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Commissioner Of Income-Tax v. Shri Krishna Bandar Trust.
Summary of the Opinion (Reference under section 256(1) of the Income-tax Act, 1961)
Factual and Procedural Background
The Revenue made a reference under section 256(1) of the Income-tax Act, 1961 for the assessment year 1984–85. The question referred asked whether the Tribunal was justified in law in holding that the income of Shri Krishna Bandar Trust (a discretionary trust) should be assessed taking the status of the assessee as an individual and not as an association of persons, and consequently whether deduction under section 80L should be allowed.
Facts as stated in the opinion: the assessee is a discretionary trust. The Income-tax Officer (ITO) assessed the trust in the status of an "association of persons" (AOP) and denied section 80L relief, relying on Explanation 2 to section 164. The Commissioner of Income-tax (Appeals) (CIT(A)) upheld the assessee's position, following a decision of the Hyderabad Bench of the Tribunal in Education Trust Fund v. ITO. The Revenue appealed to the Tribunal. Before the Tribunal, the assessee argued that the trustees had not mutually associated themselves for the purpose of producing income and that they were to be regarded as jointly holding office and merely receiving dividend and interest; the assessee contended the case fell under the main provision of section 164(1). The Departmental representative argued that in view of Explanation 2 to section 164 the status of a discretionary trust would be that of an association of persons and cited that the trust had been assessed as an AOP in the immediately preceding two years (AYs 1982–83 and 1983–84).
Legal Issues Presented
- 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 “association of persons”?
- Whether, consequently, the deduction under section 80L of the Income-tax Act, 1961 should be allowed to the assessee-trust?
Arguments of the Parties
Assessee's Arguments (Trust / Trustees)
- The trustees had not mutually associated themselves for the purpose of producing income; they were not joined together with volition to produce income.
- The trustees were jointly holding an office and merely receiving income by way of dividend and interest.
- The case falls under the main provision of section 164(1) and the first proviso to that section did not apply; therefore the main section (as it then stood) required tax to be charged at the maximum marginal rate, not by treating the trust as an AOP for status purposes.
- CIT(A) had upheld the assessee, following the Tribunal decision in Education Trust Fund v. ITO.
Revenue's Arguments
- For the immediately preceding two years the assessee-trust had disclosed and been assessed in the status of an association of persons; that fact was relied upon.
- In the case of a discretionary trust tax is to be charged at the maximum marginal rate as laid down in section 164(1), and Explanation 2 to section 164 meant that the status of the discretionary trust would be that of an association of persons (AOP).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Education Trust Fund v. ITO (Hyderabad Bench of the Tribunal) | Referenced as a decision supporting the assessee's position before the CIT(A). | The CIT(A) followed this decision in upholding the assessee; the opinion records that CIT(A) relied on it. |
| CIT v. Indira Balkrishna, [1960] 39 ITR 546 (SC) | Defines "association" as joining in a common purpose or common action, and that an association must have as its object the production of income, profits or gains. | The court used this principle to conclude that trustees and beneficiaries had not come together with a common purpose of earning income, and therefore did not constitute an AOP in the ordinary sense. |
| Suhashini Karuri v. WTO, [1962] 46 ITR 953 | Holds that joint trustees must be treated as a single unit in law and not as an "association of persons". | The court relied on this to support treating joint trustees as an "individual" (a single unit) rather than as an AOP. |
| CIT v. Sodra Devi, [1957] 32 ITR 615 (SC) | Holds that "individual" can include a group of persons forming a unit; "individual" is not confined to a single natural person. | Used to support the proposition that a group (such as trustees) can be assessed as an individual under tax law. |
| Mammad Keyi v. WTO, [1966] 60 ITR 737 (Kerala High Court, Full Bench) | Holds that "individual" in section 3 of the Wealth-tax Act includes a Moplah Muslim family governed by usages similar to a Hindu undivided family. | Reinforces the broader proposition that "individual" may include a group/unit when context requires. |
| Kerala Financial Corporation v. WTO, [1971] 82 ITR 477 (Full Bench, Kerala HC) | Statutory corporation held assessable as an "individual". | Supports the settled position that "individual" need not be limited to a human being and may include juristic/group entities for tax purposes. |
| Andhra Pradesh State Road Transport Corporation v. ITO, [1964] 52 ITR 524 (SC) | Authority cited to support that "individual" can include entities other than natural persons. | Referred to as part of the chain of authorities establishing that "individual" is not restricted to a human being. |
| Yogendra Nath Naskar v. CIT, Calcutta, [1969] 74 ITR 33 (SC) | Observes there is no reason why "individual" should be restricted to human beings and not extended to juristic entities. | Used to support the conclusion that the term "individual" may include juristic entities or groups where statutory context so requires. |
Court's Reasoning and Analysis
The court began by stating the statutory text of section 164(1) and Explanation 2 as it stood for the relevant period (post-amendment by the Finance (No. 2) Act, 1980). It noted that the amended section 164(1) required that tax be charged on the relevant income at the "maximum marginal rate," and Explanation 2 defined that term by reference to the highest slab applicable in the case of an association of persons as specified in the Finance Act.
