Neo Trust v. Income-tax Officer
[Citation -2015-LL-0116-1]

Citation 2015-LL-0116-1
Appellant Name Neo Trust
Respondent Name Income-tax Officer
Court HIGH COURT OF GUJARAT AT AHMEDABAD
Relevant Act Income-tax
Date of Order 16/01/2015
Judgment View Judgment
Keyword Tags hindu undivided family • share of beneficiaries • discretionary trust • individual capacity • beneficial interest • doctrine of merger • additional ground • avoidance of tax • question of fact • trust property • provident fund • gratuity fund • family trust • trust deed
Bot Summary: The same is subject to two limitations; one is that while undertaking the exercise to find out as to whether a particular trust can be said as specific trust or a discretionary trust, one has to examine the contents of the trust deed for processing a particular share of the beneficiary, if provided by the trust deed. If the share of the beneficiary/s is determined and specified, such trust can be termed as specific trust but if the share is not determined or uncertain depending upon the decision of the trustees as they may take from time to time, then such trust can be termed as discretionary trust. To say in other words, if a specific trust is having its beneficiaries, few as individual and few as discretionary trusts but the share of each of the individual as well as discretionary trusts is specific, while undertaking the task of assessment the Assessing Officer for the purpose of share of the individual beneficiaries may take into consideration the normal tax treated chargeable for such purpose but while taking into consideration the share of each of the discretionary trust, who are beneficiary, may consider the applicable tax rate for the discretionary trust and, thereafter, may assess the tax of the representative assessee. The first level trust has three beneficiaries; one individual, one discretionary trust and one specific trust ; second level trust, which is discretionary trust and is beneficiary of the first level trust has its beneficiaries, providing for specific shares for individual person(s) as well as discretionary trust; third level trust, which is a discretionary trust but all its member beneficiaries are individual but shares of the beneficiaries are uncertain. Attempt to contend that if the beneficiary of the second level trust is a discretionary trust or the shares are uncertain of the beneficiaries of the second level trust, the beneficiary of the first level trust can also be taxed at the maximum marginal rate under section 164 of the Act, in our view, cannot be accepted because the relationship between the trustees in the representative capacity and the answerability of the trustees to the beneficiary is limited to the beneficiary of a particular trust as per the Trusts Act and it cannot be stretched or reached to the beneficiaries of the beneficiary and then again beneficiaries' beneficiary. Neo Trust v. IAC the Tribunal in its decision, reported at 1992 41 ITD 412, at paragraph 11.3, had observed thus: We do not agree with the submission of the learned counsel for the assessee to the effect that the trustees of each oral discretionary trusts of first line were the real beneficiaries of the assessee trust and that under the law we are not entitled to inquire as to on whose behalf and for whose benefit those trustees had to receive part of the income from the assessee trust. In view of the aforesaid observations and discussions, we find that on the first question, reproduced at paragraph 2 hereinabove, the answer would be against the Revenue and in favour of assessee but with the option available to the Assessing Officer to resort to the provisions of section 164 of the Act in the event the beneficiary of the first level trust are discretionary trust to the extent of their respective shares but such analogy or the mode would not be available by connecting the beneficiary of the second level trust with the third level trust even if they are discretionary trust or the shares of the beneficiaries are uncertain and such aspect may arise for consideration only if there is separate assessment of the trustees of the second level trust or third level trust.


