Our trust stopped running its distributorship itself and let another concern run it for a monthly fee. Does the income still 'consist of or include profits and gains of business' for s.161(1A)?
On these facts, yes. The Tribunal held that the distributorship agreement was a commercial asset, that letting it out temporarily did not take the income out of the business head, and that the income was business income attracting s.161(1A), which was inserted with effect from 1 April 1985 and which the Tribunal found to contain no ambiguity whatsoever. The appeals were dismissed and the assessment in the status of association of persons was upheld.
Decided by the ITAT (T.V. Rajagopala Rao, Judicial Member (Income-tax Appellate Tribunal, Madras)) on 1991-04-30, reported as [1991] 38 ITD 409 (Mad). It bears on section 161(1A), section 161, section 160, section 2(31) of the Income Tax Act 1961, in Charitable Trusts & Exemption and Assessment & Scrutiny matters.
This is a Revenue-side decision on the first years of s.161(1A) and it shows how little it takes to attract the sub-section: the trust had ceased to operate the distributorship itself and was taking a fixed monthly fee, and the income was still business income. The yield of a commercial asset is business profit irrespective of how the asset is exploited, so a trust that parks a business with a related concern does not escape the maximum marginal rate. The order should be used with care on one point: the Tribunal upheld the status of association of persons, whereas the competing view is that s.161(1A) alters the rate without displacing the representative character of the assessment, so an assessment framed on the aggregate income of all beneficiaries as one AOP unit remains arguable — see the note under 'validity'.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee is a private trust created by a deed dated 1 April 1982 executed by Smt SAP Lakshmi Achi, widow of Shri Palaniappan Chettiar, for the benefit of six beneficiaries in determinate shares: SAP Annamalai as trustee on behalf of Kumudam Endowments 80 per cent, Jawahar Palaniappan 5 per cent, Ranjit Annamalai 5 per cent, Anjana Kothai 5 per cent, P. Srinivasan 2.5 per cent and P. Varadarajan 2.5 per cent. The beneficiaries and their beneficial interests were known. The objects clause required the income, after outgoings, to be divided and credited to the beneficiaries' accounts and applied for their general welfare, education, marriage and maintenance, and for the maintenance and objects of the first beneficiary trust. The trust held a sales distributorship for periodicals under an agreement dated 15 April 1982 and carried on that business. It ran the business itself until 11 April 1984 and thereafter allowed M/s Varalakshmi Agencies to conduct the distributorship for fixed monthly sums, the arrangement running in two one-year spells; the distributorship agreement itself was never cancelled and the distributorship came to an end only in 1987, after both years in issue. The trust deed authorised the trustees to carry on any business and to invest trust funds in it. The question in both appeals was whether Rs 1,27,475 for assessment year 1985-86 and Rs 1,69,565 for 1986-87 were liable to be included as the assessee's business income by virtue of the newly inserted s.161(1A).
The appeals were dismissed as being without merit and the orders of the lower authorities were confirmed (para 17). The income earned by the assessee was business income and the assessment of the assessee in the status of association of persons was held to be perfectly justified.
The Tribunal treated the distributorship agreement as a commercial asset which had to be exploited to yield income, and the fact that the assessee let another concern conduct the distributorship for a monthly fee did not change the character of the yield, because the yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited. The distributorship agreement was never cancelled, the assessee merely directed the publishers to send the periodicals to Varalakshmi Agencies, the arrangement ran in two one-year spells with reversion to the assessee afterwards, and the assessee never recovered its deposit with the publishers, so this was not a permanent withdrawal from the business. The Tribunal treated Varalakshmi Agencies as carrying on the distributorship as the assessee's agent and applied the line of cases in which assets temporarily let out remain commercial assets, distinguishing Narain Swadeshi Weaving Mills and Sultan Bros., where the assessee had never carried on or could no longer carry on the relevant business. The trust decisions relied on by the assessee were distinguished as turning on other provisions — s.13(1)(d), s.11(4A) and s.13(1)(bb) — or on facts where the trust was a passive recipient with no right to interfere, whereas this trust deed authorised the trustees to carry on business and the trust had in fact done so from 1982 to 1984. On the construction of s.161(1A) the Tribunal held there was no ambiguity whatsoever in its wording, so the rule in Vegetable Products favouring the assessee on an ambiguous provision had no application, and it relied on the departmental circular explaining the insertion as directed at taxpayers conducting business through the medium of private trusts to avoid the tax that would be payable if the business were carried on in partnership.
