AMY F. CAMA (MRS.) (TRUSTEE OF THE ESTATE OF LATE M. R. ADENWALLA) VS COMMISSIONER OF INCOMETAX, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 2744 (2020)

(a) Income-tax---

----Representative assessee---Trustee---Assessment of trustee---Effect of S.161---Trustee entitled to benefits available to beneficiary---Trustee can claim exemption under S.54---Indian Income Tax Act, 1961, Ss.54 & 161.

Section 161 of the Income Tax Act, 1961, makes a representative assessee subject to the same duties, responsibilities and liabilities as if the income was received by him beneficially. The fiction is created as it was never the object or intention of the Act to charge tax upon persons other than the beneficial owner of the income. Whatever benefits the beneficiary will get in the said assessment must be made available to the trustee while assessing him under section 161.

(b) Income-tax---

----Capital gains---Exemption---Sale of house used as residence and purchase of another .house for purposes of residence---Sale of house used by trustee and beneficiaries for residence and purchase of another house for residence-- Exemption under S.54 can be claimed---Indian Income Tax Act, 1961, 58.54 & 161.

T. the assessee, was the sole executrix and trustee of the will of her husband. As per the will, the trustee had absolute discretion to deal with the properties without being responsible or accountable for any loss or any diminution. The trustee was to collect and recover all interest, dividends, rents. etc., and was to pay all rents. taxes, assessment, etc., in respect of .the properties and the balance was to be utilised by her. On November 29, 1961, she sold an immovable property known as "Aden Hall" for approximately Rs.7 lakhs. By an agreement, dated November 9, 1961, she agreed to purchase a flat in the building "Wyoming". Part of the funds received from the sale of immovable property "Aden Hall" were used for purchase of the flat. 'Aden Hall' was being used by T alongwith her children for :residence and upon purchase of the new flat. T alongwith her children used the same for their residence. The assessee claimed that Rs.1,47,.775 used for purchase of the flat should be deducted from the capital gain arising out of the sale of the immovable property-Aden Hall. The assessee placed reliance upon section 54 of the Act for the .said deduction. The Income-tax Officer negatived the assessee's claim. This was upheld by the Tribunal. On a reference:

Held, that T in her dual capacity as the trustee and as a beneficiary having life interest was residing in the property which was sold and she used the newly acquired flat for residence. The assessee was entitled to the deduction of the purchase price of the flat from the- capital gain under section 54.

Arundhati Balkrishna (Mrs.) v. CIT (1989) 177 ITR 275 (SC); Bai Hamabai J. K. Mehta v. CIT (1948) 16 ITR 115 (Bom.); CIT v. Kamalini Khatau (1994) 209 ITR 101 (SC); CIT v. Trustees. T. Stanes & Co. Ltd. Staff Pension Fund (19,93) 200 ITR 396 (Mad.); CIT v. Wadia (J.B.) (1963) 48 ITR 135 (Bom.); CWT v. Official Trustee of West Bengal for Trust Murshidabad Estate (1982) 136 ITR 162 (Cal.); CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (1977) 108 ITR 555 (SC); N. V. Shanmugham & Co. v. CIT (1971) 81 ITR 310 (SC); Nagappa (C.R.) v. CIT (1969) 73 ITR 626 (SC) and Pandit (R.H.) v. CIT (1972) 83 ITR 136 (Bom.) ref.

J. D. Mistry with B. D. Damodar instructed by Kanga & Co. for the Assessee.

R. V. Desai with B. M. Chatterjee for the Commissioner

JUDGMENT

A. Y. SAKHARE, J.---By this reference under section 256(1) of the Income-tax Act, 1961 (the "Act" for short), the Income-tax Appellate Tribunal, Bombay, has referred the following Question of law to this Court for opinion at the instance of the assessee:

"Whether, on the facts and in the circumstances of the case, the deduction under section 54 of the Income-tax Act, 1961, was available in computing the capital gain arising from the sale of the property known as 'Aden Hall'?"

