1992 (3) TMI 23 - HC - Income Tax

Trustees of discretionary private trust assessed as 'individual' not 'association of persons' under income tax law

Commissioner Of Income-Tax Versus Shri Krishna Bandar Trust

The Calcutta HC determined that trustees of a discretionary private trust should be assessed as 'individual' rather than 'association of persons' under ... Determination of the status of the assessee - 'Individual' Or 'Association of persons' - Deduction under section 80L - discretionary trust - HELD THAT:- It is now well-settled that the word 'individual' does not necessarily and invariably always refer to a single natural person. A group of individuals may as well come in for treatment as an individual under the tax laws if the context so requires. Reference may be made in support of this proposition, to the Full Bench decision of the Kerala High Court in Kerala Financial Corporation v. WTO [1970 (3) TMI 49 - KERALA HIGH COURT], where the statutory Corporation was held to be assessable as an individual. The said decision drew strength from a number of decisions of the Supreme Court including that in Sodra Devi's case [1957 (5) TMI 9 - SUPREME COURT]. The other decision is Andhra Pradesh State Road Transport Corporation v. ITO [1964 (3) TMI 15 - SUPREME COURT]. We may also refer to the decision in Jogendra Nath Naskar v. CIT[1969 (2) TMI 9 - SUPREME COURT], wherein the Supreme Court has observed that there could be no reason why the word 'individual' in section 3 of the Indian Income-tax Act, 1922, should be restricted to human being alone and not to juristic entities. The assessability as an association of persons was only by the artifice of a deeming clause. Therefore, by no stretch of imagination, could either the trustees or the beneficiaries be an association of persons because there is no element of volition on their part which is the essence of association. They do not join of their volition in a common effort or endeavour to produce income. Such are the incidents of an association of persons under the direct taxes. But the amendment effected by the Finance (No. 2) Act, 1980, had done away with the deeming provisions whereby a trust, under section 164(1) could be assessed as though it were an association of persons. Where, however, a case falls under sub-section (2) of section 164, the tax is chargeable as if the income to be charged were the income of an association of persons. But the fiction of an association of persons as contained in sub-section (2) or for that matter sub-section (3) of section 164 relates only to a charitable or public religious trust but not to a discretionary private trust dealt with by sub-section (1) of section 164. This position has come to stay with effect from the assessment year 1980-81 by reason of the amendment of the said sub-section through the Finance (No. 2) Act, 1980. Thus, we are of the view that the trustees of the assessee-trust have to be assessed in the status of an 'individual'. We, accordingly, return our answer in the affirmative and in favour of the assessee. There will be no order as to costs. The High Court of Calcutta considered a reference made by the Revenue regarding the assessment of the income of Shri Krishna Bandar Trust for the assessment year 1984-85. The main issue was whether the income of the trust should be assessed as an 'individual' or as an 'association of persons' for the purpose of allowing a deduction under section 80L of the Income-tax Act, 1961.The facts revealed that the trust was a discretionary trust assessed as an 'association of persons' and claimed relief under section 80L. The Income Tax Officer contended that a discretionary trust should be taxed as an association of persons, making the deduction under section 80L unavailable. The Commissioner of Income-tax (Appeals) supported the trust's position, citing a decision by the Hyderabad Bench of the Tribunal.The Revenue challenged this decision before the Tribunal, arguing that the trust had previously disclosed its status as an association of persons for the preceding two years. The Departmental representative contended that a discretionary trust should be treated as an association of persons due to Explanation 2 to section 164 of the Income-tax Act, 1961.The relevant provision, section 164(1), stated that tax should be charged at the maximum marginal rate for indeterminate or unknown income beneficiaries. The Court noted that the amendment introduced by the Finance (No. 2) Act, 1980, clarified the tax treatment of discretionary trusts. The Court emphasized that the determination of an assessee's status is part of the income computation process and should align with general principles.The Court referred to legal precedents to define an 'association of persons' and an 'individual.' It highlighted that the trust and beneficiaries did not join for the common purpose of earning income, indicating they should not be considered an association of persons. The Court also noted that the term 'individual' could encompass a group of persons forming a unit under tax laws.The Court analyzed the historical context of section 164(1) and the implications of the 1980 amendment, which removed the deeming provision for trusts to be assessed as associations of persons. It clarified that the fiction of an association of persons only applied to charitable or public religious trusts, not discretionary private trusts.Based on the facts and legal principles, the Court concluded that the trustees of the trust should be assessed as an 'individual.' The judgment favored the assessee, and no costs were awarded.In summary, the Court's decision clarified the tax treatment of discretionary trusts under the Income-tax Act, emphasizing the distinction between an individual and an association of persons based on legal principles and precedents.