COMMISSIONER OF INCOME TAX vs SUBARNA REKHA AGRICULTURAL ESTATE.

SUHAS CHANDRA SEN, J. :

The Tribunal has referred the following question of law to this Court under s. 256(1) of the IT Act, 1961 for its determination :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in its view that the maximum rate of tax under s. 164(1) of the IT Act, 1961 could not be applied to the income of the trust set apart under the reserve fund ?"

The assessment year involved is 1981-82 for which the relevant accounting period ended is 1980 calendar year.

The facts found by the Tribunal are as under :

The assessee is a private trust. Till the asst. yr. 1980-81, 35% of the total income kept in a general reserve used to be offered for taxation and was assessed to tax accordingly. In the assessment year under consideration a nil return was submitted. It was claimed before the ITO that by a resolution dt. 1st January, 1980, the Board of Trustee resolved to discontinue the reserve fund. It was further claimed that the entire income of the trust was distributed to the beneficiaries according to the ratio of the shares. The ITO was of the opinion that there was no provision for discontinuation of the reserve fund or its distribution to the beneficiaries till the youngest great grandson of Smt. Dhuri Devi Jalan attained the age of 18 years. So, he held that "35% of the income transferred to reserve fund stands to be treated as indeterminate and assessed in the hands of the trust itself as in earlier years."

On appeal, the CIT(A) agreed with the ITO that "the trustees did not have any power to discontinue the reserve fund" and as such the ITO rightly taxed 35% of the income of the trust.

Being aggrieved, the assessee preferred an appeal before the Tribunal. On examination of the terms of the trust deed dt. 23rd December, 1960, the Tribunal held that "till dissolution of the trust itself the trustees have no power to do away with or discontinue the reserve fund."

It was, however, submitted on behalf of the assessee before the Tribunal at the time of the hearing of the appeal that one of the beneficiaries, Smt. Dhuri Devi Jalan who was entitled to 10% of the income of the trust expired and another beneficiary of Jalan Charity Trust entitled to 5% of the net income executed a deed of surrender in respect of its share. It noticed that the CIT(A) stated in his order that "it is true that Smt. Dhuri Devi Jalan has expired". The Tribunal dealt with this matter as follows :

"We agree with the authorised representative for the assessee that in the interest of justice the ITO should be directed to verify whether Smt. Dhuri Devi Jalan died in the previous year relevant to the assessment year under consideration, and whether the Jalan Charity Trust really executed a deed of surrender of its right in the assessment year under consideration or before that. In case of his finding both the facts as stated by the assessee-trust, the income set apart for Smt. Dhuri Devi Jalan as well as the Jalan Charity Trust should be treated as having reverted to the trust itself. In that case, 20% of the net income of the trust will have to be calculated by treating 5% payable to Jalan Charity Trust and 10% payable to Smt. Dhuri Devi Jalan to be part of the income of the trust. It is needless to point out that for the purpose of determining 20% of the net income, such net income should be computed in accordance with the provisions given in para 1(8) of the trust deed".

The CIT(A) himself stated that the Board of Trustees had held a meeting on 1st January, 1980 and had resolved to discontinue the reserve fund and the entire income of the trust has been distributed to the beneficiaries according to the ratio of their shares laid down in the deed. He did not discuss or come to a finding that the beneficiaries under the trust were indeterminate or unknown. After holding that the resolution of the trustees had no legal effect he observed that the ITO has rightly taxed 35% of the income of the trust as of a discretionary (sic) trust in terms of Expln. 1(ii) of s. 164. The assessee challenged this finding of the CIT(A) because it was contrary to the decision of the Tribunal in an earlier case. As there was no dispute that the beneficiaries under the trust were determinate and known and this was impliedly accepted by the CIT(A), as appears from his observation quoted earlier, this Tribunal observed : We, however, agree with the authorised representative for the assessee that the maximum rate of tax under s. 164(1) cannot be applied in view of the decision dt. 4th January, 1979 of this Tribunal in ITA Nos. 78 to 80 (Gau) of 1978-79 in the assessees own case."

In the abovementioned appeals the Tribunal also held as follows :

"After hearing both the sides, we are of the opinion that the order of the AAC should be confirmed. This is because the trust fund to which 35% of the income is to be credited every year is itself to be distributed amongst the beneficiaries on the dissolution of the trust according to their respective shares. We have held under similar circumstances that this position could not be regarded as a case where individual shares of the persons on whose behalf or for whose benefit such income is receivable are indeterminate or unknown within the meaning of s. 164(1) of the IT Act, 1961 in the case of Mahadeo jalan Estate by our order dt. 22nd September, 1977 made in ITA Nos. 472 and 473 (Cal) of 1976-77. The Revenue has not been able to distinguish the facts of these cases on the principles applied therein and hence, we are of the opinion that the AAC was right in his decision in the case of this assessee."

On behalf of the Revenue a question has been raised as to whether the shares of the beneficiaries in the 35% of the income of the trust fund were determinate or not this question, however, was not raised before the Tribunal nor decided by it. It has not been shown that there is any legal infirmity in the order of the Tribunal.

Under those circumstances, the question referred to us is answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE, J. :

I agree.