1990 (7) TMI 37 - HC - Income Tax

Trust beneficiaries not an association of persons; business income taxable on trustees under section 161(1) only

HC held that beneficiaries of the trust could not be treated as an 'association of persons' or 'body of individuals' for income-tax purposes, as they had ... Manner of assessment to tax of the business income of the trust - association of persons - Liability of representative assessee - Department in these applications that the beneficiaries must be looked upon as an association of persons - HELD THAT:- We do not see how the trustees who are authorised to carry on business under the terms of a deed of trust can be considered in the same position as the receivers in Shanmugam's case [1970 (4) TMI 27 - SUPREME COURT]. The beneficiaries have not come together with the object of carrying on business nor have they authorised the trustees to carry on any business, as was the case in the above decision. The trustees derive their authority to carry on business, Rot from the beneficiaries, but from the settlor under the terms of the deed of trust, They do not require, the consent of the beneficiaries for exercising their authority under the deed of trust. The authority is conferred on them by the settlor. The beneficiaries are mere recipients of the income earned by the trust. They have not come together for a common purpose. They cannot, therefore be considered as an association of persons or a body of individuals in the same position as the erstwhile partners in Shanmugam's case. In the present case, the beneficiaries cannot be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust nor have they authorised the trustees to carry on business. They are merely receivers of income from the trust. The ratio of Shanmugam's case, therefore, does not apply to the present case. In view of the clear provisions of section 161(1) of the Income-tax Act, as interpreted by our High Court and the Supreme Court, there can be no doubt that the trustees have to be assessed in the manner provided in section 161(1) of the Income-tax Act, in respect of any income of the trust. Looking to the interpretation put by the Supreme Court on the term 'association of persons' also, there can be no doubt that the beneficiaries who are named in the trust as recipients of the income of the trust cannot be considered as an association of persons. Therefore the trustees also cannot take on the character of an association of persons. There is no dispute that the trustees, in their own right, cannot be considered as an association of persons. Looking to these clear provisions of law, therefore, in our view, there is no stateable case or question which the Tribunal can be directed by us to refer to us for our determination. The points at issue are squarely covered by the authorities of our own High Court and the Supreme Court. Issues Involved:1. Manner of assessment to tax of the business income of the trust.2. Applicability of section 161(1) and section 164 of the Income-tax Act, 1961.3. Whether the beneficiaries can be considered as an association of persons.4. Double taxation of trust income.Summary:1. Manner of assessment to tax of the business income of the trust:The applications pertain to the assessment of trustees of a trust where the settlor has empowered trustees to carry on business. The income, including business income, is to be distributed among specified beneficiaries with determinate shares. The assessment years in question are prior to the insertion of section 161(1A) by the Finance Act, 1984, effective from April 1, 1985.2. Applicability of section 161(1) and section 164 of the Income-tax Act, 1961:Chapter XV of the Income-tax Act deals with tax liability in special cases, including representative assessees. Section 161(1) mandates that the representative assessee (trustee) is subject to the same duties, responsibilities, and liabilities as if the income were received by them beneficially. Section 164 applies where the individual shares of the beneficiaries are indeterminate or unknown, in which case the income is taxed as one unit. However, in these applications, the shares of the beneficiaries are known and determinate, thus section 164 is not applicable.3. Whether the beneficiaries can be considered as an association of persons:The Department's contention that beneficiaries should be considered as an association of persons was rejected. The trustees carry on business for the benefit of the beneficiaries, not on their behalf. The beneficiaries have not come together with the object of carrying on business nor have they authorized the trustees to do so. The trustees derive their authority from the settlor under the deed of trust, not from the beneficiaries. The Supreme Court's decision in CIT v. Indira Balkrishna and the High Court's decision in CIT v. Balwantrai Jethalal Vaidya support this interpretation.4. Double taxation of trust income:In one application, the Tribunal discussed the issue of double taxation, noting that some beneficiaries had already been separately assessed on their beneficial interest in the trust's income. The Tribunal held that such income cannot be assessed again in the hands of the trustees. However, no specific question was framed on this aspect, so it was not further examined.Conclusion:The trustees must be assessed in the manner provided in section 161(1) of the Income-tax Act. The beneficiaries cannot be considered as an association of persons, and the trustees cannot be assessed as such. The rule issued in each application is discharged, and there will be no order as to costs.