JUDGMENT judgment of court was delivered by Jayant Patel J.-As in present group of appeals, substantial questions of law, to some extent, are interconnected and they are also common in certain group, they are being considered simultaneously. We may record that in order to appreciate respective questions formulated in respective matters, questions can be reformulated and, thereafter, based on answer, in facts of each case, ultimate decision can be recorded. In our view, mainly two substantial questions of law would arise in present group of matters as referred to hereinafter and to be specific in first group of matter, comprising Tax Appeal No. 20 of 2001, I. T. R. No. 28 of 2000, I. T. R. No. 25 of 2003, I. T. R. No. 74 of 1996 and I. T. R. No. 141 of 1996, following question would be required to be considered: "Whether, on facts and in circumstances of case, Appellate Tribunal has substantially erred in law in holding that since some or all beneficiaries of trust are discretionary trust, to extent of share of beneficiary as discretionary trust, tax can be charged at maximum marginal rate under section 164 and not under section 161 of Income-tax Act, 1961 (hereinafter referred to as "the Act')." Whereas, in second group of I. T. R. No. 42 of 2000, I. T. R. No. 43 of 2000, I. T. R. No. 44 of 2000 and Tax Appeal No. 141 of 2001, substantial question of law which may be required to be considered would be as under: "Whether, on facts and in circumstances of case, Tribunal was right in taxing income of assessee holding it as real income of assessee?" relevant facts in brief in each of group can be summarised as under: Tax Appeal No. 20 of 2001 appeal is preferred against order of Tribunal dated April 18, 2000, in I. T. R. Nos. 2795 and 2772/Ahd/1986. Initially, Assessing Officer assessed appellant-trust as discretionary trust under section 164 of Act and charged tax at maximum marginal rate. matter was carried in appeal before Commissioner of Income-tax (Appeals) who confirmed order of Assessing Officer matter was further carried in appeal before Tribunal and Tribunal held that income to extent of 60.5 per cent. which was allocated to beneficiary trust can be taxed at maximum marginal rate while income to extent of 39.5 per cent. which was allocated to another beneficiary is to be treated in tax under section 161 of Act. Against said decision of Tribunal, present appeal. I.T.R. No. 28 of 2000 Assessing Officer, after examining various aspects of case, held status of assessee to be discretionary trust and assessed tax at maximum marginal rate by applying provisions of section 164(1) of Act. matter was carried in appeal and Commissioner of Income-tax (Appeals) confirmed order of Assessing Officer matter was further carried in appeal before Tribunal and Tribunal reversed order of first appellate authority and directed Assessing Officer to treat assessee as specific trust against which, present reference by Revenue. I. T. R. No. 25 of 2003 Assessing Officer found that assessee-trust is discretionary trust and, therefore, charged tax at maximum marginal rate under section 164 of Act. matter was carried in appeal and Commissioner of Income-tax (Appeals) confirmed order passed by Assessing Officer. matter was further carried in appeal before Tribunal and Tribunal held that section 164 of Act would not apply and found that trust is still specific and, consequently, for purpose of tax, effect of order of Tribunal is that tax will be leviable under section 161 of Act. Under circumstances, present reference before this court for applicability of section 164 or section 161 of Act to assessee. I. T. R. No. 74 of 1996 Assessing Officer held that trust cannot be treated as specific trust and will have to be regarded as discretionary trust liable to tax at maximum marginal rate. matter was carried in appeal before Commissioner of Income-tax (Appeals) and Commissioner of Income-tax (Appeals) confirmed order of Assessing Officer. matter was further carried before Tribunal and Tribunal dismissed appeal by confirming order passed by Commissioner of Income-tax (Appeals). Under these circumstances, present appeal by assessee before this court. I. T. R. No. 141 of 1996 Assessing Officer found that assessee cannot be treated as specific trust and will have to be regarded as discretionary trust liable to tax at maximum marginal rate. matter was carried in appeal before Commissioner of Income-tax (Appeals) and Commissioner of Incometax (Appeals) confirmed order of Assessing Officer. matter was further carried before Tribunal and Tribunal dismissed appeal of assessee, by confirming order passed by Commissioner of Income-tax (Appeals). Under these circumstances, present appeal by assessee before this court. I. T. R. No. 42 of 2000 with I. T. R. No. 43 of 2000 with I. T. R. No. 44 of 2000 facts are common inasmuch as Assessing Officer found that assessee-trust cannot be treated as specific trust but are discretionary trust liable to pay tax at maximum marginal rate. matter was carried in appeal before Commissioner of Income-tax (Appeals) and Commissioner of Income-tax (Appeals) confirmed order of Assessing Officer. matter was further carried before Tribunal. However, before Tribunal, additional ground was raised that amount paid in advance to assessee by society with whom agreement was entered into could not be treated as income in debit entry and said amount be permitted as if "no income". Tribunal rejected said contention. Under these circumstances, present reference before this court on point as to whether Tribunal was right in taxing aforesaid amount as real income of assessee or not. Tax Appeal No. 141 of 2001 Assessing Officer found that assessee-rust be treated as discretionary trust and liable to tax at maximum marginal rate. matter was carried in appeal before Commissioner of Income-tax (Appeals) and Commissioner of Income-tax (Appeals) set aside order of Assessing Officer and remanded matter to Assessing Officer. Assessing Officer, thereafter, reconsidered matter and found that income of Rs. 1,60,790 was real income of assessee. matter was once again carried in appeal before Commissioner of Income-tax (Appeals), who confirmed order of Assessing Officer and dismissed appeal. matter was further carried in