Panna Sanjay Trust vs Commissioner of Income Tax, Gujarat

Bhagwati, C.J.—This reference raises a short but very interesting question of construction of section 164 of the Income Tax Act, 1961. The

reference arises out of an assessment made on the trustee of a trust called Panna Sanjay Trust for the assessment year 1962-63, the relevant

account year being Samvat year, 2017. This trust was created by Kasturbhai Lalbhai by exerting a deed of trust dated 18th March, 1961, for the

benefit of the wife, children and grand-children of his son, Shrenik. The period of distribution of the trust estate provided founder the trust deed

was thirty years from the date of the trust deed and until the date of distribution arrived, the income of the trust estate was to be applied at the sole

discretion of the trustees for the benefit of the wife, children and grand-children of Shrenik. During the relevant year of account, the income of the

thrust estate Was Rs. 6,977f and that was the income returned by the trustees of the trust. Now out of this income of Rs. 6,977 a sum of Rs.

3,000 was paid by the trustees to Kalpana, who was one of the beneficiaries under the trust. Since the income of Kalpana from other sources

amounted to Rs. 35,973 the Income Tax Officer though that it would be more beneficial to the revenue to tax the sum of Rs. 3,000 received by

Kalpana under the trust in the hands of Kalpana rather than to tax it in the hands of the trustees. The Income Tax Officer accordingly included the

sum of Rs. 3,000 in the total income of Kalpana and directly assessed her in respect of that amount. That left a balance of Rs. 3,977 to be

assessed in the hands of the trustees and since the individual shares of the beneficiaries under the trust were indeterminate or unknown, the Income

Tax Officer proceeded to assess the trustees as representative-assessee in the status of association of persons u/s 164 and charged tax on the

balance of Rs. 3,977 at the rate applicable to the income of Rs. 6,977. The trustees were aggrieved by the application of the rate appropriate to

the total income of Rs. 6,977 and they arrived the matter in appeal to the Appellate Assistant Commissioner. The Appellate Assistant

commissioner accepted the contention of the trustees that the rate at which tax was liable to be charged was the rate applicable to the total income

of Rs. 3,977 and allowed the appeal. The revenue thereupon preferred a further appeal to the Tribunal and before the Tribunal, the revenue

succeeded in restoring the view taken by the Income Tax Officer. The Tribunal took the view that, even though the total income taxable in the

hands of the trustees was Rs. 3,977 by reason of the sum of Rs. 3,000 having been directly assessed in the hands of Kalpana, the rate applicable

for determining the tax chargeable on the trustees was the rate applicable to the total income of Rs. 6,977. This view taken by the Tribunal is

challenged in the present reference.

The controversy between the parties lies in a very narrow compass and in order to arrive at its proper determination, it is necessary to refer to a

few sections of the Act. Section 160 defines who is a representative-assessee for the purposes of the At and enumerated four categories of

representative-assessees who are assessable in respect of income which does not beneficially belong to them but belongs beneficially to another.

Clause (iv) of sub-section (1) of treat section describes the fourth category of representative-assessee by saying that in respect of income which a

trustee appointed under a trust declared by a duly excluded instrument in writing, whether testamentry or otherwise, revives or is entitled to receive

on behalf or for the benefit of any person, such trustee shall be a representative-assessee. Section 161 imposed a substantive liability to assessment

on the representative-assessee in the following terms :

(1) Every representative-assessee, as regard 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 were 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 this Chapter, 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.

Every representative-assessee is liable to assessment in his own name in respect of the income in respect of which he is a representative-

assessee and the assessment on him in respect of such income is deemed to be made upon him in his representative capacity only and the tax is

also to be levied upon him in like manner and to the same extent as it would be leviable upon the person represented by him. This last provision an

obviously apply only where income is specifically receivable by the representative-assessee on behalf or for the benefit of a single beneficiary or

where there are more beneficiaries than one, the individual shares of the beneficiaries are determinate and known. Tax in such a case would be

levied on the representative-assessee on the portion of the income to which any particular beneficiary is beneficially entitled in the same manner and

to the same extent as it would be leviable upon the beneficiary and in respect of such portion of the income, the representative-assessee would be

assessed in a representative capacity as representing the beneficiary. But this does not mean that the revenue cannot proceed to make direct

assessment on the beneficiary in respect of the portion of the income to which he is beneficiary entitled. Such income having accrued to him would

from part of his total income and would be clearly assessable in his hands and this right of the revenue to make direct assessment on him in respect

of such income stands unimpaired by the provision enabling assessment of such income in the hands of the representative-assessee in a

representative capacity. Section 166 makes this clear by pervading that nothing in the earlier sections of that chapter shall prevent direct

assessment of the person on whose behalf or for whose benefit income therein referred to is receivable. If, therefore, any portion of the income is

receivable or its received by the representative-assessee specifically for the benefit of a particular beneficiary so that such income an be said to

accrued to the beneficiary, the revenue has an option either to assess the representative-assessee in his representative capacity u/s 161 or to make

direct assessment on the beneficiary in respect of such income by virtue of the right expressly preserved u/s 166.

