PETITIONER: C.I.T. Vs. RESPONDENT: KAMALINI KHATAU DATE OF JUDGMENT09/05/1994 BENCH: BHARUCHA S.P. (J) BENCH: BHARUCHA S.P. (J) VENKATACHALLIAH, M.N.(CJ) AGRAWAL, S.C. (J) CITATION: 1994 AIR 2759 1994 SCC (4) 308 JT 1994 (4) 16 1994 SCALE (2)976 ACT: HEADNOTE: JUDGMENT:
The Judgment of the Court was delivered by
S.P. BHARUCHA, J.- 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. 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:
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“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.
Name of the trust Amount Rs 1. Geeta Mayour D. Trust No. 11600 2. Ambalal Sarabhai D. Trust No. 46200 3. Manorama Sarabhai (K. 8 D-Trust) 1000 4. Saraladevi Sarabhai (G. 15) D. Trust 1400 5. Manorama Sarabhai D. Trust No. 17300 6. Anand Sarabhai (J-9) D. Trust 500 --------- 18,000 ------
3.The assessee contended before the Income Tax Officer
that the said amountof Rs 18,000 was not liable to be
taxed in her hands. The payment of incomeunder 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 Rs 18,000 in her hands. In doing so he relied
upon the provisions of Section 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?”
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4.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.
5.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
and 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 accrue 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 subsection (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,receiveror manager;
(iv)in respect of income which a trustee
appointed under a trust declaredby a duly
executed instrument in writing whether
testamentary or otherwise [including any wakf
deed which is valid under the Mussalman Wakf
Validating Act, 1913 (6 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
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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 read thus:
“Charge of tax where share of beneficiaries
unknown.- (1) Subject to the provisions of
sub-sections (2) and (3), where any income in
respect of which the persons mentioned in
clauses (iii) and (iv) of subsection (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 benefit 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.”
6.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
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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 Sections 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.
7.Some analogous provisions of the Indian Income Tax Act,
1922, may also be noted. Section 40 stated that where the
guardian or trustee of any person being a minor, lunatic or
idiot was entitled to receive on behalf of such beneficiary
or was in receipt on behalf of such beneficiary of any
income, profits or gains chargeable under that Act, tax
would be levied upon and recoverable from such guardian or
trustee in like manner and to the same amount as it would be
leviable upon and recoverable from any such beneficiary if
of full age or sound mind and in direct receipt of such
income, profits or gains. More relevant are the provisions
of Section 41, which read thus:
” Courts of Wards, etc.- (1) In the case of
income, profits or gains chargeable under this
Act which the Courts of Wards, the Administra-
tors-General, the Official Trustees 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, or any
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trustee or trustees [appointed under a trust
declared by a duly executed instrument in
writing whether testamentary or otherwise]
(including the trustee or trustees under any
Wakf deed which is valid under the Mussalman
Wakf Validating Act, 1913), are entitled to
receive on behalf of any person], the tax
shall be levied upon and recoverable from such
Court of Wards, Administrator-General,
Official Trustee, receiver or manager [or
trustee or trustees], in the like manner and
to the same amount as it would be leviable
upon and recoverable from [the person on whose
behalf such income, profits or gains are
receivable], and all the provisions of this
Act shall apply accordingly:
Provided that where any such income, profits
and gains or any part thereof are not
specifically receivable on behalf of any one
person, or where the individual shares of the
persons on whose behalf they are receivable
are indeterminate or unknown, the tax shall be
levied and recoverable at the maximum rate,
but, where such persons have no other personal
income chargeable under this Act and none of
them is an artificial juridical person, as if
such income, profits or gains or such part
thereof were the total income of an
association of persons:
Provided further that when part only of the
income, profits and gains of a trust is
chargeable under this Act, that proportion
only of the income, profits and gains
receivable by a beneficiary from the trust
which the part so chargeable bears to the
whole income, profits and gains of the trust
shall be deemed to have been derived from that
part.
(2)Nothing contained in sub-section (1)
shall prevent either the direct assessment of
the person on whose behalf income, profits or
gains therein referred to are receivable, or
the recovery from such person of the tax
payable in respect of such income, profits or
gains.”
