Income-tax---

----Representative assessee---Trust---Shares of beneficiaries determinate-- Beneficiaries not entitled to receive trust income for a period of 20 years-- Beneficiaries had no role to play in trust---Beneficiaries merely a body of individuals and not an association of persons---Trust to be assessed under S.161(1)---Indian Income Tax Act, 1961, S.161(1).

The assessee-trust formed for the benefit of seven persons of whom two were majors and five were minors, carried on business in silver and potatoes and earned a profit of Rs.10,417 from the said business. The assessee contended that in regard to the said business, the assessment should be made in the status of an association of persons and since the shares of the beneficiaries had been indicated in the trust-deed, the income from the trust had to be assessed in the individual hands of the beneficiaries. The Income tax Officer rejected the claim of the assessee. On appeal, the Appellate Assistant Commissioner held that even though the shares of the beneficiaries had been specifically mentioned, the same were to be distributed after 20 years from the date of creation of the trust and till that time there was no question of any distribution, that the income belonged to the trust only and not to the beneficiaries, and that, therefore, the income was assessable in the hands of the trust under section 161(1) of the Income Tax Act, 1961. On further appeal, the Tribunal allowing the appeal in part in relation to the objection of the status of the assessee, directed assessment in the status of an association of persons. On a reference at the instance of the assessee:

Held, that in accordance with the terms of the settlement deed, the beneficiaries had no role to play in the business carried on by the trust and the entire income was to remain with the trust till its distribution as expressed in the settlement deed. Thus, the beneficiaries were not required to do anything but to stand and wait for something to fall to their respective shares in accordance with the settlement deed. They were merely, thus, a body of individuals and not an association of persons with any intention to

carry on a common activity to produce taxable income. Therefore, the income accrued to the trust without the beneficiaries having any right to receive it and it was clearly a case where the assessment of the trust on receipt of the said income had to be made under section-161(1) of the Act.

CIT v. Marsons Beneficiary Trust (1991) 188 ITR 224 (Bom.) and Saraswathi Ammal (N.P.) v. CIT (1982) 138 ITR 19 (Mad.) ref.

Nemo for the Assessee

A. Adhikari for the Commissioner.

JUDGMENT

S. K. KULSHRESTHA, J.---Upon a direction having been issued by this Court by an order, dated September 15, 1989, passed on the application of the applicant (assessee) under section 256(2) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal , Jabalpur Bench, Jabalpur, has drawn up a statement of the case and referred the following question of law arising out of the order of the said Tribunal:

"Whether, on the facts and in the circumstances of the case, the provisions of section 161(1) of the Income Tax Act, 1961, were applicable and the assessee could not be assessed as an association of persons?"

The applicant is a private trust which was created by the settlor, Neelam Chand Berdia, vide a registered settlement deed on November 26, 1979. The trust was formed with a capital of Rs.1,000 for the benefit of seven persons of whom two were major and five were minor children. The relevant clauses of the settlement deed read as follows:

"2. For effecting the settlement, he, the settlor, doth hereby transfer and assign up to the trustees all the said sum of Rs.1,000 (rupees one thousand only) by cash and his beneficial interest in the said sum and to have and to hold the said sum and the income thereof upon the trust and for the purpose hereinafter declared of and concerning the same.

3. For the consideration aforesaid, the trustees hereby covenant with the settlor, his heirs, executors and administrators that the trustees and other trustees for the time being shall stand and be possessed of the said sum of Rs.1,000 and all income-arising thereof upon the trust and with and subject to the powers and the provisions hereinafter declared of and concerning the same.

4. (a) The date of distribution means the day on which shall expire the period of 20 years after execution of the settlement or such earlier or later day as the trustees may in their absolute discretion at any time after the execution of this settlement by deed., appoint to be the date of distribution.

(b) subject to the above provisions and other conditions of this deed, the share of each beneficiaries in the annual or other income and the assets of the trust for the time is as follows:

Provided that in case where any of the beneficiaries dies or retires on becoming major by intimation of his retirement to the trustees before the expiry of determination of the trust, the share of income due to the deceased/retiring beneficiary shall be payable equally to all the surviving beneficiaries. .

Provided also that in case where the beneficiary No.4, i.e., Miss Jyoti Berdia, gets married before the determination of the trust, her share in the income assets and the trust fund shall cease and that share shall be payable equally to all the surviving beneficiaries.

Provided further that where any money is advanced by any beneficiary or his/her guardian on behalf of the beneficiary as a loan for any business of the trust, interest shall be allowed on such money at such rate as may be agreed upon before determining the residue of annual or other income to be divided amongst the beneficiaries and such interest shall be payable to such beneficiary in addition to his/her share in the residue of annual or other incomes.

