Commissioner Of Income-Tax v. Arvind Narrottam

1. This reference arises out of assessments made on the assessee as an individual for the assessment years 1962-63, 1963-64 and 1964-65, the relevant account years being Samvat Years 2017, 2018 and 2019. The Reference involves a question of construction of three trust deeds executed by the assessee's father for the benefit of the assessee, his wife, and his children and grandchildren, one dated 19th March 1955 in respect of Arvind Narrottam Trust, the other dated 9th April 1955 in respect of Arvind Family Trust, and the third dated 18th March 1961 in respect of Arvind Kalyan Trust. All the three trust deeds are in identical terms barring only the difference in the minimum amounts payable to the beneficiaries out of the income of each year and it would therefore be sufficient to make a reference only to the terms of one of the three trust-deeds, namely, that in respect of Arvind Kalyan Trust. By that trust deed, the assessee's father settled certain shares on the trust set out in Clauses 7 and 8 of the trust deed which, according to their English translation, run as follows:

"7-A. For a period of 30 years from this day that is to say till the period of distribution the trustees shall pay out of the net amount remaining from the interest or other income of the trust fund after deducting thereout the expenses incurred for management of the trust, payment of taxes, etc., such sum as the Trustees shall think fit to Arvind and, if during that period Arvind is married, to Arvind and his wife and the children of Arvind and the grandsons and granddaughters ( in the male line) of Arvind or any one or more of them and if after doing so any saving remains from the income such saving is to be added to the trust funds as capital, but the Trustees shall have to pay Rs. 250/- at least every year to Arvind and if Arvind is married in the meantime, to Arvind and his wife each, and if after doing so there is any saving out of the income in every year, such saving is to be added to the trust funds as capital. If in any circumstances, the net income of the trust fund is less than the minimum amount payable as about the whole of such amount should be paid to Arvind and, if Arvind is married in the meantime, it should be distributed equally between Arvind and his wife. But if before the expiry of 30 years from this day Arvind expires unmarried or, if Arvind is married in the meantime, and Arvind and his wife are both not then alive, then the annual income of the trust funds should be added to the Trust funds till the expiry of 30 years from this day.

7-B. On the expiry of 30 years from this day, the property of this trust fund, and whatever saving is added thereto as capital out of income of every year shall be distributed by the trustees amongst Arvind, Arvind's wife, Arvind's Children, Arvind's grand-children (in the male line) whoever of them may be alive then or amongst such one or more of them as the Trustees think fit and in such proportion as the Trustees think fit. If the trustees so think fit, all such properties may be paid to one or more of such persons as may be alive then or the same may be distributed amongst them in equal proportion or in greater or lesses proportion or the same may be distributed amongst one or more of such persons then alive either in equal proportion or in greater or lesser proportion. But if for any reason, the Trustees do not determine as to whom and in what proportion such amount should be distributed or if the decision taken by them cannot be enforced lawfully or may be considered illegal then in such circumstances the Trust fund and its income accumulated as capital shall be distributed in equal proportion between Arvind his wife, and his child or children then alive and the branches of his children who may have expired prior to the date of the distribution that is to say per capita between the persons then alive and per stripes amongst the branches of the pre-deceased children, but if at the date of distribution none out of Arvind, his wife, or his children or grand-children (in the male line) is alive, the amount of the trust fund and its income accumulated as capital should be distributed between my son Niranjan and his wife and Manan and Manini and the children of Niranjan as are then alive and the branches of his children as may have expired that is to say per capita between the persons then alive and per stripes amongst the branches of the deceased children (of niranjan) and if none of them is alive then all the property of this trust and its accumulated income should be handed over, as donation, on such conditions as the trustees think fit, to the Gujarat University or other public educational institution or any institution giving medical assistance to public or any institution doing work for improvement of public health.

8. If at any time before the expiry of 30 years from this day, the Trustees feel that this trust should be wound up and such properties as may form part of the trust fund should be distributed, then the Trustees are hereby authorised to distribute such property of the trust and any income thereof accumulated as capital (which is hereinafter described as trust property) amongst Arvind, wife of Arvind, and such child or children and grandsons and grand-daughters of Arvind (in the male line) of Arvind as may then be alive or amongst one or more of them in such proportion as the Trustees may think fit, but if at that time none out of Arvind, his wife, and his children or grandsons and granddaughters (in the male line) is alive, the trust property should be distributed amongst Niranjan and Niranjan's wife and Manan and Manini and his children and the grandsons and granddaughters ( in the male line) of Niranjan or amongst such one or more of them and in such proportion as the trustees may think fit and if one of them is also alive, then the Treaties shall have power to give the trust property by way of donation to the Gujarat University or any other University or any other public trust or trusts or any other public institution of institutions which one way or other, work for education and/or medical and/or cultural purposes or one or more Universities, Trusts or Institutions, encouraging or assisting such purpose."

