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Issues: (i) Whether the amount deemed to be dividend on liquidation of the company and received by the trustees was includible in the beneficiary's total income under section 41(2) of the Income-tax Act, 1922. (ii) Whether the surplus arising from sale of trust investments by the trustees was includible in the beneficiary's total income under section 41(2) read with sections 3 and 10 of the Income-tax Act, 1922.
Issue (i): Whether the amount deemed to be dividend on liquidation of the company and received by the trustees was includible in the beneficiary's total income under section 41(2) of the Income-tax Act, 1922.
Analysis: The beneficiary was entitled only to the income from the trust property and not to the corpus. The shares formed part of the corpus, and the amount realised on liquidation, though partly treated as dividend income under the Act, remained an accretion to corpus in the hands of the trustees. Tax treatment under the Income-tax Act did not alter the beneficiary's rights under the trust deed, nor make the amount receivable by the trustees on behalf of the beneficiary.
Conclusion: The amount was not includible in the beneficiary's total income and the answer was in the negative, in favour of the assessee.
Issue (ii): Whether the surplus arising from sale of trust investments by the trustees was includible in the beneficiary's total income under section 41(2) read with sections 3 and 10 of the Income-tax Act, 1922.
Analysis: Under the will, the trustees were to hold and, if necessary, vary the investments, while only the income from such investments was to go to the beneficiary for life. The sale proceeds and resulting surplus were therefore part of the trust corpus and had to be reinvested. Even if the surplus was taxable in the trustees' hands, it was not income receivable by or on behalf of the beneficiary under the terms of the will.
Conclusion: The surplus was not includible in the beneficiary's total income and the answer was in the negative, in favour of the assessee.
Final Conclusion: The reference was answered entirely against the Revenue and the beneficiary succeeded on both questions.
Ratio Decidendi: Amounts forming part of trust corpus do not become assessable in the beneficiary's hands merely because they are deemed income under the taxing statute; inclusion under section 41(2) depends on whether they are receivable by the trustees on behalf of the beneficiary under the trust instrument.
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