1977 (12) TMI 27 - HC - Income Tax

Taxability of Trust Income: Assessing Trustees vs. Beneficiaries Under Section 164

Commissioner Of Income-Tax, Gujarat Versus Smt. Kamalini Khatau

Commissioner Of Income-Tax, Gujarat Versus Smt. Kamalini Khatau - [1978] 112 ITR 652, 1978 CTR 327 Issues Involved:1. Taxability of income received by the assessee from discretionary trusts.2. Applicability of Section 164 of the Income-tax Act, 1961.3. Applicability of Section 166 of the Income-tax Act, 1961.4. Option of the revenue to tax either the trustees or the beneficiaries.Detailed Analysis:1. Taxability of Income Received by the Assessee from Discretionary Trusts:The primary issue was whether the income received by the assessee from six discretionary trusts, totaling Rs. 18,000, should be taxed in her hands. The assessee, a beneficiary under nine different trusts, included income from three specific trusts in her return, but contested the inclusion of income from the remaining six discretionary trusts. The Income-tax Officer assessed the amount in her hands under Section 166, but the Appellate Tribunal held that such income should be taxed in the hands of the trustees under Section 164.2. Applicability of Section 164 of the Income-tax Act, 1961:Section 164 deals with the charge of tax where the share of beneficiaries is unknown. The Tribunal concluded that the income from the six discretionary trusts fell within the purview of Section 164, as the shares of the beneficiaries were indeterminate and unknown. The Tribunal held that the tax should be charged as if the income were the total income of an association of persons, and thus, the income could not be directly assessed in the hands of the assessee.3. Applicability of Section 166 of the Income-tax Act, 1961:Section 166 allows for the direct assessment of the beneficiary or the recovery from the beneficiary of the tax payable in respect of such income. The revenue contended that Section 166 was applicable, enabling them to assess the income directly in the hands of the assessee. However, the Tribunal rejected this contention, asserting that Section 164 was the governing provision in this case.4. Option of the Revenue to Tax Either the Trustees or the Beneficiaries:The larger bench examined whether the revenue had the option to tax the income either in the hands of the trustees or the beneficiaries. The majority opinion held that Section 164, being an exception to Section 161, governed the case, and thus, the income should be taxed in the hands of the trustees. The dissenting opinion, however, argued that the revenue had the option to tax the income in the hands of the beneficiaries under Section 166, especially when the income was actually received by the beneficiary during the accounting year.Majority Opinion:The majority held that the income from the discretionary trusts should be assessed in the hands of the trustees under Section 164. They emphasized that Section 164 creates a charge by stating 'tax shall be charged,' and thus, it overrides the general provisions of Section 161. The majority concluded that Section 166 does not apply to cases falling under Section 164, as Section 164 is a specific provision that governs the taxability of income from discretionary trusts where the shares of the beneficiaries are indeterminate and unknown.Dissenting Opinion:The dissenting judge argued that the revenue had the option to tax the income either in the hands of the trustees or the beneficiaries. He emphasized that Section 166 expressly allows for the direct assessment of the beneficiary in respect of income received by them. The dissenting opinion also highlighted that the principle of taxing the person in actual receipt and control of the income should apply, and thus, the income received by the beneficiary from the discretionary trusts should be taxable in their hands.Conclusion:In view of the majority opinion, the question was answered in the negative, favoring the assessee and holding that the income from the discretionary trusts should be assessed in the hands of the trustees under Section 164. The revenue was directed to pay the costs of the reference to the assessee.