Holding

The trust’s income must be computed under the Income Tax Act, including permissible deductions, and the disallowed portion of interest is correctly denied as a deduction.

Summary

Mrs. Arundhati Balkrishna, a beneficiary of the Shrimati Arundhati Balkrishna Trust, claimed deductions for interest paid by the trust on amounts withdrawn from an estate account. The Income Tax Officer disallowed part of the interest, holding that some withdrawals were for personal expenses. The assessee appealed to the Assistant Commissioner, then to the Income Tax Appellate Tribunal, and finally raised two questions of law before the Gujarat High Court: (i) whether the disallowed portion of interest was correctly denied, and (ii) whether her assessable income should be the net income of the trust computed under the Income Tax Act, not merely the amount actually received by her. Both the Tribunal and the High Court dismissed the appeals, and the Supreme Court affirmed that the trust’s income must be computed according to Sections 161(1) and 166 of the Income Tax Act, taking permissible deductions into account, and that the disallowance of the interest portion was correct. Consequently, the appeals were dismissed with costs.

Issues considered

Whether the portion of interest paid by the trust, attributable to withdrawals for personal expenditure, is admissible as a deduction against the assessee’s other income.
Whether the assessable income of a beneficiary of a trust is the net income of the trust as determined under the Income Tax Act, rather than the actual amount received by the beneficiary.

Legislation cited

Income Tax Act, 1961s. 161(1), s. 166

Subjects

Income TaxTrust incomeRepresentative assesseeSection 161Section 166Deduction of interestTax assessment of trust beneficiaries

Judgment

-~ MRS. ARUNDHATI BALKRISHNA A
v.
COMMISSIONER OF INCOME TAX

MARCH 1, 1989

[R.S. PATHAK, CJ AND RANGANATH MISRA, J.J B
~

Income Tax Act, 1961-S. 161(1) read withs. 166--Computation
of assessee's income derived from a Trust-Real income of Trust to be
"'-i included in the total income of assessee after taking into consideration
different items ofpermissible deductions in relation to that income.

The appellant was an assessee who derived income from a Trust.
c
For assessment years 1964-65 and 196(i-67 the Income Tax Officer dis-
1 allowed deduction of two amounts claimed as interest paid by the Trust
for amounts withdrawn from an Estate Account for investment on the
ground that a portion of the amounts withdrawn from the Estate
Account bad been utilized for personal expenditure by the assessee. The D
appellants appeals to the Assistant Commissioner having been rejected,
she preferred second appeals to the Appellate Tribunal raising an addi·
tional question in respect of the assessment year 1964-65 that she was
liable to tax on the net income only received by her from the Trust and
~
not on income determined in accordance with the provisions of the.
Income Tax Act in the case of the Trust. The Tribunal dismissed the E
appeals but at the instance of the appellant referred the two questions of
law arising therein to the High Court which answered both of them
I against the assessee.

t- Dismissing the appeals,

f HELD: It is not the income shown in the books of account of the
F

Trust actually paid to the assessee after deduction of the outgoings from
the income received in the bands of the Trust, but the real income of the
Trust bas to be included in the total income of the assessee after taking
into consideration the different items of permissible deductions in rela-
lion to that income. l869E-F] G

~- It is apparent from s. 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 H

865
866 SUPREME COURT REPORTS I 1989] 1 S.C.R.

liable to assessment in bis own name in respect of that income; but any
A
such assessment is dee1111ed to be made upon him in his 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 recover-
able from the person represented by him. And s. 166 of the Act clarities
that the provisions relating to the liability of a representative assessee
B 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 figure. What the trustee receives as the income
pertaining to the beneficiary is received by him under an obligation to
c pass on that income to the beneficiary. However, in most cases adminis-
tration charges and expenses have to be met out of the Trust's income
and it is only the net income which reaches the beneficiary. If the
income had to pass directly to the beneficiary and not under trust
through a trustee, the beneficiary would have equally to meet those
D outgoings, leaving a net income in his hands which for the purposes of
the Income Tax Act would have been computed after reducing the gross
income by the deductions admissible under the Act. l868H; 869A·EI

(ii) The High Court was right in deciding the question relating to
the disallowance of part of the interest claimed as a deduction against
E ~the assessee. l868FI

Padmavati Jaikrishna v. Addi. Commissioner of Income-Tax,
Gujarat, 11987] 166 I.T.R. 176, referred to.
I
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 80 -i
F & 81 of 1975. r
From the Judgment and Order dated 26/27.8.1974 of the Gujarat
High Court in LT. Reference Nos. 7 and 29 of 1973.

S.C. Patel for the Appellant.
G
Dr. V. Gauri Shanker and Ms. A. Subhashini for the Res·
pondent.

