Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME-TAX BOMBAY
Vs.
RESPONDENT:
MANILAL DHANJI, BOMBAY
DATE OF JUDGMENT:
31/01/1962
BENCH:
DAS, S.K.
BENCH:
DAS, S.K.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION:
1963 AIR 433 1962 SCR Supl. (2) 902
CITATOR INFO :
R 1971 SC2463 (13)
R 1972 SC 7 (16)
RF 1985 SC1698 (29)
F 1987 SC 107 (8)
ACT:
Income Tax-Trust created in favour of minor
child-No benefit accruing to minor in accounting
year-Whether income from trust taxable as income
of assessee-Trust by assessees father-Assessee
directed to use income for benefit of himself, his
wife and children-Whether income taxable as income
of assessee-Indian Income-tax Act 1922 (XI of
1922) ss. 16(3) 41(1)-Indian Trusts Act, 1882 (11
of 1882) s. 8.
HEADNOTE:
In 1953 the assessee created a trust in
respect of a sum of money and provided that the
interest on that amount was to be accumulated and
added to the corpus and that his minor daughter C
was to receive the income from the corpus
increased by the addition of interest when she
attained the age of 18 years. In the relevant
account year, when C was still a minor, the income
derived from the trust fund was Rs. 410 Earlier in
1941, the assessee’s father had created a trust in
respect of certain shares and money directing the
trustees to pay the net interest and income
thereof to the assessee "for the maintenance of
himself and his wife and for the maintenance,
education and benefit of all his children till his
death". In the relevant account year a sum of Rs.
14,170 accrued as income in the hands of the
assessee from the said trust funds,
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The taxing authorities included both these incomes
in the total income of the assessee.
^
Held, that neither of these two incomes could
be included in the total income of the assessee.
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Under s. 16(3)(b) of the Indian Income-tax
Act, upon which the authorities relied, the
assessee could only be taxed on the income from
the trust funds for the benefit of his minor child
if in the year of account the minor child either
received the income or it accrued to her or she
had a beneficial interest in the income in the
relevant year of account. In the present case
though there was income in the hands of the
trustees and they were liable to pay tax thereon,
there was no benefit to the minor child in that
year. As such the sum of Rs. 410 did not form part
of the total income of the assessee.
The trust deed of 1941 created two trusts,
the one requiring the trustees to pay the income
from the trust funds to the assessee and the
second requiring the assessee to spend the income
for the maintenance of himself and his wife and
for the maintenance, education and benefit of his
children. It was not a case where the settler
merely expressed a wish or desire or hope but he
gave as direction which created a trust in respect
of the income in the hands of the assessee in
favour of himself, his wife and children. The
assessee did not create the second trust in
respect of the beneficial interest which he held
under the trust of 1941 and s. 8 of the Indian
Trusts Act which forbade the creating of such a
trust was inapplicable. The assessee was a trustee
and not the sole beneficiary; and since the shares
of the beneficiaries were Indeterminate it was
open to the Department to levy and recover tax at
the maximum rate from the assessee as trustee
under the first proviso to s.41(1) but the
Department was not entitled to include the sum of
Rs. 14,170 in the total income of the assesse as
though he was the sole beneficiary under the trust
deed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 323 of 196. Appeal from the judgment and order
dated September 25, 1958, of the Bombay High Court
in I.T.R. No. 3 of 1958.
K. N. Rajagopal Sastri and D. Gupta, for the
appellant.
R. J. Kolah, J. B. Dadachanji, O. C. Mathur
and Ravinder Narain, for the respondent.
1962. January 31. The Judgment of the Court
was delivered by
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S. K. DAS, J.-The Commissioner of Income-tax,
Bombay City I, has preferred this appeal to this
Court on a certificate of fitness granted by the
High Court of Bombay under s. 66A (2) of the
Indian Income-tax Act, 1922.
The assessee, who is the respondent before
us, was assessed to income-tax as an individual in
respect of his income for the assessment year
1954-55. The taxing authorities included in the
assessee’s total income for the year to sums,
namely, a sum of Rs. 410/- and a sum of Rs.
