The trustees of my settlement are being assessed on the trust income. The department has now also included the same income in my own assessment under s.64. Does s.161(2) stop it?
No. Section 161(2) does not deny the Assessing Officer the option to assess the person represented instead of the representative assessee; it only requires that when the representative assessee is the one assessed, he is assessed under Chapter XV and not under any other provision. But the same income cannot be charged twice — the Court recorded that the assessments already made on the minor beneficiaries would be annulled and any tax recovered refunded.
Decided by the Supreme Court (J.C. Shah J and A.N. Grover J (judgment delivered by Shah J)) on 1968-09-04, reported as AIR 1969 SC 888; [1969] 73 ITR 626 (SC); [1969] 1 SCR 979. It bears on section 161, section 160, section 166, section 64, section 4, section 5 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Assessment & Scrutiny matters.
This is the source of the proposition, applied ever since and relied on in Kamalini Khatau, that assessment of a representative assessee is an option and not an obligation. It cuts both ways: it defeats the argument that a trust assessment ousts an assessment on the settlor or beneficiary, and it supplies the answer to double taxation, because s.161(1) presupposes income that is liable to tax, and where the income is already charged in the settlor's hands under s.64 there is nothing left to charge in the hands of the trustee or the beneficiary.
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On 14 April 1955 C.R. Nagappa executed seven separate deeds of trust settling specified properties for the benefit of his minor children, each deed vesting the property in four trustees — Nagappa himself, his two wives and a married daughter. Under each deed part of the income was to be used immediately for the beneficiary's benefit and the balance accumulated for him or her and handed over at a future date fixed by the deed. For assessment year 1962-63 the Income-tax Officer included in Nagappa's total income the trust income used for the immediate benefit of the beneficiaries but not the accumulated income. The Commissioner, acting under s.263, directed that the income set aside for the deferred benefit of the minors be included as well. Nagappa's appeal to the Tribunal, on the ground that the trust income was assessable under s.161(1) only in the trustees' hands, failed. Two questions were referred to the High Court of Mysore, which held that s.64(v) applied and that s.161(2) did not make it inapplicable, and that the assessments on the minor beneficiaries — although themselves illegal in view of that answer — did not bar the application of s.64(v). Nagappa appealed. The minor beneficiaries had in fact been separately assessed to tax for the same year.
The appeal was dismissed with costs (paras 17 and 18). Section 161(2) does not deny the Income-tax Officer the option to assess the person represented rather than the representative assessee; it requires only that where the representative assessee is assessed, the assessment is under Chapter XV and not under any other provision. The trust income was rightly included in the settlor's total income under s.64(v), and the assessments made on the minor beneficiaries for the same income could not stand and were to be annulled with refund of any tax recovered.
Section 160 defines the representative assessee and s.160(2) deems him an assessee; s.161(1) makes him liable to assessment in his own name but only in his representative capacity and only to the same extent as the person represented. It is implicit in s.161(1) that the officer may assess a representative assessee but is not bound to do so, and s.166 expressly says that nothing in the preceding sections prevents the direct assessment of the person on whose behalf the income is receivable or recovery from him (para 5). The contention that s.161(2) barred an assessment on the beneficiary was therefore contrary to the plain terms of s.166; s.161(2) merely exacts that when the representative assessee is assessed in exercise of the Revenue's option, he is assessed under Chapter XV alone (para 6). Section 64(v) requires income arising to a person or association of persons from assets transferred without adequate consideration, to the extent it is for the immediate or deferred benefit of the transferor's spouse or minor child, to be included in the transferor's total income, and 'transferred' includes settled under a trust (paras 7 and 8). Once so included, the income cannot be brought to tax again in the hands of the beneficiary or the trustee, because s.161(1) predicates the existence of income liable to tax; and if s.161(1) cannot operate there is no scope for s.161(2) (para 9). The Court traced s.161(2) to the conflict under ss.40 and 41 of the 1922 Act, disapproving the obiter in Saifudin Alimohamed and approving Chagla CJ in Balwantrai Jethalal Vaidya, that the trustee's liability is co-extensive with the beneficiary's and never wider, that every assessment against a trustee must fall under the representative-assessee provision, and that that provision comes into play only after the income has been computed under the ordinary computation provisions (paras 10 to 15).