8.We may now revert to the High Court’s judgments. The
majority judgment laid emphasis upon the word “charge” in
the marginal note to Section 164 and upon the word “charged”
in the body thereof. The charge created by Section 4 was in
accordance with and subject to the provisions of the Act and
it was held that, therefore, the charge in the case of the
special class of representative assessees created by Section
164 prevailed over the charge created by Section 4. In cases
falling under Section 164 one had to look only to its
provisions rather than to the provisions of Section 161.
The word “receivable” in the context in which it occurred in
Section 164 indicated that it was the trust deed that one
had to look at and not the actual exercise of discretion by
the trustees in the course of the year. Section 166
permitted the direct assessment of the beneficiary when it
could possibly be done under the provisions of Sections 160
to 169 in Chapter XV. What was crucial was not Section 166
but Section 164; because if, under Section 164, it was not
open to the Revenue to proceed against the beneficiary, it
was not open to the Revenue to treat the income of the trust
except as the income of a fictional association of persons.
The last portion of Section 164 only gave an option as to
rates at which the tax was to be levied. The interest of a
beneficiary under a discretionary trust was merely his right
to be considered
316
by the trustees. Because of the impossibility to deal with
income in such cases the legislature had made the special
provision of Section 164. The question was, accordingly,
answered by the majority judgment in the negative, that is,
in favour of the `assessee and against the Revenue.
9.The dissenting judgment noted that tax liability arose
on the last date of an accounting year. It was, therefore,
permissible to tax a beneficiary under a discretionary trust
provided that, upon exercise of the discretion conferred
upon the trustees under the trust deed before the last date
of the accounting year in which the income was received,
they had indicated that a part or the whole thereof was of
the beneficial ownership of one or more of the
beneficiaries. The money in question, so soon as the
discretion was exercised in favour of one or more
beneficiaries, was receivable by them in fulfilment of the
disposition made by the trust deed and what was merely a
right to be considered as a potential recipient of a benefit
became a vested right to receive the income or part of it
according to the exercise of the discretion by the trustees.
The money in question, as soon as the discretion was
exercised, was held in trust for the respective
beneficiaries and they became entitled to receive the same.
In other words, before the accounting year ended and the tax
liability arose the beneficiaries were the persons in whom a
vested right to receive and control the income arose. There
was. therefore, no reason why, on principle, the resulting
payment upon the exercise of discretion could not be taxed
optionally in the hands of the beneficiaries for they were
the persons in actual receipt and control of the income.
Section 164 was Do more than an enabling section similar to
Section 161(1) and nothing more or less could be read
therein. In cases covered by Section 161 (1) the option
could be exercised on the strength of the trust deed itself
since the income in such cases was specifically receivable
by the trustees on behalf of or for the benefit of a single
beneficiary or, where there were more beneficiaries than
one, the individual shares of the beneficiaries were
determinate and known. So far as cases covered by Section
164 were concerned, the exercise of the option became
possible only upon the discretionary trustees allocating
amongst the beneficiaries the whole or part of the income in
the exercise of their discretion during the accounting year
for, upon the happening of such event, the income was
received by the beneficiaries in fulfilment of the
disposition made by the trust deed and such income became
chargeable to tax in the hands of the beneficiaries in view
of the provisions of Sections 4 and 5 of the Act. As
regards the use of the word ,charge’ in the marginal note
and the body of Section 164 in contradistinction to the use
of the expression “levied upon and recovered from” in
Section 161, the difference in the choice of language was of
no significance. The word ‘charged’ in Section 164 could
only be construed as conveying the meaning “levied and
recovered”. Section 166 was attracted in cases covered by
Section 164 where the beneficiaries had received the income
or part thereof pursuant to the exercise of discretion by
the trustees of a discretionary trust in the course of the
same accounting year. Even assuming that the word
‘receivable’ in Section 164 had to be interpreted to
317
mean receivable under the trust deed and that it was the
trust deed that one had to look at, this interpretation did
not come in the way of holding that even a discretionary
beneficiary, pursuant to the exercise of discretion in his
favour and upon his receiving his share of the income in the
course of the accounting year in which it was received by
the trustees, was liable to be assessed and taxed in respect
thereof. The dissenting judgment, therefore, answered the
question that was posed in the affirmative, that is to say,
in favour of the Revenue and against the assessee.