appeal before Tribunal and Tribunal concurred with view of Commissioner of Incometax (Appeals) and Assessing Officer and dismissed appeal of assessee. Under these circumstances, present appeal by assessee before this court for limited point as to whether amount of Rs. 1,60,790 could be treated as real income of assessee or not for purpose of tax. We have heard Mr. S. N. Soparkar, learned senior counsel with Mr. B. S. Soparkar, learned counsel in tax appeals and reference(s) made by assessee and we have also heard Mr. Manish Bhatt, learned senior counsel, Mr. Nitin Mehta, Mr. Varun Patel and Mr. P. G. Desai, learned counsel appearing for Revenue in respective matters, namely, wherever assessee has preferred tax appeal or reference, they have appeared for Revenue and in matters where reference is made by Revenue, they have appeared for Revenue as per appearance is filed in respective matters. Discussion for first substantial question of law as mentioned in paragraph 2 referred to herein above 6.1 It is undisputed position that all assessees are trusts created by trust deed. In order to consider question, we may refer to relevant statutory provisions under Indian Trusts Act, 1882 (hereinafter referred to as "the Trusts Act") and also relevant provisions of Income-tax Act, 1961 (hereinafter referred to as "the Act"). Section 4 of Trusts Act provides for creation of trust for any lawful purpose. Since factum of creation of trust is not in dispute, nor is under challenge, we find that no further discussion may be required in this regard. Section 9 of Trusts Act provides that every person capable of holding property can be beneficiary. Chapter III of trust Act provides for duties and liabilities of trustees. Section 11 of Act provides that trustee is bound to fulfil purpose of trust and to obey direction of author of trust unless modified by consent of all beneficiaries being competent to contract. Section 13 of Act creates obligation upon trustees to protect title of trust properties. Section 14 provides that trustee must not himself or another set up any title to property adverse to interest of beneficiaries. obligation is created upon trustees by section 15 to deal with trust properties as carefully as man of ordinary prudence as if properties were belonging to him. Section 17 of Act provides role of trustees to be impartial when beneficiaries are more than one. By virtue of section 18 of Act obligation is created upon trustees to prevent waste. Section 23 of Act provides liability upon trustees, if any breach of trust is made. As we are not concerned with other provision under this Chapter, same need not be discussed in detail, save and except stated hereinafter. Chapter VI provides for rights and liabilities of beneficiaries. As per section 55, beneficiary has right to rent and properties of trust. Section 56 provides for right of beneficiary to ensure execution of intention of author of trust to extent of beneficiaries' interest. Section 57 provides for right of beneficiaries to inspect and take copies of instruments of trust. beneficiary has also right to transfer beneficial interest as per section 58. Section 60 provides for right with beneficiary that trust properties are properly protected and held by persons and by proper number of such person. Section 61 provides that beneficiary has right that trustees are compelled to perform particular act of duty and are restrained from committing any contemplated or probable breach of trust. We need not discuss other provisions of Act. 6.2 In our view, scheme of Trusts Act shows that creation of trust is recognised and provisions made for rights and liabilities of trustees and also of beneficiaries show that there is jural relation for enforcement of such rights and liabilities between trustees of any trust and beneficiaries of trust. breach of trust by trustees in respect of any properties of trust can be enforced by beneficiaries against trustees. 6.3 We may now refer to Act. Section 161 and section 164 of Act, which are relevant for purpose of consideration, are as under: "161. Liability of representative assessee.-(1) Every representative assessee, as regards income in respect of which he is representative assessee, shall be subject to same duties, responsibilities and liabilities as if 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 tax shall, subject to other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to same extent as it would be leviable upon and recoverable from person represented by him. (1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on whole of income in respect of which such person is so liable at maximum marginal rate: Provided that provisions of this sub-section shall not apply where such profits and gains are receivable under trust declared by any person by will exclusively for benefit of any relative dependent on him for support and maintenance, and such trust is only trust so declared by him.... (2) Where any person is, in respect of any income, assessable under this Chapter in capacity of representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act. 164. Charge of tax where share of beneficiaries unknown.-(1) Subject to provisions of sub-sections (2) and (3), where any income in respect of which 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 benefit of any one person or where individual shares of 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 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 relevant income or part of relevant income at maximum marginal rate: Provided that in case where- (i) none of beneficiaries has any other income chargeable under this Act exceeding maximum amount not chargeable to tax in case of association of persons or is beneficiary under any other trust; or (ii) relevant income or part of relevant income is receivable under trust declared by any person by will and such trust is only trust so declared by him; or (iii) relevant income or part of relevant income is receivable under trust created before 1st day of March, 1970, by nontestamentary instrument and Assessing Officer is satisfied, having regard to all circumstances existing at relevant time, that trust was created bona fide exclusively for benefit of relatives of settler, or where settler is Hindu