2012 (7) TMI 152 - HC - Income Tax

Re-computation of income tax liability - to adopt the maximum marginal rate of 40% applicable under Section 164(1) - that the benefits are extended to the dependents and relatives of the employees also - Held that - In all welfare measures, whether under Government or in Public Sector, benefits extended to the employees means benefits extended to their family members also as the immediate dependent family members of an employee cannot be disassociated from the employee. There is no case that the fruits of employment is enjoyed by the concerned employee individual himself alone. Thus, the trust in question was an exception to Section 164, the maximum marginal rate could not be applied to the income of the Trust - against revenue.

Summary

Issues:
1. Application of maximum marginal rate of tax for assessment year 1997-98.
2. Interpretation of Section 164 of the Income Tax Act regarding discretionary trust.
3. Benefit under Proviso (iv) to Sub-section (1) of Section 164.
4. Relief granted by the Income Tax Appellate Tribunal and absence of appeal by the income tax department.
5. Direction to re-compute income tax liability based on Tribunal's decision.

Analysis:

1. The primary issue in this case revolves around the application of the maximum marginal rate of 40% for the assessment year 1997-98. The petitioners contended that the respondents erred in applying this rate, arguing that the trust in question fell under an exception to Section 164 of the Income Tax Act.

2. Section 164 of the Income Tax Act deals with discretionary trusts and the treatment of trustees as representative assesses. The petitioners claimed that their trust qualified for an exception under Proviso (iv) to Sub-section (1) of Section 164, which exempts certain trusts from the maximum marginal rate of tax.

3. The crucial aspect of the case involved the interpretation and application of the benefit provided under Proviso (iv) to Sub-section (1) of Section 164. The Income Tax Appellate Tribunal, in its order, held that the assessee-trust was entitled to this exemption and should not be taxed at the maximum marginal rate.

4. Notably, the Tribunal's decision favored the petitioners by granting relief and directing that the trust should be taxed at the normal slab rate applicable to an Association of Persons (AOP). It is significant to highlight that the income tax department did not appeal against this order, indicating acceptance of the Tribunal's decision.

5. Consequently, the High Court set aside the impugned orders and directed the assessing authority to re-calculate the income tax liability of the petitioners in line with the Tribunal's decision. The re-computation was to include the benefit provided by Proviso (iv) to Sub-section (1) of Section 164, with a stipulated timeframe of three months for completion from the date of receipt of the judgment.