For all the above reasons we hold that the treating of the income earned by the assessee is business income and treating the status of the assessee as association of persons is perfectly justified and the orders of the lower authorities are therefore confirmed.
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Handle my notice → Ask a CA on WhatsAppOn these facts, yes. The Tribunal held that the distributorship agreement was a commercial asset, that letting it out temporarily did not take the income out of the business head, and that the income was business income attracting s.161(1A), which was inserted with effect from 1 April 1985 and which the Tribunal found to contain no ambiguity whatsoever. The appeals were dismissed and the assessment in the status of association of persons was upheld. This was decided by the ITAT (T.V. Rajagopala Rao, Judicial Member (Income-tax Appellate Tribunal, Madras)) and bears on section 161(1A), section 161, section 160, section 2(31) of the Income Tax Act 1961. It is reported as [1991] 38 ITD 409 (Mad). This is a Revenue-side decision on the first years of s.161(1A) and it shows how little it takes to attract the sub-section: the trust had ceased to operate the distributorship itself and was taking a fixed monthly fee, and the income was still business income. The yield of a commercial asset is business profit irrespective of how the asset is exploited, so a trust that parks a business with a related concern does not escape the maximum marginal rate. The order should be used with care on one point: the Tribunal upheld the status of association of persons, whereas the competing view is that s.161(1A) alters the rate without displacing the representative character of the assessment, so an assessment framed on the aggregate income of all beneficiaries as one AOP unit remains arguable — see the note under 'validity'. If it applies to you, the first step is this: Test whether what was let out is a commercial asset of the trust and whether the trust had itself exploited it before — the Tribunal turned on the fact that the trust had run the distributorship from 1982 to 1984 and that the distributorship agreement was never cancelled.
The assessee is a private trust created by a deed dated 1 April 1982 executed by Smt SAP Lakshmi Achi, widow of Shri Palaniappan Chettiar, for the benefit of six beneficiaries in determinate shares: SAP Annamalai as trustee on behalf of Kumudam Endowments 80 per cent, Jawahar Palaniappan 5 per cent, Ranjit Annamalai 5 per cent, Anjana Kothai 5 per cent, P. Srinivasan 2.5 per cent and P. Varadarajan 2.5 per cent. The beneficiaries and their beneficial interests were known. The objects clause required the income, after outgoings, to be divided and credited to the beneficiaries' accounts and applied for their general welfare, education, marriage and maintenance, and for the maintenance and objects of the first beneficiary trust. The trust held a sales distributorship for periodicals under an agreement dated 15 April 1982 and carried on that business. It ran the business itself until 11 April 1984 and thereafter allowed M/s Varalakshmi Agencies to conduct the distributorship for fixed monthly sums, the arrangement running in two one-year spells; the distributorship agreement itself was never cancelled and the distributorship came to an end only in 1987, after both years in issue. The trust deed authorised the trustees to carry on any business and to invest trust funds in it. The question in both appeals was whether Rs 1,27,475 for assessment year 1985-86 and Rs 1,69,565 for 1986-87 were liable to be included as the assessee's business income by virtue of the newly inserted s.161(1A). The matter was decided on 1991-04-30 by the ITAT (T.V. Rajagopala Rao, Judicial Member (Income-tax Appellate Tribunal, Madras)). On those facts the ITAT held as follows. The appeals were dismissed as being without merit and the orders of the lower authorities were confirmed (para 17). The income earned by the assessee was business income and the assessment of the assessee in the status of association of persons was held to be perfectly justified.
