The Question:

"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that in the case of the assessee Trust, the beneficiaries and their shares are determinate and, therefore, the trustees could not be assessed for tax and the provisions of section 164 of the Income Tax Act are not attracted?"

Facts of the Case:

4. The assessee was a Trust created by a Trust Deed dated 01.04.1986. The author of the Trust was one Smt. A. Lalitha. The Trustees were Sri P.Sekar, Smt. S.Gowri and Sri P.Badri. The Trust was created for the benefit of seven beneficiaries. The beneficiaries and their beneficial interest in the income of the Trust other than the income which forms part of the corpus or capital fund of the Trust were as under :

From 01.04.1986 to 31.03.1989 the following were the beneficiaries with the following sharing ratios :

1. Smt. P.Girija in the status of individual           -           15%

2. Sri P.Sekar in the status of individual            -            20%

3. Smt.S.Gowri in the status of individual           -           15%

4. Sri P.Badri in the status of individual              -           25%

5. Sri P.Prabhakar in the status of individual      -           25%

From 01.04.1989 to the determination period of 25 years from 01.04.1986 the following were the beneficiaries with equal sharing ratios:

1. Sri D.Parthasarathy in the status of individual

2. Smt. P.Girija in the status of individual

3. Sri P.Sekar as karta of Hindu Undivided Family

4. Sri P.Sekar in the status of individual

5. Smt.S.Gowri in the status of individual

6. Sri P.Badri in the status of individual till the date of his marriage and separately in the status of the individual and Hindu Undivided Family consisting of himself and his wife from the date of marriage.

7. Sri P.Prabhakar in the status of individual till the date of his marriage and separately in the status of individual and Hindu Undivided Family consisting of himself and his wife from the date of marriage.

Contention of the Department:

Department assessed the income of trust under section 164 on the following grounds:

Though the beneficiaries are known and the share of the beneficiaries are determinate apparently, but are fluctuating depending upon the contingencies, such as, getting married, begetting children. He further submitted that number of beneficiaries would be less in the beginning of the accounting year , but more at the end of the accounting year, if such contingencies happen. Hence, the beneficiaries cannot be regarded as known.

Contention of the Assessee

Whatever the beneficial interest, the beneficiaries had in the income of the Trust have been directly assessed under section 166 of the Act in the hands of the beneficiaries and so no liability arises in the hands of the Trustees under section 161, or under section 164 of the Act framed the assessment under section 164 of the Act treating the trustees as the representative assessee in respect of 90% of the accumulated income.

Observations

Section 5 of the Act deals with the scope of the total income of any previous year of residents and non residents. Section 4 of the Act deals with the charge of income tax in respect of total income of the previous year of every person "subject to the provisions of this Act".

Chapter XV of the Act deals with the liability in special cases. Representative assessees are dealt in section 160 of the Act. Section 160(1)(iv) of the Act provides that in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including any wakf deed, which is valid under the Musalman Wakf Validity Act, 1913 (6 of 1913) receives or is entitled to receive on behalf of or for the benefit of any person such trustee or trustees will be representative assessee.

Section 161 provides for the extent of the liability of the representative assessee to the effect that every representative assessee as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in Chapter XV, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.

Section 164 of the Act gets attracts only when the shares of the beneficiaries are unknown, which is manifest from the marginal heading of that section itself, viz., Charge of tax where the share of the beneficiaries unknown. That section comes into play only where any income or any part thereof is not specifically receivable on behalf of or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown, and in such case, the relevant income, or part of the relevant income shall be charged at the maximum marginal rate.

Final Decision

"In the assessment year with which we are concerned, having regard to the terms of the trust, the beneficiaries had no right to receive any part of the corpus of the trust to which the income received by the trustees by way of prize money on the lottery ticket was required to be credited. The right to the beneficiary was only to share in the division of that corpus at the end of the fifteen year period or sooner, if all the beneficiaries unanimously agreed to terminate the trust. The beneficiaries could not have been assessed to tax in respect of any part of this prize money in the year in which that money was received by the trust. The prize money received by the trustees on the lottery tickets not being an amount in which the beneficiaries, whose identities are known and whose shares are determinate, could claim a share in the year of account and which amount could not have been assessed in their hands as their income in whole or in part, therefore, was not assessable in the hands of the trustees who only represented the beneficiaries for the purposes of assessment and who could only be assessed in the same manner and to the same extent as the beneficiaries could have been assessed. The trustees assumed no higher liability than the beneficiaries themselves were required to bear under the law. If the beneficiary was not to be taxed, that tax could not be levied on the trustee who only represented the beneficiary and no more, in cases where the identity of the beneficiary was known and the share of the beneficiary was determinate. (emphasis supplied)

 

Beneficiary share determinacy prevents trustee assessment under section 164 when beneficiaries' identities and shares are fixed. Where a trust instrument identifies beneficiaries and apportions beneficial interests, and beneficiaries have no present right to receive the income in the relevant year, the special charge applicable when beneficiary shares are unknown is inapplicable; trustees, as representative assessees, are liable only to the same extent and in the same manner as the beneficiaries could have been assessed, and cannot bear greater tax liability where identities and shares are determinate.