Case: C.R. Nagappa Vs. Commissioner of Income Tax, Mysore

concern with what the guardians did with the profits after they had paid the tax on the income from the business; or it was open to the department to proceed against the guardians under Section 41 and to tax in their hands only that income which they bad received on behalf of the minors".It was apparently assumed that it was open to the Income-tax Officer either to assess and tax the guardians and if they were owners of the business and of the income accruing therefrom, or to tax them as trustees under Section 41. In so assuming the Court exalted Sections 40 and 41 into quasi-charging sections. The observation was plainly obiter, for the Income-tax Department had assessed the income in the hands of the guardians as trustees under Section 41.11. In a later judgment of the same High Court, the Court reversed the earlier opinion : Commissioner of Incometax, Ahmedabad v. Balwantrai Jethalal Vaidya, 1958-34 ITR 187 = (AIR 1959 Bom 298 ). The Court held in that case that the liability of trustees to income-tax is co-extensive with that of the beneficiaries and cannot in any case be a larger or wider liability, the assessment is made upon a trustee, his liability to pay tax must be determined in accordance with Section 41 of the Income-tax Act. It was observed in that case that Section 41 gives no option to the Taxing Department to treat the income receive by the trustee on behalf of the beneficiary as his own income or to treat it as the income of the trustee on behalf of the beneficiary. It was further observed :"If the assessment is upon a trustee the tax has to be levied and recovered in the manner provided in Section 41. The only option that the Legislature gives is the option embodied in sub-section (2) of Section 41, and that option is that the Department may assess the beneficiaries instead of the trustees, or having assessed the trustees it may proceed to recover the tax from the beneficiaries. But on principle the contention of the Department cannot be accepted that, when a trustee is being assessed to tax, his burden which will ultimately fall upon the beneficiaries should be increased and whether that burden should be increased or not should be left to the option of the Department. The basic idea underlying Section 41, and which is in conformity with principle, is that the liability of the trustees should be co-extensive with that of the beneficiaries and in no sense a wider or a larger liability. Therefore, it is clear that every case of an assessment against a trustee must fall under Section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III."The earlier judgment of the Bombay High Court was followed by the Madras High Court in V. Ramaswamy Iyengar v. Commissioner of Income-tax, Madras, 1960-40 ITR 377 (Mad). The principle underlying the judgment in Balwantrai Jethalal Vaidyas case, 1958-34 ITR 187 = (AIR 1959 Bom 298 ) was approved in Birendra Kumar Datta v. Commissioner of Income-tax, Calcutta, 1961-42 ITR 661 = (AIR 1960 Cal 323 ); and A. Razzak v. Commissioner of Income-tax, West Bengal, 1963-48 ITR 276 (Cal).12. In our opinion the observations made in Saifudin Alimohmeds case, 1953-25 ITR 237=(AIR 1954 Bom 219 ) (set out earlier herein) were incorrect. The Legislature while enacting the new Act, to avoid doubts has given effect to the observations made by Chagla, C. J., in Balwantrai Jethalal Vaidyas case, 1958-34 ITR 187 =(AIR 1959 Bom 298 ) and has enacted that where the income is assessable under Ch. XV in the hands of a person in the capacity of a representative assessee it is not liable to be assessed under any other provision of the Act that is, the tax is not liable to be levied under any other provision of the Act.13. In our view Chagla C. J., was right in observing in Balwantrai Jethalal Vaidyas case, 1958-34 ITR 187 =(AIR 1959 Bom 298 ) in dealing with the scheme of Section 41 of the Income-tax Act, 1922, that-";. . . . . . it is clear that every case of an assessment against a trustee must fall under Section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III.* * * Section 41 only comes into play after the income has been compute in accordance with Chapter III. Then the question of payment of tax arises and it is at that stage that Section 41 issues a mandate "on the Taxing Department that, when they are dealing with the income of a trustee, they must levy the tax and recover it in the manner laid down in Section 41."The same considerations must apply in the interpretation of Section 161 (2) of the Income-tax Act, 1961.14. Sub-section (2) of Section 161 merely enacts that when income is assessed in the hands of a representative assessee in his own name, the assessment shall be deemed to be made upon him in the representative capacity only and tax shall be levied and recovered in the manner provided in sub-section (1).15. It is true that in this case for the assessment year 1962-63 the minors were assessed to tax, but the assessment will not affect the validity of the inclusion of the trust income in the assessment made on Nagappa under Section 64 (v). It was conceded before the High Court on behalf of the Revenue that the assessment of the minor beneficiaries in respect of the income could not stand, in view of the assessment of Nagappa under Section 64 (v).In our view that concession was rightly made, and we have no doubt that all the assessments made against the minor beneficiaries will be annulled and the tax, if any, recovered will be refunded.