The Tribunal treated the distributorship agreement as a commercial asset which had to be exploited to yield income, and the fact that the assessee let another concern conduct the distributorship for a monthly fee did not change the character of the yield, because the yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited. The distributorship agreement was never cancelled, the assessee merely directed the publishers to send the periodicals to Varalakshmi Agencies, the arrangement ran in two one-year spells with reversion to the assessee afterwards, and the assessee never recovered its deposit with the publishers, so this was not a permanent withdrawal from the business. The Tribunal treated Varalakshmi Agencies as carrying on the distributorship as the assessee's agent and applied the line of cases in which assets temporarily let out remain commercial assets, distinguishing Narain Swadeshi Weaving Mills and Sultan Bros., where the assessee had never carried on or could no longer carry on the relevant business. The trust decisions relied on by the assessee were distinguished as turning on other provisions — s.13(1)(d), s.11(4A) and s.13(1)(bb) — or on facts where the trust was a passive recipient with no right to interfere, whereas this trust deed authorised the trustees to carry on business and the trust had in fact done so from 1982 to 1984. On the construction of s.161(1A) the Tribunal held there was no ambiguity whatsoever in its wording, so the rule in Vegetable Products favouring the assessee on an ambiguous provision had no application, and it relied on the departmental circular explaining the insertion as directed at taxpayers conducting business through the medium of private trusts to avoid the tax that would be payable if the business were carried on in partnership. In the words reproduced by the source cited on this page: "For all the above reasons we hold that the treating of the income earned by the assessee is business income and treating the status of the assessee as association of persons is perfectly justified and the orders of the lower authorities are therefore confirmed." The decision followed or applied Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC) — distinguished; Sultan Bros. (P) Ltd. v. CIT [1964] 51 ITR 353 (SC) — distinguished; CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) — held inapplicable, s.161(1A) being unambiguous.
It was decided by the ITAT on 1991-04-30 and is reported as [1991] 38 ITD 409 (Mad). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 161(1A), section 161, 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 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 dismissed as being without merit and the orders of the lower authorities were confirmed (para 17). The income earned by the assessee was business income and the assessment of the assessee in the status of association of persons was held to be perfectly justified. It arises in Charitable Trusts & Exemption and Assessment & Scrutiny matters, on section 161(1A), section 161, section 160, section 2(31) of the Income Tax Act 1961, and was decided by T.V. Rajagopala Rao, Judicial Member (Income-tax Appellate Tribunal, Madras). 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. Look for the indicators of an intention to resume: short renewable spells rather than a sale, an unrecovered deposit with the principals, and reversion of the asset to the trust on expiry. Do not run a Vegetable Products ambiguity argument on s.161(1A); the Tribunal held there is no ambiguity in its wording. Check the s.161(1A) proviso before conceding: the sub-section does not apply where the profits are receivable under a trust declared by will exclusively for the benefit of a relative dependent on the settlor for support and maintenance and that is the only trust so declared by him. If the assessment has been framed on the aggregate income in the status of AOP, keep the status point alive separately from the rate point, using CIT v. Marsons Beneficiary Trust on status.
