The capital loss suffered by a trust can be set off against the individual income of a beneficiary who is directly assessed by the Income-tax Officer.

JUDGMENT :

G.T. Nanavati, J.

The Tribunal has referred the following questions to this court under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") :

"(1) Whether, on the facts and in the circumstances of the case, the capital loss arising on sale of shares of Rajesh Textile Mills Ltd. by the trustees of the trust of which the assessee was a beneficiary as also the settlor can be set off against the individual income of the assessee from capital gains ?

(2) Whether the Tribunal was justified in law in holding that, while determining the income falling under the head 'Capital gains', the Income-tax Officer was bound to consider the capital loss which had arisen in the hands of the trust as, unless the said loss is taken into consideration, the assessee's total income cannot be computed in accordance with law ? "

2. The respondent-assessee is a beneficiary under the Veenaben Vadilal Trust. The assessee possessed shares of Sayaji Mills Limited. As a shareholder of Sayaji Mills Limited, she got 186 shares of Rajesh Textile Mills Limited. The trust also held shares of Sayaji Mills Limited and, as a shareholder, it got 157 shares of Rajesh Textile Mills Limited. During the assessment year 1971-72, the assessee sold her 186 shares and the trust sold 157 shares of Rajesh Textile Mills Limited. In the return of income filed for that year, the assessee claimed a capital loss of Rs. 42,317 on sale of 343 shares of Rajesh Textile Mills Limited. While working out the capital loss, the assessee claimed the cost of the share which was Rs. 100 per share and also a deduction of Rs. 108.75 per share, being the difference between the cum-right and ex-right quotations of the shares of Sayaji Mills Limited. The Income-tax Officer disallowed the deduction of Rs. 108.75 per share claimed by the assessee and determined the capital gains at Rs. 4,104. Rs. 2,139 was found to be the capital gain in respect of the sale of shares which belonged to her personally and Rs. 1,963 in respect of sale of shares held by the trust. We are not referring to the other claims which were disallowed as that is not necessary for the purpose of this reference. As the assessee's claim for deduction of capital loss was rejected by the Income-tax Officer, she preferred an appeal to the Appellate Assistant Commissioner. It was contended before the Appellate Assistant Commissioner that, while determining the capital loss on account of sale of shares of Rajesh Textile Mills Ltd., the assessee was entitled to deduction on account of the fall in value of shares in Sayaji Mills Limited, as the shares of Rajesh Textile Mills Limited were received as right shares. The Appellate Assistant Commissioner, following the decision of the Tribunal in Income-tax Appeal No. 1206 (Ahd)/70-71, held that the assessee was entitled to the deduction of the fall in value of shares in Sayaji Mills Limited while computing the capital gain in respect of shares of Rajesh Textile Mills Limited. Therefore, the addition of Rs. 2,139 made by the Income-tax Officer was ordered to be deleted and he was directed to verify the claim of capital loss made by the assessee and allow the same. As regards the similar claim made in respect of sale of 157 shares of Rajesh Textile Mills Limited by the trustee, the Appellate Assistant Commissioner did not accept the assessee's contention and agreed with the finding of the Income-tax Officer that capital loss suffered on that account cannot be considered in the hands of the assessee as a beneficiary.

3. The assessee thereupon preferred an appeal to the Tribunal. The question which the Tribunal was required to consider was whether capital loss suffered on account of sale of 157 shares of Rajesh Textile Mills Limited by the trustee could be rightly claimed by the assessee while working out her total income. The Tribunal decided the appeal in favour of the assessee by holding that, as the Income-tax Officer has preferred to assess the beneficiary,