Income-tax---

----Assessment---Status---Private discretionary trust---Individual---Status of assessee must be determined first---Representative assessee of a discretionary trust is assessable as an individual---Indian Income Tax Act, 1961, Ss.2(31) & 112.

The Assessing Officer is required to determine the status of an assessee first and only after determining the status of the assessee, the Assessing Officer shall proceed further with the assessment. He cannot proceed ahead without determining the status of an assessee and that is not the scheme of the Act.

The representative assessee in the case of a discretionary trust must be regarded as an individual.

CIT v. Deepak Family Trust No. l (1995) 211 ITR 575 (Guj.) and CIT v. Shri Khrishna Bandar Trust (1993) 201 ITR 989 (Cal.) fol.

The assessee was a private discretionary trust. For the assessment year 1993-94, the assessee submitted its return in the status of an individual, disclosing therein the long-term capital gain. The Assessing Officer charged tax on the said capital gain at 20 per cent. in accordance with the provisions of section 112(1)(a) of the Income Tax Act, 1961. The Commissioner of Income-tax issued a notice under section 263 of the Act indicating that the assessee was an association of persons and was liable to pay tax at the rate of 30 per cent. On a writ petition to challenge the notice:

Held, allowing the petition, that the trust was to be assessed as an individual for all purposes. There was no question of apparent error on the part of the Assessing Officer and there was no question of prejudice to the Revenue. The notices under section 263 were liable to be quashed.

East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893 ref.

J.P. Shah for Petitioners.

B.J. Shelat for M.R. Bhatt for R.B. Bhatt & Co. for Respondent.

JUDGMENT

B.C. PATEL, J. ---The petitioners in these petitions challenge the notices under section 263 of the Income Tax Act, 1961 (hereinafter referred to as "The Act"), inter alia, contending that the trust is not an association of persons, but is an individual and, therefore, the Assessing Officer has assessed the tax in accordance with law and the issuance of the notices under section 263 is contrary to the provision of law and not in consonance with the decision rendered by this Court in the case of CIT v. Deepak Family Trust No. l (1995) 211 ITR 575 and by the Calcutta High Court in the case of CIT v. Shri Krishna Bandar Trust (1993) 201 ITR 989.

In all these petitions, there is a common point and at the request of the learned advocates, we have disposed of these matters by a common judgment.

We have taken the facts from Special Civil Application No.829 of 1996, which are as under: ---

The petitioner-assessee is a private discretionary trust. The beneficiaries of the said trust are individuals. For the assessment year 1993?94, the assessee submitted its return in the status of an individual, disclosing therein the long-term capital gain. The Assessing Officer charged tax on the said capital gain at 20 per cent. in accordance with the provisions of section 112(1)(a)(ii) of the Act on March 28, 1994, a copy of which is annexed to the petition. The Commissioner of Income-tax on January 29, 1996, issued notice under section 263 of the Act, indicating that the trust is an association of persons and that the Assessing Officer has charged tax on long-term capital gain at the rate of 20 per cent. instead of 30 per cent. applicable to the assessees other than individuals and Hindu undivided families erroneously, which is also prejudicial to the interests of the Revenue.

Mr. Shelat, learned counsel appearing for the Revenue, submitted that a show-cause notice has been issued and the Court should not interfere at this stage, as the Commissioner of Income-tax is going to decide the matter after considering objections that may be raised by the assessee. He further submitted that had it been the contention that the petitioner is entitled to benefit claiming as an individual under section 80-L of the Act, then it can be said that the case is covered by the judgments referred to hereinabove, but in the instant case, the question is of determination of tax in special cases as found in Chapter XII of the Act. Section 112 of the Act pertains to tax on long-term capital gains. The said section reads as under:--

" 112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "capital gains" the tax payable by the assessee on the total income shall be the aggregate of,--

(a)??????? in the case of an individual or a Hindu undivided family,---

(i)???????? the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and

(ii)??????? the amount of income-tax calculated on such long-term capital gains? ???? at the rate of twenty per cent.

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent.;

(b)??????? in the case of a company,--

(i)???????? the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and

(ii)??????? the amount of income-tax calculated on such long-term capital gains ????? at the rate of forty per cent.

Provided that in relation to long-term capital gains arising to a venture capital company from the transfer of equity shares of venture capital undertakings, the provisions of sub-clause (ii) shall have effect as if for the words "forty per cent." the words "twenty per cent." had been substituted;

(c)??????? in any other case,--

(i)???????? the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income; and

(ii)??????? the amount of income-tax calculated on such long-term capital gains? ???? at the rate of thirty per cent ...."

Mr. Shelat, learned counsel, submitted that the case of the assessee would fall in clause (c) of subsection (1) of section 112 and not clause (a) section 2(31) defines "person", which reads as under:--

(i)???????? an individual,

(ii)??????? a Hindu undivided family,

(iii)?????? a company,

(iv)?????? a firm,

(v)??????? an association of persons or a body of individuals, whether incorporated or not.

(vi)?????? a local authority, and

(vii) ???? every artificial juridical person, not falling within any of the preceding sub-clauses.

According to Mr. Shelat, the assessee would fall in the category of an association of persons and, therefore, clause (c) of subsection (1) of section 112 will be attracted.