14,170/-. It was stated that these two sums
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accrued in the relevant account year in the
following circumstances. On January 12, 1953 the
assessee created a trust in respect of a sum of
Rs, 25,000/-, the trustees whereof were the
Central Bank Executor & Trustee Co., the assessee
himself his wife and brother. The scheme of the
trust-deed was that the said sum of Rs. 25,000/-
was set apart by the assessee and it was provided
that the interest on that amount should be
accumulated and added to the corpus and a minor
daughter of the assessee, named Chandrika, was to
receive the income from the corpus increased by
the addition of interest, when she attained the
age of 18 on February 1, 1959. She was to receive
the income during her life time and after her
death the corpus was to go to persons with whom we
are not concerned. The income derived from the
said trust fund amounted to Rs. 410/- in the
relevant account year and the taxing authorities
included this amount in the total income of the
assessee, purporting to act under s. 16(3)(b)
and/or s. 16(3)(a)(iv) of the Income-tax Act. As
regards the second sum of Rs. 14,170/- it appears
that on December 1, 1941, the assessee’s father
had created a trust in respect of some shares and
a cash sum of Rs. 30,000/- for the benefit of his
four sons including the assessee. The trustees
were the Central Bank Executor and Trustee Co.
Ltd., the assessee himself and one other person.
The said trustees were to hold the trust funds
upon trust to
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pay the net interest and income thereof to the
assessee "for the maintenance of himself and his
wife and for the maintenance, education and
benefit of all his children till his death". The
sum of Rs. 14,170/-. it was stated, accrued as
income in the hands of the assessee in the
relevant account year from the said trust funds.
The view of the taxing authorities and the Income-
tax Appellate Tribunal was that under the
aforesaid provision of the trust deed the assessee
was the sole beneficiary and that the amount was
received by him for his own benefit and he was not
accountable to any one in respect of the amount
and, therefore, this amount was liable to be
included in his total income.
On behalf of the assessee the contention was
that the sum of Rs. 410/- aforesaid was not liable
to be included in the total income of the assessee
inasmuch as Chandrika, the minor daughter of the
assessee, had no right to the income nor any
beneficial interest therein in the relevant year
of account under the provisions of the trust deed
and, therefore, neither s. 16(2)(a)(iv) nor s.
16(3)(b) applied to the case. As to the sum of Rs.
14,170/- the case of the assessee was that it
should not be included in his total income as the
sole beneficiary, because the beneficiaries under
the trust settlement were not only the assessee
but his wife and children as well. It was
contended that the assessee received the amount in
trust for himself and his wife and children and it
was open to the Department to proceed under the
first proviso to s. 41 (1) of the Income-tax Act
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and recover tax on a separate assessment made on
the assessee as a trustee in respect of the said
sum at the maximum rate, because the individual
shares of the beneficiaries on whose behalf the
money was receivable were indeterminate and not
known.
The Income-tax Appellate Tribunal, on an
appeal by the assessee, did not accept these
contentions. The Tribunal was then moved to state
a
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case to the High Court on two questions of law
those questions were:
"1. Whether the sum of Rs. 410/- is
properly includible in the assessee’s total
income either in accordance with the
provisions of section 16(3)(b) and/or section
16(3)(a)(iv) of the Indian Income-tax Act,
1922?
2. Whether the sum of Rs. 14,170/- is
properly includible in the total income of
the assessee as the sole beneficiary thereof
under the trust settlement made on 1-12-1941
by Dhanji Devsi?"
On being satisfied that these questions of law
arose out of the order of the Tribunal dated April
24, 1957, the Tribunal stated a case under s.
66(1) of the Income-tax Act. The High Court
answered both the questions in favour of the
assessee by its judgment and order dated September
25, 1958. There after the High Court granted a
certificate of fitness under s. 66A(2) of the
Income-tax Act and, as we have already stated, the
present appeal has been brought to this Court on
the strength of that certificate.
We proceed now to deal with the first
question which relates to the sum of Rs. 410/-.
The question is whether this sum was properly
includible in the assessee’s total income under
the provisions of s. 16(3)(b) of the Income-tax
Act, because Mr. Rajagopal Sastri appearing for
the appellant has not pressed the claim which was
made before the Tribunal on behalf of the
Department under the provisions of s.