The Judgment of the Court was delivered by

H PATHAK, CJ. The appellant is an assessee who derives income
MRS. ARUNDHATI v. C.l.T. [PATHAK, CJ.[ 867

from various sources, including income from the Shrimati Arundhati A
Balkrishna Trust, Ahmedabad. In a~sessment proceedings for the
assessment year 1964-65 the Income Tax Officer found that a sum of
Rs.10,880 had been debited to the interest account maintained in the
books of the Ahmedabad Trust as interest paid to the Harivallabhadas
Kalidas Estate Account. Upon further scrutiny, he discovered that
substantial debits totalling Rs.2,19,804 included withdrawals from the B
Estate Account by the Ahmedabad Trust on ac~ount of the personal
expenses of the assessee. After taking into consideration earlier with-
drawals from the Estate Account by the Ahmedabad Trust for the
purpose of investment and making.adjustments for deposits during the
year, the Income Tax Officer concluded that the net withdrawals from
the Estate Account for personal expenditure were Rs.3, 10,806. He
held that the proportionate interest of Rs.6, 199 out of the total .interest
c
of Rs.10,880 paid by the Ahmedabad Trust to the Estate Account was
referable to such withdrawals, and therefore constituted an inadmissi-
ble deduction. Similarly, for the assessment year 1966-67 the Income
Tax Officer found that a sum of Rs.25 ,496 had been shown in the
books of account of the Ahmedabad Trust for the relevant previous D
year as interest paid to the Estate Account. He held that of this sum,
an amount of Rs.12,833 was referable to withdrawals for purposes
other than investment, and accordingly he disallowed the claim of
interest to that extent.

The assessee appealed to the Appellate Assistant Commissioner E
of Income-Tax, and failing there he proceeded in second appeal to the
Income Tax Appellate Tribunal, claiming that the entire amount of
interest should have been allowed as a deduction for each year. An
additional question raised in respect of the assessment year 1964-65
related to the point whether the assessee was liable to tax on the net
income only received by her from the Trust or the income determined F
in accordance with the provisions of the Income Tax Act in the case of
the Trust. The Appellate Tribunal dismissed the appeals of the
assessee.

At the instance of the assessee the Appellate Tribunal referred
the following questions of law to the High Court of Gujarat in respect G
of the assessment year 1964-65:

"(1) Whether, on the facts and in the circumstances of the
case, the Tribunal was right in not holding ihat out of
the interest payment of Rs.10,880, Rs.6,199 was not
an admissible deduction against the income from H
other sources?
868 SUPREME COURT REPORTS 119891 1 S.C.R.

(2) Whether, on the facts and in the circumstances of the ~
A
case, the income includible in the total income of the
assessee is income determinable as per provisions of
the Income Tax, 1961 in the case of the Trust or the
income receivable by the assessee from the said
trust?"
B
The question referred to the High Court for assessment year
1966-67 was:

"Whether on the facts and in the circumstances of the case,
the Tribunal was right in holding that out of the interest
payment of Rs.25,496, Rs.12,833 was not an admissible
c deduction against the income from other sources?"

The High Court held that the question relating to the disallo·
wance of part of the interest for the two assessment years was rightly
decided against the assessee and in favour of the Revenue. On the
D second question in the reference for the assessment year 1964-65, the
High Court held that the income includible in the total income of the
assessee was income determinable in accordance with the provisions of
the Income Tax Act in the case of the Trust and not the income
actually received or receivable by the assessee from the Trust or
according to the entries in the books of accounts of the Trust. In the
E result that question was also answered against the assessee and in
favour of the Revenue .
.
In regard to the question arising in each of the assessment years
1964-65 and 1966-67 relating to the disallowance of part of the interest
claimed as a deduction by the assessee, the High Court relied on the
F view taken by it earlier in Shrimati Padmavati Jaykrishna v. Commis·
sioner of Income Tax., [1975] 101 I.T.R. 153. The judgment of the
High Court was considered in appeal by this Court in Padmavati
Jaikrishna v. Addi. Commissioner of Income-Tax, Gujarat, [19871166
I.T.R. 176 and this Court affirmed the view taken by the High Court.
For the reasons which found favour with this Court in that case, we
G must answer the question in the two appeals before us against the
assessee and in favour of the Revenue.

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
H by it on behalf of the assessee. It is apparent from s. 161(1) of the
MRS. ARUNDHATI v. C.l.T. [PATHAK, CJ.] 869

Income Tax Act, 1961 that a representative assessee, that is to say a A
trustee, as regards the income in respect of which he is 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
B
upon him in his representative capacity only, and the tax is levied upon
t 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. Ands. 166 ofihe.Act clarifies that the provisions relating to
the liability of a representative assessee will not prevent either the
direect assessment of the person on whose behalf or for whose benefit
income is receivable, or the recovery from such person of the tax c
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 a'ssessed must be in the same figure.
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
D
beneficiary. However, in most cases administration charges and
expenses have to be met out of the Trust's income and it is only the net
income which reaches the beneficiary. If the income had to pass
directly to the beneficiary ancinot under trust through a trustee the
beneficiary would have equally to meet those outgoings, leaving a net
income in his hands which for the purposes of the Income Tax Act
would have been computed after reducing the gross income by the
E
deductions admissible under the Act. It seems to us clear that it is not
the income shown in the books of account of the Ahmedabad Trust
actually paid to the assessee after deduction of the outgoings from the
income received in the hands of the Ahmedabad Trust, but the real
income of the Ahmedabad Trust has to be included in the total income
F
of the assessee after taking into consideration the different items of
permissible deductions in relation to that income. We are of opinion
that the High Court is right in the view which it has taken.

In the result, the appeals fail and are dismissed with costs.

Appeals dismissed. G
H.L.C.