Mr. Shah, learned counsel for the assessee, submitted that a discretionary trust must be considered to be at; individual for all purposes. Mr. Shah drew our attention to the following portion of the decision of the case in the case of CIT v. Deepak Family Trust No. l (1995) 211 ITR 575 (Guj.) (headnote);

"It is now well-settled that the word 'individual' does not necessarily and invariably always refer to a single natural person. A group of individuals may as well come in for treatment as an individual under the tax laws if the context so requires. The word 'association' means 'to join in any purpose' or 'to join in action'. Therefore, 'association of persons' as used in section 2(31)(v) of the Income Tax Act, 1961, means an association in which two or more persons join in a common purpose or common action. The association must be one the object of which is to produce income, profits or gains. In the case of a discretionary trust, neither the trustees nor the beneficiaries can be considered as having come together with the common purpose of earning income. The beneficiaries have not set up the trust. The trustees derive their authority under the terms of the trust-deed. They are merely in receipt of income. The mere fact that the beneficiaries or the trustees, being representative assessees, are more than one, cannot lead to the conclusion that they constitute an association of persons. The trustees of a discretionary trust have to be assessed in the status of 'individual' and, consequently, deduction under section 80-L of the Income Tax Act, 1961, is allowable to them."

Mr. Shah, learned counsel, has placed reliance on the decision of the Calcutta High Court in CIT v. Shri Krishna Bandar Trust (1993) 201 ITR 989. Since the determination of the status of an assessee is a part of the process of computation of income, it is necessary to look into the general principles for determining whether the status of the trustees of a discretionary trust can be taken to be as "association of persons" or as "individual". The Assessing Officer has first to ascertain before proceeding with the assessment whether the person filing a return would fall in which category of persons as defined in section 2(31) of the Act, meaning thereby the Assessing Officer is required to determine the status of a person and that would be the first step to be taken for assessment proceedings. After determining the status of a person as an individual or an association of persons, as the case may be, he will have to proceed further and will have to determine the liability of the assessee. For considering whether it would be an association of persons or an individual, this Court in the case of CIT v. Deepak Family Trust No.l (1995) 211 ITR 575 considered several decisions of the apex Court as well as of other High Courts. The Courts have considered that the representative assessee in the case of a discretionary trust must be regarded as an individual and as a consequence of that status, if any benefit is made available under the Act, the same is to be granted to that assessee and accordingly the Calcutta High Court as well as this Court granted benefit under section 80-L of the Act.

Mr. Shelat's contention is that though for the purpose of section 80-L the assessee may be treated as an individual, but if it is a discretionary trust, then the assessee is not necessarily an individual as contemplated under section 112(1)(a) and the assessee would be assessed according to clause (c) of subsection (1) of section 112. Thus, according to him, the assessee would be "individual" for one provision and would be "association of persons" for another provision. It is not possible to accept this argument for the simple reason that the Assessing Officer is required to determine the status of an assessee first and only after determining the status of the assessee, the Assessing Officer shall proceed further with the assessment. He cannot proceed ahead without determining the status of an assessee and that is not the scheme of the Act. Wherever it is necessary separate provisions are made for different slabs of taxes. With regard to section 112, it would be noticed that for individuals and Hindu undivided families, the amount of income-tax on long-term capital gain is to be calculated at the rate of 20 per cent. However, a provision is made with respect to a company, another category of assessee, at the rate of 40 per cent. and other than individual or a Hindu undivided family and company, all other cases are covered under clause (c) of subsection (1) of section 112 and the person falling in this category is to be charged on long-term capital gain at the rate of 30 per cent. But once the status of an assessee is determined as an individual, then in that case clause (a) of subsection (1) of section 112 will be made applicable. The Assessing Officer, without making a reference to the judgment, on the facts has come to the decision, which is correct, in our view, and there is no question of apparent error in view of the settled legal position. The view of the Calcutta High Court as well as of the Gujarat High Court appears to be that the trustees of a discretionary trust are to be assessed in the status of individual and benefit of section 80-L is thus consequential benefit of conferring status to a trust of an individual. The Calcutta High Court has observed as under in the case of CIT v. Shri Krishana Bandar Trust (1993) 201 ITR 989:

"It will have to be held that the representative assessee in the case of a discretionary trust must be regarded as an individual and thus would be entitled to the benefit of deductions under section 80-L of the Act. "

It is not that for the purpose of section 80-L, the Courts have taken the view that the trust would be considered as an individual. In view of this, it is clear that the trust is to be assessed as an individual for all purposes and, therefore, the Assessing Officer has rightly assessed the assessee. There is, therefore, no question of apparent error on the part of the Assessing Officer and there is no question of prejudice to the Revenue and, therefore, the orders passed by the Assessing Officer are in accordance with law and legal.

Mr. Shah, the learned Advocate, in answer to a question about maintainability of the petition raised by Mr. Shelat, submitted that the notice is without jurisdiction. In support of his submission, he has relied upon the decision of the apex Court in the case of East India Commercial Co. Ltd. v. Collector of Customs, AIR 1962 SC 1893 wherein the apex Court has held as under (page 1905):

We, therefore, hold that the law declared by the highest Court in the State is binding on authorities or Tribunals under its superintendence, and that they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. If that be so, the notice issued by the authority signifying the launching of proceedings contrary to the law laid down by the High Court would be invalid and the proceedings themselves would be without jurisdiction.

In the result, the petitions are allowed. The impugned notices are quashed and set aside. Rule made absolute accordingly in each of the matters with no order as to costs.

M.B.A./1275/FC???????????????????????????????????????????????????????????????????????????????? Petition allowed.