undivided family, exclusively for benefit of members of such family, in circumstances where such relatives or members were mainly dependent on settler for their support and maintenance; or (iv) relevant income is receivable by trustees on behalf of provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by person carrying on business or profession exclusively for benefit of persons employed in such business or profession, tax shall be charged on relevant income or part of relevant income as if it were total income of association of persons: Provided further that where any income in respect of which person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, preceding proviso shall apply only if such profits and gains are receivable under trust declared by any person by will exclusively for benefit of any relative dependent on him for support and maintenance, and such trust is only trust so declared by him. (2) In case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of nature referred to in sub-clause (iia) of clause (24) of section 2, or which is of nature referred to in sub-section (4A) of section 11, tax shall be charged on so much of relevant income as is not exempt under section 11 or section 12, as if relevant income not so exempt were income of association of persons: Provided that in case where whole or any part of relevant income is not exempt under section 11 or section 12 by virtue of provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on relevant income or part of relevant income at maximum marginal rate. (3) In case where relevant income is derived from property held under trust in part only for charitable or religious purposes or is of nature referred to in sub-clause (iia) of clause (24) of section 2 or is of nature referred to in sub-section (4A) of section 11, and either relevant income applicable to purposes other than charitable or religious purposes (or any part thereof) is not specifically receivable on behalf or for benefit of any one person or individual shares of beneficiaries in income so applicable are indeterminate or unknown, tax chargeable on relevant income shall be aggregate of- (a) tax which would be chargeable on that part of relevant income which is applicable to charitable or religious purposes (as reduced by income, if any, which is exempt under section 11) as if such part (or such part as so reduced) were total income of association of persons; and (b) tax on that part of relevant income which is applicable to purposes other than charitable or religious purposes, and which is either not specifically receivable on behalf or for benefit of any one person or in respect of which shares of beneficiaries are indeterminate or unknown, at maximum marginal rate: Provided that in case where- (i) none of beneficiaries in respect of part of relevant income which is not applicable to charitable or religious purposes has any other income chargeable under this Act exceeding maximum amount not chargeable to tax in case of association of persons or is beneficiary under any other trust; or (ii) relevant income is receivable under trust declared by any person by will and such trust is only trust so declared by him; or (iii) relevant income is receivable under trust created before 1st day of March, 1970, by non-testamentary instrument and Assessing Officer is satisfied, having regard to all circumstances existing at relevant time, that trust, to extent it is not for charitable or religious purposes, was created bona fide exclusively for benefit of relatives of settler, or where settler is Hindu undivided family, exclusively for benefit of members of such family, in circumstances where such relatives or members were mainly dependent on settler for their support and maintenance, tax shall be charged on relevant income as if relevant income (as reduced by income, if any, which is exempt under section 11) were total income of association of persons: Provided further that where relevant income consists of, or includes, profits and gains of business, preceding proviso shall apply only if income is receivable under trust declared by any person by will exclusively for benefit of any relative dependent on him for support and maintenance, and such trust is only trust so declared by him: Provided also that in case where whole or any part of relevant income is not exempt under section 11 or section 12 by virtue of provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on relevant income or part of relevant income at maximum marginal rate. Explanation 1.-For purposes of this section,- (i) any income in respect of which persons mentioned in clause (iii) and clause (iv) of sub-section (1) of section 160 are liable as representative assessee or any part thereof shall be deemed as being not specifically receivable on behalf or for benefit of any one person unless person on whose behalf or for whose benefit such income or such part thereof is receivable during previous year is expressly stated in order of court or instrument of trust or wakf deed, as case may be, and is identifiable as such on date of such order, instrument or deed; (ii) individual shares of persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless individual shares of persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in order of court or instrument of trust or wakf deed, as case may be, and are ascertainable as such on date of such order, instrument or deed. Explanation 2.