Holding

The Revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of income that has been distributed and received by the beneficiaries in the accounting year.

Summary

The Supreme Court examined whether the tax authorities could choose to assess tax on either the trustees or the beneficiaries of a discretionary trust when the trust's income was distributed and actually received by the beneficiaries during the accounting year. The respondent, a beneficiary of six discretionary trusts, argued that the income should be taxed only in the hands of the trustees under Section 164 of the Income Tax Act, 1961. The Revenue relied on Section 166, contending that the beneficiaries could also be directly assessed. The Court held that Section 164 does not preclude assessment of beneficiaries and, read together with Sections 160‑165, gives the Revenue the option to tax either party. Consequently, the Court allowed the appeal, setting aside the High Court’s majority decision and confirming that the beneficiaries are liable to tax under Sections 4 and 5 when they receive the trust income.

Issues considered

Whether the Revenue may assess and recover tax from either the trustees or the beneficiaries of a discretionary trust when income is distributed and received by the beneficiaries in the accounting year
Interpretation of Sections 164 and 166 of the Income Tax Act, 1961 in relation to representative assessees

Legislation cited

Income Tax Act, 1922s. 40, s. 41
Income Tax Act, 1961s. 160, s. 161, s. 162, s. 163, s. 164, s. 165, s. 166, s. 4, s. 5
Wealth Tax Act, 1957s. 21, s. 3

Subjects

discretionary trustrepresentative assesseesection 164section 166tax assessmentincome taxbeneficiarytrusteetax recoveryIndian tax law

Judgment

A COMMISSIONER OF INCOME TAX, GUJARAT, AHMEDABAD
v.
SMT. KAMALTNI KHATAU

MAY 9, 1994

B [M.N. VENKATACHALTAH, CJ., S.P. BHARUCHA AND
S.C. AGRAWAL, JJ.J

Income Tax Act 1961-Sections 4, 5, 160, 161, 162, 163, 164, 165, and
166-Beneficiary of discretionary trust-Held, revenue has the option to assess
C and recover tax from either the trnstee or the beneficiaries in respect of such
income as has been distributed and received by the beneficiarie.1 in the course
of the accounting year.

The Respondent-assessee was a beneficiary in respect of six: trusts.
Each of the six trusts gave a discretion to the Trustees to accumulate the
D net income of the Trust and at their discretion pay the same to the named
beneficiaries. During the accounting year relevant to the Assessment Years
19~9- 70, the assessee recovered a total amount of Rs. 18,000 from the six J.
tru~s, in pursuance of resolution of the trustees to distribute the same
fro0: out of the income of the six trusts for the accounting year.
E
Before the Income Tax Officer the assessee contended that the said
amount of Rs. 18,000 was not liable to be taxed in her hands, but was
taxable only in the hands of the trustees in view of Section 164 of the
Income Tax Ad 1961. The Income Tax Officer however taxedx the amount
in her hands, relying upon Section 166 of the Income Tax Act. On appeal
F by the assessee the Appellate Assistant Commissioner affirmed the ITO's
view. In second Appeal by the assessee, the Income Tax Appellate Tribunal ,
held that no part of the income of the six trusts was recoverable on behalf
of or for the benefit of the beneficiaries and therefore Section 164 and not
Section 166 \\'as attracted.
G On a reference at the instance of the Revenue the Gujarat High
Court by a majority upheld the view of the Tribunal. The Revenue appealed
to the Supreme Court. The (}Uestion for determination was whether the
Revenue had an option to assess and recover tax front either the trustees
or the beneficiaries of a discretionary trust when the income thereof was
H distributed and received by the beneficiaries in the accounting year.
942
C.I.T. v. SMT. KAMALINI 943

,., Allowing the appeal, this Court A
......
HELD : 1. It is settled law that a representative asS',ssee 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 statutory
provisions dealing with representative asscssee. A trustee may, therefore,
be assessed in respect of the income of the trust and tax recovered from B
him thereon only under and in the manner provided by Sections 160 and
166 of the Income Tax Act. The question is whether Section 164 is a code
\
'> in itself dealing with all matters relating to a discretionary trust. [960-C-E]

2. Even the trustee of a discretionary trust is, by reason of the terms
of Section 160, a representative assessee. Section 161(1) sets out the
c
liability of a representative assessee. Its first part makes him subject, as
regards the income in respect of which he is a representative assessee, 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 made liable to assessment in hi~ own name in respect thereof. The D
., second part affords protection to the representative assessee; it states that
such assessment shall be deemed to be made upon him only in his
> representative capacity and also that tax may be levied upon and recovered
from him only in like manner and to the same extent as it would be leviable
upon and rtcoverab;e from the person represented by him. Section 161(2) E
gives the representative assessee a further measure of protection by
making it explicit that "he shall not in respect of that income be assessed
under any other provisions of this Act". This is of significance for "any
other provision of this Act" must plainly mean by provision of the Act other
than Section 161. [960-F-H, 961-A]
.I· F
3. Section 164 does not' give any of the protections given by Section
' 161. It does not create a charge on the income of a discretionary trust.
Section 164 harks back to Section 161 when it refers to "persons ..................
liable as representative assessees." Section 164 sets out only how such tax
can be charged when the income is not distributed and the income is
G
distributed. Section 164 cannot be read as being a code in itself applicable
to the taxation of a discretionary trust. [961-B-F, 962-A-B]

4. But Section 166 does not help the Revenue because it states that
.. _. Sections 160 to 163 do not prevent either the direct assessment of the
person on whose behalf or for whose benefit income therein referred to is H
944 SUPREME COURT REPORTS [1994] 3 S.C.R.

