Income Tax Appellate Tribunal - Delhi
Birma Devi Trust,, New Delhi vs Department Of Income Tax on 27 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'A' DELHI
BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL
ITA No. 3427(Del)/2010
Assessment Year: 2007-08
Income Tax Officer, M/s Birma Devi Trust,
Ward 24(1), New Delhi. Vs. C6/58, Safdarjung Development
Area, New Delhi.
(Appellant) (Respondent)
Appellant by : Shri H.K. Lal, Sr. DR
Respondent by : Shri K.C. Singhal, Advocate &
Shri D.K.Khanna, C.A.
ORDER
PER K.G. BANSAL : AM This appeal emanates from the order of Commissioner of Income- tax (Appeals)-XXII, New Delhi, passed in appeal no. 196/09-10 on 21.04.2010 relating to assessment year 2007-08. The corresponding assessment order was framed by the Income-tax Officer, Ward 24(1), New Delhi on 09.12.2009 under the provisions of section 143(3) of the Income-tax Act, 1961. The only substantive ground taken by the revenue is that the ld. CIT(Appeals) erred on facts and in law in allowing the appeal of the assessee by not appreciating the fact that the trust is a determinate trust and is liable to pay tax at maximum marginal rate on the income of ` 42,53,456/- determined by the AO.
2 ITA No. 3427(Del)/2010
2. The facts of the case are that the assessee filed its return of income on 23.7.2007 declaring nil income. The return was processed u/s 143(1) of the Act. Thereafter, the case was selected for scrutiny by issuing a notice u/s 143(2) on 12.09.2008. The assessee declared income of ` 39,51,972/- as property income, ` 3,01,334/- as interest and ` 150 as dividend. The income was apportioned as under:-
M.L. Jain-5% T.C. Jain-5% R.C.Mittal HUF -7% Uma Jain-2% N.C. Jain HUF-8% Veena Jain-2% S.C. Jain HUF -8% Alka Jain-2% Rajesh Jain-5% Ritu Jain-8% Parul Jain-8% Rahul Jain-10% Shweta Jain-5% Siddharth Jain-5% Karan Jain-5% Vikrant Jain-5% Aditya Mittal-5% Saurabh Jain-5% 2.1 The assessee was required to show cause as to why the income should not be taken at ` 42,53,456/-. In particular, it was mentioned that Uma Jain, Veena Jain and others had incomes which exceeds the maximum amount not chargeable to tax and, therefore, the trust was liable 3 ITA No. 3427(Del)/2010 to pay tax at maximum marginal rate. It appears that the assessee claimed extra deduction of ` 12,32,889/- u/s 24, which was proposed to be added to the income of the assessee. It was submitted that the trust was created on 27.10.1980. The shares of the beneficiaries are determinate and, therefore, it is a specific trust where shares of the beneficiaries are fixed. The case of the assessee has been accepted in scrutiny assessment for assessment years 1981-82 to 1984-85. The assessee also furnished the details of expenditure of ` 6,02,123/- incurred in respect of the property and it was submitted that this expenditure has not been claimed. The AO considered the facts of the case. He came to the conclusion that the assessee is liable to be taxed in the status of Association of Persons (AOP). Further, he computed the income from house property at ` 45,82,738/-. After considering interest and dividend income, the total income was computed at ` 48,84,220/- as under:-
Income as per return Nil Income from house property: Annual value 6546768/- Less: Standard deduction u/s 24@ 30% 1964030/- Rs. 4582738/- Income from other sources Interest 301334/- Dividend 150/- Rs. 301484/- Total income Rs. 4884222/- Rounded off Rs. 4884220/- 4 ITA No. 3427(Del)/2010
2.2 Aggrieved by this order, the assessee moved an appeal before the CIT(Appeals)-XXII, New Delhi. Various submissions made by the assessee were considered. He came to the conclusion that where shares of beneficiaries are determinate and the income of the trust does not include any business income, the provision contained u/s 161(1) come into force.
The provisions are that the assessment is to be made on the trustee as representative assessee at the rate or rates applicable to the total income of each beneficiary. The AO has option either to assess the trustees or the beneficiaries separately. Accordingly, it was held that the trust could not be assessed in the status of AOP. In view thereof, it was further held that tax at the maximum marginal rate cannot be charged in the hands of the trustees. He, however, upheld the action of the AO in allowing deduction u/s 24 @ 30% of the annual value by mentioning that the provision does not admit of deduction of an amount more than the amount calculated @ 30% of the annual value. Aggrieved by this order, the revenue is in appeal before us.