The relevant assessment year is 1962-63. The assessee was a trustee of the testamentary trust created by Mr. M.R. Adenwalla, who died on July 27, 1955, leaving behind the estate which, inter alia. included immovable property known as Aden Hall admeasuring about 4.710 sq. yds at Napean Sea Road, Bombay.

The late Mr. M.R. Adenwalla left behind him a will, dated May 17, 1939. By the said will, he created a settlement regarding rest and remainder of his properties. The late Mr. Adenwalla appointed his wife, Tehmina, as sole executrix and trustee of a will. The entire residual estate of the late Mr. Adenwalla was to vest in the trustee. As per will, the trustee was in an absolute discretion to deal with the properties without being responsible or accountable for any loss or any diminution. The trustee was to collect and recover all interest, dividends, rents, etc., and was to pay all rents, taxes, assessments, etc., in respect of the properties and the balance was to be utilised by her. On the death of Mrs. Tehmina or in the event of her predeceasing the testator, the entire properties were to be distributed between every child of the testator. The relevant clauses of the will are as under:

Clause 2: "1 appoint my dear wife. Tehmina, hereinafter called 'my trustee', to be The sole executrix and trustee of this my will."

Clause 4:1 devise and bequeath the rest and residue of all my property of whatsoever kind and whosesoever situated (hereinafter referred to as 'my residuary estate' unto my trustee upon the trusts following that is to say:

(a) To keep my residuary estate or such portion thereof as my trustee shall in her absolute discretion think fit. in its then state of investment without being responsible or accountable for any loss or diminution in the price thereof or in her discretion to sell the same or any portion thereof and to invest the net sale proceeds in such securities or property or shares in joint-stock companies or other investments whether authorised or not and in such manner in all respects as my trustee shall in her absolute discretion think fit without being responsible or accountable for any loss or diminution in the price thereof.

(b) To collect and recover all interest, dividends, rents, profits and income of my residuary estate and to pay out of the same all rents, rates, taxes, assessments and outgoings and charges for collection and insurance premia in respect thereof including the costs of all necessary repairs;

(c) To pay the balance of such interest, dividends, rents, profits and income of my residuary estate to my wife, Tehmina, for and during the term of her natural life absolutely;

(d) On the death of my wife or in the event of my wife predeceasing me on my death (which period is hereinafter for brevity's sake referred to as "the period of distribution") to divide the corpus of my residuary estate into parts in the manner following that is to say one part for every child of mine who may be living at the period of distribution and one part for every son of mine who may have died before the said period of distribution leaving a widow only or widow and/or issue living at the period of distribution aid one part for every daughter of mine who may have died before the period of distribution leaving issue living at the period of distribution.

On November 29, 1961, Mrs. Tehmina, sole executrix and trustee sold an immovable property "Aden Hall" for approximately Rs.7 lakhs. By an agreement, dated November 9, 1961, Mrs. Tehmina agreed to purchase a flat in the building "Wyoming". Part of The funds received from the sale of immovable property "Aden Hall" were used for purchase of a flat. Aden Hall was being used by Mrs. Tehmina alongwith her children for residence and upon purchase of a new flat, Mrs. Tehmina alongwith her children used the same for their residence.

The assessee claimed that Rs.1,47,775 used for purchase of the flat should be deducted from The capital gain arising out of the sale of immovable property---Aden Hall. The assessee placed reliance upon section 54 of the Act for the said deduction.

