : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment of this trust as an AOP was misconceived and unsustainable in law and in setting aside the assessment with a direction to make separate assessment on the managing trustee under Section 161(1) of the Income-tax Act in respect of the income of the share of each of the three beneficiaries on the basis of three returns filed ? "
(2.) THE facts are that for three assessment years under consideration, the ITO assessed Karelal Kundanlal Trust in the status of an AOP (association of persons). According to the ITO, the settlor executed a trust deed on October 24, 1950, conveying certain movable and immovable properties to the trustees named therein. THE ITO, therefore, made the assessment in the hands of the trustees to whom the properties had been conveyed in the status of an association of persons (AOP). It was pleaded before the ITO that, in a trust, the trustees were bound to fulfil the purpose of the trust and to obey the directions of the author of the trust given at the time of its creation. On appeal before the AAC, a similar contention was advanced by the trustees and the AAC repelled the contention and maintained the order passed by the ITO. The assessee preferred an appeal before the Tribunal and the Tribunal accepted the appeal and came to the conclusion that the assessment on the trustees could not be made as on " an association of persons ", but could only be made as on a representative assessee representing the share of the beneficiary. The Tribunal, therefore, held that the trustees could only be assessed as a representative assessee under Section 161(1) of the I.T. Act in respect of the income, i.e., 1/3rd share of each of the three beneficiaries. Against this judgment of the Tribunal, the Department presented an application to this court under Section 256(2) of the I.T. Act, 1961, and this court directed the Tribunal to make a reference and, hence, this reference has been made by the Tribunal for answering the question quoted above. Learned counsel appearing for the Department contended that the law on the subject has been stated in Kanga and Palkhivala's Law and Practice of Income-tax, seventh edn., vol. I, at p. 947, wherein it has been observed that the Department has the option to make an assessment on the representative assessee or a direct assessment on the person beneficially entitled to the income. It was contended that thus the ITO and the AAC were right in assessing the trustees as an association of persons and the view taken by the Appellate Tribunal was not justified in law. Learned counsel for the Department placed reliance on CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652 (Guj) [FB].
(3.) LEARNED counsel for the assessee, on the other hand, contended that Section 161 of the I.T. Act, 1961, provides for assessment in a representative capacity and what is a representative assessee, has been defined in Section 160(1)(iv). It was contended that the note put by the learned author in Kanga and Palkhivala's Income-tax Act about the Department's option only means that the Department has the option either to assess the representative assessee or a direct assessment on the person who is beneficially entitled to the income. It was, therefore, contended that it does not mean that the Department can assess the trustees individually and, as they are more than one, they could be treated as an association of persons as was done in this case by the ITO and maintained by the AAC. LEARNED counsel relied on a decision reported in CIT v. V. S, Kumaraswami Reddiar Trust [1982] 138 ITR 808 (Ker), where the question has been considered in detail. He also placed reliance on the decision in C.R. Nagappa v. CIT [1969] 73 ITR 626 (SC), where their Lordships of the Supreme Court have considered Section 161 of the I.T. Act, 1961. It was, therefore, contended that the Tribunal was right in setting aside the assessment of the trustees as an association of persons. Section 160(1) of the I.T. Act, defines "Representative assessee" and in respect of a trust, Clause (iv) of this section is material, which reads as under: " (iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913) (VI of 1913), receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees ". ;