A discretionary private trust is assessable as an “individual” and not as an “AOP” as”individual” includes group of individuals

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A discretionary private trust is assessable as an “individual” and not as an “AOP” as “individual” includes group of individuals

 

 

 

COMMISSIONER OF INCOME TAX vs. SHRI KRISHNA BANDAR TRUST

HIGH COURT OF CALCUTTA

Ajit K. Sengupta & Shyamal Kumar Sen, JJ.

IT Ref. No. 113 of 1989

19th March, 1992

(1992) 60 CCH 0249 KolHC

(1993) 201 ITR 0989

Legislation Referred to

Sections 164, 80L

Case pertains to

Asst. Year 1984-85

Decision in favour of:

Assessee

Liability in special cases—Discretionary private trust—A discretionary private trust is assessable as an “individual” and not as an “AOP”as “individual” includes group of individuals—An AOP is an association in which two or more persons join in a common purpose or common action, the object of which is to produce income which element is lacking in the case of discretionary trust

Held :

It is AN admitted position that the assessee is a discretionary trust and is liable to be charged to tax at the maximum marginal rate. In the main section, as it stood at the relevant time, there was no reference to “an AOP” and in a case to which the main section is applicable, tax has to be charged at the maximum marginal rate as defined in Expln. 2. It is, therefore, clear that it is not permissible to assess the trustees in the status of “an AOP” with the aid of the provision contained in the main s. 164(1) which is, admittedly, applicable in this case. It is now well settled that the word “individual” does not necessarily and invariably always refer to a single natural person. A group of individuals may as well come in for treatment as an individual under the tax laws if the context so requires.—CIT vs. Indira Balkrishna (1960) 39 ITR 546 (SC) : TC44R.916, CIT vs. Sodra Devi (1957) 32 ITR 615 (SC) : TC42R.359, Kerala Financial Corporation vs. WTO (1971) 82 ITR 477 (Ker), Andhra Pradesh State Road Transport Corporation vs. ITO (1964) 52 ITR 524 (SC) and Jogendra Nath Naskar vs. CIT (1969) 74 ITR 33 (SC) : TC10R.147 relied on; Mammad Keyi vs. WTO (1966) 60 ITR 737 (Ker) and Suhashini Karuri vs. WTO (1962) 46 ITR 953 (Cal) applied.

(Paras 5 & 6)

The matter can be viewed from another angle also. Before its amendment by the Finance (No. 2) Act, 1980, s. 164(1) created a fiction whereby, in the case of a discretionary trust, the tax exigible was the tax payable by an AOP or at the rate of 65 per cent whichever course would be more beneficial to the Revenue. The expression “as if the relevant income or part of relevant income were the total income of an AOP” is a clear pointer that the legislature never conceived of assessment of a trust, answering the description of s. 164(1), as an AOP in the ordinary course. The assessability as an AOP was only by the artifice of a deeming clause. Therefore, by no stretch of imagination, could either the trustees or the beneficiaries be an AOP because there is no element of volition on their part which is the essence of association. They do not join of their volition in a common effort or endeavour to produce income. Such are the incidents of an AOP under the direct taxes. But the amendment effected by the Finance (No. 2) Act, 1980, had done away with the deeming provisions whereby a trust, under s. 164(1) could be assessed as though it were an AOP. Where, however, a case falls under sub-s. (2) of s. 164, the tax is chargeable as if the income to be charged were the income of an AOP. But the fiction of an AOP as contained in sub-s. (2) or for that matter sub-s. (3) of s. 164 relates only to a charitable or public religious trust but not to a discretionary private trust dealt with by sub-s. (1) of s. 164. This position has come to stay w.e.f. the asst. yr. 1980-81 by reason of the amendment of the said sub-section through the Finance (No.2) Act, 1980. Having regard to the facts and circumstances of this case, the trustees of the assessee-trust have to be assessed in the status of an “individual”.

(Paras 7 to 9)

Conclusion :

A discretionary private trust is assessable as an “individual” and not as an “AOP”.

Deduction under s. 80L—Allowability to discretionary trust—Trustees of discretionary trust being assessable as individual, deduction under s. 80L is allowable

AJIT K. SENGUPTA, J.:

In this reference made at the instance of the Revenue, the following question of law has been referred to this Court under s. 256 (1) of the IT Act, 1961, for the asst. yr. 1984-85 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the income of Shri Krishna Bandar Trust should be assessed taking the status of the assessee as ‘individual’ and not ‘AOP’ and, consequently, the deduction under s. 80L of the IT Act, 1961, should be allowed ?”

