1986 PLP 622 (PTD)

G.L. OZA, J.‑‑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 assessment in 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 on this trust as and a .t3 P. was misconceived and unsustainable in law and in setting aside the assessment with a direction to make separate assessment on the managing trustee under S. 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 income‑‑tax Officer assessed Karelal Kundanlal Trust in the status of A.O.P. (Association of Persons), According to the I‑T.O. the settler executed a trust deed on 24‑10‑1950 conveying certain movable and movable properties, to the trustees named therein. The I.‑T.O, therefore, made the assessment in the hands of the trustees to whom the properties had been conveyed in the status of Association of Persons (A.O.P . ) It was pleaded before the I.T.O. that in a trust, the trustees were bound in fulfil the purpose sir the trust and to obey the directions of the author of the trust given at the time of its creation.

3. On appeal before the A.A.C., a similar contention was advanced by the trustees and the. A.A.C. repelled the contention and maintained the order passed by the I.T.O. The assessee preferred an appeal before the Tribunal and the Tribunal accept the appeal and came to the conclusion that the assessments could not be made of the trustees as an association of persons, but could only be made as a representative assessee representing the share of the beneficiary. The Tribunal, therefore, held that the trust could only be assessed as a representative assessee under section; 161 (1) of the I.‑T. Act in respect of the income; i.e.1/4the 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. 1 961 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.

4. 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 page 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 I.‑T.O. and the A.A.C were right ‑in assessing the trustee as an association of Persons and the view taken by the Appellate Tribunal is not justified in law. Learned counsel for the Department placed reliance on Commissioner of Income‑tax Gujrat v. Smt. Kamalini Khatua (1978) 112 ITR 652 : (1978 Tax LR 833) (Guj.) (FB).

5. Learned counsel‑for the assessee, on the other hand, contended that section 161 of the Income‑tax Act, 1961, provides for assessment in .representative capacity and what is a representative assessee, has been defined in section 160(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 direct assessment of the person who beneficially is entitled to the income. It was, therefore, contended that it does not mean that the Department can assess the trustee 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 I.‑T.O. and maintained by the A.A.C. Learned counsel relied on a decision reported in (Commissioner of Income‑tax v. V.S. Kumaraswamy Reddiar Trust) (1982) 138 ITR 808 : (1982 Tax LR 163) (Ker) where the question has been considered in detail. ‑He also placed reliance on the decision reported in C.R. Nagappa v. Commissioner of Income‑tax (1969) 73 ITR 626 : (AIR 1969 SC 88$) 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.

6. Section 160 of the Income‑tax Act defines 'Representative Assessee and in respect of a trust, clause (iv) of this section is material which reads as under: "(1V) 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." It is in this context that the term 'representative assessee' has to be understood in clause (1) of section 161, which reads as under:‑ "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." It clearly lays down that in regard to income in respect of which he is a representative assessee, he will be subject to the same duties, responsibilities and liabilities as if the income were the income received by or accruing (to) or, in favour of him beneficially and, therefore, he shall be liable to assessment in his own name in respect of that income. It has been further. provided that such assessment shall be deemed Ao be made upon him in his respresentative capacity only and the tax shall, subject to other provisions contained in this Chapter, be levied upon and recovered from him in the like manner to the same extent as it would be leviable and recoverable from the person represented by him.

7. It is, therefore, clear that reading the definition of 'representative assessee' in clause (iv) of section 160(1), it is clear that the trustee could be assessed in respect of the income which is meant for the beneficiary and he represents him. It is also clear that the extent of the tax liability would be the same as could be levied and recovered from a person represented by him and in a case of trust ‑it will mean the beneficiary.

8. If in the context of the language of section '160(iv) and section 161, the note on which reliance has been placed by the learned counsel for the department is read, it does not mean what it was suggested. The note on which reliance is placed is in these terms: "Sections 160 and 161 are enabling sections. Department's option to assess representative assessee or person beneficially entitled to income. Section 166 makes it clear that sections 160 and 161 are enabling sections, i.e. 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 is, therefore, clear that either the assessment should be made of the representative assessee, i.e. a trustee, or directly of the beneficiary, but it is clear that it could only be with regard to the income to which the beneficiary is entitled and the liability will only be to that extent. Under these circumstances this note could not be used to justify the assessment of the trustees in their personal capacity and as they are more than one, assess them as an Association of Persons.

9. Section 166 of the Act also makes the position further clear. It is as under:‑ "

166. 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." It only says that nothing to the foregoing sections, i.e. sections 160 and 161, shall prevent either direct assessment of the person on whose behalf or for whose benefit income therein is referred to is receivable or the recovery from such person of the tax payable in respect of such income. The section starts with the heading 'Representative assessees miscellaneous provisions'. This, therefore, only provides that the assessment could be made either of the trustee as a representative assessee, as contemplated under section 161, or directly of the beneficiary who is entitled to the income as indicated in the trust. Under these circumstances, therefore, the observation made by the author could not lead to the inference which it appears that the learned. I .‑T . 0. and the A.A. C . tried to draw. There is no option with the department in case of a representative assessee to assess the representative personally. He could only be assessed as a representative assessee or the assessment co~)ld be made of the beneficiary directly.

