Our private trust has determinate beneficiaries and the deed lets the trustees carry on business. The Assessing Officer has assessed the whole business income as one unit in the status of AOP. Is that right?
For years before assessment year 1985-86, no. Where the shares of the beneficiaries are known and determinate, s.164 has no application, the trustees must be assessed under s.161(1), each beneficiary's share is taxed as if it formed part of that beneficiary's income and the trustees' liability is the sum of those amounts — and this is so whatever the nature of the income, including business income. For assessment year 1985-86 onward this is displaced by s.161(1A), which charges the maximum marginal rate where the income consists of or includes profits and gains of business; the judgment expressly says at para 2 that it does not deal with that provision.
Decided by the High Court (Sujata V. Manohar J) on 1990-07-24, reported as [1991] 188 ITR 224 (Bom). It bears on section 161, section 161(1A), section 164, section 166, section 160, section 2(31) of the Income Tax Act 1961, in Charitable Trusts & Exemption and Assessment & Scrutiny matters.
The case is worth carrying for what it decides beside the rate. It holds that the beneficiaries of a private trust cannot be treated as an association of persons merely because the trustees carry on business: the trustees derive their authority from the settlor, not from the beneficiaries, the beneficiaries have not joined in a common purpose, and a beneficiary who does not disclaim under s.9 of the Trusts Act is not thereby consenting to the business. Section 161(1A) is a rate provision and does not in terms address status, so the reasoning is arguably untouched by it — but for years from AY 1985-86 the point is contested: the Tribunal in Seva Trust v. ITO [1991] 38 ITD 409 (Mad) upheld an assessment in the status of association of persons in a s.161(1A) year. Use this case against an assessment framed on the aggregate income of all beneficiaries as one AOP unit, but do not present the status point as settled for those years. It also puts Shanmugham in its place: receivers authorised by the owners are one thing, trustees authorised by a settlor another.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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A group of income-tax applications concerned the assessment of trustees of trusts under whose deeds the settlor had given the trustees power to carry on business, and under which the income of the trust including its business income was required to be distributed among specified beneficiaries in determinate shares. The question in each was how the business income of the trust was to be assessed. All the applications related to assessment years before s.161(1A) took effect, that provision having been inserted by the Finance Act 1984 with effect from 1 April 1985, so the Court dealt with the law as it stood earlier. The Department contended that the beneficiaries must be looked upon as an association of persons so that the entire income accruing to them could be taken as one unit, relying on N.V. Shanmugam and Co. v. CIT, and argued that the trustees carrying on business under the deed stood in the position of the receivers in that case, that 'on behalf of' and 'for the benefit of' were equivalent, and that beneficiaries who had not disclaimed must be taken to have consented to the business. In Income-tax Application No. 157 of 1990 some beneficiaries had already been separately assessed on the business income they earned from the trust.
The rule issued in each application was discharged, with no order as to costs (para 18). Where the shares of the beneficiaries are known and determinate there is no question of s.164 being attracted; the trustees must be assessed in the manner provided by s.161(1) in respect of any income of the trust, whether business income or otherwise; the income is treated as if distributed to the beneficiaries, tax on each beneficiary's share is separately calculated as if it formed part of that beneficiary's income, and the tax payable by the trustees is the sum total of those amounts. The income cannot be taxed in the trustees' hands as one unit, and neither the beneficiaries nor the trustees can be treated as an association of persons.
Balwantrai Jethalal Vaidya held s.41 of the 1922 Act, in the same terms as s.161(1), to be mandatory: the assessment of income returned by a trustee, whether from property, business or shares, can be made only in accordance with that section, and the nature of the income makes no difference — the sole question is whether the assessment is being made upon a trustee (paras 4 and 5). That decision was approved by the Supreme Court in the Nizam's Family (Remainder Wealth) Trust case under the analogous s.21 of the Wealth-tax Act, so by parity of reasoning s.161(1) is necessarily attracted whenever an assessment is made on trustees, and s.161(1) makes no distinction between business income and other income; s.164 operates only where the shares are indeterminate or unknown, in which case the income is taxed in the trustees' hands as one unit (paras 6 and 7). The shares here being determinate, s.164 could not apply and the s.161(1) mechanism followed (para 8). Shanmugham was distinguished: the trustees have no authority from the beneficiaries to carry on business, as the receivers there had; the trustees derive their authority from the settlor; Shanmugham does not lay down that 'for the benefit of' always equals 'on behalf of'; and a beneficiary does not authorise a business by receiving income, nor is a failure to disclaim under s.9 of the Trusts Act a withdrawal of consent, the right of disclaimer having no reference to any business (paras 9 to 11). Applying Indira Balkrishna, an association of persons requires two or more persons joining in a common purpose or action with the object of producing income; the beneficiaries neither set up the trust nor authorised the business and are merely recipients of income, so they are not an association of persons and the trustees cannot take on that character either (paras 12 to 14).