16(3)(a)(iv). Before we go to the provisions of s.
16(3)(b) it is advisable to set out the material
portions of cls. 3 and 4 of the trust-deed of
January 12, 1953. Those clauses were in these
terms:
"3. The Trustees shall hold and stand
possessed of the trust fund and the
investments for the time being representing
the
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same and receive the income, divided,
interest and rents thereof and invest the
same and the resulting income, dividend,
interest and rents thereof so as to
accumulate at compound interest to the intent
that such accumulations shall be added to the
principal trust fund until the settler’s
daughter Chandrika shall attain the age of
eighteen years which age she will attain on
the 1st February 1959 and after the
expiration of the above named period the
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Trustees shall deal with and dispose of the
trust fund as hereinafter stated.
4. The Trustees shall hold and stand
possessed of the trust fund and the
accumulations thereof upon trust to pay the
net interest and income thereof after
deducting all out goings and charges for
collection to the said Chandrika for her life
for her maintenance..."
It is clear from these clauses that during the
minority of Chandrika, the income from the trust
funds was to be accumulated and added to the trust
funds and after the attained majority on February
1, 1959, she was to get only the income from the
enlarged trust funds. Now, in the relevant year of
account Chandrika was still a minor and under the
terms of the trust deed she had no right to the
trust income nor any beneficial interest therein;
she could neither receive nor enjoy the income.
She did not derive any benefit whatsoever from the
trust funds during her minority and even after she
attained majority, she did not have any right to
the trust income which arose during her minority
and her only right was to enjoy the income arising
from the enlarged trust funds, i. e., the original
trust funds and the accumulations of trust income
during her minority. Therefore, the sum of Rs.
410/-was not the income of Chandrika, but was the
income of the trustees and the income was
impressed with a trust, namely, that it should be
added to
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the trust corpus. The question is, does s.
16(3)(b) apply to such a case ?
We shall presently read s. 16(3), but before
we do so it is necessary to refer to the scheme of
s. 16 of the Income-tax Act. The section deals
with the computation of total income as defined in
s. 2(15) of the Act, and provides that what sums
are to be included or excluded in determining the
total income. The definition of total income in s.
2(15) involves two elements-(a) the income must
comprise the total amount of income, profits and
gains referred to in s. 4(1), and (b) it must be
computed in the manner laid down in the Act. The
exemption granted under the Act is of two kinds;
certain classes of income are exempted from tax
and also excluded from the computation of total
income, while certain other classes of income
exempted from tax are to be included in the
assessee’s total income. Now cl. (a) of sub-s. (i)
of s. 16 provides the sums exempted from tax under
certain provisions of the Act should be included
in the assessee’s total income. Clause (b) lays
down the mode of computing a partner’s share in
the profit or loss of the firm. Under cl. (c)
income which arises to any person by virtue of any
settlement or disposition from assets remaining
the property of the settler or disponer etc. is
taxed as his income. The object of the legislation
is clearly designed to overtake and circumvent a
tendency on the part of the tax-payers to
endeavour to avoid or reduce tax liability by
means of settlements. Sub-section (2) deals with
grossing up of dividend etc. Then we come to sub-
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s. (3). This sub-section aims at foiling an
individual’s attempt to avoid or reduce the
incidence of tax by transferring his assets to his
wife or minor child or admitting his wife as a
partner or admitting his minor child to the
benefits of a partnership in a firm in which such
individual is a partner. The sub-section creates
an artificial
909
liability to tax and must be strictly construed.
Now, let us read the sub-section.
"16. (3) In computing the total income
of any individual for the purpose of
assessment there shall be included:
(a) so much of the income of a wife
or minor child of such individual as
arises directly or indirectly:
(i) from the membership of the
wife in a firm of which her
husband is a partner;
(ii) from the admission of the
minor to the benefits of
partnership in a firm of which
such individual is a partner;
(iii)from assets transferred
directly or indirectly to the
wife by the husband otherwise
than for adequate
consideration or in connection
with an agreement to live
apart; or
(iv) from assets transferred
directly or indirectly to the
minor child, not being a
married daughter by such
individual otherwise than for
adequate consideration; and
(b) so much of the income of any
person or association of persons as
arises from assets transferred otherwise
than for adequate consideration to the
person or association by such individual
for the benefit of his wife or a minor
child or both."