_.;~
A receivable or the recovery from such person of the tax payable in respect
of such income. The section is clearly clarilicatory. It does not empower
any assessment or recovery by itself. (962-C-D]

5. The income of a discretionary trust which is within the accounting
year distributed to and received by the beneficiary would squarely fall
B within the broad sweep of "total income" under Section 5 and the
beneficiary would be liable to assessment and recovery under Section 4. .,
[962-G]
•
6. In the absence of an express provision it cannot be said that the "
beneficiaries of a discretionary trust are not liable to be assessed in respect
c of their interest in the trust properties even when such interest is identified
in the accounting year and the trustees who represent them alone are so
liable so that tax can be recovered only from them. The Revenue has the
option to assess and recover tax from either the trustees or the
beneficiaries of a discretionary trust in respect of such income thereof as
D has been distributed and received by the beneficiaries in the course of the
accounting year. (963-C-D] "
C.R. Nagappa v. CIT, (1969) 73 !TR 626; CWT v. Trnstees of HEH ~
Nizam's Family (Remainder Wealth) Trnst, (1977) 108 ITR 555; Jytindra
Sinhji v. S.l. Tripathi, (1993) 201 ITR 661 and CWT v. Kripashanker
E Dayashankar Worah, (1971) 81 ITR 763, relied on.

C. WT. v. Arvind Narottam, (1988] 4 SCC 133, distinguished.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2145 of
1978.
F ••
From the Judgment and Order dated 23.12.77 of the Gujarat High
Court in l.T.R. No. 118 of 1974.
'
With

G (C.A. Nos. 2147/78, 2148/78, 2151-53/78, 2155-56178, 2099179, 2147-
48179, 63/80, 2074/81, 733/82, 905/89, 3313/90 & 734/82).

Harish N. Salve, P.H. Parekh and Fazl for the Appellants.

D.P. Gupta, Solicitor General, Ranbir Chandra, P.Parmeshwaran, ;._,,

H Ms. A. Subhashini, D.N. Mishra and M/s. J.B.D. & Co. and A.N. Arora
C.l.T. v. SMT. KAMALINI [BHARUCHA, J.J 945

for the Respondents. A
The Judgment of the Court was delivered by

BHARUCHA, J. An interesting question arises in these appeals. It is
this : has the Revenue an option to assess and recover tax from either the
trustees or the beneficiaries of a discretionary trust when the income B
thereof is distributed and received by the beneficiaries in the accounting
year? The appeals have been heard together and may be disposed of by a
common judgment taking, as illustrative, the facts of the lead appeal (Civil
Appeal No. 2145 of 1978, CIT. Gujarat, Ahmedabad v. Mrs. Kamalini
Khatau).
c
The relevant Assessment Year is 1969-70, the previous year being the
calendar year 1968. The assessee was the beneficiary of 9 trusts. In respect
of three she was the sole beneficiary, and there is no dispute about their
income. In regard to the other six trusts, the assessee was one of the
beneficiaries thereunder. In each of these six trust deeds the clause relevant D
for our purpose read thus :

"From and after the date hereof (i.e., the date of the Trust Deed)
and during the periods mentioned in this clause, the Trustees may
either accumulate the net income of the Trust or at their discretion
pay the same to the persons as mentioned therein or to any one E
or more of them to the exclusion of others or other of them for
their, his or her absolute use or benefit in such proportion and in
such manner as the Trustees may in their absolute discretion think
fit .... 11

During the accounting year relevant to the Assessment Year 1969-70 the F
assessee received the amounts set but hereafter. The amounts were
received pursu11nt to the resolutions of the trustees to distribute the same
from out of the income of the six trusts for the accounting year.

Name of the trust Amount
G
1. Geeta Mayour D. Trust No.1 1,600
2. Ambala Sarabhai D. Trust No. 4 6,200
3. Manorma Sarabhai (K.8 D-Trust) 1,000
4. Saraladevi Sarabhai (G.15) D. Trust 1,400
5. Manorama Sarabhai D. Trust No. 1 7,300 H
946 SUPREME COURT REPORTS (1994] 3 S.C.R.

A 6. Anand Sarabhai (J-9) D. Trust 500

18,000

The assessee contended before the Income-tax Officer that the said
amount of Rs. 18,000 was not liable to be taxed in her hands. The payment
B of income under the said six trusts to any one or more of the beneficiaries
thereof depended upon the discretion of the trustee; accordingly the shares
of the beneficiaries thereof \Vere indeterminate and unknown. The income
of the trusts was, therefore, taxable only in hands of the trustees thereof.,
having regard to the provisions of section 164 of the Income-tax Act, 1961
(hereinafter referred to as "the Act"). The ITO rejected the assessee's
c contention and assessed the said amount of Rs. 18,000 in her hands. In
doing so he relied upon the provisions of section 166 of the Act. The
assessee preferred an appeal. The Appellate Assistant Commissioner af-
firmed the view taken by the ITO. The assessee preferred a second appeal
before the Income Tax Appellate Tribunal. The Tribunal held that no part
D of the income of the said six trusts was receivable on behalf of or for the
benefit of any of the beneficiaries thereof. The provisions of section 164
were, therefore, attracted. The Tribunal rejected the Revenue's contention
that section 166 was applicable. Accordingly, the Tribunal allowed the
assessee's appeal. At the behest of the Revenue, the Tribunal referred to
the High Court of Gujarat for its opinion the following question :
E
'Whether, on the facts and in the circumstances of the case, various
1

amounts totalling to Rs. 18,000 received by the assessee out of the
income of the six discretionary trusts are liable to be taxed in the
hands of the assessee?"