Now, where income is not receivable or received by the representative-assessee specifically for the benefit of a single beneficiary or where the

beneficiaries are more than one, the individual shares of the beneficiaries rare indeterminate or unknown, the last part of section 161(1) which

prescribes that tax shall be levied upon the representative-assessee in the like manner and to the same extent as it would be leviable upon the

person represented by him, would not be applicable. How then is the assessment on the representative-assessee to be made in such a case ?

Section 164 provides the answer to this question. It says :

Where and income in respect of which the persons mentioned in clauses (iii) and (iv) of sub-section (1) of section 160 are liable as

representative-assessees or any part thereof, is not specifically receivable on behalf 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 (which persons are hereinafter in this

section referred to as the beneficiaries) are indeterminate or unknown, tax shall be charged as if such income or such part thereof were the total

income of an association of persons, or, where such income or such part thereof is actually received by a beneficiary, then at the rate or rates

applicable to the total income of the beneficiary if such course would result in a benefit to the revenue.

What this section provides is that where any income or any part thereof is not specifically receivable by the representative assessee for the

benefit of a single beneficiary or where there are more beneficiaries than one, the individual shares of the beneficiaries are indeterminate and

unknown, tax shall be charged in the hands of the representative-assessee as if such income or such part thereof were the total income of an

association of persons. That part of the income which may be either the whole of the income of the trust or a part of it in respect of which it cannot

be predicated that a particular beneficiary is beneficial entitled to it either wholly or in any determinate and known share so as to attract the

applicability of the last part of section 161(1), would have to be taxed in the hands of the trustees as if it were the total income of an association of

persons. So much for the main part of section 164 but there is a clause which follows upon it which deals with the situation ""where such income or

such part thereof is actually received by a beneficiary"" and prescribes that in such a situation, tax shall be charged on such income or such part

thereof at the rate or rates applicable to the total income of the beneficiary if such course would result in benefit to the revenue. The construction of

this clause was also a matter of controversy between the parties but is not necessary for us to examine it sine it was commons ground between the

parties that the revenue did not assessee the sum of Rs. 3,000 paid to Kalpana in the hands of the trustees by resorting to this clause. But, even

part from this clause, when ""such income"", that is, income which falls within the main part of section 164 or any part of ""such income"" is paid by the

representative-assessee to the beneficiary, the beneficiary an always be assessed directly in respect of such amount since such amount would on

receipt by the beneficiary from part of his total income and would be assessable in the hand so the part of his total income and would be assessable

in the hands of the beneficiary. here also, section 166 operates to make it clear that the provision enacted in section 164 for assessment of ""such

income"" in the hands of the representative-assessee as an association of persons shall not prevent direct assessment of the beneficiary in respect of

any part of ""such income"" received by him. The revenue has thus two modes of assessment available in respect of the amount actually received by

the beneficiary out of ""such income""; one is to assess it as part of ""such income"" in the hands of the representative-assessee in a representative

capacity u/s 164 and the other is to assess it directly in the hands of the beneficiary by including it in the total income of the beneficiary. Now, it

was not dispute in behalf of the revenue, and indicated it could not be, that theses two modes of assessment are alternative to each other. The

revenue can bring the amount actually received by the beneficiary to charge in the hands of the representative-assessee in a representative capacity

or bring it to charge in the hands of the beneficiary by direct assessment on him. If it is charged to tax in the hands of the beneficiary, it cannot again

be brought to tax in the hands of the representative-assessee. This would appear to be clear in principle both having regard to the scheme of

sections 161, 164 and 166 as also on the application of the doctrine that the revenue cannot, in the words of the Supreme Court in Commissioner

of Income Tax v. Murlidhar Jawar and Purna Ginning and Pressing Factory, ""seek to assess the one income twice"". But apart from principle, there

is also a decision of the Bombay High Court in Trustees of Chaturbhuj Raghavji Trust v. Commissioner of Income Tax, where the same view has

been taken in regard to the construction of the corresponding section 41 of the Income Tax Act, 1922, which, so far as is material for the present

purpose, was in almost identical terms with the main part of section 164 and section 166. The Bombay High Court pointed out in that case that