10.The learned Solicitor General appearing for the Revenue
submitted that when income was received on behalf of a
beneficiary of a trust, the beneficiary could be directly
assessed under Section 5. The Act did not intend to levy tax
except in relation to the person who received income
beneficially. Sections 160 to 166 were enacted to take care
of a situation where the recipient of the income was not the
person entitled to the beneficial enjoyment thereof and they
created the concept of a “representative assessee” as also
the fiction that he received the income beneficially. At
the same time, it was made clear that the representative
assessee’s liability did not extend beyond the limit of the
direct assessee, implicitly recognising the liability of the
direct assessee to be assessed. When the beneficiaries of a
trust or their shares therein were indeterminate or
unknown, the first part of Section 161 applied for the
liability of the trustee of a discretionary trust flowed
from Section 161. The second part of Section 161, namely,
levy and recovery in like manner and to the same extent, was
inherently inapplicable to the situation and it was here
that Section 164 made special provision as to the status in
which and the rate at which the tax was to be levied and
recovered from the trustee. No judgment stated that the
income of a trust must only be assessed in the hands of the
trustee. What was stated was that where the assessment was
made in the hands of the trustee, it could only be made in
terms of the provisions of Sections 160 to 166, or the
equivalent provisions of Sections 40 and 41 of the 1922 Act.
Even where the trustee was taxed it was the beneficial
interest which was taxed. There was and could be no dispute
that in the case of a specific trust the Revenue could
assess and recover the tax from the beneficiary even though
the trustee was the first recipient of the income and had
legal title thereto. On a parity of reasoning, there was no
impediment to taxing the beneficiary of a discretionary
trust when he had received the income in the accounting
year. Section 161 made the representative assessee subject
to the same duties,responsibilities and liabilities as if
the income was received by him beneficially. It was
necessary to create this fiction because it was never the
object or intention of the Act to charge tax upon anybody
other than the beneficial owner of the income. Having
created the fiction of beneficial receipt, protection was
given to the representative assessee by providing that the
tax in his hands would be levied upon and recovered from him
in the like manner and to the same extent as it would be
leviable upon and recoverable from the person represented by
him. It was implicit in this that the tax could
318
be leviable upon and recoverable from the person represented
by the representative assessee.
11.In the submission of Mr Salve, learned counsel for the
assessee, Section 161 dealt generally with the taxation of
all representative assessees, including trustees, whereas
Section 164 was a special provision applicable to
discretionary trusts and was a complete code which laid down
not only the mode and manner of taxation but also prescribed
the basis and extent of the charge of tax. Section 164,
therefore, excluded the application of Section 161 wherever
it became applicable on account of the existence of the
circumstances therein mentioned. The assessment of
beneficiaries even where their shares were unknown was
unworkable because there could not be a fragmented
assessment, partly on the trustees and partly on the
beneficiaries. The tax was on the accrual of income upon
the person who was in direct control thereof. The point at
which the income was levied was when the income accrued to
the trustees. The distribution of income did not clothe the
sum received by the beneficiary with the character of income
which could be taxed once again on its receipt. The
argument that there were two limbs to Section 161 was
misconceived because the trustees were liable to tax as
owners and a beneficial interest in the income was not a
condition essential to make the income taxable. Any person
in effectual control of income could be taxed thereon, the
subsequent deployment being irrelevant. It was conceivable
that in certain circumstances, e.g., in the case of a
specific trust in which a specific beneficiary was in direct
receipt or control of specified income, the beneficiary
could be directly assessed on general principles. Section
166 only clarified that if, generally, in law a beneficiary
could be assessed to tax then the provisions of Sections 160
to 165 would not by implication bar direct assessment.
