TaxTMI 
TaxTMI 
2015 (2) TMI 121
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....of Tax Appeal No.20 of 2001, ITR No.28 of 2000, ITR No.25 of 2003, ITR No.74 of 1996 and ITR No.141 of 1996, following question would be required to be considered:- "Whether on facts and circumstances of the case, the Appellate Tribunal has substantially erred in law in holding that since some or all beneficiaries of the Trust are discretionary Trust, to the extent of share of beneficiary as discretionary Trust, the tax can be charged at the maximum marginal rate under Section 164 and not under Section 161 of the Income Tax Act, 1961 (hereinafter referred to as the, 'Act'). 3. Whereas, in the second group of ITR No.42 of 2000, ITR No.43 of 2000, ITR No.44 of 2000 and Tax Appeal No.141 of 2001, the substantial question of law which may be required to be considered, would be as under:- "Whether on facts and circumstances of the case, the Tribunal was right in taxing income of the Assessee holding it as real income of the Assessee?" 4. The relevant facts in brief in each of the group can be summarized as under:- Tax Appeal No.20 of 2001 The appeal is preferred against the order of the Tribunal dated 18.04.2000 in I.T.R. No.2795 and 2772/Ahd/1986. Initially, A.O. asse....
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....Court. ITR No.141/1996 The A. O. found that the Assessee cannot be treated as Specific Trust and will have to be regarded as discretionary Trust liable to tax at the maximum marginal rate. The matter was carried in appeal before the CIT(A) and CIT(A) confirmed the order of the A.O. The matter was further carried before the Tribunal and the Tribunal dismissed the appeal of the Assessee, by confirming the order passed by the CIT(A). Under these circumstances, the present appeal by the Assessee before this Court. ITR No.42 of 2000 with ITR No.43 of 2000 with ITR No.44 of 2000:- The facts are common inasmuch as the A. O. found that the Assessee Trust cannot be treated as Specific Trust but are discretionary Trust liable to pay tax at the maximum marginal rate. The matter was carried in appeal before the CIT(A) and CIT(A) confirmed the order of the A.O. The matter was further carried before the Tribunal. However, before the Tribunal, additional ground was raised that the amount paid in advance to the Assessee by the Society with whom the agreement was entered into could not be treated as income in the debit entry and the said amount be permitted as if 'no income'. The Tribun....
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....regard. Section 9 of the Trust Act provides that every person capable of holding the property can be beneficiary. Chapter III of the Trust Act provides for the duties and liabilities of the Trustees. Section 11 of the Act provides that the Trustee is bound to fulfill the purpose of the Trust and to obey the direction of the author of the trust unless modified by consent of all the beneficiaries being competent to contract. Section 13 of the Act creates an obligation upon the Trustees to protect the title of the Trust properties. Section 14 provides that the Trustee must not himself or another set up any title to the property adverse to the interest of the beneficiaries. An obligation is created upon the Trustees by Section 15 to deal with the trust properties as carefully as a man of ordinary prudence as if the properties were belonging to him. Section 17 of the Act provides the role of the Trustees to be impartial when the beneficiaries are more than one. By virtue of Section 18 of the Act, obligation is created upon the Trustees to prevent the waste. Section 23 of the Act provides the liability upon the Trustees, if any breach of the trust is made. As we are not concerned with th....
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....e from the person represented by him. [(1A) Notwithstanding anything contained in subsection (1), where any income in respect of which the person mentioned in clause (iv) of subsection (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate : Provided that the provisions of this subsection shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him. [***] (2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act." [Charge of tax where share of beneficiaries unknown. 164. (1) 60[Subject to the provisions of subsections (2) and (3), where] any income in respect of which the persons mentioned in clauses (iii) and (iv) of subsection (1) of section 160 ....
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....any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.] [(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, 72[or which is of the nature referred to in subclause (iia) of clause (24) of section 2,] 73[or which is of the nature referred to in subsection (4A) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11 74[or section 12], as if the relevant income not so exempt were the income of an association of persons : [Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of subsection (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]] [(3) In a case where the relevant income is derived from property held under trust in part only for charitable or religious purposes 77[or is of the nature referred to in subclause (iia) of clause (24) of section 2]....
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....an association of persons :] [Provided further that where the relevant income consists of, or includes, profits and gains of business, the preceding proviso shall apply only if the income is receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him : Provided also that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of subsection (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]] [Explanation 1.-For the purposes of this section,- (i) any income in respect of which the persons mentioned in clause (iii) and clause (iv) of subsection (1) of section 160 are liable as representative assessee or any part thereof shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly....
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....joy and get the benefits of the Trust property. However, the same is subject to two limitations; one is that while undertaking the exercise to find out as to whether a particular Trust can be said as specific Trust or a Discretionary Trust, one has to examine the contents of the Trustdeed for processing a particular share of the beneficiary, if provided by the Trustdeed. If the share of the beneficiary/s is determined and specified, such Trust can be termed as specific Trust, but if the share is not determined or uncertain depending upon the decision of the Trustees as they may take from time to time, then such Trust can be termed as Discretionary Trust. The second aspect for the purpose of application of the Act is concerned, as the Trustees are in representative capacity, representing the interest of the beneficiary in the Trust for the purpose of tax liability the competent authority under the Act may examine as to whether the income of a particular beneficiary treated individually is liable for the higher slab of income tax or not. If it is found that the tax liability of the amount receivable or received by the beneficiary of his share individually in the hands of the benefici....