F A Division Bench of the High Court referred the matter to a larger
Bench, and it was heard by a Bench of three learned Judges. The order of '
the Tribunal was upheld by the m~jority judgment, the third learned Judge
dissented. We shall have occasion to refer to the majority and dissenting
judgments.
G
It is convenient now to set out those provisions of the Act which have
a bearing on the issue that we are called upon to decide. Section 4 imposes
the charge; it says that where any Central Act enacts that income-tax shall
be charged for any assessment year at any rate, income-tax at that rate shall
be charged for that year, in accordance with and subject to the provisions
H of the Act, in respect of the total income of the previous years of every
C.J.T v. SMT. KAMALINI[BHARUCHAJ.] 947

person. Section 5 defines that total income of a person resident in India to A
include 1'aII income from whatever source derived which ~

(a) is received or is deemed to be received in India in such year
by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in B
India during such year; or

(c) accrues or arises to him outside India during such year 11 •

Chapter XV of the Act is en-titled "Liability in Special Cases". Part B
thereof sets out the general provisions applicable to representative asses- C
sees. Section 160 defines a representative assessee for the purposes of the
Act to mean:

"(i) in respect of the income of a non-resident specified in sub-sec-
tion (l) of section 9, the agent of the non-resident, including a
person who is treated as an agent under section 163; D

(ii) in respect of the income of a minor, lunatic or idiot, the
guardian or manager who is entitled to receive or is in receipt of
such income on behalf of such minor, lunatic or idiot;

(iii) in respect of income which the Court of Wards, the Ad- E
ministrator-General, the Official Trustee of any receiver or
manager (including any person, whatever his designation, who in
fact managers properly on behalf of another) appointed by or
under any order of a court, receives or is entitled to receive, on
behalf or for the benefit of any person, such Court of Wards,
Administrator-General, Official Trustee, receiver or manager;
F

(iv) in respect of income which a trustee appointed under a trust
declared by a duly executed instrument in writing whether tes-
tamentary or otherwise (including any wakf deed which is valid
under the Mussalman Wakf Validating Act, 1913 (VI of 1913) G
receives or is entitled to receive on behalf or for the benefit of any
person, such trustee of trustees;

(v) in respect of income which a trustee appointed under an oral
tru.st receive..<; or is entitled to receive on behalf or for the benefit
of any person, such trustee or trustees." H
948 SUPREME COURT REPORTS (1994] 3 S.C.R.

A At the relevant time Section 161 read thus :

"Liability of representative assessee - (1) Every representative
asses.see, as regards the income in respect of which he is a repreM
sentative asses.sec, shall be subject to the same duties, responM
sibilities and liabilities as if the income were income received by
B or accruing to or favour of him beneficially, and shall be liable to
assessment in his own name in respect of that income; but any such
assessment shall be deemed to be made upon him in his repre-
sentative capacity only, and the tax shall, subject to the other
provisions contained in this Chapter, be levied upon an recovered
c from him in like manner and to the same extent as it would be
leviable upon and recoverable from the person represented by him.

(2) Whether any person is, in respect of any income, assessable
under this Chapter in the capacity of a representative asses.see, he
shal1 not, in respect of that income, be assessed under any other
D 11
provision of this Act •

Section 162 entitles every representative asses.see who, as such, pays any
sum under the Act to recover it from the person on whose behalf it is paid
or to retain an amount equal to the sum so paid out of moneys that are or
E may come to him in his representative capacity. As it stood at the relevant
time, section 164 read thus :

"Charge of tax where share of beneficiaries unknown - Where any
income in respect of which the persons mentioned in clauses (iii)
F and (iv) of sub-section (i) of section 160 are liable as representative
assessees or any part thereof, is not specifically receivable on
behalf 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 (which persons are
hereinafter in this section referred to as the beneficiaries) are
G indeterminate or unknown, tax shall be charged as if such income
or such part thereof were the total income of an association of
persons, or where such income of such part thereof is actually
received by a beneficiary, then at the rate or rates applicable to
the total income or total world income of the beneficiary if such
H course would result in a benefit to the revenue.
C.l.T. v. SMT. KAMALINI [BHARUCHA, J.] 949

Section 166 read thus : A

11
Direct assessment or recovery not barred - Nothing in the forego-
ing sections in this Chapter shall prevent either the direct assess-
ment of the person on whose behalf or for whose benefit income
therein referred to is receivable or the recovery from such person B
of the tax payable in respect of such incorne. 11

We may now paraphrase, and thus emphasise, the provis10ns of
\ Chapter XV that are most material lo our discussion. By reason of section
160 trustees appointed under a trust deed or will who receive or are
entitled to receive on behalf or for the benefit of any person any income C
are representative assessees in respect of such income. Under section 161
every representative assessee is, as regards the income in respect of which
he is a representative assessee, subject to the same duties, responsibilities
and liabilities as if he income were income received by or accruing to or
in favour of him beneficially and he is liable to assessment in his own name D
.. in respect thereof. Such assessment, however, is deemed to be made upon
him only in his representative capacity and tax can be 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. A
representative assessee may not, in such capacity and in respect of income
received by him as a representative assessee, 1.Je assessed under any E
provision of the Act other than Chapter XV. Section 164 sets out : how tax
is to be charged where the share of the beneficiaries is unknown. It applies
when the persons mentioned in clauses (iii) and (iv) of sub-section (1) of
section 160 are liable as representative assessees. It, therefore, applies in
the case of trustees who receive or are entitled to receive income on behalf
or for the benefit of any person. Where income in respect of which the F
trustees are liable as representative assessces nis not specifica11y receivable
on behalf or for the benefit of any one person, or where the individual
shares of the persons on whose behalf or for whose benefit such inco1ne
or such part thereof is receivable ........... arc indeternllnate or unknown'1 tax
shall charge as if that income were the total income of an association of G
persons. Section 164 itself, therefore, sets out what a discretionary trust for
the purposes of the Act is. A discretionary trust is a trust whose income is
not specifically receiveable on behalf or for the benefit of any one person
or wherein the individual shares of the beneficiaries are indeterminate or
unknown. The rate of tax payable by trustees upon the income of a
.J-
discretionary trust is that which would be paid upon such income by an H
950 SUPREME COURT REPORTS [1994] 3 S.C.R.