The argument on behalf of the appellant is
that the conditions laid down in cl. (b) of sub-s.
(3) of s. 16 are fulfilled in the present case and
therefore the Department was intitled to include
in the
910
total income of the assessee so much of the income
in the hands of the trustees as arose from the
assets transferred by the assessee for the benefit
of his minor child. It is pointed out that the
conditions laid down in cl.(b)are-(1) that there
must be income in the hands of any person or
association of persons (trustees in the present
cases;) (2) the income must arise from assets
transferred otherwise than for adequate
consideration to the trustees; and (3) the
transfer must be for the benefit of the minor
child. It is argued that when the conditions are
fulfilled and the only exceptional case, namely,
where the transfer is for adequate consideration
is out of the way, cl. (b) must apply and the
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Department is entitled to include the income in
the hands of the trustees in computing the total
income of the individual assessee who made the
transfer.
At first sight the argument appears to be
attractive and supported by the words used in the
clause. On a closer scrutiny, however; it seems to
us that cl. (b) must be read in the context of the
scheme of 16 and the two clauses (a) and (b) of
sub-s. (3) thereof must be read together. So read
the only reasonable interpretation appears to be
the one which the High Court accepted, namely,
that the scheme of the section requires that an
assessee can only be taxed on the income from a
trust fund for the benefit of his minor child,
provided that in the year of account the minor
child derives some benefit under the trust deed
either he receives the income, or the income
accrues to him, or he has a beneficial interest in
the income in the relevant year of account. But if
no income accrues, or no benefit derived and there
is no income at all (so far as the minor child is
concerned), then it is not consistent with the
scheme of s. 16 that the income or benefit which
is non-existent so far as the minor child is
concerned, will be included in the income of his
father. Take, for example, a case where the assets
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were transferred otherwise than for adequate
consideration for the benefit of a minor child,
but the child has attained majority before the
relevant year of account. After the child attains
majority the sub-section would cease to apply and
the income from assets transferred for the benefit
of the child would no longer be taxable in the
parent’s hands. The reason must be that in the
relevant year of account there is no benefit to
the minor child by the transfer, even though the
transfer was originally made for the benefit of
the child. The same principle may be illustrated
by another example which has been dealt with by
the High Court. Take a case where there are
intermediate beneficiaries before the minor gets
the benefit under the trust deed. In such a case
the learned Advocate for the Department conceded
in the High Court that cl. (b) of sub-s. (3) of s.
16 would not be attracted till the minor derived
benefit under the trust deed. Mr. Rajagopal Sastri
did not make any such concession before us; but
seems to us that principle underlying the
illustration is incontestable. If the minor
derives no benefit in the relevant year of
account, it can hardly be said that for that year
the transfer was for the benefit of the minor
child. Section 4, the charging section, of the
Income-taxs Act makes it clear that what is taxed
is the total income of the relevant account year,
and total income, according to s. 2 (15), is the
income, profits and gains referred to in sub-s.
(1) of s. 4 and computed in the manner laid down
in the Act. In other words, the tax is levied on a
yearly basis. It is true that in the present case
there was income in the hands of the trustees and
the trustees were liable to pay tax thereon. That,
however, is not the question before us. The
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question before us is whether such income in the
hands of the trustees could be included in the
total income of the assessee under cl. (b) of sub-
s.(3) of s. 16. In our opinion, when
912
cl. (b) of sub-s. (3) of s. 16 talks of benefit of
the minor child it refers to benefit which arises
or accrues to the minor in the year of account. If
there be no such benefit, the income cannot be
included in the total income of the individual who
made the transfer. There is a third type of case
which also illustrate the same principle. If only
a portion of the income of the trust is reserved
for the minor child, cl, (b) would apply and that
portion of the income which is set apart for the
benefit for the child would be taxable in the
hands of the settler. All these illustrations only
establish the principle that the minor child must
derive some benefit in the relevant year of
account before cl. (b) would apply.