12.There are three judgments of this Court which have a
bearing on these appeals. In C.R. Nagappa v. CIT the
assessee had executed several trust deeds settling specific
properties for the benefit of his minor children. Under
each deed he had settled certain properties for the benefit
of a named minor child and had vested the properties in four
trustees, namely, himself, his two wives and a married
daughter. Under each of the trust deeds a portion of the
income was to be utilised immediately for the benefit of the
beneficiary and the balance was to be accumulated and handed
over to the beneficiary upon a stated date. It was
contended on behalf of the appellant that the Income Tax
Officer was bound to assess the income under each trust deed
separately in the hands of the trustees as representative
assessees and, by reason of Section 161(2), was incompetent
to assess the income in the hands of either the appellant or
the beneficiaries. This Court held that it was implicit in
the terms of Section 161(1) that the Income Tax Officer
could assess a representative assessee as regards the income
in respect of which he was a representative assessee, but he
was not bound to do so. He could assess either the
representative assessee or the person represented by him,
1 (1969) 73 ITR 626: AIR 1969 SC 888 : (1969) 1 SCR 979
319
and this was expressly so enacted in Section 166. The
Income Tax Officer could assess the person represented in
respect of the income of the trust property and the
appropriate provisions of the Act relating to the
computation of his total income and the manner in which the
income was to be computed would apply to such assessment.
The Income Tax Officer could also assess the representative
assessee in respect of that income and limited to that
extent and tax could be levied and recovered from the
representative assessee to the same extent as it was
leviable upon and recoverable from the person represented by
him. The contention raised by the appellant’s counsel that
since the trustees were assessable in respect of the income
of the beneficiaries under Section 161(1), that income could
not by virtue of Section 161(2) be assessed in the hands of
the beneficiaries was contrary to the plain terms of Section
166. Section 161(2) did not purport to deny the Income Tax
Officer the option of assessing the income in the hands of
the person represented by the representative assessee. It
merely enacted that when a representative assessee was
assessed to tax in the exercise of the option of the
Revenue, he could be assessed only under the provisions of
Chapter XV and under no other provisions of the Act. It was
pointed out that Section 161(2) had been enacted to remove
the conflict of judicial opinion which had arisen in regard
to the interpretation of the analogous provisions of
Sections 40 and 41 of the 1922 Act. The observations of
Chagla, C.J., of the Bombay High Court in the case of CIT v.
Balwantrai Jethalal Vaidya2 which dealt with the scheme of
Section 41 of the 1922 Act, were approved. They read:
“… it is clear that every case of an
assessment against a trustee must fall under
Section 4 1, and it is equally clear that,
even though a trustee is being assessed, the
assessment must proceed in the manner laid
down in Chapter III…. Section 41 only comes
into play after the income has been computed
in accordance with Chapter 111. Then the
question of payment of tax arises and it is at
that stage that Section 41 issues a mandate to
the Taxing Department that, when they are
dealing with the income of a trustee, they
must levy the tax and recover it in the manner
laid down in Section 41.”
The same considerations applied to the interpretation of
Section 161(2). It merely enacted that when income was
assessed in the hands of a representative assessee in his
own name the assessment would be deemed to be made upon him
in the representative capacity only and tax could be levied
and recovered in the manner provided in Section 161(1).
13.In Jyotendrasinhji v. S.I. Tripathi3 a Bench of two
learned Judges of this Court founded their judgment
principally upon Nagappa case’ and concluded that by virtue
of Section 166 the Revenue had an option in the case of the
income of a discretionary trust either to make an assessment
upon the trustees or to make an assessment upon the
beneficiaries.