The court observed these key points in its analysis:
- The assessee is a discretionary trust and, as admitted, is liable to be charged to tax at the maximum marginal rate under section 164(1).
- The main provision of section 164(1) as it stood at the relevant time prescribed only the rate at which tax is to be charged for cases covered by that section; it did not itself determine the manner of computation of total income or determine the legal status of the assessee for all purposes.
- Determination of the status of an assessee (for purposes of computation of income) is a matter to be considered under the general principles governing status; it cannot be inferred that the main provision of section 164(1) converts a discretionary trust into an association of persons for all purposes simply because the maximum marginal rate is defined with reference to an AOP.
- Prior to the Finance (No. 2) Act, 1980 amendment, section 164(1) contained a deeming provision which expressly treated the relevant income "as if" it were the total income of an association of persons (or else taxed it at 65%); that pre-amendment wording demonstrated the legislature had created a legal fiction for taxing purposes rather than asserting that trustees or beneficiaries actually constituted an AOP in the ordinary sense.
- The 1980 amendment removed that deeming fiction from subsection (1); consequently, the main subsection (1) no longer provided for treating the trust as an association of persons as a matter of legal status—it only specified the rate of tax to be applied.
- If a case falls under subsection (2) of section 164, then the tax is chargeable "as if" the income were that of an association of persons; but that deeming/provision concerns charitable or public religious trusts (sub-sections (2) and (3)) and does not apply to discretionary private trusts governed by subsection (1).
- Applying established authorities on the meanings of "association of persons" and "individual" (for example, Indira Balkrishna; Suhashini Karuri; Sodra Devi and other cited cases), the court concluded that trustees who are joint office-holders and beneficiaries who have not come together with the common purpose of earning income do not, in ordinary legal meaning and for tax-status purposes, constitute an AOP. Joint trustees may be treated as a unit and thus as an "individual" for assessment purposes.
On this basis, the court concluded that it was not permissible to assess the trustees as an association of persons by reference to the main provision of section 164(1), and that the correct approach was to assess the trustees in the status of an "individual."
Holding and Implications
Holding: The court returned its answer in the affirmative and in favour of the assessee. In direct terms, the court held that the trustees of the discretionary trust must be assessed in the status of an individual, not as an association of persons.
Implications:
- Direct effect on the parties: The assessment must treat the trustees as an individual for computation of income; the Tribunal was justified in law in so holding, and the result is favourable to the assessee (the discretionary trust).
- Consequential relief: The referred question included whether deduction under section 80L should be allowed; by returning an affirmative answer in favour of the assessee and treating the trustees as an individual, the implications in the reference point toward allowance consistent with that status as recorded in the opinion.
- Broader precedent: The opinion rests on interpretation of section 164(1) and established case law about the meanings of "individual" and "association of persons." The court explained that the 1980 amendment removed the earlier deeming fiction in subsection (1); it did not purport to create a novel doctrine but applied existing principles. The opinion does not record establishing any new, distinct legal principle beyond applying the cited authorities and the statutory text. There is no order as to costs.
Judgment note: The opinion was delivered by Ajit K. Sengupta, J.; Shyamal Kumar Sen, J. agreed.
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 section 256(1) of the Income-tax Act, 1961, for the assessment year 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 ‘association of persons’ and, consequently, the deduction under section 80L of the Income-tax Act, 1961, should be allowed?”
2. Shortly stated, the facts are that the assessee is a discretionary trust and was assessed in the status of an “association of persons”. The assessee claimed relief under section 80L of the Income-tax Act, 1961. The Income-tax Officer was of the view that, having regard to the provisions of Explanation 2 to section 164 of the Income-tax Act, 1961, a discretionary trust has to be taxed as an association of persons and, therefore, deduction under section 80L was not available to the assessee-trust. The Commissioner of Income-tax (Appeals) upheld the stand of the assessee-trust following the decision of the Hyderabad Bench of the Tribunal in the case of Education Trust Fund v. 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 producing 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 section 164(1) of the Income-tax Act, 1961, and the first proviso to that section was not attracted in this case.