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]It is implicit in the terms of(1) that theOfficer may assess a representative assessee as regards income in respect of which he is a representative assessee, but he is not bound to do so. He may assess either the representative assessee or the person represented byhim.6.The contention raised by Counsel for Nagappa that since the trustees were assessable in respect of the income of the beneficiaries under Section 161 (1), that income could not by virtue of(2) of Section 161 be assessed in the hands of the beneficiary is contrary to the plain terms of Section 166.(2) of Section 161 does not purport to deny theOfficer the option to assess the income in the hands of the person represented by the representative assessee : it merely enacts that when a representative assessee is assessed to tax in exercise of the option of the revenue, he shall be assessed under Chapter XV and shall not in respect of that income be assessed under any other provision of the Act.We will presently state the reasons why the rule was so enacted by the Parliament. But on the plain words used by the Parliament the plea raised by counsel that the representative assessee alone may be assessed as regards income in respect of which he is a representative assessee cannot be accepted.It is clear that in each of the five cases income which in truth is not the income of the assessee is directed in the special conditions prescribed to be included in the total income of the assessee. Where an individual has transferred assets without adequate consideration to another person or association of persons, the income from the assets intended for the benefit immediate or deferred of the spouse or minor child of such individual is, by Clause (v), liable to be included in the income of the individual. There is no doubt that the word "transferred" includes settled under a trust.In our opinion the observations made in Saifudin Alimohmeds case,ITR 237=(AIR 1954 Bom 219  ) (set out earlier herein) were incorrect. The Legislature while enacting the new Act, to avoid doubts has given effect to the observations made by Chagla, C. J., in Balwantrai Jethalal Vaidyas case,ITR 187 =(AIR 1959 Bom 298  ) and has enacted that where the income is assessable under Ch. XV in the hands of a person in the capacity of a representative assessee it is not liable to be assessed under any other provision of the Act that is, the tax is not liable to be levied under any other provision of the Act.13. In our view Chagla C. J., was right in observing in Balwantrai Jethalal Vaidyas case,ITR 187 =(AIR 1959 Bom 298  ) in dealing with the scheme of Section 41 of the;. . . . . . it is clear that every case of an assessment against a trustee must fall under Section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III.* * * Section 41 only comes into play after the income has been compute in accordance with Chapter III. Then the question of payment of tax arises and it is at that stage that Section 41 issues a mandate "on the Taxing Department that, when they are dealing with the income of a trustee, they must levy the tax and recover it in the manner laid down in Sectionsame considerations must apply in the interpretation of Section 161 (2) of theion (2) of Section 161 merely enacts that when income is assessed in the hands of a representative assessee in his own name, the assessment shall be deemed to be made upon him in the representative capacity only and tax shall be levied and recovered in the manner provided in(1).15. It is true that in this case for the assessment yearthe minors were assessed to tax, but the assessment will not affect the validity of the inclusion of the trust income in the assessment made on Nagappa under Section 64 (v). It was conceded before the High Court on behalf of the Revenue that the assessment of the minor beneficiaries in respect of the income could not stand, in view of the assessment of Nagappa under Section 64 (v).In our view that concession was rightly made, and we have no doubt that all the assessments made against the minor beneficiaries will be annulled and the tax, if any, recovered will be refunded.