2 (1958) 34 ITR 187 (Bom)
3 1993 Supp (3) SCC 389 :(1993) 201 ITR 611
320
14.In CWT v. Trustees of H.E.H. Nizam’s Family (Remainder
Wealth) Trust4 this Court was dealing with provisions of the
Wealth Tax Act, 1957, analogous to Sections 160 to 166 of
the Act and Sections 40 and 41 of the 1922 Act. Section 21
(1) of the Wealth Tax Act stated that in the case of assets
chargeable to tax thereunder which were held, inter alia, by
a trustee appointed under a trust deed, wealth tax “shall be
leviable upon and recoverable from the trustee … in the
like manner and to the same extent as it would be leviable
upon and recoverable from the person on whose behalf the
assets are held…… Sub-section (2) stated that nothing
contained in sub-section (1) would prevent either the direct
assessment of the person on whose behalf the assets were
held or recovery from him of the tax payable in respect
thereof. This was a case in which the late Nizam of
Hyderabad had created several trusts. For the purposes of
the judgment it was sufficient that the provisions of what
was called “the family trust” were referred to. By the
trust deed the Nizam had transferred a corpus of rupees nine
crores to the trustees to be nationally divided into 175
equal units, of which 166 1/2 units were allotted to the
relations mentioned in the second schedule to the trust deed
in the manner specified therein, the number of units
allocated to each relation being mentioned there. The
Wealth Tax Officer assessed only the value of 13 units in
the hands of the trustees and the value of the other units
in the hands of the representative beneficiaries. The
matter reached the High Court upon a reference by the Income
Tax Appellate Tribunal and thereafter this Court. The
question that was considered was whether assessment could be
made on the trustees under Section 3 apart from and without
reference to Section 21. The answer was seen to depend upon
the true meaning and effect of Sections 3 and 21 and the
interrelation between them. Section 3 was the charging
section and it levied the charge of wealth tax on the net
wealth of the assessee on the relevant valuation date. Net
wealth was defined in Section 2(m) to mean-
“….the amount by which the aggregate value
computed in accordance with the provisions of
this Act of all the assets, wherever located,
belonging to the assessee on the valuation
date, including assets required to be included
in his net wealth as on date under this Act,
is in excess of the aggregate value of all the
debts owed by the assessee on the valuation
date.”
It was clear from this definition that any property,
wherever located, “belonging to” the assessee on the
relevant valuation date would be includable in the net
wealth of the assessee assessable to wealth tax. An
argument was advanced on behalf of the trustees that assets
held by a trustee in the trust for others could not be said
to be assets “belonging to” the trustee so as to be included
in his net wealth. The assets so held were not the
trustee’s property in any real sense. They were the
property of the beneficiaries and the beneficiaries were the
true owners. The trustee could not, therefore, be assessed
to wealth tax in respect of the trust properties
4 (1977) 3 SCC 362 1977 SCC (Tax) 457 : (1977) 108 ITR 555
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under Section 3. It was for this reason, went the argument,
that special provision had to be made in Section 21 for
assessing the trustee and hence assessment on the trustee
could only be made in accordance with such special
provision. Prima facie, this Court observed, there seemed
to be force in the argument but it was not thought necessary
to express any final opinion since there was an alternative
argument advanced on behalf of the assessee which left no
room for doubt. For this purpose it was assumed that the
trustee of a trust could be assessable in respect of the
trust properties under Section 3 even in the absence of
Section 21. But Section 3 imposed the charge of wealth tax
subject to the other provisions of the Act and these other
provisions included Section 21. Section 3 was, therefore,
made expressly subject to Section 21 and had to yield to
that section insofar as the latter made special provision
for the assessment of a trustee of a trust. Section 21 was
mandatory in its terms. It was clear on a combined reading
of Sections 3 and 21 that whenever assessment was made on a
trustee, it had to be made in accordance with the provisions
of Section 21. Every case of assessment on a trustee would
necessarily fall under Section 21 and he could not be
assessed apart from and without reference to that section.
To take a contrary view, giving option to the Revenue to
assess the trustee under Section 3 without following the
provisions of Section 21, would be to refuse to give effect
to the words “subject to the other provisions of this Act in
Section 3”, to ignore the maxim “generalia specialibus non
derogant” and to deny mandatory force and effect to the
provisions of Section 21. The court noted that in Nagappa
case1 the observations of Chagla, C.J., quoted above had
been approved and the court went on to state that the same
consideration must apply in the interpretation of Section
161(2). It had, therefore, to be held uncontrovertible that
whenever a trustee was sought to be assessed that assessment
had to be made in accordance with Section 21. It had also
to be noted that the assessment which was to be made on a
trustee under Section 21 was an assessment in a
representative capacity. It was really the beneficiaries
who were sought to be assessed in respect of their interest
in the trust properties through the trustees. Section 21
provided that in respect of the trust properties held by a
trustee wealth tax could be levied upon him in the like
manner and to the same extent as it would be leviable on the
beneficiary for whose benefit the trust properties were
held. This provision could apply only where the trust
properties were field by the trustee for the benefit of a
single beneficiary or, where there were more beneficiaries
than one, the individual shares of the beneficiaries in the
trust properties were determinate and known. Where such was
the case wealth tax could be levied on the trustee in
respect of the interest of any particular benefit under the
trust properties in the same manner and to the same extent
as it would be leviable upon the beneficiary and in respect
of such interest in the trust properties the trustee would
be assessed in a representative capacity as representing the
beneficiary. This did not mean that the Revenue could not
make a direct assessment oil the beneficiary in respect of
the interest ill the trust property which belonged to him.
