2015 (12) TMI 1647 - AT - Income Tax

Assessment of income of the assessee trust - interest income - Held that - Interest income was not liable to be taxed as business and profession in the hands of the assessee trust being a revocable trust. However such income is to be taxed in the hands of contributors.

Issues Involved:
1. Taxability of income in the hands of the contributors versus the Association of Persons (AOP).
2. Nature of the activities of the assessee trust and their classification as commercial or non-commercial.
3. Validity of the assessment order by the Assessing Officer (AO) regarding the taxability of income in the hands of the trust.
4. Applicability of Sections 61 and 63 of the Income Tax Act, 1961 to the assessee trust.
5. Classification of the trust as a revocable trust.
6. Applicability of Section 164(1) and Explanation 1 to Section 164 of the Income Tax Act, 1961.
7. Classification of the trust as an Association of Persons (AOP) for tax purposes.

Issue-wise Detailed Analysis:

1. Taxability of Income:
The primary issue was whether the income of the assessee trust should be taxed in the hands of the contributors or the AOP. The CIT(A) held that the income of the assessee is taxable in the hands of the contributors and not in the hands of the AOP. This decision was based on the provisions of Sections 61 and 63 of the Income Tax Act, which state that all income generated by a revocable trust is to be assessed in the hands of the contributors. The Tribunal upheld this view, emphasizing that the trust was indeed a revocable trust and thus, the income should be taxed in the hands of the contributors.

2. Nature of Activities:
The AO argued that the activities of the assessee trust were commercial in nature and did not align with the spirit of a trust. However, the CIT(A) and the Tribunal found that the trust was established to invest and hold equity-related investments in Indian entities, and the income generated was from dividends on mutual funds and interest on debentures, which were claimed as exempt. The Tribunal concluded that the activities were not commercial transactions but were in line with the objectives of the trust.

3. Validity of AO's Assessment Order:
The AO's assessment order, which taxed the income in the hands of the trust under the head "income from business and profession," was annulled by the CIT(A). The Tribunal upheld this annulment, finding that the AO's conclusion that the trust created a smokescreen for commercial transactions was not justified. The Tribunal emphasized that the income should be assessed in the hands of the contributors, as per the provisions of the trust deed and the contribution agreements.

4. Applicability of Sections 61 and 63:
Sections 61 and 63 of the Income Tax Act were pivotal in this case. These sections dictate that income arising from a revocable transfer of assets is chargeable to tax as the income of the transferor (contributors, in this case). The Tribunal, following the precedent set by the coordination bench in the case of M/s India Advantage Fund-VII, confirmed that the income generated by the trust should be assessed in the hands of the contributors, thereby applying Sections 61 and 63 appropriately.

5. Classification as a Revocable Trust:
The trust deed and contribution agreements explicitly stated that the trust was a revocable trust, and all income generated would be assessed in the hands of the contributors. The Tribunal found no dispute regarding the revocable nature of the trust and concluded that the income should be taxed in the hands of the contributors, not the trust.

6. Applicability of Section 164(1) and Explanation 1:
The AO invoked Section 164(1) and Explanation 1, arguing that the trust should be taxed at the maximum marginal rate as the beneficiaries were indeterminate or unknown. However, the Tribunal found that the beneficiaries were identifiable and their shares were determinable based on the trust deed and contribution agreements. The Tribunal referred to the decision in the case of XYZ, In Re, and other relevant judgments, concluding that Section 164(1) did not apply as the beneficiaries and their shares were ascertainable.

7. Classification as an AOP:
The AO classified the trust as an AOP, which was contested by the assessee. The Tribunal held that the beneficiaries did not come together to form an AOP but were merely recipients of the income earned by the trust. The Tribunal emphasized that the trust was created by the settlor, and the beneficiaries had separate agreements with the trust, not with each other. Therefore, the trust could not be classified as an AOP for tax purposes.

Conclusion:
The Tribunal dismissed the appeal by the Revenue, upholding the CIT(A)'s order that the income of the assessee trust should be taxed in the hands of the contributors, not the trust or as an AOP. The Tribunal found that the trust was a revocable trust, and the activities were not commercial in nature. The assessment of income in the hands of the trust was annulled, and the provisions of Sections 61, 63, and 164(1) were applied appropriately to determine the taxability of the income.

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