BHARUCHA - (1.) AN interesting question arises in these appeals. It is this; has the Revenue an option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust when the income thereof is distributed and received by the beneficiaries in the accounting year? The appeals have been heard together and may be disposed of by a common judgment, taking, as illustrative, the facts of the lead appeal (Civil Appeal No. 2145 of 1978, CIT, Gujarat, Ahmedabad v. Mrs. Kamalini Khatau).
(2.) THE relevant Assessment Year is 1969-70, the previous year being the calendar year 1968. THE assessee was the beneficiary of 9 trusts. In respect of three of these she was the sole beneficiary, and there is no dispute about their income. In regard to the other six trusts, the assessee was one of the beneficiaries thereunder. In each of these six trust deeds the clause relevant for our purpose read thus : "From and after the date hereof (i.e., the date of the Trust Deed) and during the periods mentioned in this clause, the Trustees may either accumulate the net income of the Trust or at their discretion pay the same to the persons as mentioned therein or to any one or more of them to the exclusion of others or other of them for their, his or her absolute use or benefit in such proportion and in such manner as the Trustees may in their absolute discretion think fit ... ." During the accounting year relevant to the Assessment Year 1969-70 the assessee received the amounts set out hereafter. THE amounts were received pursuant to the resolutions of the trustees to distribute the same from out of the income of the six trusts for the accounting year. JUDGEMENT_308_4_1994Html1.htm . The assessee contended before the Income-tax Officer that the said amount of Rs. 18,000.00 was not liable to be taxed in her hands. The payment of income under the said six trusts to any one or more of the beneficiaries thereof depended upon the discretion of the trustees; accordingly, the shares of the beneficiaries thereof were indeterminate and unknown. The income of the trusts was, therefore, taxable only in the hands of the trustees thereof, having regard to the provisions of Section 164 of the Income-tax Act, 1961 (hereinafter referred to as "the Act").The ITO rejected the assessee's contention and assessed the said amount of Rupees 18,000/- in her hands. In doing so he relied upon the provisions of S. 166 of the Act. The assessee preferred an appeal. The Appellate Assistant Commissioner affirmed the view taken by the ITO. The assessee preferred a second appeal before the Income-tax Appellate Tribunal. The Tribunal held that no part of the income of the said six trusts was receivable on behalf of or for the benefit of any of the beneficiaries thereof. The provisions of Section 164 were, therefore, attracted. The Tribunal rejected the Revenue's contention that Section 166 was applicable. Accordingly, the Tribunal allowed the assessee's appeal. At the behest of the Revenue, the Tribunal referred to the High Court of Gujarat for its opinion the following question: "Whether, on the facts and in the circumstances of the case, various amounts totalling to Rs. 18,000/ - received by the assessee out of the income of the six discretionary trusts are liable to be taxed in the hands of the assessee ?" . A Division Bench of the High Court referred the matter to a larger Bench, and it was heard by a Bench of three learned Judges. The order of the Tribunal was upheld by the majority judgment, the third learned Judge dissented. We shall have occasion to refer to the majority and dissenting judgments.
(3.) . It is convenient now to set out those provisions of the Act which have a bearing on the issue that we are called upon to decide. Section 4 imposes the charge; it says that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate, income-tax at that rate shall be charged for that year, in accordance with the subject to the provisions of the Act, in respect of the total income of the previous year of every person. Section 5 defines the total income of a person resident in India to include "all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accure or arise to him in India during such year, or (c) accrues or arises to him outside India during such year." Chapter XV of the Act is entitled "Liability in Special Cases". Part B thereof sets out the general provisions applicable to representative assessees. Section 160 defines a representative assessee for the purposes of the Act to mean: "(i) in respect of the income of a non-resident specified in sub-section (1) of Section 9, the agent of the non-resident, including a person who is treated as an agent under Section 163; (ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot; (iii) in respect of income which the Court of Wards, the Administrator-General, the Official Trustee or any receiver or manager (including any person, whatever his designation, who in fact manages property on behalf of another) appointed by or under any order of a court, receives or is entitled to receive, on behalf or for the benefit of any person, such Court of Wards, Administrator-General, Official Trustee, receiver or manager; (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; (v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on, behalf or for the benefit of any person, such trustee or trustees." At the relevant time Section 161 read thus: " Liability of representative assessee - 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. Section 162 entitles every representative assessee who, as such, pays any sum under the Act to recover it from the person on whose behalf it is paid or to retain an amount equal to the sum so paid out of moneys that are or may come to him in his representative capacity. As it stood at the relevant time, Section 164 reads thus : Charge of tax where share of beneficiaries unknown - Where any income in respect of which the persons mentioned in clauses (iii) and (iv) of sub-section (1) of Section 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefits such income or such part thereof is receivable (which persons are hereinafter in this section referred to as the beneficiaries) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total income of an association of persons, or where such income or such part thereof is actually received by a beneficiary, then, at the rate or rates applicable to the total income or total world income of the beneficiary if such course would result in a benefit to the Revenue. Section 166 read thus: "Direct assessment or recovery not barred -Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable or the recovery from such person of the tax payable in respect of such income." . We may now paraphrase, and thus emphasise, the provisions of Chapter XV that are most material to our discussion. By reason of Section 160 trustees appointed under a trust deed or will who receive or are entitled to receive on behalf or for the benefit of any person any income are representative assessees in respect of such income. Under Section 161 every representative assessee is, as regards the income in respect of which he is a representative assessee, 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 he is liable to assessment in his own name in respect thereof. Such assessment, however, is deemed to be made upon him only in his representative capacity and tax can 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. A representative assessee may not, in such capacity and in respect of income received by him as a representative assessee, be assessed under any provision of the Act other than Chapter XV. Section 164 sets out how tax is to be charged where the share of the beneficiaries is unknown. It applies when the persons mentioned in clauses (iii) and (iv) of sub-section (1) of Section 160 are liable as representative assessees. It, therefore, applies in the case of trustees who receive or are entitled to receive income on behalf or for the benefit of any person. Where income in respect of which the trustees are liable as representative assessees "is not specifically receivable on behalf or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable... are indeterminate or unknown" tax shall be charged as if that income were the total income of an association of persons. Section 164 itself, therefore, sets out what a discretionary trust for the purposes of the Act is. A discretionary trust is a trust whose income is not specifically receivable on behalf or for the benefit of any one person or wherein the individual shares of the beneficiaries are indeterminate or unknown. The rate of tax payable by trustees upon the income of a discretionary trust is that which would be paid upon such income by an association of persons. Where, however, such income or a part thereof is actually received by a beneficiary, tax shall be charged thereon at the rate applicable to the total income of the beneficiary if this benefits the Revenue. Section 166 states that nothing in Ss. 160 to 166 shall prevent the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable or the recovery from such person of the tax payable in respect thereof.;