The beneficiary would always be
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assessable in respect of his interest in the trust
properties since such interest belonged to him and the right
of the Revenue to make direct assessment on him in respect
of such interest stood unimpaired by the provisions enabling
assessment to be made on the trustee in a representative
capacity. Subsection (2) made this clear. What was
important to note was that in either case what was taxed was
the interest of the beneficiary in the trust properties.
Where the beneficiaries were more than one and their shares
were indeterminate or unknown the trustee would be
assessable in respect of their total interest in the trust
properties. Obviously in such a case it was not possible to
make direct assessment on the beneficiaries in respect of
their interest in the trust properties because their shares
were indeterminate or unknown and that is why it was
provided that the assessment could be made on the trustee as
if the beneficiaries for whose benefit the trust properties
were held were an individual. The beneficial interest was
treated as if it belonged to one individual beneficiary and
assessment was made on the trustee in the same manner and to
the same extent as it would be made on such fictional
beneficiary. In this case too it was the beneficial
interest which was assessed to wealth tax in the hands of
the trustee.
15.It may be added that this Court in the case of CWT v.
Kripashankar Dayashanker Worah5 has held that Section 21(1)
of the Wealth Tax Act, 1957, was analogous to Section 41 (1)
of the 1922 Act, the only difference being that whereas the
former dealt with assets the latter dealt with income and,
subject to this difference, the two provisions were
identically worded. Hence, the decisions rendered under
Section 41(1) of the 1922 Act had a bearingupon the
interpretation of Section 21 (1) of the Wealth Tax Act.
16.Mr Salve drew our attention to the judgment of this
Court in CWT v. ArvindNarottam6 where the trust deed
provided for payment to the beneficiary of a minimum sum and
left it to the discretion of the trustees whether or not any
further distribution of income should be made. There were
similar provisions in relation to the corpus of the trust.
The court held that only the minimum guaranteed income could
be said to be the property of the beneficiary. On the
distribution of the accumulated balance at the end of the
stipulated period, there was no right in the beneficiary to
receive any part thereof; it was open to the trustees to
ignore him altogether and they could pay it to such other
members of the family as they chose. It was, therefore,
held that it was only the capitalised value of the interest
of the assessee that had to be included in his net wealth.
17.Both sides cited some English decisions but we do not
think it profitable to refer to them for what we are really
concerned with is the interpretation of the language
employed in the relevant provisions of the Act.
18.As the judgments of this Court referred to above lay
down, a representative assessee may be assessed in respect
of income received by him as such and tax recovered from him
thereon only under and in the
5 (1971) 2 SCC 570: (1971) 81 ITR 763
6 (1988) 4 SCC 11 3 : 1988 SCC (Tax) 477
323
manner provided by the provisions in the statute dealing
with representative assessees. A trustee may, therefore, be
assessed in respect of the income of the trust and tax
recovered from him thereon only under and in the manner
provided by Sections 160 to 166 of the Act. The question
then is : Is the trustee of a discretionary trust liable to
be taxed in respect of the income of the trust and tax
recovered from him thereon by reason of the provisions of
Section 164 alone or has Section 164 to be read with the
other provisions dealing with representative assessees,
viz., Sections 160 to 163 and 165 and 166? In other words,
is, as Mr Salve contended, Section 164 a code in itself
dealing with all matters relating to a discretionary trust?
