Commissioner of Income Tax vs Bhartidevi Sarabhai

R.K. Abichandani, J.—The following two questions had arisen out of the order of the Tribunal made in ITA No. 1623/Ahd/1973-74

decided on 24th July, 1975.

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 53,122 received by

the assessee from various discretionary trusts could not be taxed in the hands of the assessee under s. 166 of the IT Act ?

If the answer to question No. 1 is against the assessee, whether on the facts and in the circumstances of the case, the Tribunal was justified in

law in holding that the said sum of Rs. 53,122 was exempt from tax inasmuch as the said sum was paid out of dividends received by the trusts,

which were exempt from tax under s. 80K of the IT Act, 1961 ?

Earlier, when this reference had come up for hearing before the Division Bench (B. J. Divan, C.J. and P. D. Desai, J.), the Court, by its order

dt. 1st March, 1978, following the decision of the Full Bench in The Commissioner of Income Tax, Gujarat, Ahmedabad Vs. Kamalini Khatau,

which was decided on 23rd December, 1977, answered the question No. 1 in the affirmative in favour of the assessee and against the Revenue

and held that in view of the answer given to question No. 1, it was not necessary to answer question No. 2.

The Revenue approached the Supreme Court by way of Civil Appeal No. 2150/ 78 against the said decision and the Supreme Court, by its order

dt. 8th February, 1996 [reported as CIT vs. Bharti Devi Sarabhai, taking note of the fact that the decision which was relied on by the High Court

in answering the first question in favour of the assessee was reversed by the Supreme Court in Commissioner of Income Tax, Gujarat, Ahmedabad

Vs. Kamalini Khatau (Smt), and following that decision, answered the question No. 1 in favour of the Revenue and against the assessee, reversing

the decision of the High Court on that point. The Supreme Court observed that since question No. 2 referred to the High Court was left

unanswered by it, the matter had to go back to the High Court for deciding the question No. 2 in accordance with law. That is how this reference

has been listed for our opinion on question No. 2.

These two questions were identical to the questions which were referred to the High Court in a cognate matter in the case of Dr. Vikram A.

Sarabhai, arising out of ITA No. 1621/Ahd/1973-74. In that cognate matter also, the High Court had earlier taken a similar view as was done in

the present case and the matter was carried to the Supreme Court in Civil Appeals Nos. 2154/1978 and 2157/1978 and the Supreme Court, by

its order dt. 7th February, 1996 [reported as CIT vs. Dr. Anand Sarabhai Trust], reversing the judgment of the High Court on its opinion on

question No. 1, held that Revenue had the option to assess and recover from either the trustees or from the beneficiaries of a discretionary trust in

respect of such income thereafter as has been distributed to and received by the beneficiaries in the course of accounting year and answering

question No. 1, in negative in favour of the Revenue and against the assessee, directed the question No. 2 in the said two references to be gone

into and answered by the High Court. Those two references i.e., IT Ref. No. 216/1977 and IT Ref. No. 268/1977 came up for hearing on the

question No. 2, which was identical to the present question No. 2, before a Division Bench and the Division Bench, by its decision dt. 26th

February, 1997 [reported as CIT vs. Dr. Anand Sarabhai], answered the question No. 2 in the affirmative against the Revenue and in favour of the

assessee, in both the references. It was held that the amount of the dividend income received by the trustee which was allowable for deduction

under s. 80K, when passed on to the beneficiary, would nonetheless be eligible to the same deduction. When admittedly the amounts were paid by

the trust out of the dividend income which was in the hands of the trusts, eligible to deduction under s. 80K as has been found on facts, it was held

that the Tribunal was right in holding that such deductible amounts received by the assessee from the discretionary trusts were eligible for deduction

under s. 80K of the said Act. The facts and the said question of law in the present case are identical to those in the case of Dr. Vikram A.

Sarabhai (supra) and the opinion of this Court on question No. 2 in the cognate references i.e. IT Ref. No. 216/1977 and IT Ref. No. 268/1977,

will hold good even for the present question No. 2. Following the reasoning given in the judgment of the Division Bench rendered on 26th

February, 1997 in IT Ref. 216/1977 and IT Ref. 268/1977, we answer question No. 2 referred to us in the affirmative against the Revenue and in

favour of the assessee. The reference stands disposed of accordingly with no order as to costs.