Daksha R. Sheth v. Seventh Income-Tax Officer — 1989 DIGILAW 573 (MAD)

ORDER Per Shri T. N. C. Rangarajan, Judicial Member - This appeal reiterates the claim for deduction under section 80L of the Income-tax Act, 1961. 2. The assessee is an individual. She was in receipt of a share of income from the Ramesh Trust in which she was a beneficiary. She claimed that of the said share a sum of Rs. 3,300 represented interest from bank which was eligible for deduction under section 80L. The I. T. O. was of the opinion that since Ramesh Trust was assessed in the status of an Association of Persons, the assessee was not eligible to the deduction in view of the provisions of sub-section (3) of section 80L. This was confirmed on appeal. 3. In the further appeal before us it was contended on behalf of the assessee that the trust returned the income only a representative capacity but the status was taken as "Association of Persons" for assessment purposes and it could not have any bearing on the question whether the assessee was entitled to the deduction as the beneficial owner of the income. On the other hand, the revenue relied on the provisions of sub-section (3) of section 80L and contended that since the assessment of the trust in the status of Association of Persons has become final, the assessee was not entitled to any relief. 4. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to the deduction claimed. It is not in dispute that the assessee is a beneficiary under a trust and the income which was received was bank interest eligible for deduction under section 80L. Therefore, it was prima facie exempt under that section. 5. The objection of the revenue is that since the trust is assessed in the status of Association of persons, the deduction should be denied under the provisions of section 80L (3). The assessee claims that the assessment of the trust in the status of Association of Persons was not in accordance with law. But the revenue resists this contention by claiming that the issue cannot be raised as the assessment has become final. 6. We are unable to accept this objection of the revenue. The present assessment concerns the income of the assessee, since it is the assessee who is the beneficial owner of the income. But the revenue resists this contention by claiming that the issue cannot be raised as the assessment has become final. 6. We are unable to accept this objection of the revenue. The present assessment concerns the income of the assessee, since it is the assessee who is the beneficial owner of the income. It is also not in dispute that this income is eligible for deduction under section 80L as such. The assessment of the trust is only in a representative capacity and it cannot be any different from the status in which the assessee is to be assessed. See CWT v. Trustees of H. E. H. Nizams Family (Reminder Wealth) Trust [1977] 108 ITR 555 (SC). There is nothing to show that the assessee formed an Association of Persons with any other beneficiary. In the circumstances, the correct status that could be taken in the case of the trust can only be the same status as that of the assessee viz. individual. Perhaps the trust attracted higher rate of tax applicable to the status of Association of persons under the provisions of section 164. But that is only for rate purposes and does not change the status of the trust itself. Even if such a status is taken in the case of a trust erroneously, it will not be binding on the assessee who can certainly question it in the collateral proceedings, because it is well settled that the rule of res judicata does not apply to collateral proceedings. 7. Even if we assume that the status of Association of Persons was correctly taken in the hands of the trust, the assessee is clearly entitled to relief. This is because under section 86(v) the share of member of the Association of Persons is exempt from income-tax altogether since it is already taxed in the hands of the Association of Persons. Even if we assume that the status of Association of Persons was correctly taken in the hands of the trust, the assessee is clearly entitled to relief. This is because under section 86(v) the share of member of the Association of Persons is exempt from income-tax altogether since it is already taxed in the hands of the Association of Persons. Even in the cases of trusts there are clear instructions in two circulars of the Department No. 157 dated 26-12-74 and No. 45/78/66-ITJ (5) dated 24-2-1967 which have noted that in spite of clear instructions to the effect that neither section 41 (of the 1922 Act) which gave an option to the department to tax either the representative assessee or the beneficial owner of the income nor the parallel provisions of the 1961 Act contemplated assessment of the same income both in the hands of the trustees and the beneficiaries. The sub-section (3) of section 80L was introduced by the Direct TAx Laws (Amendment) Act, 1984 with retrospective effect from 1-4-1976 basically to clarify that the deduction which is not admissible in the case of a firm will not be admissible for the partner also as explained by the Memorandum Explaining the Objects (150 ITR St. 3 at 9, para 12). However, the cases of Association of Persons and Body of Individuals appear to have been added without noticing the difference between the case of assessment of a firm and the case of assessments of Association of Persons. Whereas in the case of a firm the share of the partner is again taxable in his hands, in the case of an Association of Persons the share of a member is specifically exempt under section 86(v). When the income itself is not taxable once again in the hands of a member when it has already suffered tax in the hands of Association of Persons, the provisions of sub-section (3) appear to be redundant insofar as the assessment of the member of the Association of Persons is concerned. Of course, we notice that these provisions had undergone further change in 1989 when in view of the introduction of section 67A it may have certain consequences which however are not germane to the assessment for the present assessment year 1983-84. Of course, we notice that these provisions had undergone further change in 1989 when in view of the introduction of section 67A it may have certain consequences which however are not germane to the assessment for the present assessment year 1983-84. Thus in any view of the matter either the income itself is not taxable under section 86(v) on the basis that the income has suffered tax in the status of Association of Persons in the hands of the trust or it is income which is properly assessable only in the status of individual in which event it is liable for deduction under section 80L since sub-section (3) does not apply to such a case. We, therefore, accept the claim of the assessee which is limited to the deduction under section 80L and direct the Income-tax Officer to re-compute the income accordingly. 8. In the result, the appeal is allowed.