The Commissioner of Income Tax vs The Dutts' Trust

Alfred Henry Lionel Leach, C.J.—The firm of U.B. Dutt and Company in which there were three partners, carried on business as general

merchants in Calicut. They also owned a cinema and a Saw Mill at Kallai and a rice mill at Ernakulam. In 1935, certain creditors applied for the

adjudication of the partners as insolvents under the Provincial Insolvency Act. This petition was not proceeded with, because on the 14th

December, 1935, an agreement was arrived at under which the debtors'' properties were to be conveyed to trustees for the benefit of their

creditors. Accordingly the debtors'' assets were conveyed to three trustees with power to realise what was necessary and to pay the creditors

proportionately out of the monies they received. The trustees sold the cinema in the firm''s financial year which ended on the 30th June, 1937. The

general business was also sold, but they carried on the Saw Mill business which proved to be a profitable concern. The profits made from the Saw

Mill were sufficient to pay in full all the creditors.

This case deals with the assessment of the trustees for the year 1939-40. The trustees claimed that the creditors were the beneficiaries of the

trust, but the Income Tax authorities held that the partners were. The trustees also claimed to be entitled under the provisions of Section 10 (2)

(vi), to an allowance for depreciation of the assets which had been sold in the previous year, but this claim was also disallowed. In these

circumstances the Commissioner of Income Tax has referred to this Court for decision the following questions:

Q.--(1) ""Whether under the provisions of the Act the assessment made on the trustees on behalf of the unregistered firm of Messrs. U. B. Dutt and

Company is correct in law?

Q.--(2) ""Whether under the provision of the Act the unabsorbed depreciation of the general and cinema business discontinued prior to the year of

account under review can be set-off against the income of the Saw Mill business of the year of account which is the subject-matter of assessment?.

Section 41(1) of the Act states that in the case of income, profits or gains chargeable under the Act which trustees appointed under a trust

declared by a duly executed instrument in writing are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from

the trustees in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf the income,

profits or gains are receivable and all the provisions of the Act shall apply accordingly. There are two provisos to this sub-section, but it is only

necessary to refer to the first one which says that where the income, profits or gains or any part thereof are not specifically receivable on behalf of

any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be

levied and recoverable at the maximum rate.

The deed of trust executed by the partners in U.B. Dutt and Company, was executed for the benefit of their creditors. The object of conveying

their assets to the three trustees was solely to provide for the liquidation of their debts. The profits received by the trustees were to be distributed

among the creditors and this is what has been done. The contention that the beneficiaries here were the debtors is one which has only to be stated

to be rejected. The income was received by the trustees on behalf of the general body of creditors. The answer to the first question is in the

negative which means that the tax should be levied on the trustees as trustees for the general body of creditors.

The answer to the second question must be in favour of the Income Tax authorities. Section 10 (2) (vi) cannot be read as giving the assessees

the right to deduct an allowance for depreciation in a business which has ceased to exist. If the trustees had continued the cinema business, they

would certainly have been entitled to an allowance; but, that business having ceased and the assets disposed of before the year of account,

obviously they cannot ask for any allowance. Therefore the answer to the second question is also in the negative.

As the assessees have succeeded in part and failed in part, we will make no order as to costs.