3. Before us, the learned DR referred to the provision contained in section 167B regarding charge of tax where shares of members in an 5 ITA No. 3427(Del)/2010 association of persons or body of individuals are unknown. It was her case that the provision is applicable on the facts and in the circumstances of the case as the trust is liable to be assessed in the status of an AOP. 3.1 In reply, the ld. counsel for the assessee referred to the provision contained in section 161(1) regarding liability of representative assessee. It is provided that every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to same duties, responsibilities and liabilities as if the income were income received by or accruing to or in 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 representative capacity only, and the tax shall, subject to other provisions contained in this chapter, be levied upon and recovered from him in like manner and to the same extent as it would be levied upon and recovered from the person represented by him. This is a general provision. The sum and substance of the provision is that a representative assessee is liable to be assessed as if the income has been received by him. However, he is to be assessed in the like manner and to the same extent as the person represented by him. Sub-section (1A) provides that if the income includes 6 ITA No. 3427(Del)/2010 business income, then the whole of the income will be charged at maximum marginal rate. The proviso to this sub-section carve out exception in the case of a trust declared by any person by will for the benefit of any relative dependent upon him for support and maintenance. In such a case, provision contained in sub-section (1A) is not applicable. Thereafter, the ld. counsel drew our attention to the provision contained in section 164(1) regarding charge of tax where the share of the beneficiaries are unknown and it is provided that where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown, tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. On the basis of these provisions, the case of the ld. counsel is that provision contained in section 161(1) is general in nature providing that the liability of a representative assessee cannot exceed that of the beneficiaries although the revenue has an option to tax either the trustee or the beneficiaries. Therefore, the status of the representative assessee will be the same as that of the beneficiaries. The trust cannot be taxed as an AOP, as done by the AO. However, where the shares of the beneficiaries are indeterminate in respect of the income or any part thereof, such income or part thereof is liable to be taxed at the maximum marginal 7 ITA No. 3427(Del)/2010 rate. On the basis of this provision, it is submitted that the provision regarding charge of relevant income at maximum marginal rate has been mentioned specifically in section 164(1). Therefore, one does not have to go to any other section for deciding whether any part of the income of the trust is liable to be taxed at maximum marginal rate or not. Coming to the provision contained in section 167B, it is submitted that the provision is applicable where shares of members in AOP or body of individuals are unknown. The assessee is neither an association of persons nor a body of individuals. It is a trust and, therefore, this provision has no applicability to the facts of the case.
3.2 In order to support the aforesaid contentions, reliance has been placed on the decision of Hon'ble Supreme Court in the case of CWT Vs. Trustees of H.E.H Nizam's Family (Remainder Wealth) Trust, (1997) 108 ITR 555. The Hon'ble Court considered the provisions contained in sections 3, 21 and 41 of the Wealth-tax Act, 1957. It was mentioned that the contemplated assessment is on the trustee u/s 21(1) or section 21(4) in a representative capacity. It is really the beneficiaries who are sought to be assessed in respect of their interest in the trust properties through the trustee. Sub-section (1) provides that wealth-tax shall be levied upon him 8 ITA No. 3427(Del)/2010 in the like manner and to the same extent as it would be leviable on the beneficiary for whose benefit the trust properties are held. Section 21(2) clarifies that nothing contained in sub-section (1) shall prevent either the direct assessment of the beneficiary for whose benefit the trust properties are held or the recovery from the beneficiary of the wealth-tax in respect of his interest in the trust properties, which is assessed in the hands of the trustee. In either case what is taxed is the interest of the beneficiary in the trust properties and not the corpus of the trust properties. This applies even in respect of a trust where the shares are indeterminate or unknown, i.e., the trustees would be assessable in respect of the total beneficial interest of the beneficiaries in the trust properties. In such a case, it is obvious that direct assessment of the beneficiaries cannot be made because their shares are indeterminate or unknown. However, what can be taxed in the hands of the trustees is the beneficial interest of the beneficiaries on the valuation date. Coming to the issue as to whether the shares of the beneficiaries were indeterminate or unknown, the Hon'ble Court mentioned that the position has to be seen on the valuation date. So long as it is possible to say on the relevant valuation date that the beneficiaries are known and their shares are determinate, the possibility that the beneficiaries may change by reason of subsequent events, such 9 ITA No. 3427(Del)/2010 as birth or death, would not take the case out of the ambit of section 21(1). The case of the ld. counsel is that the provisions in the Income-tax Act and the Wealth-tax Act are in pari-materia although some amendments have taken place in both the Acts after rendering this decision. However, the fundamental principles remain the same. In the income- tax Act, it has been provided that if the income consists of business income, then the whole of the income is liable to be taxed at maximum marginal rate. The assessee trust does not have any business income. Therefore, the decision is applicable on the facts of the case. 3.3 Further, reliance has been placed on the decision of Hon'ble Supreme Court in the case of CIT Vs. Kamalini Khatau (1994) 209 ITR 101. This judgment has been relied upon for a limited purpose that if a resolution of the Board of Directors is passed to allocate shares to various beneficiaries in respect of an income of a particular year, then, the provisions contained in section 161 will be applicable and not the provisions contained in section 164(1). The trust deed in that case provided that from and after the date hereof and during the periods mentioned in this clause, the trustees may either accumulate the net income of the trust or at their directions pay the same to the persons as 10 ITA No. 3427(Del)/2010 mentioned therein or to any one 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. For the accounting period relevant to assessment year 1969-70, the assessee received amounts set out hereafter. The amounts were received pursuant to the resolutions of the trustees to distribute the same from out of the income of the six trusts for the accounting period:
Name of the trust Amount (Rs.)
