Income accruing from assets for minor's benefit to be included in total income

1. The assessee executed seven separate deeds of trust for the benefit of his minor children and vested the properties in four trustees, himself 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 assessment proceeding the ITO, included in the total income of the assessee, the income arising from the trust properties and used for the immediate benefit of the beneficiaries, but not the income directed to be accumulated.

3. The Commissioner, u/s 263, directed that the income of the deferred benefit of the minor beneficiaries be also included in the total income of the assessee.

4. The Tribunal rejected the assessee's appeal.

5. The High Court also answered against the assessee.

6. The Supreme Court held as under:

The Income-tax Officer may, therefore, assess the person represented in respect of the income of the trust property and the appropriate provisions of the Income-tax Act relating to the computation of the total income and the manner in which the income is to be computed will apply to that assessment. The Income-tax Officer may in appropriate cases assess the representative assessee in respect of that income and limited to that extent, and tax may be levied and recovered from him to the same extent as may be leviable and recoverable from the person represented by him.

Sub-section (2) of section 161 does not purport to deny the Income-tax Officer 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 Parliament. But on the plain words used by 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.

Sub-section (2) of section 161 was presumably intended to remove the conflict of judicial opinion which arose in the interpretation of the analogous provisions of sections 40 and 41 of the Indian Income-tax Act of 1922. In Saifudin Alimohamed v. Commissioner of Income-tax [1954] 25 ITR 237, the Bombay High Court expressed the opinion (which was not necessary for the ultimate decision of the reference) that section 41 conferred an option upon the Income-tax Officer either to assess the income as the income of the beneficiary or as the income of the trustee. The court observed at page 247 in dealing with the case in which the trustees appointed by the civil court in a suit were carrying on the business on behalf of two minors:"... it was open to the department to have assessed the income of the guardians under section 10 on the basis that the particular business was carried on by the guardians in their own right, and the taxing department could have taken up the stand that they had no concern with what the guardians did with the profits after they had paid the tax on the income from the business; or it was open to the department to proceed against the guardians under section 41 and to tax in their hands only that income which they had received on behalf of the minors."Sub-section (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 sub-section (1).It is true that in this case for the assessment year 1962-63 the 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.In the view we have taken, this appeal must fail and is dismissed with costs.