-(Omitted by Direct Tax Laws (Amendment) Act, 1987)" If section 161 is read with section 164 of Act it appears that in case where individual share receivable by beneficiary is indeterminable or unknown, charge of tax shall be at maximum marginal rate as per section 164 but if share of beneficiary is determined or fixed specific share on each beneficiary is provided, section 161 would be applicable and tax chargeable would be as per normal rate provided. Therefore, distinction between section 161 and section 164 can be summarised as that in case of trust, where specific share of beneficiaries are provided (hereinafter referred to as "the specific trust" for sake of convenience), rate of tax shall be as per schedule but in case of trust where shares of beneficiaries is unknown or indeterminable (hereinafter referred to as "the discretionary trust" for sake of convenience), tax chargeable shall be at maximum marginal rate. another aspect is that assessee is in capacity as representative assessee of beneficiary of trust and not in his individual capacity of himself. To say in other words, trustees of trust are to be treated in representative capacity of beneficiary and they are identified as representative assessee. There is substance in contention of learned counsel for Revenue that when trust in representative capacity through its trustees are to be assessed, Assessing Officer may examine aspects of beneficiaries of particular trust. Such is apparent because trustees are to represent trust property and beneficiaries of trust are to enjoy and get benefits of trust property. However, same is subject to two limitations; one is that while undertaking exercise to find out as to whether particular trust can be said as specific trust or discretionary trust, one has to examine contents of trust deed for processing particular share of beneficiary, if provided by trust deed. If share of beneficiary/s is determined and specified, such trust can be termed as specific trust but if share is not determined or uncertain depending upon decision of trustees as they may take from time to time, then such trust can be termed as discretionary trust. second aspect for purpose of application of Act is concerned, as trustees are in representative capacity, representing interest of beneficiary in trust for purpose of tax liability competent authority under Act may examine as to whether income of particular beneficiary treated individually is liable for higher slab of income-tax or not. If it is found that tax liability of amount receivable or received by beneficiary of his share individually in hands of beneficiary is higher, option would be available to Assessing Officer to assess tax at higher level and then to finalise assessment. To say in other words, if specific trust is having its beneficiaries, few as individual and few as discretionary trusts but share of each of individual as well as discretionary trusts is specific, while undertaking task of assessment Assessing Officer for purpose of share of individual beneficiaries may take into consideration normal tax treated chargeable for such purpose but while taking into consideration share of each of discretionary trust, who are beneficiary, may consider applicable tax rate for discretionary trust and, thereafter, may assess tax of representative assessee. But such option may be available only if some of beneficiaries of trust are discretionary trust, though their shares are specific as per trust deed. In absence of any discretionary trust being beneficiary and if shares of each of beneficiaries is specific, liability of representative assessee shall be as per section 161 of Act at normal rate of tax. Attempt was made by learned counsel for Revenue to contend that it is not that Assessing Officer can look upon status of beneficiaries of particular trust for finding out as to whether it is discretionary trust or specific trust but it was submitted that if beneficiary of such discretionary trust, though its share is specific but if share of beneficiary of that particular trust, which is beneficiary of parent trust is uncertain, specific trust which is beneficiary of another parent specific trust can also be assessed as discretionary trust. Alternatively, it was submitted that once principle is accepted that for assessing any representative assessee capacity of beneficiary is to be considered as if discretionary or specific trust for purpose of chargeability of tax, it can discretionary or specific trust for purpose of chargeability of tax, it can reach to any beneficiary of beneficiary trust at any level and if ultimate beneficiary may be at second level trust or third level trust, is found to be discretionary trust, or shares of beneficiary is found to be uncertain, first level trust can be assessed as discretionary trust for chargeability of tax and if assessment is not considered accordingly, one can easily get away from liability to pay tax at maximum marginal rate though shares of ultimate beneficiaries may be uncertain or unknown. Whereas on behalf of assessee, it was contended that when any assessment is to be made of representative assessee, Assessing Officer has to find out whether shares of beneficiaries are specific or not as per trust deed. If shares of beneficiaries are specific, irrespective of fact that whether it is discretionary trust or any specific trust or any individual person, assessment can be under section 161 of Act and cannot be under section 164 of Act. It was submitted that it is not open to Assessing Officer to look at status of beneficiaries of trust or beneficiary of second level or third level trust, whether discretionary or specific trust and it was, therefore, submitted that lower authorities have committed error and have not properly construed statutory provisions of Act. In order to appreciate contention we find that same can better be explained by giving example. For example, first level trust has three beneficiaries; one individual, one discretionary trust and one specific trust ; second level trust, which is discretionary trust and is beneficiary of first level trust has its beneficiaries, providing for specific shares for individual person(s) as well as discretionary trust; third level trust, which is discretionary trust but all its member beneficiaries are individual but shares of beneficiaries are uncertain. contention on behalf of assessee is that first level trust, wherein share of each of beneficiaries is specific, is required to be assessed under section 161 and section 164 of Act would not be applicable. Whereas contention of Revenue is that while assessing first level trust, Assessing Officer can reach up to third level trust and its beneficiaries to find out as to whether share of beneficiaries at third level trust is specific or not. If contention of either side is strictly examined in light of provisions of Trusts Act independently, one may say that composition of first level trust and its beneficiaries, wherein share of each of beneficiaries is specific share or not is only required to be considered. But if considered in light of