Tax payable by the trustees will be the sum total of the tax so calculated on the share of each beneficiary.
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Handle my notice → Ask a CA on WhatsAppFor years before assessment year 1985-86, no. Where the shares of the beneficiaries are known and determinate, s.164 has no application, the trustees must be assessed under s.161(1), each beneficiary's share is taxed as if it formed part of that beneficiary's income and the trustees' liability is the sum of those amounts — and this is so whatever the nature of the income, including business income. For assessment year 1985-86 onward this is displaced by s.161(1A), which charges the maximum marginal rate where the income consists of or includes profits and gains of business; the judgment expressly says at para 2 that it does not deal with that provision. This was decided by the High Court (Sujata V. Manohar J) and bears on section 161, section 161(1A), section 164, section 166, section 160, section 2(31) of the Income Tax Act 1961. It is reported as [1991] 188 ITR 224 (Bom). The case is worth carrying for what it decides beside the rate. It holds that the beneficiaries of a private trust cannot be treated as an association of persons merely because the trustees carry on business: the trustees derive their authority from the settlor, not from the beneficiaries, the beneficiaries have not joined in a common purpose, and a beneficiary who does not disclaim under s.9 of the Trusts Act is not thereby consenting to the business. Section 161(1A) is a rate provision and does not in terms address status, so the reasoning is arguably untouched by it — but for years from AY 1985-86 the point is contested: the Tribunal in Seva Trust v. ITO [1991] 38 ITD 409 (Mad) upheld an assessment in the status of association of persons in a s.161(1A) year. Use this case against an assessment framed on the aggregate income of all beneficiaries as one AOP unit, but do not present the status point as settled for those years. It also puts Shanmugham in its place: receivers authorised by the owners are one thing, trustees authorised by a settlor another. If it applies to you, the first step is this: Fix the assessment year first. For AY 1985-86 onward, s.161(1A) applies to a trust whose income consists of or includes profits and gains of business and this judgment does not answer the rate question — check the proviso for a trust declared by will exclusively for a dependent relative before conceding.
A group of income-tax applications concerned the assessment of trustees of trusts under whose deeds the settlor had given the trustees power to carry on business, and under which the income of the trust including its business income was required to be distributed among specified beneficiaries in determinate shares. The question in each was how the business income of the trust was to be assessed. All the applications related to assessment years before s.161(1A) took effect, that provision having been inserted by the Finance Act 1984 with effect from 1 April 1985, so the Court dealt with the law as it stood earlier. The Department contended that the beneficiaries must be looked upon as an association of persons so that the entire income accruing to them could be taken as one unit, relying on N.V. Shanmugam and Co. v. CIT, and argued that the trustees carrying on business under the deed stood in the position of the receivers in that case, that 'on behalf of' and 'for the benefit of' were equivalent, and that beneficiaries who had not disclaimed must be taken to have consented to the business. In Income-tax Application No. 157 of 1990 some beneficiaries had already been separately assessed on the business income they earned from the trust. The matter was decided on 1990-07-24 by the High Court (Sujata V. Manohar J). On those facts the High Court held as follows. The rule issued in each application was discharged, with no order as to costs (para 18). Where the shares of the beneficiaries are known and determinate there is no question of s.164 being attracted; the trustees must be assessed in the manner provided by s.161(1) in respect of any income of the trust, whether business income or otherwise; the income is treated as if distributed to the beneficiaries, tax on each beneficiary's share is separately calculated as if it formed part of that beneficiary's income, and the tax payable by the trustees is the sum total of those amounts. The income cannot be taxed in the trustees' hands as one unit, and neither the beneficiaries nor the trustees can be treated as an association of persons.
Balwantrai Jethalal Vaidya held s.41 of the 1922 Act, in the same terms as s.161(1), to be mandatory: the assessment of income returned by a trustee, whether from property, business or shares, can be made only in accordance with that section, and the nature of the income makes no difference — the sole question is whether the assessment is being made upon a trustee (paras 4 and 5). That decision was approved by the Supreme Court in the Nizam's Family (Remainder Wealth) Trust case under the analogous s.21 of the Wealth-tax Act, so by parity of reasoning s.161(1) is necessarily attracted whenever an assessment is made on trustees, and s.161(1) makes no distinction between business income and other income; s.164 operates only where the shares are indeterminate or unknown, in which case the income is taxed in the trustees' hands as one unit (paras 6 and 7). The shares here being determinate, s.164 could not apply and the s.161(1) mechanism followed (para 8). Shanmugham was distinguished: the trustees have no authority from the beneficiaries to carry on business, as the receivers there had; the trustees derive their authority from the settlor; Shanmugham does not lay down that 'for the benefit of' always equals 'on behalf of'; and a beneficiary does not authorise a business by receiving income, nor is a failure to disclaim under s.9 of the Trusts Act a withdrawal of consent, the right of disclaimer having no reference to any business (paras 9 to 11). Applying Indira Balkrishna, an association of persons requires two or more persons joining in a common purpose or action with the object of producing income; the beneficiaries neither set up the trust nor authorised the business and are merely recipients of income, so they are not an association of persons and the trustees cannot take on that character either (paras 12 to 14). In the words reproduced by the source cited on this page: "Tax payable by the trustees will be the sum total of the tax so calculated on the share of each beneficiary." The decision followed or applied CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187 (Bom) — followed; CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 (SC) — followed; CIT v. Indira Balkrishna (SC) — applied; N.V. Shanmugam and Co. v. CIT (SC) — distinguished (paras 9 to 13).
