2012 (7) TMI 701 - AT - Income Tax

Trust dissolution proceedings added to the income of the assessee - invoking section 56 1 and 56 2 vi - assessee contested against the applicability of the provisions of Section 2 24 iva treating income in the hands of the Appellant - Held that - For applicability of Clause (vi) of s/section (2) of section 56 there should be a sum of money (ii) that its aggregate value exceeds Rs. 50,000 (iii) that it should be received without consideration by an individual or HUF and (iv) in any previous year, from any person, between the period 1st April 2006 and 1st October 2009. The assessee has received this amount on dissolution of trust in the capacity of beneficiaries as already been accepted by the Commissioner (Appeals),therefore, the amount received by the trust is in pursuance of dissolution of trust. The amount received in pursuance of dissolution of trust cannot be termed to be an amount received by the beneficiaries without consideration . The fact that the trust had borne the tax at maximum marginal rate on its income has also not been controverted. Therefore the addition cannot be upheld on the applicability of clause (vi) of sub-section (2) of section 56 as the money received by the assessee is not without consideration . Disallowing expenses u/s 14A - Held that - As disallowance has been computed with reference to rule 8D, which is not applicable to the year under consideration therefore, this issue has to be restored to the file of AO to re-compute the same in accordance with the judgment of Hon ble Jurisdictional High Court rendered in Godrej & Boyce Mfg. Co. Ltd. v. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT Rule 8D not retrospective and is applicable from Assessment Year 2008-09.

Summary

Issues Involved:
1. Addition under Section 56(1) and 56(2)(vi) on account of receipts from the dissolution of Sant Trust.
2. Treatment of expenditure on legal and technical books.
3. Disallowance of expenses under Section 14A.

Detailed Analysis:

Issue 1: Addition under Section 56(1) and 56(2)(vi) on account of receipts from the dissolution of Sant Trust

The primary issue in the appeal concerns the addition of Rs. 1,36,00,595 made to the assessee's income due to the dissolution of the Sant Trust. The assessee argued that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in law and on facts by construing the provisions of the Indian Trusts Act and holding that the amount received constituted income under Sections 2(24)(iva), 56(1), and 56(2)(vi) of the Income Tax Act, 1961.

The Assessing Officer (AO) argued that the amount received retained the character of income as per Section 2(24)(iva) because the assessee could not act in dual capacity as both trustee and beneficiary. The AO also noted that the trust was not registered under Section 12AA of the Act. The CIT(A) upheld the AO's decision, stating that the trust's dissolution proceeds were not exempt under Section 56(2)(vi) as they were not received from a "relative" or under any other exempted category.

Upon appeal, the Tribunal noted that the CIT(A) had accepted the validity of the trust and its dissolution, but wrongly concluded that the amount received was taxable under Section 56(2)(vi). The Tribunal held that the amount received by the assessee on dissolution of the trust was not "without consideration" and therefore could not be taxed under Section 56(2)(vi). The Tribunal emphasized that the trust had paid tax at the maximum marginal rate and the amount received by the assessee was in the capacity of a beneficiary, not as a trustee. Consequently, the addition was deleted.

Issue 2: Treatment of expenditure on legal and technical books

The assessee contested the CIT(A)'s decision to treat a sum of Rs. 10,417 spent on legal and technical books as capital expenditure instead of revenue expenditure. However, this issue was not pressed by the assessee's counsel during the hearing, and thus, it was dismissed as "not pressed."

Issue 3: Disallowance of expenses under Section 14A

The assessee challenged the disallowance of Rs. 3,52,493 under Section 14A, arguing that no expenditure was incurred to earn exempt income. The Tribunal observed that the disallowance was computed with reference to Rule 8D, which was not applicable for the assessment year under consideration. The Tribunal restored this issue to the AO with a direction to re-compute the disallowance in accordance with the judgment of the Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 328 ITR 081 (Bom.). Consequently, this ground was allowed for statistical purposes.

Conclusion:

The Tribunal allowed the appeal partly. The addition under Section 56(1) and 56(2)(vi) was deleted, the issue regarding the treatment of expenditure on legal and technical books was dismissed as not pressed, and the disallowance of expenses under Section 14A was remanded to the AO for re-computation.