  1. Shortly stated, the facts are that the assessee is a discretionary trust and was assessed in the status of an “AOP”. The assessee claimed relief under s. 80L of the IT Act, 1961. The ITO was of the view that, having regard to the provisions of Expln. 2 to s. 164 of the IT Act, 1961, a discretionary trust has to be taxed as an AOP and, therefore, deduction under s. 80L was not available to the assessee-trust. The CIT (A) upheld the stand of the assessee-trust following the decision of the Hyderabad Bench of the Tribunal in the case ofEducation trust Fund vs. ITO.

The Revenue, being aggrieved, went to the Tribunal. The case of the assessee before the Tribunal was that the trustees in the instant case had not mutually associated themselves for the purpose of producting income and that they were jointly holding an office and were merely receiving income by way of dividend and interest. According to the assessee, its case fell under the main provision of s. 164 (1) of the IT Act, 1961, and the first proviso to that section was not attracted in this case.

On the other hand, the case of the Revenue before the Tribunal was that, for the immediately preceding two years, namely, asst. yrs. 1982-83 and 1983-84, the assessee-trust disclosed its status as that of an AOP and it was assessed in that status for both these years. It was, inter alia, contended by the Departmental Representative before the Tribunal that while, in the case of a discretionary trust, the tax shall be charged at the maximum marginal rate as laid down in s. 164 (1) of the said Act, the status of the discretionary trust would be that of an AOP in view of Expln. 2 to s. 164 of the said Act.

  1. It is necessary at this stage to set out the provisions of s. 164 (1) and Expln. 2 thereto as it stood at the relevant time.

164. Charge of tax where share of beneficiaries unknown.—(1) Subject to the provisions of sub-ss. (2) and (3), where any income in respect of which the persons mentioned in cls. (iii) and (vi) of sub-s. (1) of s. 160 are liable as representative assessees or any part thereof is not specifically receivable to 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 are indeterminate or unknown (such income, such part of the income and such persons being hereafter in the section referred to as ‘relevant income’, ‘part of relevant income’ and beneficiaries’, respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate…

Expln. 2. – In this section, ‘maximum marginal rate’ means the rate of income-tax (including surcharge on income-tax, if any,) applicable in relation to the highest slab of income in the case of an AOP as specified in the Finance Act of the relevant year.”

  1. It may be observed that the word “tax shall be charged on the relevant income at the maximum marginal rate” as well as Expln. 2 as aforesaid were inserted in the Act by an amendment introduced by the Finance (No. 2) Act, 1980, w.e.f. 1st April, 1980. Prior to the amendment, the relevant portion of s. 164 (1) read as under :

“tax shall be charged—

(i) as if the relevant income or part of relevant income were the total income of an AOP, or

(ii) at the rate of 65 per cent,

whichever course would be more beneficial to the Revenue.”

  1. It is an admitted position that the assessee is a discretionary trust and is liable to be charged to tax at the maximum marginal rate. In the main section, as it stood at the relevant time, there was no reference to “an AOP” and in a case to which the main section is applicable, tax has to be charged at the maximum marginal rate as defined in Expln. 2. It is, therefore, clear that it is not permissible to assess the trustees in the status of an “AOP” with the aid of the provision contained in the main s. 164 (1) which is, admittedly, applicable in this case Sec. 164 (1) only lays down the rate of tax applicable to a discretionary trust. It is not concerned with the manner of computation of total income. In fact, this section comes into play only after the income has been computed in accordance with the other provisions of the IT Act, 1961. Since the determination of the status of an assessee is a part of the process of computation of income, it is necessary to look into the general principles for determining whether the status of the trustees of a discretionary trust can be taken to be as “as AOP” or as an “individual”.

