A discretionary trust distributed income to me during the year and the trustees have already been assessed on it. Can the Assessing Officer also assess me?
Yes — the Revenue has an option, and it can assess either the trustees or the beneficiary, but only in respect of income actually distributed to and received by the beneficiary during the accounting year. Section 164 is not a code in itself; it fixes only how tax is charged, while the liability to be assessed comes from s.161, and s.5 read with s.4 lets the beneficiary be taxed directly on what he actually received.
Decided by the Supreme Court (M.N. Venkatachaliah CJ, S.C. Agrawal J and S.P. Bharucha J (judgment of the Court delivered by S.P. Bharucha J)) on 1994-05-09, reported as 1994 AIR 2759; 1994 SCC (4) 308; JT 1994 (4) 16; 1994 SCALE (2) 976; lead appeal Civil Appeal No. 2145 of 1978. It bears on section 164, section 166, section 161, section 160, section 5, section 4 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Assessment & Scrutiny matters.
This is the case the department leads with whenever it assesses a discretionary-trust beneficiary on a distribution. Its limits are the defence: the option runs only to income distributed and received in the accounting year, so accumulated income cannot be assessed in the beneficiary's hands at all. It is also an option, not a licence to collect twice — Nagappa (which this judgment applies at para 24) requires the duplicate assessment to be annulled. The Court expressly held that s.166 itself does not help the Revenue here, because s.166 speaks of income 'receivable', which discretionary trust income is not; the Revenue's power comes from s.5 and s.4, and s.166 is merely clarificatory.
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The assessment year was 1969-70, the previous year being calendar 1968. The assessee was the beneficiary of nine trusts. In three she was the sole beneficiary and no dispute arose about their income. In the other six she was one of several beneficiaries, and each of those six deeds provided that during the specified periods the trustees 'may either accumulate the net income of the Trust or at their discretion pay the same to the persons as mentioned therein or to any one or more of them to the exclusion of others' in such proportion and manner as the trustees in their absolute discretion thought fit. During the accounting year the trustees resolved to distribute, and the assessee received, amounts from the six trusts totalling Rs 18,000 (tabulated in para 2 of the report as Rs 11,600, Rs 46,200, Rs 1,000, Rs 1,400, Rs 17,300 and Rs 500 under a printed total of Rs 18,000 — see editor_note). The assessee contended before the Income Tax Officer that the shares of the beneficiaries were indeterminate and unknown so the income was taxable only in the trustees' hands under s.164. The ITO rejected that and assessed the Rs 18,000 in her hands, relying on s.166. The Appellate Assistant Commissioner affirmed. The Tribunal held that no part of the income was receivable on behalf of or for the benefit of any beneficiary, that s.164 was attracted and s.166 was not, and allowed the assessee's appeal. On a reference at the Revenue's instance, a Division Bench of the Gujarat High Court referred the matter to a larger Bench of three Judges, whose majority upheld the Tribunal, one Judge dissenting.
The appeals were allowed, the majority judgment of the High Court was set aside and the references were answered against the assessee, with no order as to costs (paras 25 to 27). The Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of so much of the trust income as has been distributed to and received by the beneficiaries in the course of the accounting year.
A trustee even of a discretionary trust is a representative assessee by force of s.160, and it is s.161 that makes him liable to assessment and to recovery, s.161(1) also giving him the protections that the assessment is in his representative capacity only, that tax is levied and recovered from him only in like manner and to the same extent as from the person represented, and, by s.161(2), that he may not be assessed under any other provision (paras 18 and 19). Section 164 does not create a charge; the word 'charged' there means only 'levied', and s.164 harks back to s.161 when it speaks of persons 'liable as representative assessees', so it cannot be read as a code in itself governing discretionary trusts, and the assessee's principal contention to that effect was rejected (paras 20 to 22). Section 166 does not itself avail the Revenue, because it speaks of income 'receivable' on behalf of or for the benefit of a person, which cannot be said of discretionary trust income, the distribution being left to the trustees' discretion; but s.166 is merely clarificatory and empowers no assessment by itself, so the beneficiary's exclusion from s.166 does not mean he cannot be assessed under other provisions (para 23). Section 5 brings within total income what a person receives, and income of a discretionary trust distributed to and received by a beneficiary within the accounting year therefore falls within the sweep of s.5 and is assessable on him under s.4 (para 23). Nagappa had already held it implicit in s.161(1) that the officer may assess either the representative assessee or the person represented, and the Nizam's Family Trust case that when a trustee is assessed it is really the beneficiaries who are sought to be assessed through the trustee; absent an express provision the Court would not hold that beneficiaries whose interest is identified in the accounting year are immune (para 24).