The trustees are under the deed itself P.C. Berdia, and Neelam Chand Berdia. "

The assessee-trust carried on the business of silver and potato and earned a profit of Rs.10,417 from the said business. The contention of the assessee in regard to the business was that assessment should be made in the status of association of persons and that since the shares of the beneficiaries have been indicated in the trust-deed, the income from the trust has to be assessed in the individual hands of the beneficiaries. This claim was negatived by the Income-tax Officer and the appeal filed by the assessee before the Appellate Assistant Commissioner was also dismissed. The Appellate Assistant Commissioner was of the view that even though shares of the beneficiaries had been specifically mentioned, the same were to be distributed after 20 years from the date of creation of the trust and till that time, there was no question of any distribution, the income belonged to the trust only and not to the beneficiaries. The income was, thus, taxable, in the hands of the trust under section 161(1) of the Act.

The trust carried the matter to the Tribunal in second appeal and the Tribunal allowing the appeal in part in relation to the objection of the status of the assessee, directed assessment in the status of an association of persons.

We have heard learned counsel for the parties and perused the record

In Saraswathi Animal (N.P.) v. CIT (1982) 138 ITR 19, their Lordships of the Madras High Court have observed (headnote):

"Body of individuals is a new classification in the fiscal statute: Right from 1939, if not from 1922 onwards, the Income-tax Act had known and recognised the distinct category of taxpayers going by the name of association of individuals or association of persons. Although the expressions were left undefined, Courts used to associate this class of persons with certain attributes, chief amongst which was their being associated in a common endeavour for producing taxable income. This at once excluded from the category those who found themselves thrown together by the accident of their birth, by the accident of another's death, by the accident of testamentary dispositions, and so on. To hold, therefore, that 'a body of individuals' must be equated to an 'association of persons' would be to disregard the stage-by-stage evolution of the statutory classification of the different kinds of taxpayers under section 2(31) of the Income Tax Act, 1961. The difference between an association and a body is too pronounced to be slurred over. While an 'association' might well-connote an active element of combining or associating, a 'body' would include even a comparatively inert mass of people or institution. The only essential attributes of a body of individuals are that there should be a plurality of individuals and they must, in the gross, have a nexus to a source of income. This conception at once excludes the crucial characteristics which we associate with an association of persons, such for instance, as a common intention and a common activity to produce taxable income. In other words, persons who do nothing but stand and wait may not be an association of persons; but, they may yet be a body of individuals, if they stand together, and wait for something to be shared between them. It would be a matter for the income-tax authorities as well as the Tribunal and the Courts to consider the facts in each case to find out if any given group of people are to be regarded as a body of individuals or not. The individuals concerned may have something or other in common which brings them together with reference to an income or its source, it may be common intention; it may be common holding out; or it may be a sharing of common spoils. The list is not exhaustive. Nor is it necessary that all these characteristics must be present in every case. Much might depend on the relationship in the gross to the income or to the income-yielding asset in question."

In the case in hand, it is clear that in accordance with the terms of the settlement deed, the beneficiaries had no role to play in the business carried on by the trust and the entire income was to remain with the trust till its distribution as expressed in clause 4(a) of the settlement deed. Thus, the beneficiaries were not required to do anything but to stand and wait for something to fall to their respective shares in accordance with the settlement deed. They were merely; thus, body of individuals and not an association of persons with any intention to carry on a common activity to produce taxable income.

In CIT v. Marsons Beneficiary Trust (1991) '188 ITR 224, their Lordships of the Bombay High Court have observed (headnote):

"Trustees who are authorised to carry on business under the terms of a deed of trust are not in the same position as receivers. An association of persons as used in section 3 of the Income-tax Act means an association in which two or more persons join in a common purpose or common action, and as the words occur in asection which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. Trustees derive their authority to carry on business, not from the beneficiaries, but from the settlor under the terms of the deed of trust. They do not require the consent of the beneficiaries for exercising their authority under the deed of trust. The authority is conferred on them by the settlor. The beneficiaries are mere recipients of the income earned by the trust. They have not come together for a common purpose. They cannot, therefore, be considered as an association of persons or a body of individuals."

The situation in the present case is not different. In the present case, the income accrued to the trust without the beneficiaries having any right to receive it and it was clearly a case where the assessment of the trust on receipt of the said income would be made under section 161(1) of the Income-tax Act.

Accordingly, the reference is answered against the assessee and in favour of the Revenue.

M.B.A./3033/FC Reference answered.