(1977) 108 ITR 555 (SC)
Representative assessees; liability of a representative assessee
In a representative capacity. The liability of the trustee is coextensive with, and no greater or less than, that of the beneficiary. The trustee is assessed in the same manner and to the same extent as the person represented.
When a trustee is assessed in respect of trust property, is the assessment made on the trustee in its own right, or in a representative capacity standing in the shoes of the beneficiary?
Trusts had been created by the Nizam under which trustees held property for the benefit of identified beneficiaries whose interests arose at different times, some being in possession and others holding remainder interests. The Revenue assessed the trustees, and questions arose as to the basis on which that assessment should proceed — in particular whether the trustees were to be taxed as a separate taxable entity on the whole of the trust property, or whether the assessment had to be made by reference to the individual beneficiaries and their respective interests.
The matter reached the Supreme Court, which examined the scheme of representative assessment and its application where multiple beneficiaries hold interests of differing character in the same trust property.
For the assessee
A trustee holds property for others and has no beneficial interest of its own. The statutory scheme makes the trustee a representative assessee, and an assessment in that capacity must mirror what could have been made on the beneficiary — same measure, same rate, same exemptions. It cannot become a means of taxing the fund as a single entity at a higher burden than the beneficiaries would bear.
For the Revenue
The trustees hold and manage the property as a single fund and are the persons in whom it is vested. Assessing them on the fund as a whole is administratively straightforward and is what the charging provisions contemplate where the property is held by them.
The Court held that the scheme of representative assessment does not create a new or independent charge. A trustee assessed in respect of trust property is assessed in a representative capacity, standing in the place of the beneficiary, and the assessment must be made in the same manner and to the same extent as it would be on the beneficiary directly. The liability of the representative assessee is therefore coextensive with that of the person represented — neither greater nor less. It follows that the character of the beneficiary's interest, the exemptions and reliefs available to that beneficiary, and the rate applicable to that beneficiary all carry through to the assessment on the trustee. The Court held that where several beneficiaries hold distinct interests, the assessment must reflect those separate interests rather than treating the fund as a single undifferentiated whole, because each assessment on the trustee is in substance an assessment referable to a particular beneficiary. The representative machinery is a means of collection directed at the person in whose hands the property lies; it is not a device for taxing the fund as an entity in its own right.
The foundation of the pass-through concept, now in Sections 303 and 304 of the IT Act 2025. The statutory regimes for business trusts, investment funds, securitisation trusts and venture capital funds in Sections 221 to 224 codify a similar idea — that income is taxed in the hands of the unit holder or contributor rather than being trapped in the vehicle. Where those provisions leave a gap, this coextensive-liability principle is the default against which the position is assessed.