The other two trust deeds also contain similar clauses in regard to the disposition of the trust funds forming the subject-matter of those trust deeds, with this difference that whereas the minimum amount payable to the assessee out of the income of the trust was Rs. 250 per year in respect of each of the two trusts, namely, Arvind Narottam Trust and Arvind Kalyan Trust, it was only Rs. 150 per year in respect of Arvind Family Trust. It was common ground between the parties that, during the relevant years of account, the assessee received from the trustees only the minimum amounts payable to him under the three trusts, namely, Rs. 250, Rs. 150 and Rs. 250 aggregating to Rupees 650 and nothing more was paid to him by the trustees in exercise of their discretion under Clause 7-A of the trust deeds.

2. In the course of the assessment of the assessee to income-tax for the assessment years 1962-63, 1963-64 and 1964-65, a question arose whether the entire amount of the three trusts was includible in the total income of the assessee or only the minimum amount of Rs. 650 payable to the assessee under the three trusts. The Income-Tax Officer took the view that the assessee being unmarried during the relevant years of account was the sole beneficiary under the trust deeds and the entire income of the relevant account years was therefore receivable by the trustees on behalf of or for the benefit of the assessee and the assessee was liable to be assessed directly in respect of such income under Section 166 of the Income-Tax Act, 1961. The Income- Tax Officer accordingly included the entire income of the three trusts in the total income of the assessee for all the three assessment years. The asessee being aggrieved by the orders of the Income-tax Officer, preferred appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner disagreed with the view taken by the Income-Tax Officer and held that the only income receivable by the trustees for the benefit of the assessee was the minimum amount of Rs. 650 and that was therefore the only amount in respect of which the assessee could be directly assessed under Section 166 which could be included in the total income of the assessee for the purpose of his assessment. This decision of the Appellate Assistant Commissioner was challenged in appeal by the Income - Tax Officer but the appeal was unsuccessful and the Tribunal agreeing with the view taken by the Appellate Assistant Commissioner rejected the appeal. Hence the present reference at the instance of the Commissioner.

3. Before we examine the terms of the trust deeds it would be convenient at this stage to refer to the provisions of the Act bearing on the determination of the controversy between the parties. Section 160 defines "Representative assessee" and enumerates 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 that section describes the fourth category of representative assessees by saying that in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise receives or is entitled to receive on behalf or for the benefit of any person, such trustee shall be representative assessee. Section 161 imposes a substantive liability to assessment on the representative assessee in the following terms:-

"161. (1) Every representative assessee, as regards 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.

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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 can 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 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 income to which he is beneficially entitled.

Such income having accrued to him would form 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 providing 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 is received by the representative assessee specifically for the benefit of a particular beneficiary so that such income can be said to accrue to the beneficiary, the Revenue has an option either to assess the representative assessee in his representative capacity under Section 161 or to make direct assessment on the beneficiary in respect of such income in virtue of the right expressly preserved under Section 166.

4. 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 or the beneficiaries are indeterminate or unknown, the last part of Section 161(1) which prescribes that tax shall be levied upon the representative assessee in 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 that in such a case

"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."

We are not directly concerned with the interpretation of Section 164 and it is therefore not necessary to analyse that section with a view to arriving at its true interpretation, but it is sufficient to state that the Section contemplates two cases; one where there is only one beneficiary and the other where there are more beneficiaries than one; in the former, income or any part thereof is not receivable by the representative assessee specifically for the benefit of the sole beneficiary and in the latter, income or any part thereof is receivable by the representative assessee for the benefit of the beneficiaries but the individual shares of the beneficiaries are indeterminate and unknown; and the section states that in either case, 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. Vide the observations of the Bombay High Court in Mahalaxmiwala v. Commr. Of I.T. 26 ITR 177 = (AIR 1955 Bom 22), which, though made in reference to the proviso to Section 41(1), are also applicable in the construction of Section 164.

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 is cannot be predicated that a particular beneficiary is beneficially 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. But even here, 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 can always be assesed directly in respect of such amount since such amount would, on receipt by the beneficiary, form part of his total income and would be assessable in the hands of the beneficiary. Here too, 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 under Section 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.