section 41 provided for two alternative methods, namely, either to tax the income in the hands of the native methods, namely, either to tax the

income in the hands of the trustees or to tax it directly in the hands of the person on whose behalf the income was receivable under the trust and

one of them having been availed of by the Income Tax department in making direct assessment on the beneficiary, which away a valid assessment

u/s 41(2), the other alternative of taxing the income in the hands of the trustees was no longer available to the department. Here in the present case,

the sum of Rs. 3,000, actually received by Kalpana, was brought to tax in her hands and it could not thereafter be brought to tax again in the hands

of the trustees as representative-assessees u/s 164. It was therefore required to be excluded from the total income of the trustees for the purpose

of chargeability to tax u/s 164 and in fact the revenue did exclude it and sought to tax only the balance of Rs. 3,977 under that section. But the

question is, what is the rate at which tax was chargeable on the balance of Rs. 3,977 ?

The learned Advocate-General appearing on behalf of the revenue contended that though the sum of Rs. 3,000 actually received by Kalpana

had to be excluded from the total income of the trustees for the purpose of chargeability to tax, since it was already taxed in the hands of Kalpana,

it did not ease to be a part of the total income of the trustees and the total income for determination of the rate was therefore still the entire income

of Rs. 6,977 without excluding the sum of Rs. 3,000. This contention sought to draw a dichotomy between exclusion for the purpose of

chargeability to tax and exclusion for the purpose of rate and postulated that exclusion from chargeability to tax did not carry with it exclusion for

the purpose of determination of rate. But this postulate is plainly incorrect and is contrary to the scheme of the Income Tax Act. The Bombay High

Court, while examining the scheme of the old Income Tax Act, pointed out in Commissioner of Income Tax v. N. M. Raiji :

The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose

of computing the total income. Not only is the sum not liable to tax, but it is also not to from part of the total income for the purpose of determining

the rate. When the legislature intends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides,

as it is done in section 16...........

The scheme of the present Income Tax Act, so far as this aspect of the question is concerned, is admittedly the same as the shame of the old

Income Tax Act and these observations of the Bombay High Court though made in the context of the old Income Tax Act would have equal

validity under the present Income Tax Act. Wherever any income is excluded from chargeability to tax either expressly or by necessary implication

arising from the scheme of the Act or its provisions, exclusion operates in the computation of the total income not only for the purpose of liability to

tax but also for the purpose of determination of rate. If the intention of the legislature is to exclude such income from the computation of the total

income only for the purpose of chargeability to tax and not for the purpose of determination of rate, the legislature makes a specific profession in

that behalf and unless which specific provision is found in the statute, exclusion of such income from the total income for the purpose of

chargeability to tax must be held to carry with it exclusion from total income for the purpose of determination of rate. One income goes out from

the total income for the purpose of liability to tax, it would also go out for determination of rate unless there is a specific procession in the statute

providing the contrary. Now here in the present case, the sum of Rs. 3,000 was taxed in the hands of Kalpana and having already been taxed once

in the hands of Kalpana it was not chargeable to tax in the hands of the trustees. It was therefore liable to be excluded from the total income of the

trustees for the purpose of chargeability to tax. This, as already pointed out above, was conceded by the revenue. Once we reach it position, the

inevitable consequence must be that the sum of Rs. 3,000 must also be excluded from the total income of the trustees for determination of the rate.

The revenue cannot, in the absence of a specific provision to that effect, ask us to stop short at merely excluding the amount received by Kalpana

from the total income of the trustees for the purpose of chargeability to tax. We asked the learned Advocate-General whether he was in a position

to point out any provision in the Act similar to section 66 providing that even though the amount taxed in the hands of the beneficiary shall not be

liable to be taxed gains in the hands of the trustees, it shall still be includible in the total income of the trustees for determination of the rate, but the

learned Advocate-General was not in a position to point out and such provision to us. It must, therefore, follow that if the amount actually received

by Kalpana was rightly excluded from the total income of the trustees for the purpose of chargeability to tax, it must also likewise be excluded from

the total income for determination of the rate. The Tribunal was therefore in error in coming to the conclusion that the balance of the income of Rs.

3,977 was chargeable to tax in the hands of the trustees at the rate applicable to a total income of Rs. 6,977. The rate cast which tax was liable to

be charged was the rate applicable to a total income of Rs. 3,977 which was the total income chargeable to tax in the hands of the trustees.

Our answer to the question referred to us therefore is in the negative. The rate at which tax was liable to be charged to the trustees was the rate

applicable to a total income of Rs. 3,977. The commissioner will pay the costs of the reference to the assessee.