10. In C.R. Nagappa v. Commissioner of Income‑tax A I R 1969 S C 888 (supra), section 161 of the I‑T. Act has been considered by their Lordships of the Supreme Court and it was observed as under "It is implicit in the terms of subsection (1) that the I.‑T.O. may assess a representative assessee as regards income in respect of which he is a representative assessee, but he is not bound to do so. He may assess either the representative assessee or the person represented by him. That is expressly so enacted in section 166 which states. 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."

11. This question was also considered in detail by the Kerala High Court in Commissioner of Income‑tax v. V.S. Kumaraswami Reddiar Trust 1982 Tax L R 163 (supra) and it was observed as under (at p. 166 and 167): "The further contention that even 'if a valid trust is posted the assessee was liable to be assessed as an association of persons was also pressed before us. Passage from p. 949 of the 7th Edn. of Kanga and Palkhivala on Income‑tax were relied on by counsel for the Department. These passages are based on the decisions in Hotz Trust of Simla v. I.‑T. Commissioner (1930) 5 I.‑T.C. 8 : A I R 1930 Lah. 929 and J.V. Saldhana v. I.‑T. Commissioner (1932) 6 I.‑T. C. 114 : A I R 1932 Mad. 378 (F. B.). The two decisions themselves had been referred to and considered both by the A.A.C. and the Tribunal. The subsequent development in the case law as also statutory developments, which ultimately led to the enactment of the new position, section 161(2), had been referred to by these taxing authorities. The decisions in Hotz Trust of Simla v. Commissioner I.‑T. and J.V. Saldhana v. Commissioner I.‑T. do not have any direct bearing on the question referred in this case. The correct principles to be applied in the case of an assessment of income in the hands of a representative assessee, had been considered by the Bombay High Court while interpreting the analogous provisions of sections 40 and 41 of the I.‑T. Act, 1922, in Commissioner I.‑T. v. Balwantrai Jethalal Vaidya (1958) 34 I.‑T.R. 187 : A I R 1959 Bom.

298. After referring to the observations made by that Court in its earlier judgment in Saifudin Alimohamed v. Commissioner I.‑T. (1954) 25 I.‑T.R. 237 : AIR 1954 Bom. 219, which in turn referred to the decisions in Hotz Trust of Simla v . Commissioner I.‑T. and J. V . Saldhana v . Commissioner I.‑T., the Bombay High Court declared that it is no longer open to the Department to levy's tax on a trustee in the same way as on an assessee who does not fulfil the character of a trustee'. That Court further held that if the income is received by a representative assessee as defined in section 160 of the Act, the Department is obliged to effect the assessment under section 161(1) of the Act. The position of law as clarified in Balwantrai Jethalal Vaidya's case has been given statutory acceptance in the light of the recommendation of the Law Commission in its 12th Report and has been specifically approved by the Supreme Court as laying down the correct law. A .combined reading of sections 160 and 161 clearly establish the position that a'representative assessee is to be assessed only under section 161(2) of the Act. This legal position is now well‑settled in the light of the pronouncements of the Supreme Court while interpreting the corresponding provisions of section 41 of the I.‑T. Act, 1922, vide Commissioner I.‑T. v. Nandlal Agarwal (1966) 59 I.‑T.R. 758 : A I R 1966 SC 899 and C.R. Nagappa v. Commissioner I.‑T (1969) 73 I.‑T.R. 626 : A I R 1969 SC 888; as also the analogous section (S. 21) of the Wealth Tax Act; vide Commissioner of Wealth Tax v. Trustees of Nizam's Family (Remainder Wealth) Trust (1977) 108 I.‑T.R. 555 at pp. 592 and 593 : 1977 Tax L.R. 998 at pp. 1008 and 1009. The Tribunal having found that the assessee herein does satisfy the requirements of a representative assessee and the said finding having been affirmed by us in the earlier part of this judgment. We are clearly of the view that the assessment could only be one under section 161(1) of the Act."

12. It is, therefore, clear that, the contention advanced by the learned counsel for the department cannot be accepted. The Tribunal was right in setting aside the assessment made by the I.‑T.O. and maintained by the A . A . C . Our answer 'to the question, therefore, is in the affirmative and the Tribunal was justified in holding that the assessment of this trust as an A. O. P. was misconceived and unsustainable in law. This reference was made as the same question arose for the assessment years 1963‑64, 1964‑65 and 1965‑66 out of which the three Miscellaneous Civil Cases referred to in para. 1 of this judgment were filed in this Court. Consequently our answer to the question stated above shall govern the assessment for all these three years. In the circumstances of the case, parties are directed to bear their own costs. M. B. A. Answered in affirmative.