Furthermore, we are also of the view that
cls. (a) and (b) of the sub-section must be read
together, Clause (a) begins with the expression
"so much of the income of a wife or minor child of
such individual as arises directly or indirectly",
and this is followed by the four circumstances
numbered (i), (ii), (iii) and (iv). There is no
doubt that so far as cl. (a) is concerned, there
must be income of the wife or minor child. Mr.
Rajagopal Sastri has not disputed this. The
obvious intention of the Legislature in enacting
cl. (b) was to see that the provisions of cl. (a)
were not defeated by the assessee creating a trust
and in order to deal with that mischief it enacted
cl. (b). Instead of the expression "so much of the
income of a wife or minor child" the expression
used in cl. (b) is "so much of the income of any
person or association of persons etc.". Obviously,
when a trust is created the income is income in
the hands of the trustees. But the underlying
principle in the two cls. (a) and (b) appears to
be the same, namely, there must be income of the
wife or minor child under cl.(a) and there must be
some benefit derived by the wife or minor child in
the year of account under cl.(b). This is
consistent with the scheme of s. 16
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and particularly sub-s. (3) thereof. which is
intended to foil an individual’s attempt to avoid
or reduce the incidence of tax by transferring his
assets to his wife or minor child etc. When,
however, the minor child derives no benefit under
the trust deed in the year of account, it is not
consistent with the scheme of s. 16 to say that
even though there is no accrual of and income or
benefit in the year of account in favour of the
minor child, yet the income must be included in
the total income of the individual concerned.
Our attention has been drawn to s. 64 of the
Income-tax Act, 1961 (43 of 1961). That section
corresponds to s. 16 of the Income-tax Act, 1922
and cl. (v) of s. 64 has made the position clear
by using the expression ’immediate or deferred
benefit" so that even a benefit which is postponed
and does not arise in the year of account will not
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entitle the Department to include the income in
the hands of the trustees in the total income of
the settler. We do not, however, think that the
Act of 1961 can be taken as declaratory of the law
which excited previously; nor can s 64 (v) be
taken as determinative of the true scope and
effect of cl. (b) of sub-s. (3) of s. 16. The
Legislature may have thought fit in its wisdom to
widen the scope of the law that existed previous
to it so as to take in deferred benefits as well.
We think that we must interpret cl. (b) of sub-s.
(3) of the context of the section as it occurs in
the Income-tax Act of 1922.
We have been referred to two English
decisions Dale v. Mitcalfe (1) and Mauray v.
Commissioners of Inland Revenue (2). One of the
decision Dale v. Mitcalfe (1) related to s. 25 of
the English Income Tax Act, 1918 (8 & 9 Geo. V. C.
40) and the other related to s. 20(1)(c) of the
English Finance Act 1922 (12 and 13 Geo V. C. 17).
Those provisions were differently worded and
appear in a different
914
context and decisions of the English Courts given
on provisions differently worded and appearing in
a different context are not, in our opinion,
helpful in determining the true scope and effect
of cl. (b) sub-s. (3) of s. 16 of the Income-tax
Act, 1922.
We have therefore, come to the conclusion
that on a true construction of cl. (b) of sub-s.
(3) of s. (3), the view expressed by the High
Court was correct and the sum of Rs. 410/- did not
form part of the total income of the assessee. The
High Court correctly answered the first question
referred to it.
We now turn to the second question. The
relevant clause of the trust deed of December 1,
1941 is cl. 7 which reads as follows:
"The trustees shall hold and stand
possessed of the Trust Fund mentioned in the
second Schedule hereto and the accumulations
thereof referred to in clause 3 thereof upon
Trust to pay the net interest and income
thereof to the Settler’s son MANILAL for the
maintenance of himself, his wife and for the
maintenance, education and benefit of all his
children till his death."