3. On the other hand, the case of the Revenue before the Tribunal was that, for the immediately preceding two years, namely, assessment years 1982–83 and 1983–84, the assessee-trust disclosed its status as that of an association of persons 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 section 164(1) of the said Act, the status of the discretionary trust would be that of an association of persons in view of Explanation 2 to section 164 of the said Act.
4. It is necessary at this stage to set out the provisions of section 164(1) and Explanation 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-sections (2) and (3), where any income in respect of which the persons mentioned in clauses (iii) and (iv) of subsection (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 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 on the relevant income or part of relevant income at the maximum marginal rate….
Explanation 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 association of persons as specified in the Finance Act of the relevant year.”
5. It may be observed that the words “tax shall be charged on the relevant income at the maximum marginal rate” as well as Explanation 2 as aforesaid were inserted in the Act by an amendment introduced by the Finance (No. 2) Act, 1980, with effect from April 1, 1980. Prior to the amendment, the relevant portion of section 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 association of persons, or
(ii) at the rate of 65 per cent.,
whichever course would be more beneficial to the Revenue.”
6. 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 association of persons” and in a case to which the main section is applicable, tax has to be charged at the maximum marginal rate as defined in Explanation 2. It is, therefore, clear that it is not permissible to assess the trustees in the status of an “association of persons” with the aid of the provision contained in the main section 164(1) which is, admittedly, applicable in this case. Section 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 Income-tax 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 “an association of persons” or as an “individual”.
7. The Supreme Court in CIT v. Indira Balkrishna, [1960] 39 ITR 546, while considering what constitutes an association of persons, held that the word “association” means “to join in any purpose” or “to join in an action”. Therefore, “association of persons” as used in section 2(31)(v) of the Income-tax 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 association of persons”.
8. In Suhashini Karuri v. WTO, [1962] 46 ITR 953, this court held that joint trustees must be taken to be a single unit in law and not as an “association of persons” and there is nothing wrong in treating such a unit as “an individual”.
9. In CIT v. Sodra Devi, [1957] 32 ITR 615, 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.
10. In Mammad Keyi v. WTO, [1966] 60 ITR 737, the Full Bench of the Kerala High Court held (Velu Pillai J. dissenting) that the term “individual” in section 3 of the Wealth-tax Act, includes a Moplah Muslim family which is governed by the usages similar to those that governed a Hindu undivided family.
11. 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 in Kerala Financial Corporation v. WTO, [1971] 82 ITR 477, 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, [1957] 32 ITR 615. The other decision is Andhra Pradesh State Road Transport Corporation v. ITO, [1964] 52 ITR 524 (SC). We may also refer to the decision in Yogendra Nath Naskar v. Cit, Calcutta , [1969] 74 ITR 33, wherein the Supreme Court has observed that there could be no reason why the word “individual” in section 3 of the Indian Income-tax Act, 1922, should be restricted to human being alone and not to juristic entities.
12. The matter can be viewed from another angle also. Before its amendment by the Finance (No. 2) Act, 1980, section 164(1) read as follows:
“Subject to the provisions of sub-sections (2) and (3), where any 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 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 association of persons, or
(ii) at the rate of sixty-five per cent.,
whichever course would be more beneficial to the Revenue.”
13. 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 association of persons 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 association of persons” is a clear pointer that the Legislature never conceived of assessment of a trust, answering the description of section 164(1), as an association of persons in the ordinary course. The assessability as an association of persons was only by the artifice of a deeming clause. Therefore, by no stretch of imagination, could either the trustees or the beneficiaries be an association of persons 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 association of persons under the direct taxes.
14. But the amendment effected by the Finance (No. 2) Act, 1980, had done away with the deeming provisions whereby a trust, under section 164(1) could be assessed as though it were an association of persons.
15. Where, however, a case falls under sub-section (2) of section 164, the tax is chargeable as if the income to be charged were the income of an association of persons. But the fiction of an association of persons as contained in sub-section (2) or for that matter sub-section (3) of section 164 relates only to a charitable or public religious trust but not to a discretionary private trust dealt with by sub-section (1) of section 164. This position has come to stay with effect from the assessment year 1980–81 by reason of the amendment of the said sub-section through the Finance (No. 2) Act, 1980.
16. 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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