We hold, accordingly, that the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of such income thereof as has been distributed and received by the beneficiaries in the course of the accounting year.
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Handle my notice → Ask a CA on WhatsAppYes — the Revenue has an option, and it can assess either the trustees or the beneficiary, but only in respect of income actually distributed to and received by the beneficiary during the accounting year. Section 164 is not a code in itself; it fixes only how tax is charged, while the liability to be assessed comes from s.161, and s.5 read with s.4 lets the beneficiary be taxed directly on what he actually received. This was decided by the Supreme Court (M.N. Venkatachaliah CJ, S.C. Agrawal J and S.P. Bharucha J (judgment of the Court delivered by S.P. Bharucha J)) and bears on section 164, section 166, section 161, section 160, section 5, section 4 of the Income Tax Act 1961. It is reported as 1994 AIR 2759; 1994 SCC (4) 308; JT 1994 (4) 16; 1994 SCALE (2) 976; lead appeal Civil Appeal No. 2145 of 1978. This is the case the department leads with whenever it assesses a discretionary-trust beneficiary on a distribution. Its limits are the defence: the option runs only to income distributed and received in the accounting year, so accumulated income cannot be assessed in the beneficiary's hands at all. It is also an option, not a licence to collect twice — Nagappa (which this judgment applies at para 24) requires the duplicate assessment to be annulled. The Court expressly held that s.166 itself does not help the Revenue here, because s.166 speaks of income 'receivable', which discretionary trust income is not; the Revenue's power comes from s.5 and s.4, and s.166 is merely clarificatory. If it applies to you, the first step is this: Separate, year by year, what the trustees distributed and the beneficiary actually received from what was accumulated. Only the former is exposed under this judgment.
The assessment year was 1969-70, the previous year being calendar 1968. The assessee was the beneficiary of nine trusts. In three she was the sole beneficiary and no dispute arose about their income. In the other six she was one of several beneficiaries, and each of those six deeds provided that during the specified periods the trustees 'may either accumulate the net income of the Trust or at their discretion pay the same to the persons as mentioned therein or to any one or more of them to the exclusion of others' in such proportion and manner as the trustees in their absolute discretion thought fit. During the accounting year the trustees resolved to distribute, and the assessee received, amounts from the six trusts totalling Rs 18,000 (tabulated in para 2 of the report as Rs 11,600, Rs 46,200, Rs 1,000, Rs 1,400, Rs 17,300 and Rs 500 under a printed total of Rs 18,000 — see editor_note). The assessee contended before the Income Tax Officer that the shares of the beneficiaries were indeterminate and unknown so the income was taxable only in the trustees' hands under s.164. The ITO rejected that and assessed the Rs 18,000 in her hands, relying on s.166. The Appellate Assistant Commissioner affirmed. The Tribunal held that no part of the income was receivable on behalf of or for the benefit of any beneficiary, that s.164 was attracted and s.166 was not, and allowed the assessee's appeal. On a reference at the Revenue's instance, a Division Bench of the Gujarat High Court referred the matter to a larger Bench of three Judges, whose majority upheld the Tribunal, one Judge dissenting. The matter was decided on 1994-05-09 by the Supreme Court (M.N. Venkatachaliah CJ, S.C. Agrawal J and S.P. Bharucha J (judgment of the Court delivered by S.P. Bharucha J)). On those facts the Supreme Court held as follows. The appeals were allowed, the majority judgment of the High Court was set aside and the references were answered against the assessee, with no order as to costs (paras 25 to 27). The Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of so much of the trust income as has been distributed to and received by the beneficiaries in the course of the accounting year.
A trustee even of a discretionary trust is a representative assessee by force of s.160, and it is s.161 that makes him liable to assessment and to recovery, s.161(1) also giving him the protections that the assessment is in his representative capacity only, that tax is levied and recovered from him only in like manner and to the same extent as from the person represented, and, by s.161(2), that he may not be assessed under any other provision (paras 18 and 19). Section 164 does not create a charge; the word 'charged' there means only 'levied', and s.164 harks back to s.161 when it speaks of persons 'liable as representative assessees', so it cannot be read as a code in itself governing discretionary trusts, and the assessee's principal contention to that effect was rejected (paras 20 to 22). Section 166 does not itself avail the Revenue, because it speaks of income 'receivable' on behalf of or for the benefit of a person, which cannot be said of discretionary trust income, the distribution being left to the trustees' discretion; but s.166 is merely clarificatory and empowers no assessment by itself, so the beneficiary's exclusion from s.166 does not mean he cannot be assessed under other provisions (para 23). Section 5 brings within total income what a person receives, and income of a discretionary trust distributed to and received by a beneficiary within the accounting year therefore falls within the sweep of s.5 and is assessable on him under s.4 (para 23). Nagappa had already held it implicit in s.161(1) that the officer may assess either the representative assessee or the person represented, and the Nizam's Family Trust case that when a trustee is assessed it is really the beneficiaries who are sought to be assessed through the trustee; absent an express provision the Court would not hold that beneficiaries whose interest is identified in the accounting year are immune (para 24). In the words reproduced by the source cited on this page: "We hold, accordingly, that the Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of such income thereof as has been distributed and received by the beneficiaries in the course of the accounting year." The decision followed or applied C.R. Nagappa v. Commissioner of Income Tax [1969] 73 ITR 626 (SC) — applied (para 24); CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust — relied on (para 24).