The question before us is whether under this
clause the income received by the assessee is
impressed with a trust in favour of himself, his
wife and children to whom he is accountable as a
trustee for the amount received. In other words,
the question is whether the trust deed of December
1, 1941, created two trusts, the one requiring the
trustees to pay the income from the trusts funds
to the assessee and the second requiring the
assessee to spend the income for the maintenance
of himself and his wife and for the maintenance,
education and benefit of his children. In cases
where property is given to a parent or other
person standing or regarded as in loco parentis,
with a direction
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touching the maintenance of the children, the
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question often arises whether the settler intended
to impose a trust by the direction or whether the
direction was only the motive of the gift. The
line between the two classes of cases has not been
drawn always very firmly. It is, however, clear
that in construing provisions of this kind the
Court will not enforce or treat as obligatory a
mere wish or desire or hope on the part of the
settler that the donee of the fund should or would
ought to or is expected to apply it for the
benefit of other persons; on the other hand, the
Court does regard as binding and obligatory and
does enforce a direction or trust in favour of
third parties if such a binding obligation can be
clearly ascertained from the document. Instances
of cases where no trust is created and of cases
where trust is created and detailed at pages 85
and 86 of Lewin on Trusts (15th Edition).
We are unable to hold that in the case before
us cl. 7 of the trust deed merely expressed a wish
or desire or hope on the part of the settler. We
are in agreement with the High Court that the
direction contained in cl. 7 created a trust in
favour of the assessee, his wife and children. The
expression "for the maintenance of himself and his
wife and for the maintenance, education and
benefit of all his children" is not indicative of
a mere desire or hope. It imposes a binding and
obligatory trust. In re. Booth, Booth v. Booth (1)
a testator gave the residue of his estate to his
executors, on trust, to pay to his wife or permit
her to receive the annual income thereof during
her life, "for her use and benefit and for the
maintenance and education of my children". It was
held that the wife took the income subject to a
trust for the maintenance and education of the
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children. A similar view was expressed in Raikes
v. Ward (1) and Woods v. Woods (2)
On behalf of the appellant our attention was
drawn to s. 8 of the Indian Trusts Act, 1882 (II
of 1882) which states that the subject matter of a
trust must be property transferable to the
beneficiary and it must not be merely beneficial
interest under a subsisting trust. It is contended
that the assessee held a beneficial interest in
the income from the trust funds under the trust
deed of December 1, 1941, and in respect of
beneficial interest another trust could not be
created in favour of himself, his wife and
children. We think that this argument proceeds on
a misconception. The assessee did not create a
second trust in respect of the beneficial interest
which he held under the trust deed of December 1,
1914. The assessee father created two trusts by
that trust deed, one requiring the trustees to pay
the trust income to the assessee and the other
requiring the assessee, who was himself a trustee,
to spend the income for the maintenance, education
and benefit of his children. It is not disputed
that by a single document more than one trust may
be created. It is not, therefore, true to say that
the subject matter of the trust in the present
case was merely a beneficial interest under a
subsisting trust.
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Under s. 41 of the Income-tax Act it was open
to the Department either to tax; the trustees of
the trust deed or to tax those on whose behalf the
trustees had received the amount. The true
position of the assessee in this case was that he
was a trustee and not the sole beneficiary under
the trust deed. He held the income on trust for
himself, his wife and his children. The shares of
the beneficiaries were indeterminate and therefore
under the first proviso to s. 41(1) of the
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Income-tax Act, it was open to the Department to
levy and recover the tax at the maximum rate from
the assessee; but that did not entitle the
Department to include the sum of Rs. 14,170/- in
the total income of the assessee as though he was
the sole beneficiary under the trust deed, Mr.
Rajagopal Sastri made it clear that the intention
of the Department was to include the sum in the
total income of the assessee in order to levy and
charge super-tax on him. This, we do not think,
the Department was entitled to do. In respect of
the sum of Rs. 14,170/- the assessee was a
trustee, within the meaning of s. 41 of the
Income-tax Act, appointed under a trust declared
by a duly executed instrument in writing and as
such trustee he had the right to contend that his
assessment in respect of the money received by him
not as a beneficiary but as a trustee could only
be made under the first proviso to s. 41 (1). We
have, therefore, come to the conclusion that on
the second question also the answer given by the
High Court was correct.
The result, therefore, is that the appeal
fails and is dismissed with costs.
Appeal dismissed.
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