Geeta Mayour D-Trust No. 1 1,600/-
Ambalal Sarabhai D-Trust No. 4 6,200/-
Manorama Sarabha (K.8) D-Trust 1,000/-
Sarladevi Sarabha (G.15) D-Trust 1,400/-
Manorama Sarabha D-Trust No. 1 1,000/-
Anand Sarabhai(J-9)D.-Trust 500/-
18,000/-
3.4 The Hon'ble Court referred to the provisions contained in sections
161 and 164 and mentioned that it appears that section 164 cannot be 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 beneficiary of a discretionary trust, even if he has received its income in the accounting year, cannot be taxed thereon because section 164 does not provide for such a contingency. It is further mentioned that the intent and 11 ITA No. 3427(Del)/2010 purpose of section 166 is clarificatory in nature and it does not empower any assessment or recovery by itself. It only makes it clear that sections 160 to 165 do not bar direct assessment of a person on whose behalf or for whose benefit the income is receivable. It is also mentioned that the income of a discretionary trust which has, within the accounting year, been distributed and received by the beneficiary would be subject to assessment in his hands and tax thereon would be recoverable from him. 3.5 Reliance has also been placed on the decision of Hon'ble Supreme Court in the case of Moti Trust Vs. CIT (1999) 236 ITR 37. It was held that even if the trust in question is regarded as a discretionary trust, in as much as profits have during the relevant assessment year been credited to the respective accounts of the beneficiaries, in view of the decision of this court in CIT Vs. Kamalini Khatau (supra), it is the beneficiaries in whose hands the income will be assessed.
4. We have considered the facts of the case and the submissions made before us. The question before us is- whether, the assessee-trust is liable to pay tax at the maximum marginal rate on the income of ` 42,53,456/- determined by the AO? From the decision in the case of Trustees of 12 ITA No. 3427(Del)/2010 H.E.H Niazm's Family (Remainder Wealth) Trust (supra), it is clear that both under sections 161 and 164, the assessee-trust is liable to pay tax in the same manner and to the same extent as the beneficiaries. In other words, the liability of a representative assessee cannot exceed the aggregate of liabilities of the beneficiaries. It is another matter that the assessment can be made either on the trustees or on the beneficiaries. If the shares of the beneficiaries are unascertained, it would not be feasible to make the assessment on the beneficiaries because income accruing to them cannot be ascertained. Therefore, in such a situation, the assessment can be made only on the trustees. However, in this case also the liability of the trustees cannot exceed the aggregate liabilities of the beneficiaries. Further, the assessee is not an association of persons because the trustees have not come together out of their volition to carry out any business etc. They have also not been brought together for carrying out any business. Therefore, they can be termed as a body of individuals. Therefore, it follows that the provision contained in section 167B has no application. The trust is also not carrying on any business. Therefore, the provision contained in section 161(1A) is not applicable, which provides for taxation in the hands of trustees or the beneficiaries at the maximum marginal rate. The AO has clearly mentioned that the profits of this year 13 ITA No. 3427(Del)/2010 have been distributed to the beneficiaries, the details of which have been mentioned by us in paragraph no. 2 (supra). It is seen that the beneficiaries are either individuals or HUFs. In the case of Kamalini Khatau(supra), the Hon'ble Supreme Court held that even in a non- specific trust, if the income has been distributed to the beneficiaries, then the trustees cannot be taxed u/s 164. This view has been reiterated by Hon'ble Supreme Court in the case of Moti Trust (supra). The ld. DR has not disputed the fact that profits have been distributed to the beneficiaries. Therefore, in view of the aforesaid two decisions of the apex court, it follows that the trustees are liable to pay tax at the rate of rates applicable in the case of the beneficiaries. In the alternative, the income may be included in the hands of the beneficiaries. We are not aware whether any of the beneficiaries is liable to be taxed at the maximum marginal rate. Therefore, it is not feasible for us to specify rate or rates at which income is taxable in the hands of the trustees. However, it is clear that the tax cannot be levied at maximum marginal rate simply because the trust is a determinate trust, as mentioned in the ground of appeal, which according to us can have any purposeful meaning if it is read to mean that the beneficiaries or the shares of the beneficiaries in the income of the trust have not been specified in the trust deed. Even if it is not done, the trustees 14 ITA No. 3427(Del)/2010 are liable to be assessed u/s 161 as the income of the trust has been credited in this year to the accounts of the beneficiaries as mentioned on page no. 1 of the assessment order.
5. In the result, the appeal is dismissed.
This order was pronounced in the open court on 27th December, 2010.
Sd/- sd/- (C.L. Sethi) (K.G.Bansal) Judicial Member Accountant Member Date of order: 27th December, 2010. SP Satia Copy of the order forwarded to:- Birma Devi Trust, Safdarjung Area, New Delhi. ITO , Ward 24(1), New Delhi. CIT(A) CIT The DR, ITAT, New Delhi. Assistant Registrar.