It was decided by the Supreme Court on 1994-05-09 and is reported as 1994 AIR 2759; 1994 SCC (4) 308; JT 1994 (4) 16; 1994 SCALE (2) 976; lead appeal Civil Appeal No. 2145 of 1978. 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 164, section 166, section 161, section 160, section 5, section 4, 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 appeals were allowed, the majority judgment of the High Court was set aside and the references were answered against the assessee, with no order as to costs (paras 25 to 27). The Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of so much of the trust income as has been distributed to and received by the beneficiaries in the course of the accounting year. It arises in Charitable Trusts & Exemption and Assessment & Scrutiny matters, on section 164, section 166, section 161, section 160, section 5, section 4 of the Income Tax Act 1961, and was decided by M.N. Venkatachaliah CJ, S.C. Agrawal J and S.P. Bharucha J (judgment of the Court delivered by S.P. Bharucha 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. If the same distribution has been assessed in the trustees' hands as well, take the point that the option is exhausted once exercised and press for the second assessment to be annulled, relying on the Court's treatment of Nagappa at para 24. Do not argue that s.166 bars the assessment on the beneficiary — the Court accepted that s.166 does not apply to a discretionary trust and then held for the Revenue anyway on s.5. Argue instead on receipt: no distribution, no charge in the beneficiary's hands. Check which version of s.164(1) governs your year before quoting para 20 of this judgment: the text the Court set out is the provision as it stood for AY 1969-70, which charged the income as if it were the total income of an association of persons, or, where the income was actually received by a beneficiary, at the rate applicable to the beneficiary's total income if that course benefited the Revenue. That is not the present maximum marginal rate charge, and it contains no flat rate of 65 per cent.
Still good law. Later treatment was checked to this extent and no further: the Supreme Court in CWT v. Estate of Late HMM Vikramsinhji of Gondal, decided 16 April 2014, records at para 4 that Revenue counsel conceded that in view of Kamalini Khatau the High Court's view on the U.S. trusts could not be faulted, and the Court proceeded on that footing — that judgment was read in full for this entry. No systematic search for decisions doubting Kamalini Khatau was run. Separately, the ratio survives but the statutory machinery quoted in the judgment does not: para 20 sets out s.164 in the form applicable to AY 1969-70 — AOP rate, or the beneficiary's own rate on income actually received by him, whichever benefits the Revenue — which is neither the Finance Act 1970 version nor the present maximum marginal rate charge. 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 raw report on indiankanoon carries no ACT or HEADNOTE content — those fields are empty — so the only text available is the judgment itself. The judgment records at para 4 that the Gujarat High Court heard the reference by a Bench of three Judges and that one Judge dissented; the Supreme Court set aside the majority judgment. Paragraph 20 of the judgment sets out s.164 as it stood for AY 1969-70: tax charged as if the income were the total income of an association of persons, or, where the income or part of it is actually received by a beneficiary, at the rate applicable to the total income of the beneficiary if that course benefits the Revenue. The words 'sixty-five per cent' appear nowhere in this judgment; that rate belongs to the version of s.164 substituted by the Finance Act 1970 and shown on the archived departmental page incometaxindia.gov.in/w/section-164-46, and it was not the provision before the Court. The version quoted at para 20 is in any event not the current charge and must not be quoted as present law. Reported ITR citation is commonly given as (1994) 209 ITR 101 (SC) but that citation does not appear in the text read, so it is not listed under 'reported'. The table of distributions at para 2 lists six amounts — Rs 11,600, Rs 46,200, Rs 1,000, Rs 1,400, Rs 17,300 and Rs 500 — under a printed total of '18,000'. The items do not sum to that figure; the discrepancy is in the report and the figures are reproduced as found. 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 appeals were allowed, the majority judgment of the High Court was set aside and the references were answered against the assessee, with no order as to costs (paras 25 to 27). The Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of so much of the trust income as has been distributed to and received by the beneficiaries in the course of the accounting year.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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