Section 161(1A)

Section 161(1A) — the law in short

What the courts have decided on section 161(1A), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• UTI Mutual Fund v ITO High CourtHelps taxpayer
  Can they attach your bank account while the stay application is still pending?
  No. Recovery should not be made pending expiry of the appeal period or disposal of the stay application, and for a reasonable period after — so you can approach a higher forum. Reasonable prior notice must also precede withdrawal from an attached account.
• CIT v Marsons Beneficiary Trust High CourtHelps taxpayerSuperseded by amendment
  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.
• Seva Trust v ITO ITATHelps departmentNo later treatment found
  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.
• Statutory position — s.161(1) and (2): the representative assessee is taxed 'in like manner and to the same extent' as the person represented, and cannot be assessed under any other provision CBDT Circulars & InstructionsCuts both ways
  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?
  No. Section 161(1) makes the representative assessee liable to assessment in his own name, but it deems that assessment to be made upon him in his representative capacity only, and it caps the charge: the tax 'shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him'. Where the shares are determinate the measure of the trustee's liability is therefore the liability of each beneficiary separately, not a single composite charge on the trust. Section 161(2) is the other half of the protection: where a person is assessable under Chapter XV in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of the Act.
• Statutory position — s.164: the maximum marginal rate where beneficiaries' shares are indeterminate, and every proviso that takes a trust out of it, in sequence CBDT Circulars & InstructionsCuts both ways
  Our discretionary trust has been charged at the maximum marginal rate under section 164 because the beneficiaries' shares are not fixed. What exactly takes a trust out of that rate, and does it help that the trust was created by my father's will?
  Section 164(1) charges the relevant income at the maximum marginal rate where income for which a section 160(1)(iii) or (iv) representative is liable is not specifically receivable on behalf of any one person, or where the individual shares of the persons for whose benefit it is receivable are indeterminate or unknown. The FIRST PROVISO takes a case out of that rate — not into exemption, but into tax 'as if it were the total income of an association of persons' — in four situations, and only four: (i) none of the beneficiaries has any other income chargeable under the Act exceeding the maximum amount not chargeable to tax in the case of an association of persons, and none is a beneficiary under any other trust; (ii) the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; (iii) the relevant income is receivable under a trust created before 1 March 1970 by a non-testamentary instrument which the Assessing Officer is satisfied was created bona fide exclusively for the benefit of the settlor's relatives, or, where the settlor is a Hindu undivided family, of the members of that family, in circumstances where they were mainly dependent on the settlor for support and maintenance; or (iv) the relevant income is receivable by trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in that business or profession. The SECOND PROVISO then cuts all four down where there is business income: where the income of a section 160(1)(iv) trustee consists of, or includes, profits and gains of business, the first proviso applies only if those profits and gains are receivable under a trust declared by a person by will exclusively for the benefit of a relative dependent on him for support and maintenance, and that trust is the only trust so declared by him.
• Statutory position — s.161(1A): one rupee of business profit in a private trust puts the WHOLE of the trust income at the maximum marginal rate, and only the will-trust proviso saves it CBDT Circulars & InstructionsCuts both ways
  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?
  Yes, and the fact that the shares are determinate is irrelevant. Section 161(1A) opens 'Notwithstanding anything contained in sub-section (1)', so the beneficiary-rate protection in section 161(1) is displaced entirely: where any income in respect of which a person mentioned in section 160(1)(iv) is liable as representative assessee 'consists of, or includes, profits and gains of business', tax is charged on the WHOLE of the income in respect of which he is so liable at the maximum marginal rate. The single proviso is narrow and cumulative — it disapplies the sub-section only where the profits and gains are receivable under a trust declared by a person BY WILL, exclusively for the benefit of a relative dependent on him for support and maintenance, and that trust is the ONLY trust so declared by him. Sub-section (1A) was inserted by the Finance Act, 1984 with effect from 1 April 1985.
• Statutory position — s.164A read with s.160(1)(v): an oral trust pays the maximum marginal rate on the whole of its income, with no proviso and only one way out CBDT Circulars & InstructionsCuts both waysNo later treatment found
  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?
  Only one, and it has to have been taken in time. Section 164A provides that where a trustee receives or is entitled to receive any income on behalf or for the benefit of any person under an oral trust then, notwithstanding anything contained in any other provision of the Act, tax shall be charged on such income at the maximum marginal rate. There is no proviso — none of the escapes in section 164's first proviso, and not the will-trust proviso in section 161(1A), is available. The Explanation to section 164A gives 'oral trust' the meaning assigned to it in Explanation 2 below section 160(1), and that definition is residual: a trust not declared by a duly executed instrument in writing (including a valid wakf deed) AND not deemed under Explanation 1 to section 160(1) to be so declared. The only way out is therefore Explanation 1 — filing with the Assessing Officer a statement in writing signed by the trustees setting out the purposes of the trust, the particulars of the trustees, the beneficiaries and the trust property, within three months of the declaration of the trust (or, for a trust declared before 1 June 1981, within three months from that day).

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.