1998 (3) TMI 20 - HC - Income Tax

Trustees' Business Income Assessed as Association of Persons, Not Individually

The High Court ruled that the income from the business run by trustees after partition should be assessed as an association of persons (AOP), not ... Association Of Persons, Representative Assessee, Trustee Issues Involved:1. Whether the income from the business run by trustees after partition should be assessed in the status of an association of persons (AOP) or on each beneficiary individually.2. Whether there was an absence of consent of the minor in forming an AOP.Issue-wise Detailed Analysis:1. Assessment Status:The primary issue revolves around whether the income from the business run by trustees should be assessed as an association of persons (AOP) or individually for each beneficiary. The court examined the facts where the business assets were partitioned among the karta and his minor sons, followed by the creation of a trust to manage these assets. The Income-tax Officer (ITO) concluded that the beneficiaries formed an AOP and created a trust, thus the income should be assessed as AOP. The Commissioner (Appeals) upheld this view, stating that the beneficiaries combined to carry on the business, and the trust did not alter their status as an AOP. The Tribunal, however, disagreed, stating that there was no express consent from the guardian for the minors to carry on the business, thus no AOP was formed. The High Court, upon review, found that the trust deed and the conduct of the parties implied consent from the guardian, thereby forming an AOP. The court emphasized that the intention to form an AOP was evident from the joint management and the purpose of generating income, satisfying the twin tests laid down by the Supreme Court in Meera and Co. v. CIT.2. Consent of the Minor:The second issue was whether the minors' consent was absent in forming an AOP. The Tribunal held that there was no express consent from the guardian, making it impossible to form an AOP. The High Court, however, found this reasoning flawed. It noted that the father, as the natural guardian, had given implied consent by including the minors' properties in the trust and carrying on the business for their benefit. The court referred to the Supreme Court's decision in G. Murugesan and Bros. v. CIT, which allows a minor to join an AOP if the guardian consents. The High Court concluded that the guardian's consent could be inferred from the conduct of the parties, thus validating the formation of an AOP.Conclusion:The High Court ruled that the income from the business should be assessed as an AOP, not individually for each beneficiary. It emphasized that the creation of the trust and the conduct of the parties demonstrated an intention to form an AOP. The court also clarified that the provisions of section 161 of the Income-tax Act, which allow for assessment in the hands of the trustees, do not override the charging section 4, which imposes tax on the income earned by an AOP. The court dismissed the Tribunal's view that there was no consent from the guardian and held that the guardian's consent was implied. The court answered the questions of law in favor of the Revenue and awarded costs to the Revenue.