Searched for later treatment; none was found. That is not the same as a source affirming it. Nothing applying, affirming, doubting or reversing this 1991 order has been found, and no appeal from it to a High Court has been traced. A caution about searching for it: matters carrying the name 'Seva Trust' are, so far as has been found, unrelated trusts — Nanu Shakti Mandir Seva Trust, Vasavi Kanyaka Seva Trust, Kheti Vikas Seva Trust — in writ and other proceedings, and none of them is treatment of this order. It therefore remains a first-instance Tribunal order of persuasive weight only, on the first two years of s.161(1A). A practitioner meeting it in the department's hands should say so, and should add that its reasoning on the central point — that the yield of a commercial asset is business profit however the asset is exploited — is borrowed from a line of general business-income cases and is not a construction of s.161(1A) at all. Two things fix how far it carries. It turns on findings of fact that were strongly against the assessee: the trust had itself run the distributorship from 1982 to 1984, the distributorship agreement was never cancelled, the arrangement ran in two one-year spells with reversion to the trust, and the deposit with the publishers was never recovered. A trust that has genuinely and permanently withdrawn from a business is not on these facts. And the order expressly distinguishes the trust decisions relied on as turning on s.13(1)(d), s.11(4A) and s.13(1)(bb), so it says nothing about those provisions. What would displace it: a decision holding that s.161(1A) requires the trust itself to carry on the business, so that a fixed fee for allowing another to run it is not 'profits and gains of business' in the trust's hands. Nothing of that kind has been located. 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.
A SOURCING CAUTION THAT GOVERNS HOW THIS ENTRY MAY BE USED. The heading, the statement of the issue, the text of s.161(1A) reproduced at paragraph 1 and the facts at paragraph 2 have been read in the order's own words. The Tribunal's reasoning at paragraphs 9 to 16 has not: what is available for that stretch is a summary rather than the Tribunal's own sentences, and the 'reasoning' field on this page is written from that summary. Phrases attributed to the order within it should be treated as unconfirmed, and none of them should be reproduced inside quotation marks in a written submission. Only the holding at paragraph 17 has been independently confirmed word for word, and it is the only text quoted on this page. The report renders the section as 'Section 161(1 A)', with a space. That is a printing artefact and not a different provision. The years in issue are assessment years 1985-86 and 1986-87 — the first two years of s.161(1A), which was inserted with effect from 1 April 1985. That is worth knowing before the order is cited: it is a decision on a new provision, without the benefit of any later authority on it, and the Tribunal's conclusion that there is 'no ambiguity whatsoever' in the wording was reached on a first reading. Two limits on scope. The order does not decide anything about the proviso to s.161(1A), which takes out profits receivable under a trust declared by will exclusively for the benefit of a dependent relative; that proviso was not in issue. And the status point — the Tribunal upheld an assessment in the status of association of persons — sits uneasily with the competing view that s.161(1A) alters the rate without displacing the representative character of the assessment. The why-it-matters note records that tension, and a reader who needs the status point should take it from CIT v. Marsons Beneficiary Trust rather than from here. Two figures and two dates fix the case. The amounts in issue were Rs 1,27,475 for assessment year 1985-86 and Rs 1,69,565 for 1986-87. The trust ran the distributorship itself until 11 April 1984 and then allowed another concern to conduct it for fixed monthly sums, in two one-year spells; the distributorship agreement was never cancelled, and the distributorship ended only in 1987, after both years in issue. That sequence is the whole of the reasoning. The Tribunal treated the arrangement as a temporary letting of a commercial asset the trust had itself exploited and meant to resume, which is why Narain Swadeshi Weaving Mills and Sultan Bros. were distinguished. A trust that has genuinely and permanently withdrawn from a business is not on these facts. 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 dismissed as being without merit and the orders of the lower authorities were confirmed (para 17). The income earned by the assessee was business income and the assessment of the assessee in the status of association of persons was held to be perfectly justified.
TaxSphere, “Seva Trust v ITO”, https://taxnotice.vittsphere.com/caselaw/case/seva-trust-v-ito-161-1a-trust-leasing-distributorship-business-income/ (validity last checked 2026-09-08)
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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?
The Assessing Officer has assessed our trust in one order on the whole of the trust income at slab rates of its own. The shares of the beneficiaries are fixed and known. Is that how section 161 works?
Our family trust has determinate shares, mostly interest and rent, and a small share of profit from a partnership business. The Assessing Officer has charged the entire trust income at the maximum marginal rate. Can he, when the shares are fixed?
A trust in our family was never reduced to writing. The Assessing Officer says section 164A applies and has charged the maximum marginal rate on everything. Is there any relief at all?
