1968 (9) TMI 12 - SC - Income Tax

Supreme Court upholds inclusion of trust income in settlor's total income under Income-tax Act

CR Nagappa Versus Commissioner of Income-Tax

The Supreme Court affirmed the High Court's decision, upholding the inclusion of income from trust properties in Nagappa's total income under Section ... Section 64(v) income which accrues from the assets settled by N upon the trustees for the benefit of his minor children was liable to be included in his total income - Section 64(v) of the Income-tax Act, 1961, was rightly applied to the assessee's case for computing his income - Assessee appeal dismissed Issues Involved:1. Applicability of Section 64(v) of the Income-tax Act, 1961.2. Bar on assessing the income in the hands of the assessee due to assessments on minor beneficiaries.Issue-wise Detailed Analysis:1. Applicability of Section 64(v) of the Income-tax Act, 1961:C. R. Nagappa executed seven separate deeds of trust on April 14, 1955, settling specific properties for the benefit of his minor children. The properties were vested in four trustees, including Nagappa. The income from these properties was to be partly used for the immediate benefit of the beneficiaries and partly accumulated for future benefit.In the assessment for the year 1962-63, the Income-tax Officer included the income used for immediate benefit in Nagappa's total income but excluded the accumulated income. The Commissioner, under Section 263 of the Income-tax Act, directed that the deferred income also be included in Nagappa's total income. Nagappa contended that the income should be assessed in the hands of the trustees under Section 161(1), not in his hands. The Tribunal rejected this contention, and the High Court of Mysore upheld the inclusion of the income in Nagappa's total income under Section 64(v), stating that Sub-section (2) of Section 161 does not make Section 64(v) inapplicable.The Supreme Court affirmed that Section 64(v) directs the inclusion of income from assets transferred to trustees for the benefit of minor children in the total income of the settlor. The Court clarified that Section 161(1) allows the assessment of a representative assessee but does not mandate it, giving the Income-tax Officer the option to assess either the representative assessee or the person represented. Section 166 explicitly allows direct assessment of the person represented, reinforcing the Income-tax Officer's authority to include the trust income in Nagappa's total income.2. Bar on assessing the income in the hands of the assessee due to assessments on minor beneficiaries:Nagappa argued that the Income-tax Officer was bound to assess the income in the hands of the trustees and could not assess it in his hands or the beneficiaries' hands due to Sub-section (2) of Section 161. The High Court of Mysore held that assessments on minor beneficiaries do not bar the application of Section 64(v) to Nagappa's case, despite the illegality of the assessments on minors.The Supreme Court upheld this view, stating that Section 64(v) mandates the inclusion of income from assets settled by Nagappa for his minor children in his total income. The Court emphasized that income assessed under Section 64(v) cannot be taxed again in the hands of the beneficiaries or trustees. Sub-section (2) of Section 161 ensures that when income is assessed in the hands of a representative assessee, it is not assessed under any other provision.The Court referenced judicial opinions to clarify that Section 161(2) removes the conflict of judicial interpretation from the Indian Income-tax Act of 1922. The Court cited previous judgments, including Saifuddin Alimohamed v. Commissioner of Income-tax and Commissioner of Income-tax v. Balwantrai Jethalal Vaidya, to support its interpretation. The Court concluded that Section 161(2) ensures that income assessed in the hands of a representative assessee is not assessed again under any other provision.The Supreme Court dismissed Nagappa's appeal, affirming that the inclusion of the trust income in his total income under Section 64(v) was valid. The Court noted that the assessments on minor beneficiaries would be annulled, and any tax recovered would be refunded.Conclusion:The Supreme Court upheld the High Court's decision, confirming the applicability of Section 64(v) to include the income from trust properties in Nagappa's total income. The Court clarified that assessments on minor beneficiaries do not bar the application of Section 64(v) and emphasized the Income-tax Officer's authority to assess the income in the hands of the settlor. The appeal was dismissed with costs.