The Income-tax Officer, by his order, dated February 17, 1967, negatived the assessee's claim for deduction of the amount used for purchase of the flat from capital gain on the ground that the trustee who is the owner is not residing in the said flat and the beneficiaries who reside therein are not the owners. As per the Income-tax Officer, the assessee did not fulfil the conditions laid down in section 54 of the Act. The assessee filed an appeal before the Appellate Assistant Commissioner, who by his order, dated February 5, 1969, dismissed the appeal by holding that the liability of the trustee is co-extensive with that of the beneficiaries and all exemptions and deductions can be claimed by the trustee which would have been available to the beneficiaries. The Appellate Assistant Commissioner further held that in the case of capital gains the surplus arising from the sale is merely an accretion to the corpus of the trust, therefore, it cannot be said that the income is received on behalf of the beneficiary. The Appellate Assistant Commissioner held that except this condition all other conditions as enumerated in section 54 of the Act are satisfied by the assessee for getting exemptions. On this, reasoning, the Appellate Assistant Commissioner negatived the exemption claim made by the assessee. The assessee, thereafter, filed an appeal before the Income-tax Appellate Tribunal, who by its order, dated June 14, 1971, dismissed the same on the ground that the excess amount realised by the trustee would be income in her hands and the said income could not be said to be income receivable on behalf of the beneficiary. The Income-tax Appellate Tribunal came to the conclusion that the question of applicability of section 161 of the Act did not arise in the present case.

From the statement of case it is clear that Mrs. Tehmina was acting in dual capacity, (i) as trustee, and (ii) as a beneficiary. The immovable property, Aden Hall, was sold on November 29, 1961, and a flat was purchased for residence from the sale proceeds thereof. The Aden. Hall property was used by Mrs. Tehmina for her residence alongwith her children. After the sale of the immovable property, Aden Hall, Mrs. Tehmina alongwith her children used the newly-acquired flat for their residence. As per the will, Mrs. Tehmina being an executrix and sole trustee was given power to deal with the properties, to receive dividends, profits and income from the properties, to sell the assets and invest the same in securities or other investments as she may deem fit. After the death of Mrs. Tehmina, all properties were to go to the children of the testator with specified share.

The assessee has placed reliance upon section 54 of the Act to claim exemption from the capital gains. As per order of the Income-tax Officer, as confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal except one condition all other conditions as contemplated by section 54 of the Act are fulfilled by the assessee. As per the authorities the only condition which is not fulfilled by the assessee is of user, i.e., the trustee which is the owner is not in possession of a flat but a flat is being used by the beneficiary, Mrs. Tehmina, for her residence:

We have heard Mr. Mistry, learned counsel for the applicant, and Mr. Desai, learned counsel for the respondents. Before dealing with the submissions of, learned counsel it will be useful to refer to the relevant provisions of the Act. Chapter XV of the Act is titled "liability in special cases". Part B thereof sets out the general provisions applicable to the assessee. Section 160 defines a representative assessee for the purpose of the Act. Thus, by reason of section 160, the trustee appointed under a trust deed or will is representative assessee in respect of income which is received by the trustee, or which the trustee is entitled to receive. Under section 161 every representative assessee, as regards the income in respect of which he is a representative assessee is subject to the same duties, responsibilities and liabilities, as if the income were income received by or accruing to or in favour of the beneficiary, and shall be liable to assessment in his own name in respect of that income but such assessment is in a representative capacity only. Such assessment is deemed to be made upon the trustee only in his representative capacity and the tax can be levied upon and recovered from the trustee in the like manner and to the same extent as it would be levied upon and recoverable from the person represented by the trustee. This provision would apply in the case of a trustee who received or is entitled to receive income for the benefit of any person. Where income in respect of which the trustee is liable as a representative assessee is not specifically receivable on behalf of or for the benefit of any one person, or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown, tax has to be charged as if that income was the total income of an association of persons. Section 164 is an enabling section similar to section 161(1) of the Act and nothing more or less could be read therein. In the cases covered by section 161(1) an option could be exercised on the strength of the trust deed itself since the income in such cases is receivable by the trustee on behalf of or for the benefit of a single beneficiary or where there are more beneficiaries than one, the individual shares of the beneficiaries are determinate and know. The Act did not intend to levy tax except in relation to the person who received income beneficially. Sections 160 to 166 are enacted to take care of a situation, where the recipient of the income was not the person entitled to the beneficial enjoyment thereof and they created the concept of a "representative assessee" as also the fiction that he received the income beneficially. At the same time, a representative assessee's liability did not extend beyond the limit of the direct assessee, implicitly recognising the liability of the direct assessee to be assessed. Section 161 makes a representative assessee subject

to the same duties, responsibilities and liabilities as if the income was received by him beneficially. The fiction is created as it was never the object or intention of the Act to charge tax upon others than the beneficial owner of the income. Thus, it is implicit that the tax could be leviable upon and recoverable from the persons represented by the representative assessee. The trustee, therefore, can be assessed in respect of the income of the trust and tax can be recovered from him only under and in the manner provided by sections 160 to 166 of the Act. The Act also gives an option to the authorities to either directly levy tax on the beneficiaries or to levy tax upon the trustee in a representative capacity.