The Supreme Court in CIT vs. Indira Balkrishna (1960) 39 ITR 546 (SC) : TC44R.916, while considering what constitutes an AOP held that the word “association” means “to join in any purpose” or “to join in an action.” Therefore “AOP ” as used in s. 2 (31) (v) of the IT Act, 1961, means an association in which two or more persons join in a common purpose or common action. The association must be one the object of which is to produce income, profits or gains. In the present case, neither the trustees nor the beneficiaries can be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust. The trustees derived their authorities under the terms of the deed of trust. Neither the trust nor the beneficiaries have come together for a common purpose. They are merely in receipt of income. The mere fact that the beneficiaries or the trustees being representative assessees are more than one, cannot lead to the conclusion that they constitute “an AOP”.

In Suhashini Karuri vs. WTO (1962) 46 ITR 953 (Cal), this Court held that joint trustees must be taken to be a single unit in law and not as an “AOP” and there is nothing wrong in treating such a unit as “an individual”.

In CIT vs. Sodra Devi (1957) 32 ITR 615 (SC) : TC42R.359, the Supreme Court held that the word “individual” does not mean only a human being, but is wide enough to include a group of persons forming a unit.

In Mammad Keyi vs. WTO (1966) 60 ITR 737 (Ker), the Full Bench of the Kerala High Court held (Velu Pillai J. dissenting) that the term “individual” in s. 3 of the WT Act, includes a Moplah Muslim family which is governed by the usages similar to those that governed an HUF.

  1. It is now well settled that the word “individual” does not necessarily and invariably always refer to a single natural person. A group of individuals may as well come in for treatment as an individual under the tax laws if the context so requires. Reference may be made in support of this proposition, to the Full Bench decision of the Kerala High Court inKerala Financial Corporation vs. WTO (1971) 82 ITR 477 (Ker), where the statutory Corporation was held to be assessable as an individual. The said decision drew strength from a number of decisions of the Supreme Court including that in Sodra Devi’s case (supra). The other decision is Andhra Pradesh State Road Transport Corporation vs. ITO (1964) 52 ITR 524 (SC). We may also refer to the decision in Jogendra Nath Naskar vs. CIT (1969) 74 ITR 33 (SC) : TC10R.147, wherein the Supreme Court has observed that there could be no reason why the word “individual” in s. 3 of the Indian IT Act, 1922, should be restricted to human being alone and not to juristic entities.
  2. The matter can be viewed from another angle also. Before its amendment by the Finance (No. 2) Act, 1980, s. 164 (1) read as follows :

“Subject to the provisions of sub-ss. (2) and (3), where any income in respect of which the persons mentioned in cls. (iii) and (iv) of sub-s. (1) of s. 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 are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as ‘relevant income’, ‘part of relevant income’ and ‘beneficiaries’, respectively), tax shall be charged—

(i) as if the relevant income or part of relevant income were the total income of an AOP, or

(ii) at the rate of sixty-five per cent,

whichever course would be more beneficial to the Revenue.”

  1. Before such amendment, the provisions created a fiction whereby, in the case of a discretionary trust, the tax exigible was the tax payable by an AOP or at the rate of 65 per cent whichever course would be more beneficial to the Revenue. The expression “as if the relevant income or part of relevant income were the total income of an AOP” is a clear pointer that the legislature never conceived of assessment of a trust, answering the description of s. 164 (1), as an AOP in the ordinary course. The assessability as an AOP was only by the artifice of a deeming clause. Therefore, by no stretch of imagination, could either the trustees or the beneficiaries be an AOP because there is no element of volition on their part which is the essence of association. They do not join of their volition in a common effort or endeavour to produce income. Such are the incidents of an AOP under the direct taxes.

But the amendment effected by the Finance (No. 2) Act, 1980, had done away with the deeming provisions whereby a trust, under s. 164 (1) could be assessed as though it were an AOP.

Where, however, a case falls under sub-s. (2) of s. 164, the tax is chargeable as if the income to be charged were the income of an AOP. But the fiction of an AOP as contained in sub-s. (2) or for that matter sub-s. (3) of s. 164 relates only to a charitable or public religious trust but not to a discretionary private trust dealt with by sub-s. (1) of s. 164. This position has come to stay w.e.f. the asst. yr. 1980-81 by reason of the amendment of the said sub-section through the Finance (No. 2) Act, 1980.

  1. Having regard to the facts and circumstances of this case, we are of the view that the trustees of the assessee-trust have to be assessed in the status of an “individual”. We, accordingly, return our answer in the affirmative and in favour of the assessee.

There will be no order as to costs.

SHYAMAL KUMAR SEN, J.:

I agree.

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