Section 166

Section 166 — the law in short

What the courts have decided on section 166, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CWT v Estate of Late HMM Vikramsinhji of Gondal Supreme CourtHelps taxpayer
  The department says our family trust is really a specific trust because the settlor used to show its income in his own return. The trustees have retained the income. Can it be taxed in the beneficiary's hands?
  No, not on those facts. Where the trust deed leaves distribution to the trustees' discretion and the income was in fact retained and not disbursed, the trust remains a discretionary trust and the income is not assessable in the beneficiary's hands. The failure of the settlor or his successor to appoint the persons who were to exercise the discretion does not convert a discretionary trust into a specific trust.
• CIT v Kamalini Khatau Supreme CourtHelps department
  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.
• Jyotendrasinhji v S.I. Tripathi Supreme CourtHelps department
  My father's foreign trust can only be unwound if the settlor and the trustee act together. Does that still make it a revocable transfer taxable in his hands?
  Yes. The Supreme Court held that section 63 does not require the power of revocation to be absolute or unconditional. Where a deed lets the settlor, acting together with the trustee, direct payment of the income or corpus to family members, the settlor has a right to reassume power over the income or assets, and the transfer is revocable. The Court also held that where a trust is discretionary the Revenue has an option under section 166 to assess either the trustees or the beneficiaries, though not both on the same income. The appeals were dismissed.
• C.R. Nagappa v CIT Supreme CourtHelps department
  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.
• Ganesh Chhababhai Vallabhai Patel v. CIT (Gujarat High Court) — a s.161(1) assessment on the trustee carries the rate applicable to the beneficiary's TOTAL income, and s.154 rectification lies where it did not High CourtHelps departmentNo later treatment found
  Our trust was assessed under section 161 on the beneficiaries' shares at the rate their shares alone attracted. Four years later the Assessing Officer rectified it under section 154 and applied each beneficiary's personal rate on his whole income. Could he do that in rectification?
  Yes. The Gujarat High Court held that it is settled from CIT v. Kamalini Khatau that section 161(1) permits the Income-tax Officer to assess either the representative assessee or the person represented — the latter by force of section 166 — and that where he assesses the trustee, the assessment must be made in the same status as the beneficiary and at the rate applicable to that beneficiary's TOTAL income, which includes his income from outside the trust. Applying the rate relatable only to the beneficiary's share of the trust income was therefore a mistake apparent from the record, and calling for the beneficiaries' own assessment orders in order to work out that rate was not a fresh inquiry that took the case outside section 154. The Court also rejected the trust's reliance on the Central Board of Direct Taxes' circular of 24 February 1967, but in doing so it stated the principle the circular lays down: once the choice has been made to tax either the trustee or the beneficiary, it is not open to the Department to go behind it and assess the other at the same time. That principle was held simply to have no application, because the beneficiaries had not been assessed again — only the rate on the trustee's assessment had been corrected.
• 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.
• 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.166 and s.167: the Department may assess the beneficiary direct, and s.167 is about remedies against property, NOT a bar on double taxation CBDT Circulars & InstructionsCuts both ways
  The Department has assessed our trustee under section 161 and has now issued a notice to me as beneficiary on the same income. Which section stops it doing both, and is it section 167?
  It is not section 167. Section 166 is the enabling provision: 'Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income.' Section 167 is headed 'Remedies against property in cases of representative assessees' and does something quite different: it gives the Assessing Officer the same remedies against all property of any kind vested in or under the control or management of a representative assessee as he would have against the property of any person liable to pay tax, and in as full and ample a manner, 'whether the demand is raised against the representative assessee or against the beneficiary direct'. It is a recovery-reach provision in the Revenue's favour, not a taxpayer protection. The bar on taxing the same income twice comes from elsewhere: from section 161(2), from the Central Board of Direct Taxes' own instruction of 24 February 1967, and from the case law on the exercise of the option.

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.