Sub-section (2) of section 161 does not purport to deny the Income-tax Officer the option to assess the income in the hands of the person represented by the representative assessee : it merely exacts that when a representative assessee is assessed to tax in exercise of the option of the revenue, he shall be assessed under Chapter XV and shall not in respect of that income be assessed under any other provision of the Act.
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Handle my notice → Ask a CA on WhatsAppNo. Section 161(2) does not deny the Assessing Officer the option to assess the person represented instead of the representative assessee; it only requires that when the representative assessee is the one assessed, he is assessed under Chapter XV and not under any other provision. But the same income cannot be charged twice — the Court recorded that the assessments already made on the minor beneficiaries would be annulled and any tax recovered refunded. This was decided by the Supreme Court (J.C. Shah J and A.N. Grover J (judgment delivered by Shah J)) and bears on section 161, section 160, section 166, section 64, section 4, section 5 of the Income Tax Act 1961. It is reported as AIR 1969 SC 888; [1969] 73 ITR 626 (SC); [1969] 1 SCR 979. This is the source of the proposition, applied ever since and relied on in Kamalini Khatau, that assessment of a representative assessee is an option and not an obligation. It cuts both ways: it defeats the argument that a trust assessment ousts an assessment on the settlor or beneficiary, and it supplies the answer to double taxation, because s.161(1) presupposes income that is liable to tax, and where the income is already charged in the settlor's hands under s.64 there is nothing left to charge in the hands of the trustee or the beneficiary. If it applies to you, the first step is this: Do not plead s.161(2) as a jurisdictional bar to an assessment on the settlor or the beneficiary — the Court held that argument contrary to the plain terms of s.166.
On 14 April 1955 C.R. Nagappa executed seven separate deeds of trust settling specified properties for the benefit of his minor children, each deed vesting the property in four trustees — Nagappa himself, his two wives and a married daughter. Under each deed part of the income was to be used immediately for the beneficiary's benefit and the balance accumulated for him or her and handed over at a future date fixed by the deed. For assessment year 1962-63 the Income-tax Officer included in Nagappa's total income the trust income used for the immediate benefit of the beneficiaries but not the accumulated income. The Commissioner, acting under s.263, directed that the income set aside for the deferred benefit of the minors be included as well. Nagappa's appeal to the Tribunal, on the ground that the trust income was assessable under s.161(1) only in the trustees' hands, failed. Two questions were referred to the High Court of Mysore, which held that s.64(v) applied and that s.161(2) did not make it inapplicable, and that the assessments on the minor beneficiaries — although themselves illegal in view of that answer — did not bar the application of s.64(v). Nagappa appealed. The minor beneficiaries had in fact been separately assessed to tax for the same year. The matter was decided on 1968-09-04 by the Supreme Court (J.C. Shah J and A.N. Grover J (judgment delivered by Shah J)). On those facts the Supreme Court held as follows. The appeal was dismissed with costs (paras 17 and 18). Section 161(2) does not deny the Income-tax Officer the option to assess the person represented rather than the representative assessee; it requires only that where the representative assessee is assessed, the assessment is under Chapter XV and not under any other provision. The trust income was rightly included in the settlor's total income under s.64(v), and the assessments made on the minor beneficiaries for the same income could not stand and were to be annulled with refund of any tax recovered.