As per section 54, where the capital gain arises from the transfer of a capital asset to which the provisions of section 53 are not applicable, then upon fulfilling the conditions mentioned in the section the capital gain accrued to the assessee has to be dealt with under the said section. To deny the benefit of section 54 of the Act to the assessee the Revenue has placed reliance upon the decision of this Court in the case of CIT v. J. B. Wadia (1963) 48 ITR 135. It is submitted on behalf of the Revenue that the beneficiary was not to receive the benefits of the property and it is the trustee who must be treated as having dealt with the property which the trustee has done in the present case. As per the Revenue, the capital gain would be taxable in the hands of the trustee as the sale price received by the trustee forms part of the corpus of the trust, the trustee was bound to reinvest it and the beneficiary could not lay claim to any part of it as income. As per the Revenue no part of the amount could be said to be receivable by the trustee on behalf of the beneficiary so, as to make it liable for capital gain in the hands of the beneficiary. It was thus submitted that the trustee is not entitled for the benefit of section 54 of the Act. We are unable to agree with the submissions advanced by the Revenue as on the facts of the present case, the aforesaid ratio cannot be made applicable. Mrs. Tehmina was acting in a dual capacity, i.e., she was executrix and sole trustee so also she was the beneficiary. After her death, the property was to go to the children of the testator. Mrs. Tehmina along with her children was occupying the immovable property called Aden Hall, which was sold by her and thereafter, she along with her children resided in a flat purchased at Wyoming.

In the case of Bai Hamabai J. K. Mehta v. CIT (1948) 16 ITR 115, this Court has held that the beneficiaries are the owners of the properties and are liable to pay tax under the heading of property tax.

In the case of R. H. Pandit v. CIT (1972) 83 ITR 136, this Court has held that even though life interest was created in favour of certain persons and after their death the property was to pass on to the beneficiaries, even in such case, the capital gain in question must be treated as received by the trustee on behalf of the beneficiaries who were to receive it after the death of the persons in whose favour the life interest was created. It is further held that whether the beneficiaries held a contingent interest or not. is an irrelevant fact. These persons were a determined group of persons, were known, and their shares can be easily ascertained and determined as of the date when the capital gain accrued in the relevant year of account.

The Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust (1977) 108 ITR 555, while dealing with the provisions of the Wealth-tax Act has held that the trustees are holding the properties on behalf of the beneficiary and the amount of tax payable by the trustees would be the same as that payable by the beneficiary in respect of his beneficial interest, if he were assessed directly. The relevant observations on page 595 are as under:

"It is also necessary to notice the consequences that seem to flow from the proposition laid down in section 21, subsection (1), that the trustee is assessable 'in the like manner and to the same extent' as the beneficiary. The consequences are three-fold. In the first place, it follows inevitably from this proposition that there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though, for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. This was recognised and laid down by this Court in N. V. Shanmugham & Co. v. CIT (1971) 81 ITR 310 (SC). And, lastly, the amount of tax payable by the trustee would be the same as that' payable by each beneficiary in respect of his beneficial interest, if he were assessed directly. "

The Supreme Court has further observed that even where the beneficiaries of the remainder are indeterminate or unknown, the trustees can be assessed to wealth tax in respect of the totality of the beneficial interest in the remainder, treating the beneficiaries fictionally as an individual.