provisions of Act for purpose of chargeability of tax keeping in view that trustees of first level trust are to be considered as representative assessee and they represent share of beneficiary, which is specific trust, in order to see that there may not be avoidance of tax, more particularly when option is made available under section 164 of Act Assessing Officer can examine as to whether discretionary trust of first level trust is discretionary trust or not and if beneficiary of first level trust is discretionary trust, Assessing Officer can assess income of such beneficiary of first level trust at maximum marginal rate as per section 164 of Act to extent of respective share of such beneficiary trust and can assess income of first level trust by segregating income of each of beneficiary separately, whether, individual beneficiary or beneficiary trust, which is discretionary trust and not specific trust. But if second level trust, which is beneficiary of first level trust is found to be specific, then assessment of first level trust should rest there. Attempt to contend that if beneficiary of second level trust is discretionary trust or shares are uncertain of beneficiaries of second level trust, beneficiary of first level trust can also be taxed at maximum marginal rate under section 164 of Act, in our view, cannot be accepted because relationship between trustees in representative capacity and answerability of trustees to beneficiary is limited to beneficiary of particular trust as per Trusts Act and it cannot be stretched or reached to beneficiaries of beneficiary and then again beneficiaries' beneficiary. If such interpretation is made, it would not only result into stretching jural relation or legal relation between trustees and beneficiaries beyond scope of trust Act but it may also create chaotic and uncertain situation. As observed earlier in normal circumstances, once specific share of each of beneficiaries is already distributed by trustees amongst beneficiaries, Revenue can say that even if income is in hands of beneficiary, charegability of tax is not lost because assessment is in representative capacity but trustees of first level trust cannot be said to be representing interest or share of beneficiaries of its beneficiaries. Not only that but if contention is accepted for sake of consideration, resultant situation in law would be that beneficiaries of third level trust would be in position to enforce their rights not only against its own trustees, who are at third level trust but also against trustees of first level trust. Such would create endless chaotic situation which, in our view, cannot be said as conceived by Trusts Act. It is true that for purpose of tax, provisions of Act are to be considered and Act provides for assessment in representative capacity, but representative capacity of trustees of first level trust is to represent beneficial interest of beneficiary of its trust, it cannot reach to third level trust or beneficiaries of third level trust as sought to be canvassed. Had option been not available under section 164 of Act to Assessing Officer, possibly beneficiaries of second level trust could also not be considered but as such option is expressly made available under section 164 of Act we are inclined to read and interpret that for purpose of tax under Act Assessing Officer may be in position to find out status of beneficiaries of first level trust and while finding out status of beneficiaries of first level trust, he may look upon taxable liability of beneficiaries of second level trust, who are beneficiaries of first level trust and if tax payable is higher, while making assessment of first level trust, option may be resorted to under section 164 of Act to that extent only, but such cannot be permitted again to reach to third level trust and to find out taxable liability of beneficiaries of third level trust. Hence, said contention to that extent of Revenue cannot be accepted. said contention to that extent of Revenue cannot be accepted. In decision of apex court in case of CWT v. Trustees of H. E. H. Nizam's Family (Reminder Wealth) Trust reported in [1977] 108 ITR 555 (SC), in which decision of apex court begins at page 580, wherein at page 593, apex court observed, inter alia, relevant of which reads as under: "The basic idea underlying section 41, and which is in conformity with principle, is that liability of trustees should be coextensive with that of beneficiaries and in no sense wider or larger liability." On very page, it has been observed, inter alia, as under: "This court also observed that'the same considerations must apply in interpretation of section 161(2) of Income-tax Act, 1961'." At this stage, we may record that in case of one of assessees, viz., Neo Trust v. IAC Tribunal in its decision, reported at [1992] 41 ITD 412, at paragraph 11.3, had observed thus: "We do not agree with submission of learned counsel for assessee to effect that trustees of each oral discretionary trusts of first line were real beneficiaries of assessee trust and that under law we are not entitled to inquire as to on whose behalf and for whose benefit those trustees had to receive part of income from assessee trust. We are of opinion that substance of matter is to be taken into account. We have to inquire as to who are real beneficiaries of assessee trust as far as that part of income is concerned. That inquiry will be wholly unreal and would be incomplete, if we accept ipse dixit that since trustees of these 11 oral discretionary trusts of first line have been named as beneficiaries they should be regarded as beneficiaries." At this stage, we may also record that similar view was taken by Tribunal in I. T. A. No. 1435/Ahd/1988 in case of S. K. Patel Family Trust v. Asst. CIT, vide decision dated January 4, 1999, and it was held that assessee-trust be assessed under section 161 read with section 166 of Act and not under section 164 of Act. It may also be recorded that very order of Tribunal was carried in Tax Appeal No. 3 of 1999 before this court and Division Bench of this court (coram: R. Baliya and A.R. Dave JJ.) by its order dated April 16, 1999, did not find any questions of law to be considered and, therefore, appeals were dismissed. If principles of doctrine