It was decided by the High Court on 1990-07-24 and is reported as [1991] 188 ITR 224 (Bom). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 161, section 161(1A), section 164, section 166, section 160, section 2(31), 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 taxpayer. The rule issued in each application was discharged, with no order as to costs (para 18). Where the shares of the beneficiaries are known and determinate there is no question of s.164 being attracted; the trustees must be assessed in the manner provided by s.161(1) in respect of any income of the trust, whether business income or otherwise; the income is treated as if distributed to the beneficiaries, tax on each beneficiary's share is separately calculated as if it formed part of that beneficiary's income, and the tax payable by the trustees is the sum total of those amounts. The income cannot be taxed in the trustees' hands as one unit, and neither the beneficiaries nor the trustees can be treated as an association of persons. It arises in Charitable Trusts & Exemption and Assessment & Scrutiny matters, on section 161, section 161(1A), section 164, section 166, section 160, section 2(31) of the Income Tax Act 1961, and was decided by Sujata V. Manohar 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. Even for years governed by s.161(1A), use this case against the status: resist an assessment framed on the aggregate income of all beneficiaries in the status of AOP, and insist the assessment remains on the trustee in a representative capacity beneficiary by beneficiary. Prove determinacy from the deed. Once the shares are known and determinate there is no room for s.164 at all. Meet the Shanmugham argument head on: show that the beneficiaries did not authorise the trustees to carry on business, and that non-disclaimer under s.9 of the Trusts Act is not consent — the two propositions the Court rejected at paras 10 and 11. If some beneficiaries have already been separately assessed on their share of the business income, raise the double-assessment point; the Tribunal had accepted it here, though the High Court did not need to examine it (para 16).
Superseded by amendment. Superseded only in part, and only as to rate. Section 161(1A), inserted by the Finance Act 1984 with effect from 1 April 1985, provides that notwithstanding s.161(1), where the income in respect of which a trustee within s.160(1)(iv) is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of that income at the maximum marginal rate, subject to a proviso for profits receivable under a trust declared by will exclusively for the benefit of a relative dependent on the settlor for support and maintenance where that is the only trust so declared by him (text taken from the departmental page for s.161 and, for the body of the sub-section, from its verbatim reproduction in Seva Trust v. ITO). The judgment itself states at para 2 that all the applications relate to years before that date. What survives untouched is the holding that a determinate private trust and its beneficiaries are not an association of persons and that the assessment remains a representative one — a point s.161(1A) does not address. No search for later High Court or Supreme Court treatment of this judgment was carried out. One further caution: for assessment years from 1985-86 the status holding is contested. The Tribunal in Seva Trust v. ITO [1991] 38 ITD 409 (Mad) upheld an assessment in the status of association of persons under s.161(1A). No decision resolving that conflict was searched for. 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.
These were income-tax applications seeking a direction to the Tribunal to refer questions; the Court discharged the rule in each, holding the points squarely covered, so the decision is a refusal of reference rather than an answer to a reference — the reasoning is nonetheless fully stated. Paragraph 7 of the report contains an obvious misprint: the parenthesis reads '(N. B. Section 161(1)(a) was not then in existence)' where the provision meant is s.161(1A). The report does not record the number of applications disposed of; Income-tax Application No. 157 of 1990 is named at para 16. The Court did not decide the double-taxation point raised in that application because no question had been framed on it. 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 rule issued in each application was discharged, with no order as to costs (para 18). Where the shares of the beneficiaries are known and determinate there is no question of s.164 being attracted; the trustees must be assessed in the manner provided by s.161(1) in respect of any income of the trust, whether business income or otherwise; the income is treated as if distributed to the beneficiaries, tax on each beneficiary's share is separately calculated as if it formed part of that beneficiary's income, and the tax payable by the trustees is the sum total of those amounts. The income cannot be taxed in the trustees' hands as one unit, and neither the beneficiaries nor the trustees can be treated as an association of persons.
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