Section 160 defines the representative assessee and s.160(2) deems him an assessee; s.161(1) makes him liable to assessment in his own name but only in his representative capacity and only to the same extent as the person represented. It is implicit in s.161(1) that the officer may assess a representative assessee but is not bound to do so, and s.166 expressly says that nothing in the preceding sections prevents the direct assessment of the person on whose behalf the income is receivable or recovery from him (para 5). The contention that s.161(2) barred an assessment on the beneficiary was therefore contrary to the plain terms of s.166; s.161(2) merely exacts that when the representative assessee is assessed in exercise of the Revenue's option, he is assessed under Chapter XV alone (para 6). Section 64(v) requires income arising to a person or association of persons from assets transferred without adequate consideration, to the extent it is for the immediate or deferred benefit of the transferor's spouse or minor child, to be included in the transferor's total income, and 'transferred' includes settled under a trust (paras 7 and 8). Once so included, the income cannot be brought to tax again in the hands of the beneficiary or the trustee, because s.161(1) predicates the existence of income liable to tax; and if s.161(1) cannot operate there is no scope for s.161(2) (para 9). The Court traced s.161(2) to the conflict under ss.40 and 41 of the 1922 Act, disapproving the obiter in Saifudin Alimohamed and approving Chagla CJ in Balwantrai Jethalal Vaidya, that the trustee's liability is co-extensive with the beneficiary's and never wider, that every assessment against a trustee must fall under the representative-assessee provision, and that that provision comes into play only after the income has been computed under the ordinary computation provisions (paras 10 to 15). In the words reproduced by the source cited on this page: "Sub-section (2) of section 161 does not purport to deny the Income-tax Officer the option to assess the income in the hands of the person represented by the representative assessee : it merely exacts that when a representative assessee is assessed to tax in exercise of the option of the revenue, he shall be assessed under Chapter XV and shall not in respect of that income be assessed under any other provision of the Act." The decision followed or applied CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187 (Bom) — approved (paras 12 to 14); Saifudin Alimohamed v. CIT (Bom) — observations held incorrect (paras 10, 11 and 13).
It was decided by the Supreme Court on 1968-09-04 and is reported as AIR 1969 SC 888; [1969] 73 ITR 626 (SC); [1969] 1 SCR 979. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 161, section 160, section 166, section 64, section 4, section 5, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with costs (paras 17 and 18). Section 161(2) does not deny the Income-tax Officer the option to assess the person represented rather than the representative assessee; it requires only that where the representative assessee is assessed, the assessment is under Chapter XV and not under any other provision. The trust income was rightly included in the settlor's total income under s.64(v), and the assessments made on the minor beneficiaries for the same income could not stand and were to be annulled with refund of any tax recovered. It arises in Charitable Trusts & Exemption and Assessment & Scrutiny matters, on section 161, section 160, section 166, section 64, section 4, section 5 of the Income Tax Act 1961, and was decided by J.C. Shah J and A.N. Grover J (judgment delivered by Shah J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the same trust income has been assessed both on the settlor under s.64 and on the trustees or the minor beneficiaries, take the double-charge point directly: s.161(1) predicates income liable to tax, and once the income is charged under s.64 it cannot be charged again. Ask in terms, as the Revenue conceded before the High Court here, that the duplicate assessments be annulled and the tax recovered under them refunded. When the assessment is on the trustee, insist that the income is computed under the ordinary computation provisions first and that s.161 operates only at the stage of levy and recovery — the Chagla CJ formulation in Balwantrai Jethalal Vaidya, approved at paras 12 to 14.
Still good law. Later treatment checked to this extent only: the Supreme Court applied Nagappa in CIT v. Kamalini Khatau, decided 9 May 1994, at para 24, and the Bombay High Court applied the same line in CIT v. Marsons Beneficiary Trust — both judgments were read for this batch. No systematic search for decisions doubting Nagappa was run. Note that the trust regime has since been altered by s.161(1A) (Finance Act 1984, from AY 1985-86) and by successive substitutions of s.164, none of which touch the option point decided here. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report on indiankanoon carries obvious transcription errors: the author line reads 'Shaha, J.' where the Bench line names J.C. Shah; 'Changla C.J.' for Chagla C.J.; 'beneficial' for 'beneficially' in the quoted s.161(1); 'conservations' for 'observations'; 'i9n' for 'in'; 'basis idea' for 'basic idea'; and 'presumable' for 'presumably'. These are errors in the report, not in the reasoning, but any quotation should be checked against a printed report. The judgment was read in full and ends with a disposal (paras 17 and 18). This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs (paras 17 and 18). Section 161(2) does not deny the Income-tax Officer the option to assess the person represented rather than the representative assessee; it requires only that where the representative assessee is assessed, the assessment is under Chapter XV and not under any other provision. The trust income was rightly included in the settlor's total income under s.64(v), and the assessments made on the minor beneficiaries for the same income could not stand and were to be annulled with refund of any tax recovered.
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