19.To begin with, the trustee even of a discretionary
trust is, by reason of the terms of Section 160, a
representative assessee. Section 161 (1) sets out the
liability of a representative assessee. Its first part
makes him subject, as regards the income in respect of which
he is a representative assessee, 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 made liable to assessment in his own
name in respect thereof. The second part affords protection
to the representative assessee; it states that such
assessment shall be deemed to be made upon him only in his
representative capacity and also that tax may be levied upon
and recovered from him only in like manner and to the same
extent as it would be leviable upon and recoverable from the
person represented by him. Section 161(2) gives the
representative assessee a further measure of protection by
making it explicit that “he shall not in respect of that
income be assessed under any other provisions of this Act”.
This is of significance for “any other provisions of this
Act” must plainly mean any provision of the Act other than
Section 161.
20.Section 164 states that where any income in respect of
which a trustee is liable as representative assessee 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 part
thereof is receivable are indeterminate or unknown, tax
shall be charged as if such income were the total income of
an association of persons or where such income or part
thereof is actually received by a beneficiary, then at the
rate applicable to the total income of the beneficiary if
such course benefits the Revenue. Put differently, Section
164 states that tax shall be levied upon the income of a
discretionary trust as if it were the total income of an
association of persons, except that if it or part of it is
actually received by a beneficiary it or that part of it
becomes chargeable to tax at the rate applicable to the
total income of the beneficiary if that course is beneficial
to the Revenue. Section 164 does not create a charge on the
income of a discretionary trust. The word ” charged” in the
context in which it is used in Section 164 means only
“levied”. Section 164 does not make the trustee of a
discretionary trust liable to assessment or the recovery of
tax on the income of the trust. Section 164 harks back to
Section 161 when it refers to “persons… liable as
representative assessees”. It is Section 161, therefore,
which has to be read to make the trustee even of a
discretionary trust liable to assessment and
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recovery of tax on income received by him as a trustee.
Further, Section 161, as pointed out above, protects the
representative assessee by stating that assessment upon him
shall be deemed to be only in his representative capacity,
by mandating that tax can be levied upon and recovered from
him only in like manner and to the same extent as it would
be leviable upon and recoverable from the person represented
by him and by stating that he may not be assessed under any
other provisions of the Act. Section 164 does not give any
of these protections, as, clearly, they must be given to all
representative assessees.
21.The liability of a trustee of a discretionary trust to
be assessed to tax in respect of its income and to recovery
thereof is created by Section 161 and it also states that he
is not liable to such assessment under any other provisions
of the Act. Section 164 set out only how such tax shall be
charged when the income is not distributed and when the
income is distributed.
22.It does appear, therefore, that Section 164 cannot be
read as being a code in itself applicable to the taxation of
the income of a discretionary trust. Consequently, it
cannot be held that the beneficiary of a discretionary
trust, even he has received its income in the accounting
year, cannot be taxed thereon because Section 164 does not
provide for such contingency. The principle contention
raised by Mr Salve on behalf of the assessee must,
accordingly, be rejected.
23.Why, then, should the beneficiary of a discretionary
trust stand on a footing different from that of the
beneficiary of a specific trust? It is true that the
language of Section 166 does not avail the Revenue because
it states that Sections 160 to 165 do not 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”. The section is clearly 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, as aforestated, Section 166
is merely clarificatory. 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
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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.
24.In Nagappa case’ this was clearly stated. It was said
that it was implicit in the terms of Section 161(1) that the
Income Tax Officer could assess a representative assessee as
regards the income in respect of which he was a
representative assessee, but he was not bound to do so. He
could assess the representative assessee or the person
represented by him. It must also be remembered, as was said
in the case of the Nizam’s Family Trust4, that when a
trustee is assessed to tax upon the income of the trust it
is “really the beneficiaries who are sought to be assessed
in respect of their interest in the trust properties through
the trustee”. In the absence of an express provision it is
difficult to hold that the beneficiaries of a discretionary
trust are not liable to be assessed in respect of their
interest in the trust properties even when such interest is
identified in the accounting year and that the trustees who
represent them alone are so liable so that tax can be
recovered only from them.
25.We hold, accordingly, that the Revenue has the option to
assess and recover tax from either the trustees or the
beneficiaries of a discretionary trust in respect of such
income thereof as has been distributed and received by the
beneficiaries in the course of the accounting year.
26.The appeals are allowed. The judgment (of the
majority) under appeal is set aside. The references are
answered in the manner aforestated.
27. There shall be no order as to costs.
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