A association of persons. Where, however, such income or a part thereof is
actually received by a beneficiary, tax shall be charge thereon at the rate
_,.. '

applicable to the total income of the beneficiary if this benefits the
Revenue. Section 166 states that nothing in sections 160 to 166 shall prevent
the direct assessment of the person on whose behalf or for whose benefit
income therein referred to is receivable or the recovery from such person
B of the tax payable in respect thereof.

Some analogous provisions of the Indian Income Tax Act, 1922, may
also be noted. Section 40 stated that where the guardian or trustee of any I
person being a minor, lunatic or idiot was entitled to receive on behalf of "'
such beneficiary or was in receipt on behalf of such beneficiary of any
c income, profits or gains chargeable under that Act, tax would be levied
upon and recoverable from such guardian or trustee in like manner and t6
the same amount as it would be leviable upon and recoverable from any
such beneficiary if of full age or sound mind and in direct receipt of such
income, profits or gains. More relevant are the provisions of section 41, i
D which read thus :
•
''Courts of Wards, etc - (i) In the case of income, profits or gains
chargeable under this Act which the Courts of Wards the Ad-
ministrator-General, the Official Trustees or any receiver or
manager (including any person whatever his designation who in
E fact manages property on behalf of another) appointed by or under
any order of a Court, (or any trustee or trustees (appointed under
a trust declared by a duly executed instrument in writing whether
testamentary or otherwise) (including the trustee or trustees under
any Wakf deed which is valid under the Mussalman Wakf Validat-
F ing Act, 1913), are entitled to receive ori. behalf of any person) the
tax shall be levied upon and recoverable from such Court of Wards,
Administrator-General, Official Trustee, receiver or manager (or
trustee or trustees), in the like manner and to the same amount as
it would be leviable upon and recoverable from (the person on
whose behalf such income, profits or gains are receivable), and all
G the provisions of this Act shall apply accordingly : .t

••
Provided that where any such income, profits and gains or any part
thereof are not specifically receivable on behalf of any one person,
or where the individual shares of the persons on whose behalf they
H are receivable are indeterminate or unknown, the tax shall be
C.I:f. v. SMT. .KAMALINI[BHARUCHA,J.] 951

levied and recoverable at the maximum rate, but, where such A
persons have no other personal income chargeable under this Act
and none of them is an artificial judicial person, as if such income,
profits or gains or such part thereof were the total income of an
association of persons :

Provided further that when part only of the income, profits and B
gains of a trust is chargeable under this Act, that proportion only
of the income, profits and gains receivable by a beneficiary from
the trust which the part so chargeable bears to the whole income,
profits and gains of the trust shall be deemed to have been derived
from that part. c
(2) Nothing contained in sub-section (1) shall prevent either the
direct assessment of the person on whose behalf income, profits
or gains therein referred to are receivable, or the recovery from
such person of the tax payable in respect of such income, profits D
or gains."

_. We may now revert to the High Court's judgments. The majority
judgment laid emphasis upon the word 11 charge 11 in the marginal note to
section 164 and upon the word "charged" in the body thereof. The charge
created by section 4 was in accordance with and subject to the provisions E
of the Act and it was held that, therefore, the charge in the case of the
special class of representative assessees created by section 164 prevailed
over the charge created by section 4. In cases falling under section 164 one
had to look only to its provisions rather than to the provisions of section
161. The word 11receivable 11 in the context in which it occurred in section
164 indicated that it was the trust deed that one had to look at and not the F
actual exercise of discretion by the trustees in the course of the year.
Section 166 permitted the direct assessment of the beneficiary when it
could possibly be done under the provisions of sections 160 to 169 in
Chapter XV. What was crucial was not section 166 but section 164; because
if, under section 164, it was not open to the Revenue to proceed against G
the beneficiary, it was not open to the Revenue to treat the income of the
trust except as the income of a fictional association of persons. The last
portion of section 164 only gave an option as to rates at which the tax was
to be levied. The inte~est of a beneficiary under a discretionary trust was
merely his right to be considered by the trustees. Because of the impos-
sibility to deal with income in such cases the legislature had made the H
952 SUPREME COURT REPORTS l1994j 3 S.C.R.

A special provision of section 164. The question \l/as, accordingly, answered
by the majority judgment in the negatjvc, that is, in favour of the assessec
and against the Revenue.

The dissenting judgment noted that tax liability arose on the last date
of an accounting year. It was, therefore, permissible to tax a beneficiary
B under a discretionary trust provided that, upon exercise of the discretion
conferred upon the trustees under the trust deed before the last date of
the accounting year in which the income was received, they had indicated
that a part or the whole thereof was of the beneficial ownership of one or
more of the beneficiaries. The money in question, so soon as the discretion
was exercised in favour of one of more beneficiaries, was receivable by
c them in fulfillment of the disposition made by the trust deed and what was
merely a right to be considered as a potential recipient of a benefit became
a vested right to receive the income or part of it according to the exercise
of the discretion by the trustees. The money in question, as soon as the
discretion was exercised, was held in trust for the respective beneficiaries
D and they became entitled to receive the same. In other words, before the
accounting years ended and the tax liability arose the beneficiaries were
the persons in whon1 a vested right to receive and control the income arose.
There was, therefore, no reason why, on principle, the resulting payment
upon the exercise of discretion could not be taxed opt<onally in the hands
of the beneficiaries for they were the persons in actual receipt and control
E of the income. Section 164 was no more than an enabling section similar
to section 161(1) and nothing more or less could be read therein. In cases
covered by section 161(1) the option could be exercised on the strength of
the trust deed itself since the income in such cases was specifically receiv-
able by the trustees on behalf of or for the benefit of a single beneficiary
or, where there were more beneficiaries than one, the individlial shares of
F the beneficiaries were determinate and known. So far as cases covered by
section 164 were concerned, the exercise of the option became possible
only upon the discretionary trustees allocating amongst the beneficiaries
the whole or part of the income in the exercise of their discretion during
the accounting year for, upon the happening of such event, the income was
G received by the beneficiaries in fulfillment of the disposition made by the
trust deed and such income became chargeable to tax in the hands of the
beneficiaries in view of the provisions of sections 4 and 5 of the Act. As
regards the use of the word 'charge' in the marginal note and the body of
section 164 in contradistinction to the use of the expression 11 levied upon
and recovered from" in section 161, the difference in the choice of language
H
C.LT v. SMT. KAMALIN! [BHARUCHA, J.] 953