5. Now, the minimum amounts aggregating to Rs. 650 payable to the assessee under the three trusts were clearly receivable or received by the trustees specifically for the benefit of the assessee and they were therefore liable to be directly assessed in the hands of the assessee as having accrued to him. But the question is whether income receivable or received by the trustees in excess of the minimum amounts aggregating to Rs. 650 could be assessed directly in the hands of the assessee. Obviously that could be done only if such income could be said to have accrued or arisen to the assessee or received by him. Reliance was placed on behalf of the Revenue on Section 166, but that section, as pointed above, is not a charging section; it does not confer on the Revenue a right to assess a person who would not otherwise be assessable in respect of the income referred to in it. It merely declares by way of clarification that the earlier sections of the Chapter including Sections 161 and 164 shall not be construed to impair the right of the Revenue to make direct assessment on the person on whose behalf or for whose benefit income is receivable or received by the representative assessee, if such right exists under some other provision of the Act.

Now, under the charging provision of the Act, an assessee can be assessed only in respect of income which has accrued or arisen to him or is received by him during the year of account and it would therefore follow a fortiori that a person on whose behalf or for whose benefit income is receivable or received by the representative assessee cannot be directly assessed in respect of such income unless it can be shown that such income has accrued or arisen to him or is otherwise received by him. The narrow question which therefore arises for consideration is whether income in excess of the minimum amounts aggregating to Rs. 650 receivable or received by the trustees under the three trusts could be said to have accrued or arisen to the assessee during the relevant years of account, it being common ground that no part of such income was at any time received by him. The determination of this question depends on the true interpretation of the trust deeds.

6. Turning to the trust deeds it is clear on a reading of Clauses 7-A and 7-B that the period of distribution provided under each truest deed is thirty years from the date of the trust-deed. What is to be the disposition of the income of the trust funds until the expiration of the period of distribution is provided in Clause 7-A. That clause provides that until the expiration of the period of thirty years, that is, during the period upto distribution, the trustees shall, out of the net income of the trust funds, pay to the assessee or if, in the meantime the assessee gets married, then payto the assessee, his wife, his children and grandchildren or such one or more of them, as they in their discretion think fit, such amount as they think proper, subject to a minimum of Rs. 250 per year to be paid to the assessee and if the assessee gets married , then subject also to a minimum of Rs. 250 per year to the assessee and his wife, and the balance of the income shall be added to the trust funds as capital. It is also provided by Clause 7-A that if prior to the expiration of the period of thirty years, the assessee dies unmarried or in case of his marriage, both he and his wife die, the income every year shall be added to the trust funds until the expiration of the period of thirty years.

Clause 7-B then proceeds to state as to what shall happen when the date of distribution arrives on the expiration of the period of thirty years. The trustees, says Clause 7-B, shall, on the expiration of the period of thirty years, distribute the corpus of the trust funds together with the undistributed income amongst such one or more out of the assessee, his wife and his children and grand-children who may be alive at that date as the trustees may think fit and in such proportion and in such manner as they may think proper. It is therefore clear that though the assessee being unmarried was the only beneficiary during the relevant years of account, he was not entitled to the entire income of the trust funds. It was open to the trustees to payto the assessee such amount out of the income of the trust funds as they thought fit, subject only to a certain minimum amount per year. The assessee had no right to receive payment of the entire income of the trust funds. The assessee could receive only such amount as the trustees thought it fit to pay him out of the income of the trust funds subject to a minimum of Rs. 250 or Rs. 150 per year, as the case may be, and so far as the balance is concerned, the assessee was not as a matter of right entitled to receive it either during the relevant years of account or even at any future point of time.

The balance of the income which was not paid by the trustees to the assessee was to be added to the corpus of the trust funds and on the expiration of the period of thirty years, or even if the distribution took place at an earlier point of time, then at such date, the trustees could exclude the assessee from the distribution of the balance of the income. If the assessee was not alive at the date of distribution then also, he could not get any part of the balance of the income. The assessee was, therefore, at no stage entitled to receive the balance of the income and it could not be said that the balance of the income accrued or arose to the assessee during the relevant years of account so as to be chargeable to tax as part of the total income of the assessee. We must therefore hold that the Tribunal was right in taking the view that the assessee was not directly assessable in respect of the income of the three trusts in excess of Rs. 650 per year.

7. Our answers to the questions referred to us therefore are: Question No (1) in the negative, and Question (2) in the affirmative. The Commissioner will pay the costs of the Reference to the assessee.

8. Reference answered accordingly.