of merger is considered in light of decision taken by this court in case Nirma Industries Ltd. v. Deputy CIT reported in [2006] 283 ITR 402 (Guj), one may contend that aforesaid view of Tribunal in case of S. K. Patel Family Trust has been upheld by High Court but at same time it is true that there is no discussion on merits by this court and, hence, we have found it proper as per observations made hereinabove to examine questions before giving final answer to it. In decision of apex court in case of CWT v. Trustees of H. E. H. Nizam's Family (Reminder Wealth) Trust (supra), apex court had no occasion to further examine as to whether Assessing Officer can reach to beneficiary of third level trust for making assessment of trustees of first level trust. Therefore, we find that said decision would be of no help to learned counsel, Mr. Bhatt, appearing for Revenue. At this stage, we may also record that Mr. Soparkar, learned counsel appearing for assessee, did contend that view was also taken by Tribunal in case K. V. Patel Family Trust to effect that trust could be termed as specific trust and matter was carried in reference before this court being I. T. R. No. 67 of 1995 and others, wherein this court, vide order dated August 5, 2014 (K. V. Patel Family Trust v. CIT [2015] 4 ITR-OL 283 (Guj)), has held that since shares of beneficiaries of that particular trust were specific, trust is to be treated as specific trust and question was answered in favour of assessee against Revenue. However, Mr. Bhatt, learned counsel appearing for Revenue, contended that in said case of K. V. Patel Family Trust, none of beneficiary was discretionary trust nor was there any further inquiry that beneficiaries of beneficiary was discretionary trust and, therefore, said decision may not apply to present question to be considered by this court in present group of matters. We find that it is true that to classify trust as specific trust or not is considered by this court in abovereferred decision. But, in said decision, question did not come up for consideration before this court as to whether beneficiary of third level trust, even found to be discretionary trust or share is found to be uncertain, assessment of first level trust can be made under section 164 of Act or not. Mr. Mehta, learned counsel appearing for Revenue in some of matters, did contend that as per decision of this court in case of M. L. Family Trust v. State of Gujarat reported in [1995] 213 ITR 152 (Guj) and another decision of this court in case of Niti Trust v. CIT [1996] 221 ITR 435 (Guj), it has been held that trustees are representative assessees and, therefore, Assessing Officer has to look upon beneficiary for purpose of assessment of tax. In our view, even if such principle is considered, it would be to extent of beneficiaries of first level trust to be independently taxed or for considering tax liability, beneficiary of second level trust may be considered but it would not be for beneficiary's beneficiary and beneficiary's beneficiary's to extent of reaching beneficiaries of third level trust as sought to be canvassed. Hence, said decisions are of no help to Revenue. At this stage we may make useful reference to decision of apex court in case of Jyotendrasinhji v. S. I. Tripathi [1993] 201 ITR 611 (SC) and more particularly observations made at pages 628 and 629, relevant of which reads as under: "The only argument is that inasmuch these trusts are discretionary trusts, the, income therefrom must necessarily be taxed and can only be taxed in hands of trustees and not in hands of beneficiary. It is argued that Revenue has no choice to tax either trustees or beneficiaries in such case. We are unable to agree trustees in case of trust declared by duly executed instrument in writing are treated as representative assessees (section 160(1)(iv)). It is equally true that, in case of discretionary trust, trustees are liable to be taxed in respect of income received by them at rate specified in section 164(1)." Further, on page 629, it was, inter alia, observed, after considering section 166 of Act, as under: "The section states in unmistakable terms that nothing contained in preceding provisions in Chapter shall preclude Revenue from making direct assessment upon beneficiary and/or from recovering tax payable from such person. Revenue has thus been given option to tax income from discretionary trust either in hands of trustees or in hands of beneficiaries." aforesaid shows that option is available to Assessing Officer as observed earlier to tax trustees or to beneficiaries who receive share in trust property. In view of aforesaid observations and discussions, we find that on first question, reproduced at paragraph 2 hereinabove, answer would be against Revenue and in favour of assessee but with option available to Assessing Officer to resort to provisions of section 164 of Act in event beneficiary of first level trust are discretionary trust to extent of their respective shares but such analogy or mode would not be available by connecting beneficiary of second level trust with third level trust even if they are discretionary trust or shares of beneficiaries are uncertain and such aspect may arise for consideration only if there is separate assessment of trustees of second level trust or third level trust. As in all matters, being Tax No. 20 of 2001, I. T. R. Nos. 28 of 2000, 25 of 2003, 74 of 1996 and 141 of 1996, question arise for reaching to beneficiaries of second level with third level trust for assessment of first level trust, impugned orders of Tribunal cannot sustain for charging tax at maximum marginal rate under section 164 of Act. All appeals as well ITRs shall stand disposed of accordingly. We may now consider second question, as reproduced in paragraph 3 hereinabove. On second question, contention was raised by learned counsel appearing for assessee that once amount credited in books of account was on contingencies of remuneration available, it could not be considered as real income. Whereas, on behalf of Revenue, it was contended that when as per agreement, remuneration was receivable and is received, it can be treated as real income and same has been rightly considered by Tribunal. We may record that Tribunal in impugned common judgment, has observed at paragraphs 21, 22 and 23, as under: "21. We will now consider merits of additional ground raised by assessees. assessees have contended that income which was accounted for as their respective income in profit and loss account in respective year should be treated as no real income having accrued in their favour in view of notices received by assessees from their respective societies. learned counsel for assessees stated that since these assessees did not carry out any work as per agreements executed by them with their respective societies; these assessees in fact and in law and on basis of true facts are not entitled to receive any such income. No real income has accrued in favour of these assessees. Merely because certain book keeping entries were passed in books of account and such amounts were shown as income that cannot represent real income. assessees also relied upon various decisions cited supra. 