was of no significance .. The word 'charge' in section 164 could only be A
construed as conveying the meaning levied ar.d recovered'. Section 166 was
attracted in cases covered by .section 164 where the beneficiaries had
received the income or part thereof pursuant to the exercise of discretion
by the trustees of a discretionary trust in the course of the same accounting
year. Even as;uming that the word 'receivable' in section 164 had to be
interpreted to mean receivable under the trust deed and that it was the B
trust deed that one had to look at, this interpretation did not come in the
way of holding that even a discretionary beneficiary, pursuant to the
exercise of discretion in his favour and upon his receiving his share_.of the
income in the course of the accounting year in which it was received by the
trustees, was liable to be assessed and taxed in respect thereof. The c
dissenting judgment, therefore, answered the question that was posed in
the affirmative, that is to say, in favour of the Revenue and against the
assessee.

The learned Solicitor General appearing for the Revenue submitted
, that when income was received on behalf of a beneficiary of a trust, the D
beneficiary couid be directly assessed under Section 5. The Act did not
intend to levy tax except in relation to the person who received income
beneficially. Sections 160 to 166 were 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 conceP.t of a "repre·
sentative assessee 11 as also the fiction that he received the i~come benefi- E
cially. At the same time, it was made clear that the representative assessce's
liability did not extend beyond the limit of the direct assessee, implicitly
recognising the liability of the direct assessee to be assessed. When the
beneficiaries of a trust or their shares therein were indeterminate or
unknown the first part of section 161 applied for the liability of the trustee F
., of a discretionary trust flowed from section 161. The second part of section
161, namely, levy and recovery in like manner and to the same extent, \Vas
inherently inapplicable to the situafon and it was here that section 146
made special provision as to the status in which and the rate at which the
lax was to be levied and recovered from the trustee. No judgment stated
that the income of a trust must only be assessed in the hands of the trustee. G
What was stated was that where the assessment was made in the hands of
the trustee, it could only be made in terms of the provisions of section 160
to 166, or the equivalent provisions of sections 40 and 41 of the 1922 Act.
•__i... Even where the trustee was taxed it was the beneficial interest which was
taxed. There was and could be no dispute that in the case of a specific trust H
954 SUPREME COURT REPORTS [1994) 3 S.C.R.

A the Revenue could assess and recover the tax from the beneficiary even
though the trustee was the first recipient of the income and had legal title
thereto. On a parity of reasoning, there was no impediment to taxing the
beneficiary of a discretionary trust when he had received the income in the
accounting year. Section 161 made the representative assessee subject to
the same duties, responsibilities and liabilities as if the income was received
B by him beneficially. It was necessary to create this fiction because it was
never the object or intention of the Act to charge tax upon anybody other
than the beneficial owner of the income. Having created the fiction of
beneficial receipt, protection was given to the representative assessee by
providing that the tax in his hands would be levied upon and recovered
from him in the like manner and to the the same extent as it would be
c lcviable upon and recoverable from the person represented by him. It was
implicit in this that the tax could be leviable upon and recoverable from
the person represented by the representative asses.see.

In the submission of Mr. Salve, learned counsel for the asses.see,
D section 161 dealt generally with the taxation of all representative assessees,
including trustees, whereas section 164 was a special provision applicable
to discretionary trusts and was a complete code which laid down not only
the mode and manner of taxation but also prescribed the basis and extent
of the charge of tax. Section 164, therefore, excluded the application of
Section 161 wherever it became applicable on account of the existence of
E the circumstances therein mentioned. The assessment of beneficiaries even
where their shares were unknown was unworkable because there could not
be a fragmanted assessment, partly on the trustees and partly on the
beneficiaries. The tax was on the accrual of income upon the person who
was in direct control thereof. The point at which the income was levied was
when the income accrued to the trustees. The distribution of income did
F not clothe the sum received by the beneficiary with the character of income
'·
which could be taxed once against on its receipt. The argument that there
were two limbs to section 161 was misconceived because the trustees were
liable to tax as owners and a beneficial interest in the income was not a
condition essential to make the income taxable. Any person in effectual
G control of income could be taxed thereon, the subsequent deployment
being irrelevant. It was conceivable that in certain circumstances, e.g., in
the case of a specific trust in which a specific beneficiary was in direct
receipt or control of specified income, the beneficiary could be directly
assessed on general principles. Section 166 only clarified that if, generally,
--L~'
•
in law a beneficiary could be assessed to tax then the provisions of sections
H 160 to 165 not by implication bar direct assessment.
C.l.T. v. SMT. KAMALINI [BHARUCHA J.] 955