The Supreme Court in the case of Mrs. Arundhati Balkrishna v. CIT (1989) 177 ITR 275, has observed that what is assessable in the hands of the beneficiary of a trust is the income of the trust received by it on behalf of the beneficiary. As regards the income in respect of which the assessee is a representative assessee he is subject to the same duties, responsibilities and liabilities, as if the income were income received by or accruing to or in favour of any beneficiary. What trustee receives as the income pertaining to the beneficiary is received by him under an obligation to pass on that income to the beneficiary. The relevant observations of the Supreme Court on pages 278-79 are as under:

"Turning to the additional question referred to the High Court for the assessment year 1964-65, it seems to us clear that what is assessable in the hands of the assessee must be the income of the trust received by it on behalf of the assessee. It is apparent from section 161(1) of the Income-tax Act, 1961, that a representative assessee, that is to say a trustee, as regards the income in respect of which he is a representative assessee, is subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and he is liable to assessment in his own name in respect of that income; but any such assessment is deemed to be made upon him in this representative capacity only, and the tax is levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. And section 166 of the Act clarifies that the provisions relating to the liability of a representative assessee will not prevent either the direct assessment of the person on whose behalf or for whose benefit income is receivable, or the recovery from such person of the tax payable in respect of such income. The Income-tax Officer has the option to proceed either against the trustee or against the beneficiary, but in either case, the income to be assessed must be in the same sum. What the trustee receives as the income pertaining to the beneficiary is received by him under an obligation to pass on that income to the beneficiary. "

In the recent decision of the Supreme Court, in the case of CIT v. Kamalini Khatau (1994) 209 ITR 101, the Supreme Court has dealt with the issue of discretionary trusts and after analysing various provisions of the Income-tax Act has held that when the assessment is made in the hands of the trustee it can be made only in terms of the provisions of sections 160 to 166' of the Act. The Act did not intend to levy tax except in relation to the person, who received the income beneficially. Sections 160 to 166 were enacted to take care of a situation where the recipient of the income was not a person entitled to the beneficial enjoyment thereof and they created a concept of a representative assessee as also the fiction that he received the income beneficially. At the same time it was made clear that a representative assessee's liability does not extend beyond the limit of the direct assessee, implicitly recognising the liability of the direct assessee to be assessed. The Supreme Court has concluded by observing on pages 118, 119 and 120 as under:

"Page 118.---As the judgments of this Court referred to above lay down, a representative assessee may be assessed in respect of income received by him as such and tax recovered from him thereon only under and in the manner provided by the provisions in the statute dealing with representative assessee. A trustee may, therefore, be assessed in respect of the income of the trust and tax recovered from him thereon only under and in the manner provided by sections 160 to 166 of the Act.

Page 119.---Further, section 161, as pointed out above, protects the representative assessee by stating that assessment upon him shall be deemed to be only in his representative capacity, by mandating that tax can be levied upon and recovered from him only in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him and by stating that he may not be assessed under any other provisions of the Act. Section 164 does not give any of these protections, as, clearly, they must be given to all representative assessee.

Page 120.---In C.R. Nagappa's case (1969) 73 ITR 626 (SC), this was clearly stated. It was said that it was implicit in the terms of section 161(1) that the Income-tax Officer could assess a representative assessee as regards the income in respect of which he was a representative assessee, hilt he was not bound to do so. He could assess the representative assessee or the person represented by him. It must also be remembered, as was said in the case of Nizam's Family Trust (1977) 108 ITR 555 (SC), that when a trustee is assessed to tax upon the income of the trust it is 'really the beneficiaries who are sought to be assessed in respect of their interest in the trust properties through the trustee'. "

The Madras High Court in the case of C IT v. Trustees T. Stanes & Co. Ltd., Staff Pension Fund (1993) 200 ITR 396, has held that under section 161 of the Act the trustee has to be treated in the same manner and to the same extent as the beneficiary, both for the computation of income and determination of tax on the computed income. The assessment of the trustee would have to be made in the same status as that of the beneficiary. The Calcutta High Court while dealing with the provisions of the Wealth Tax Act in the case of CWT v. Official Trustee of West Bengal for Trust Murshidabad Estate (1982) 136 ITR 162, has held that the trustee is assessed under a scheme of wealth tax only as a representative assessee although for certain purposes of the Act, a trustee is an assessee. The Calcutta High Court has also held that the scheme of the Act clearly indicates-that a trustee has to be assessed only as a representative assessee. The trustee, therefore, is a notional assessee and the beneficiary is the real assessee. The Calcutta High Court has negatived the submission of the Revenue that in the Indian law a trustee is the full owner of the property and the distinction between the beneficial ownership and legal ownership in unknown to Indian law.