22. It is true that mere existence or absence of book keeping entries will not determine existence of real income. It will have to be determined on basis of due consideration of entire evidence existing on records. 23. In case of Shalini Organizer, copy of agreement dated January 14, 1982, has been placed at pages 57 to 67 of paper book No. 1. Clause 17 of said agreement reads as under: '17. As per this agreement, amount of remuneration of concerned year is required to be paid on completion of accounting year of party of second part. As per this agreement, accounting year of party of second part completes at end of February so aforesaid amount of remuneration is required to be paid as under at rate of 8 per cent. of Rs. 65,00,000, i.e., at rate of 3 per cent. of total amount of remuneration in first year and at rate of 2 per cent. for remaining two years. That amount comes to Rs. 5,20,000. This amount is required to be paid every year at end of February. Dated 28-2-1983 1,95,000 Dated 29-2-1984 1,62,500 Dated 28-2-1985 1,62,500 5,20,000 However, whenever financial necessity arise for both parties, such financial transaction can be made with view to help each other irrespective of such amount is due or not.' Similar agreements have been executed by respective housing societies and other two assessee-trusts specifying therein amount of organisation fees payable by respective societies to assessee-trusts, which will accrue in their favour on completion of their respective accounting years. entries relating to such income by way of organisation fees receivable by assessee-trusts has been credited as income in profit and loss accounts on basis of such legally enforceable agreements executed between societies and assessee-trusts. income which had already accrued in favour of assessee-trusts on completion of each accounting year of respective assessee-trusts, cannot be converted into'no' income merely because respective societies sent notices after period of more than 5 years asking for refund of aforesaid amount of income, which had already accrued by virtue of aforesaid agreements on completion of each of accounting year under consideration." Further, in paragraph 24, Tribunal proceeded to observe, relevant of which reads as under: "A perusal of respective balance-sheets of Shalini Organiser submitted in compilation at pages 42 and 43 of paper book No. 1, inter alia, shows that assessee had incurred expenditure of Rs. 30,666 in accounting year ending on February 28, 1983. Likewise profit and loss account of Astu Organiser placed at page 20 of paper book No. 1 shows that t he expenditure of about Rs. 35,055 was incurred by said trust in accounting year ending on March 31, 1983. In Sarav Organiser trust had spent sum of Rs. 32,969 in accounting year ending on March 31, 1983. figures of expenditure incurred in subsequent years are not available. However, even as per notices sent by societies, it has, inter alia, been contended by them that work done by these trusts is not matching with work done by them and, therefore, they have stated that payment for organisation fees already made to them is excessive. All these facts reveal that claim of assessees about having not done any work whatsoever is not correct and assessees' contention that no real income in fact had accrued in relevant accounting year under consideration, is also not sustainable on facts of case." If we consider reasons recorded by Tribunal in this regard, same shows that Tribunal after considering terms of agreement has recorded finding of fact that as per agreement, income which had already accrued in favour of assessee-trust during completion of accounting year cannot be treated as no income merely because respective societies sent notices after many years demanding refund of aforesaid amount. Nothing is brought to our notice that agreement expressly provided for refund of amount already paid by way of remuneration nor is there any adjudication by any authority that assessee was under obligation to refund amount. Under these circumstances, when Tribunal has recorded ultimate finding of fact after considering agreement on record that refund as sought to be contemplated cannot be termed as no real income as contended by assessee and Tribunal has found that it can be termed as real income based on terms and conditions of agreement, we do not find that same can be interfered with while undertaking examination of so-called substantial questions of law. Whether particular income was real income as per terms and conditions of agreement of assessee or not, in our view, is essentially question of fact which would be beyond scope of judicial scrutiny in present appeals before this court. same will be position for examining references which would be limited to only substantial questions of law. Hence, we find that second substantial question of law as sought to be canvassed by respective appellants or assessee would not arise for our consideration further as sought to be canvassed. Hence, references as well as tax appeals against order of Tribunal to that extent cannot be accepted. Hence, shall stand disposed of accordingly. All tax references as well as tax appeals shall stand disposed of in terms of orders passed hereinabove. *** Neo Trust v. Income-tax Officer
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