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.... considered accordingly, one can easily get away from the liability to pay tax at the maximum marginal rate, though the shares of the ultimate beneficiaries may be uncertain or unknown. 10. Whereas on behalf of the Assessee, it was contended that when any assessment is to be made of the representative Assessee, the Assessing Officer has to find out whether the shares of the beneficiaries are specific or not as per the Trustdeed. If the shares of the beneficiaries are specific, irrespective of the fact that whether it is discretionary Trust or any specific Trust or any individual person, the assessment can be under Section 161 of the Act and cannot be under Section 164 of the Act. It was submitted that it is not open to the Assessing Officer to look at the status of the beneficiaries of the Trust or a beneficiary of a second level or third level Trust, whether discretionary or a specific Trust and it was, therefore, submitted that the lower authorities have committed error and have not properly construed the statutory provisions of the Act. 11. In order to appreciate the contention we find that the same can better be explained by giving example. For example, First Level Trust ....
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....essment of the First Level Trust should rest there. 14. Attempt to contend that if the beneficiary of Second Level Trust is a discretionary Trust or the shares are uncertain of the beneficiaries of Second Level Trust, the beneficiary of the First Level Trust can also be taxed at the maximum marginal rate under Section 164 of the Act, in our view cannot be accepted because the relationship between the Trustees in representative capacity and the answerability of the Trustees to the beneficiary is limited to the beneficiary of a particular Trust as per the Trust Act and it cannot be stretched or reached to the beneficiaries of the beneficiary and then again beneficiaries' beneficiary. If such an interpretation is made, it would not only result into stretching the jural relation or legal relation between the Trustees and the beneficiaries beyond the scope of the Trust Act, but it may also create a chaotic and uncertain situation. As observed earlier in normal circumstances, once the specific share of each of the beneficiaries is already distributed by the Trustees amongst the beneficiaries, the revenue can say that even if the income is in the hands of the beneficiary, the charegabi....
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....s under: "The basic idea underlying section 41, and which is in conformity with principle, is that the liability of the trustees should be coextensive with that of the beneficiaries and in no sense a wider or a larger liability." On the very page, it has been observed inter alia, as under: "This Court also observed that "the same considerations must apply in the interpretation of section 161 (2) of the Income Tax Act, 1961"." 17. At this stage, we may record that in the case of one of the assessee, viz., Neo Trust V. Asst. Commissioner, Income Tax, the Tribunal in its decision, reported at 41 I.T.D. 418, at paragraph 11.3, had observed thus- "We do not agree with the submission of the learned counsel for the assessee to the effect that the trustees of each oral discretionary trusts of first line were the real beneficiaries of the assessee trust and that under the law we are not entitled to inquire as to on whose behalf and for whose benefit those trustees had to receive part of the income from the assessee trust. We are of the opinion that substance of the matter is to be taken into account. We have to inquire as to who are the real beneficiaries of the assesse....
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....articular trust were specific, the trust is to be treated as specific trust and the question was answered in favour of the assessee against the Revenue. 22. However, Mr.Bhatt, learned counsel appearing for the Revenue contended that in the said case of KV Patel Family Trust, none of the beneficiary was discretionary trust nor there was any further inquiry that the beneficiaries of the beneficiary was discretionary trust and therefore, the said decision may not apply to the present question to be considered by this Court in the present group of matters. 23. We find that it is true that to classify the trust as specific trust or not is considered by this Court in the above referred decision. But, in the said decision, the question did not come up for consideration before this Court as to whether beneficiary of third level trust, even found to be discretionary trust or the share is found to be uncertain, the assessment of first level trust can be made under section 164 of the Act or not. 24. Mr.Mehta, learned counsel appearing for the Revenue in some of the matters did contend that as per the decision of this Court in the case of M.L. Family Trust and Ors. Vs.State of Gujarat....
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....s or to the beneficiaries who receive the share in the trust property. 27. In view of the aforesaid observations and discussions, we find that on the first question, reproduced at paragraph No.2 hereinabove, the answer would be against the revenue and in favour of assessee, but with the option available to the assessing officer to resort to the provisions of section 164 of the Act in the event the beneficiary of the first level trust are discretionary trust to the extent of their respective shares, but such analogy or the mode would not be available by connecting the beneficiary of second level trust with third level trust even if they are discretionary trust or the shares of the beneficiaries are uncertain and such aspect may arise for consideration only if there is separate assessment of the trustees of second level trust or third level trust. 28. As in all the matters, being Tax No.20/01, ITR Nos.28/00, 25/03, 74/96 and 141/96, the question arise for reaching to the beneficiaries of the second level with third level trust for the assessment of first level trust, the impugned orders of the Tribunal cannot sustain for charging tax at the maximum marginal rate under section 1....
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.... of remuneration is required to be paid as under at the rate of 8% of Rs. 65,00,00000 i.e. at the rate of 3% of total amount of remuneration in first year and at the rate of 2% for the remaining two years. That amount comes to Rs. 5,20,000/. This amount is required to be paid every year at the end of February. Dt . 28.2.1983 1,95,000 Dt. 29.2.1984 1,62,500 Dt. 28.2.1985 1,62,500 5,20,000 However, whenever financial necessity arise for both the parties, such financial transaction can be made with a view to help each other irrespective of such amount is due or not." Similar agreements have been executed by the respective Housing Societies and the other two assessee trusts specifying therein the amount of organisation fees payable by the respective societies to the assessee trusts, which will accrue in their favour on completion of their respective accounting years. The entries relating to such income by way of organisation fees receivable by the assessee trusts has been credited as income in the P & L A/cs. on the basis of such legally enforceable agreements executed between the societies and the assessee trusts. The income whic....