There are three judgments of this court which have a bearing on A
, :>.,. these appeals. In C.R. Nagappa v. Commissioner of Income Tax, 73 !TR \
626 (SC), the asse.<;see had executed several trust deeds settling specific
properties for the benefit of his minor children. Under each deed he had
settled certain properties for the benefit of a named minor child and had
vested the properties in four trustees, namely, himself, his two wives and a
married daughter. Under each of the trust deeds a portion of the income B
was to be utilised immediately for the benefit of the beneficiary and the
balance was to be accumulated and handed over to the beneficiary upon a
stated date. It was contended on behalf of the appellant that the Income-
)- tax Officer was bound to assess the income under each trust deed separate-
ly in the hands of the trustees as representative assessees and, by reason
of section 161(2), w~s inccmpetent to assess the income in the hands of
c
either the appellant or the beneficiaries. This court held 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, but he was not bound to do so. He could assess
either the representative assessee or the person represented by him, and D
this was expressly so enacted in section 166. The Income-tax Officer could
J assess the person represented in respect of the income of the trust property
. and the appropriate provisions of the Act relating to the computation of
his total income and the manner in which the income was to be computed
would apply to such assessment. The Income-tax Officer could also assess
the representative assessee in respect of that income and limited to that E
extent and tax could be levied and recovered from the representative
assessee to the same extent as it was leviable upon and recoverable from
the person represented by him. The contention raised by the appellant's
counsel that since the trustees were assessable in respect of the income of
the beneficiaries under section 161(1), that income could not by virtue of
F
)
section 161(2) be assessed in the hands of the beneficiaries was contrary
to the plain terms of section 166. Section 161(2) did not purport to deny
~

the Income-tax Officer the option of assessing the income in the hands of
the person represented by the representative assessee. It merely enacted
that when a representative assessee was assessed to tax in the exercise of
the opinion of the Revenue, he could be as:.essed only under the provision G
of Chapter XV and under no other provisions of the Act. It was pointed
out that section 161(2) had been enacted to remove the conflict of judicial
opinion which had arisen in regard to the interpretation of the analogous
provisions of Sections 40 and 41 of the 1922 Act. The observations of
Chagla, C.J. of the Bombay High Court in the case of CIT v. Balwantrai
·-~ H
956 SUPREME COURT REPORTS [1994[ 3 S.C.R.

A Jethala/ Vaidva, 34 !TR 787, which dealt with the scheme of section 41 of
the 1922 Act, were approved. They read : ·-1-A
' .................. it is clear that every case of an assessment against a
tru~tee must fall under Section 41, and it is equally clear that, even
though a trustee is being assessed, the assessment must proceed
B in the manner laid down in Chapter III .........Seclion 41 only comes
into play after the income has been computed in accordance with
Chapter lll. Then the question of payment of tax arises and it is
al that stage that Section 41 issues a mandate lo the taxing depart-
ment that, when they are dealing with the income of a trustee, they
c must levy the tax and recover it in the manner laid down in Section
41."

The same considerations applied to the interpretation of section 161(2). It
merely enacted that when income was assessed in the hands of a repre-
sentative asses.see in his own name the assessment would be deemed to be
D made upon him in the representative capacity only and tax could be levied
and recovered in the manner provided in section 161(1).

In Jyotendrasinhji v. S. I. Tripathi and others, 201 ITR 611 (SC), a ,.
Bench of two learned Judges of this court founded their judgment prin-
cipally upon Nagappa's case and concluded that by virtue of Section 166
E the Revenue had an option in the case of the income of a discretionary
trust either to make an assessment upon the trustees or to make an
assessment upon the beneficiaries.

In Commissioner of Wealth-Tax, A.P. v. Trnstces of H.E.H. Nizam's
F Family (Remainder Wealth) Trost, 108 ITR 555 (SC), this court was dealing
with provisions of the Wealth-tax Act, 1957, analogous to sections 160 to
166 of the Act and sections 40 and 41 of the 1922 Act. Section 21(1) of the
Wealth- tax Act stated that in the case of assets chargeable to tax there-
under which were he1d, inter alia, by a trustee appointed under a trust deed,
wealth-tax Plshall be lcviable upon and recoverable from the ................ trus-
G tee ............ in the like manner and to the same extent as it would be leviable
upon and recoverable from the person on whose behalf the assets are
held ................. " Sub-section (2) stated that nothing contained in sub-section
(1) would prevent either the direct assessment of the person on whose
behalf the assets were held or recovery from him of the tax payable in
H respect thereof. This was a case in which the late Nizam of Hyderabad had
Cl.T. v. SMT. KAMALINI [BHARl,JCHA. J.] 957

created several trusts. For the purposes of the judgment it was sufficient A
that the provisions of what was called "the family trusf1 were referred to.
By the trust deed the Nizam had transferred a corpus of rupees nine crores
to the trustees to be notionally divided into 175 equal units, of which
166-1/2 units were allotted to the relations mentioned in the second
schedule to the trust deed in the manner specified therein, the number of
B
units allotted to each relation being mentioned there. The Wealth-tax
Officer assessed only the value of 13 units in the hands of the trustees and
the value of the other units in the hands of the representative beneficiaries.
The matter reach the High Court upon a reference by the Income Tax
Appellate Tribunal and thereafter this Court. The question that was con-
sidered was whether assessment could be made on the trustees under c
section 3 apart from and without reference to section 21. The answer was
seen to depend upon the true meaning and effed of sections 3 and 21 and
the inter-relation between them. Section 3 was the charging section and it
levied the charge of wealth tax on the net wealth of the assessee on the
relevant valuation date. Net wealth was defined in section 2(m) to mean " D
the amount by which the aggregate value computed in accordance with the
provisions of this Act of all the assets, wherever located, belonging to the
assessee on the valuation date is in excess of the aggregate value of all the
debts owned by the assessee on the valuation date". It was clear from this
definition that any property, wherever located, 11belonging to 11 the assessee E
on the relevant valuation date would be includible in the net wealth of the
assessee assessable to wealth tax. An argument was advanced on behalf of
the trustees that assets held by a trustee in the trust for others could not
be said to be assets "belonging to" the trustee so as to be included in his
net wealth. The assets so held were not the trustee's property in any real
sense. They were the property of the beneficiaries and the beneficiaries
F
were the true owners. The trustee could not, therefore, be assessed to
wealth tax in respect of the trust properties under Section 3. It was for this
reason~ went the argument, that special provision had to be made in Section
21 for assessing the trustee and hence asses,n1cnt on the trustee could only
be made in accordance with such special provision. Pritna facie, this court G
observed, there seemed to be force in the argument but it was not thought
necessary to express any final opinion since there was an alternative
argument advanced on behalf of the assessee which left no room for doubt.
For this purpose it was assumed that the trustee of a trust could be
assessable in respect of the trust properties under section 3 even in the H
----~
958 SUPREME COURT REPORTS (1994] 3 S.C.R.

