Court rules on employee beneficiaries under trust, assessable income under section 161.

Commissioner Of Income-Tax Versus The Trustees Of Staff Gratuity Fund Of Shree Ram Mills Limited

Commissioner Of Income-Tax Versus The Trustees Of Staff Gratuity Fund Of Shree Ram Mills Limited - [1986] 162 ITR 471, 59 CTR 92, 30 TAXMANN 426 Issues Involved:
1. Whether all the employees of the assessee-company were beneficiaries under the trust.
2. Whether the beneficiaries and their shares were determinate at the end of each accounting year.
3. Whether the income is assessable under section 161 or section 164 of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Whether all the employees of the assessee-company were beneficiaries under the trust
The court examined whether all employees of the assessee-company were beneficiaries under the trust named "Trustees of the Staff Gratuity Fund of Shree Ram Mills Limited." The trust was established by an indenture dated November 11, 1953, which aimed to create a fund for payment of gratuity to certain employees as per the judgment of the Industrial Court of Bombay and to other employees deemed deserving by the Mills. The court concluded that not all employees were beneficiaries under the trust, as it included only those covered by the Industrial Court's judgment and those nominated by the Mills. Thus, the court answered this question in the negative.

Issue 2: Whether the beneficiaries and their shares were determinate at the end of each accounting year
The court analyzed whether the beneficiaries and their shares were determinate at the end of each accounting year. The relevant provisions of sections 160, 161, and 164 of the Income-tax Act, 1961, were examined. The court held that the test of known or determinate beneficiaries and shares should be applied at the end of each accounting year when the income is received by the representative assessee. It was not necessary for the beneficiaries to be named in the trust deed; it was sufficient if it could be ascertained who the beneficiaries were at the end of each accounting year. The court found that the employees eligible for gratuity under the indenture and their shares were determinable at the end of each accounting year. Therefore, the court answered this question in the affirmative and in favor of the assessees.

Issue 3: Whether the income is assessable under section 161 or section 164 of the Income-tax Act, 1961
The court examined whether the income should be assessed under section 161 or section 164 of the Income-tax Act, 1961. Section 160 defines a representative assessee, and sections 161 and 164 provide how such an assessee should be taxed. The court held that the determination of whether the beneficiaries and their shares were known or indeterminate should be made at the end of each accounting year. Since the employees eligible for gratuity under the indenture and their shares were determinable at the end of each accounting year, the income should be assessed under section 161 and not under section 164. The court thus answered this question in the affirmative and in favor of the assessees.

Conclusion:
The court concluded that:
1. Not all employees of the assessee-company were beneficiaries under the trust.
2. The beneficiaries and their shares were determinate at the end of each accounting year.
3. The income is assessable under section 161 and not under section 164 of the Income-tax Act, 1961.

The Tribunal's decision was upheld, although for somewhat different reasons. The Revenue was ordered to pay the costs of the references to the assessees.