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

1. C.R. Nagappa executed on April 14, 1955 seven separate deeds of trust settling specific properties for the benefit of his minor children. Under each deed Nagappa settled certain properties for the benefit of his named minor child and vested the properties in four trusteesNagappa, his two wives and a married daughter. Under each deed of trust a portion of the income arising out of the trust property was to be utilised immediately for the benefit of the beneficiary and the balance was to be accumulated for his or her benefit and to be handed over to the beneficiary at a future date specified in the deed.2. In the proceeding for assessment for the yeartax Officer, City Circle II, Bangalore, included in the total income of Nagappa the income arising from the trust properties and used for the immediate benefit of the beneficiaries, but not the income directed to be accumulated. The Commissioner in exercise of the power under Section 263 of theAct, 1961, directed that the income for the deferred benefit of the minor beneficiaries be also included in the total income of Nagappa. In appeal against that order to theAppellate Tribunal; Nagappa contended that the income from trust properties was liable to be assessed under Section 161(1) only in the hands of the trustees, and not in the hands of the settlor. The Tribunal rejected that contention. At the instance of Nagappa, the Tribunal referred two questions or the opinion of the High Court of MysoreWhether having regard to the provisions of(2) of Section 161, Section 64 (v) of theAct was applicable to the assessees case for computing the assessees income for the assessment year.?(2) Whether the assessments on the minor beneficiaries for the assessment yearare a bar for assessing the income (assessed in the hands of the minor beneficiaries) in the bands of the assessee for the same assessment year. The High Court of Mysore recorded answers to the questions as followsSection 64 (v) of theAct, 1961, was rightly applied to the assessees case for computing his income for the assessment yearn (2) of Section 161 of the Act does not make Section 64 (v) inapplicable to the case of the assessee.(2) The assessments on the minor beneficiaries or the assessmentthough in themselves illegal in view of the above answer do not in law operate as a bar for the application of Section 64 (v) to the case of the assessee, the illegality of the assessments on the minors being open to correctionhas appealed against the order passed by the High Court.

Court's reasoning:
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.