A absence of section 21. But section 3 imposed the charge of wealth tax
subject to the other provisions of the Act and these other provisions
included section 21. Section 3 was, therefore, made expressly subject to
section 21 and had to yield to that section in so far as the latter made
special provision for the assessment of a trustee of a trust. Section 21 was
B mandatory in its terms. It was clear on a combined reading of sections 3
and 21 that whenever assessment was made on a trustee, it had to be made
in accordance with the provisions of section 21. Every case of assessment
on a trustee would necessarily fall under section 21 and he could not be
assessed apart from and without feference to that section. To take a
contrary view, giving option to the Revenue to assess the trustee under
c section 3 without following the provisions of section 21, would be to refuse
to give effect to the words "subject to the other provisions of this Act in
section 311 , to ignore the maxim 'f;eneralia specialibus non derogant 11 not to
deny mandatory force and effect to the provisions of Section 21. The court
noted that in Nagappa's case the observations of Chag/a. CJ. quoted above
D had been approved and the court went on to state that the same considera-
tion must.apply in the interpretation of section 161(2).It had, therefore, to
be held uncontrovertible that whenever a trustee was sought to be assessed
that assessment had to be made in accordance with section 21. It had also
to be noted that the assessment which was to be made to a trustee under
E section 21 was an assessment in a representative capacity. It was really the
beneficiaries who were sought to be assessed in respect of their interest in
the trust properties through the trustees. Section 21 provided that in
respect of the trust properties held by a trustee wealth-tax could be levied
upon him in the like manner and to the same extent as it would be Jeviable
on the beneficiary for whose benefit the trust properties were held. This
F provision could apply only where the trust properties were held by the
trustee for the benefit of a single beneficiary or, where there were more
beneficiaries than one, the individual shares of the beneficiaries in the trust
properties were determinate and known. Where such was the case wealth~
tax could be le;icci on the trustee in respect of the interest of any particular
G benefit under the trust properties in the same manner and to the same
extent as it would be leviable upon the beneficiary and in respect of such
interest in the trust properties the trustee would be assessed in a repre-
sentative capacity as representing the beneficiary. This did not mean that
the Revenue could not make a direct assessment on the beneficiary in
H respect of the interest in the trust property which belonged to him. The
C.I.T. v. SMT. KAMALINI [BHARUCHA, J.] 959

beneficiary would always be assessable in respect of his inter~st in the trust A
'"."~· properties since such interest belonged to him and the right of the Revenue
to make direct assessment on him in respect of such interest stood unim-
paired by the provisions enabling assessment to be made on the trustee in
a representative capacity. Sub-section (2) made this clear. What was im-
portant to note was that in either case what was taxed was the interest of
the beneficiary in the trust properties. Where the beneficiaries were more
B
than one and their shares were indeterminate or unknown the trustee
would be assessable in respect of their total interest in the trust properties.
y Obviously in such a case it was not possible to make direct assessment on
the beneficiaries in respect of their interest in the trust properties because
their shares were indeterminate or unknown and that is why it was provided c
that the assessment could be made on the trustee as if the beneficiaries for
whose benefit the trust properties were held were an individual. The
beneficial interest was treated as if it belonged to one individual beneficiary
and assessment was made on the trustee in the same manner and to the
same extent as it would be made on such fictional beneficiary. In this case
D
too it was the beneficial interest which was assessed to wealth tax in the
hands of the trustee .
...
It may be added that this court in the case of Commissioner of
Wealth-tax v. Kirpashankar Dayashankar Worah, 81 ITR 763 (SC), has held
that section 21(1) of the Wealth-tax Act, 1957, was analogous to section E
41(1) of the 1922 Act, the only difference being that whereas the former
dealt with assets the latter dealt with income and, subject to this difference,
the two provisions were identically worded. Hence, the decisions rendered
under section 41(1) of the 1922 Act had a bearing upon the interpretation
)
of section 21(1) of the Wealth-tax Act. F
' Mr. Salve drew our attention to the judgment of this court in Com-
missioner of Wealth-tax; Gujarat II, Ahemdabad v. Arvind Narottam, (1988]
4 sec 113, where the trust deed provided for payment to the beneficiary
of a minimum sum and left it to the discretion of the truStees whether or
not any further distribution of income should be made. There were similar G
provisions in relation to the corpus of the trust. The court held that only
the minimum guaranteed income could be said to be the property of the
beneficiary. On the distribution of the accumulated balance at the end of
,,,..__~
the stipulated period, there was no right in the beneficiary to receive any
part thereof; it was open to the trustees to ignore him altogether and they H
960 SUPREME COURT REPORTS [1994] 3 S.C.R.

A could pay it to such other members of the family as they chose. It was,
therefore, held that it was only the capitalized value of the interest of the ...A"'
assessee that had to be included in his net wealth.

Both sides cited some English decisions but we do not think it
profitable to refer to them for what we are really concerned what is the
B interpretation of the language employed in the relevant provisions of the
Act.