The legal position that emerges from the aforesaid decisions of the Supreme Court, of this Court, the Madras High Court and- the Calcutta High Court is thus, that under the Act, the Revenue has discretion either to assess the trustee or the beneficiary directly; that the trustee is to be assessed for and on behalf of the beneficiary, the trustee being a representative assessee is subject to the same duties, responsibilities and liabilities as if the income was received by him beneficially and whatever benefits the beneficiary will get in the said assessment must be made available to the trustee while assessing him under section 161 of the Act.

In the facts of the present case by a will, dated May 17, 1939, a trust was created and Mrs. Tehmina was appointed as executrix and sole trustee of the trust. She was also the beneficiary and was given the right to deal with the property in the manner she may deem fit. A life interest was created in her favour and after her death all the properties were to go to the children of the testator in specified shares. The property, which was sold and the flat, which was acquired from the said sale proceeds were both used by Mrs. Tehmina and her children for their residence. Thus, Mrs. Tehmina in her dual capacity as the trustee and as a beneficiary having life interest was residing in the property, which was sold and used the newly acquired flat for residence. Similarly, the other beneficiaries, i.e., children of the testator were residing in the property, which was sold and resided in a flat, which was acquired. Thus, the beneficiaries were using the property for their residence and continued to reside in the new flat, which was acquired. In law, the trustee, i.e., the assessee must be assessed for and on behalf of the beneficiaries. In view of the decision of the Supreme Court, this Court, the Madras High Court and the Calcutta High Court, referred to above the Appellate Assistant Commissioner was not right in holding that the trustee which was the owner of the property was not residing in the said property and the beneficiaries were residing in the said property not as the owner, therefore, section 54 of the Act is not attracted. The Income-tax Appellate Tribunal on principle agreed that since the beneficiaries comply with all the conditions lay down in section 54 of the Act, the necessary a11owance in that behalf should be accorded to the beneficiaries. However, 'the Tribunal further held that in the present case, under a will, the trustee had a right to change the investment and the excess realised by the trustee could be the income in the hands of the trustee. Thus, the Income-tax Appellate Tribunal committed error in holding that the amount which was received by the trustee cannot be treated as income receivable on behalf of the beneficiary and consequently section 161 of the Act is not applicable. The reasons assigned by the income tax Tribunal in holding that the provisions of section 161 of the Act are not applicable and the assessee is not entitled for benefit of section 54 of the Act for exemption in the capital gains cannot be upheld. In law, the beneficiaries .are the real owners and the trustee holds the properties for and on behalf of the beneficiaries. The trustee has to be assessed under the Act as a representative assessee for and on behalf of the beneficiaries and tax can lie levied and recovered from the trustee in the like manner and to the same extent as it would be leviable upon and recoverable from the person represented by the trustee. In the present case thus, the Revenue can levy tax in the like manner and to the same extent as would be leviable upon the beneficiaries. The said levy can be made upon the trustee as a representative assessee. Thus, in the present case on the facts found by the authorities as Mrs. Tehmina and the children of the testator were residing in the property sold and continued to reside in the property acquired, they are entitled for the benefit of section 54 of the Act. Thus, the assesse's claim for deduction of purchase price of the flat from capital gain as per section 54 of the Act was legal and proper.

In our judgment the decision of the Income-tax Officer as confirmed by the Appellate Assistant Commissioner and the Income-tax Tribunal denying the benefit of section 54 of the Act to the assessee was wrong. The benefit of section 54 of the Act must be extended to the assessee.

In the result, we answer the question referred to this Court in the affirmative and in favour of the assessee.

Reference to stand disposed of accordingly with no order as to costs.

M.B.A./3/FC