As the judgments of this Court referred to above lay down, a repre-
sentative assessee may be assessed in respect of income received by him as
c such and tax recovered from him thereon only under and in the manner
provided by the provisions in the statute dealing with representative asses-
sees. 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. The question then is : is the
trustee of a discretionary trust liable to be taxed in respect of the income
D
of the trust and tax recovered from him thereon by reason of the provisions
of section 164 alone or has section 164 to be read with the other provisions
dealing with representative assessees, viz., sections 160 to 163 and 165 and ..
166? In other words, is, as Mr. Salve contended, section 164 is code in
itself dealing with all matters relating to a discretionary trust?
E
To begin with, the trustee even of a discretionary trust is by reason
of the terms of section 160, a representative assessee. Section 161(1) sets
out the liability of a representative assessee. Its first part makes him
subject, as regards the income in respect of which he is a representative
F assessee, 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 made liable to assessment in his own name in respect thereof.
The second part affords protection to the representative assessee; it states
that such assessment shall be deemed to be made upon him only in his
representative capacity and also that tax may be levied upon and recovered
G from him only in like manner and to the same extent as it would be leviable
upon and recoverable from the person representated by him. Section
161(2} gives the representative assessee a further measure of protection by
making it explicit that "he shall not in respect of that income be assessed
under any other provisions of this Act". This is of significance for nany other
H provisions of this Act" must plainly mean any provision of the Act other
C.I.T. v. SMT. KAMALINI [BHARUCHA.J.] 961

than section 161. A
Section 164 states that where any income in respect of \Vhich a trustee
is liable as r~presentative asses.see is not specifically receivable on behalf
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 part thereof
B
is receivable are indeterminate or unknown, tax shall be charged as if such
income were the total income of an association of persons or where such
income or part thereof is actually received by a beneficiary, then at the rate
applicable to the total income of the beneficiary if such course benefits to
Revenue. Put differently, section 164 states that tax shall be levied upon
the income of a discretionary trust as if it were the total income of an C
association of persons, except that if it or part of it is actually received by
a beneficiary it or that part of it becomes chargeable to tax at the rate
applicable to the total income of the beneficiary if that course is beneficial
to the Revenue. Section 164 does not create a charge on the income of a
11 11
discretionary trust. The word charged in the context in which it is used D
in section 164 means only levied Section 164 does not make the trustee
11 11
•

, of a discretionary trust liable to assessment or the recovery of tax on the
income of the trust. Section 164 harks back to section 161 when it refers
to 11 persons............ liable as representative assesses". It is section 161,
therefore, which has to be read to make the trustee even of a discretionary E
trust liable to assessment and recovery of tax on income received by him
as a trustee. 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
F
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 protec-
tions, as, clearly, they must be given to all representative assessees.

The liability of a trustee of a discretionary trust to be assessed to tax G
in respect of its income and to recovery thereof is created by section 161
and it also states that he is not liable to such assessment under any other
provisions of the Act. Section 164 set out only how such tax shall be
charged when the income is not distributed and when the income is
· - _. distributed. H
962 SUPREME COURT REPORTS [1994] 3 S.C.R.

A It does appear, therefore, that Section 164 cannot l;ie read as being
a code in itself applicable to the taxation of the income of a discretionary
trust. Consequently, it cannot be held that the benefici~ry of a discretionary
trust, even he has received its income in the accoun~ing-,,ear, cannot be
taxed thereon because Section 164 does not provide for such contingency.
The principle contention raised by Mr. Salve on behalf of the assessee
B must, accordingly, be rejected.

Why, then, should the beneficiary of a discretionary trust stand on a
footing different from that of the beneficiary of a specific trust? It is true y '
that the language of section 166 does not avail the Revenue because it
c states that sections 160 to 165 do not prevent "either the direct assessment
of the person on whose behalf or for whose benefit income therein referred
to is receivabe for the recovery from such person of the tax payable in
respect of such income. 11 The section is clearly clarificatory. It does not
empower any assessment or recovery by itself. It only makes it clear that
sections 160 to 165 do not bar the direct assessment of the person on whose
D
behalf or for whose benefit the income is receivable or the recovery from
such person of the tax payable thereon, provided that is permissible under
any other provisions of the Act. Even so, since the word used in section
166 is 11 receivablen it cannot apply to a discretionary trust for it cannot be
11 1
"
said that the income thereon is receivable' for one or more beneficiaries,
E it being left to the discretion of the trustees whether or not the income
should be distributed to one or more of the beneficiaries or not at all. But
that is not to say that the beneficiary of a discretionary trust, because he
does not fall within the ambit of section 166, may not be assessed upon
income received by him and tax recovered from him thereon if that is
F permissible under any other provisions of the Act for, as aforestated,
section 166 is merely clarificatory. Section 5 of the Act defines the total 4
income of any person to include income received by him or received on ~

his behalf or which accrues or arises to him. A person may be directly
assessed in respect of such income. The income of a discretionary trust
which is within the accounting year distributed to an'cl received by the
G beneficiary would, therefore, be subject to assessment in his hands and
thereon would be recoverable from him. Such income could squarely fall
within the broad sweep of total income under section 5 and the beneficiary
would be liable to assessment and recovery of tax thereon under Section 4.

L..._
H In Nagappa's case this was clearly stated. It was said that it was
CI.T. 1·. SMT. KAMALINI [BHARUCHA l.) 963

implicit in the terms of section 161(1) that the Income Tax Officer could A
assess a representative assessee as regards the income in'respect of which
he \Vas a representative assessee, but he \Vas not bound to do so. He could
assess the representative asscssee or the person represented by him. It must
also be remembered, as was said in the case of the Nizam's Family Trust,
that when a trustee is assessed to tax upon I he income of the trust it is
"really the beneficiaries who are sought to be assessed in respect of their
B
interest in the trust properties through the trustee 11 • In the absence of an
express provision it is difficult to hold that the beneficiaries of a discretion,
ary trust are not liable to be assessed in respect of their interest in the trust
properties even when such interest is identified in the accounting year and
that the trustees who represent them alone are so liable so that tax can be C
recovered only from them.

We hold, accordingly, that the Revenue has the option to assess and
recover tax from either the trustees or the beneficiaries of a discretionary
trust in respect of such income thereof as has been distributed and received
by the beneficiaries in the course of the accounting year. D
• The appeals are allowed. The judgment (of the majority) under
appeal is set aside. The references arc answered in the manner aforestated.

There shall be no order as to costs.
E
R.R. Appeals allowed.

J
....