2013 (12) TMI 1304 - AT - Income Tax

Levy of penalty under section 271(1)(c). - taxability of income in the hands of trust or beneficiary - applicability of provisions of Section 61(1) - Held that - Following CIT vs. T.A.V. Trust 2003 (3) TMI 39 - KERALA High Court - By virtue of the provisions of s. 161(1) of the Act income from property received by the trust cannot be treated as income from property in the representative assessment which has to be made on the trustee - In the case of a trust which is having income from business as well as income from house property, by virtue of the provisions of s. 161(1A) of the Act, the income from the business earned by the trust shall be taxed at the maximum marginal rate treating it as a single unit and the income from house property has to be assessed in the hands of the trustee in the manner provided in s. 161(1) of the Act - The trust is a representative assessee and to that extent of income tax leviable on the incomes of the beneficiaries, assessment can be made either in the hands of the respective beneficiaries or in the hands of the assessee to that extent only, indicating the tax liability of respective beneficiaries by consolidated order - The Assessing Officer has not followed either of the procedures but still contending to hold that the entire income received on the fixed deposit is taxable in the hands of the assessee- trust, violating the directions of the learned CIT(A) and also violating the provisions of the Act - The orders of AO levying penalty is not only bad in law but also on facts - Penalty cannot be levied - Decided in favour of assessee.

Issues Involved:
1. Legality of penalty under section 271(1)(c) for non-filing of returns by the trust.
2. Assessment of interest income received by the trust under section 161 of the Income Tax Act, 1961.
3. Compliance with the directions of the CIT(A) by the Assessing Officer.

Detailed Analysis:

1. Legality of Penalty under Section 271(1)(c) for Non-Filing of Returns:
The primary issue revolves around the imposition of penalties under section 271(1)(c) of the Income Tax Act, 1961, for the assessment years 2000-2001 to 2004-2005. The Assessing Officer levied penalties for non-filing of returns by the trust, which were confirmed by the CIT(A). The amounts levied as penalties were Rs. 45,58,800 (2000-2001), Rs. 28,05,384 (2001-2002), Rs. 21,26,117 (2002-2003), Rs. 18,28,533 (2003-2004), and Rs. 28,60,525 (2004-2005). The trust argued that it should not be liable for penalties as the income should be assessed in the hands of the beneficiaries, not the trust.

2. Assessment of Interest Income Received by the Trust under Section 161:
The trust received interest income from a fixed deposit of Rs. 14.05 crores, which was under lien with the Income Tax Department. The trust contended that under section 161 of the I.T. Act, the income should be assessed in the hands of the beneficiaries. The CIT(A) initially directed the Assessing Officer to complete the assessments under section 161, which was not followed. The trust maintained that the interest income should be taxed in the hands of the beneficiaries or in the trust as a representative assessee, as per the provisions of section 161.

3. Compliance with the Directions of the CIT(A) by the Assessing Officer:
The CIT(A) had directed the Assessing Officer to assess the interest income under section 161, considering the trust as a representative assessee. However, the Assessing Officer did not follow these directions and continued to assess the entire interest income in the hands of the trust. The CIT(A) later confirmed the penalties on the trust for non-filing of returns, despite earlier directing the assessment under section 161. The tribunal found this contradictory and noted that the Assessing Officer's actions were not in compliance with the CIT(A)'s directions or the provisions of the Act.

Conclusion:
The tribunal examined the rival contentions and perused the records, noting that the trust had determinate beneficiaries and should not be assessed at the maximum marginal rate. The tribunal referred to the Hon'ble Kerala High Court's decision in CIT vs. T.A.V. Trust, which held that the income should be assessed in the hands of the beneficiaries or the trustee in a representative capacity. The CIT(A) had directed the Assessing Officer to follow section 161, but the Assessing Officer failed to comply, leading to the imposition of penalties.

The tribunal concluded that the penalties levied were not correct, as the trust was a representative assessee, and the income should be assessed in the hands of the beneficiaries. The tribunal found that the Assessing Officer's actions were in violation of the CIT(A)'s directions and the provisions of the Act. Consequently, the tribunal deleted the penalties and allowed the appeals of the assessee.

Order:
The appeals of the assessee are allowed, and the penalties under section 271(1)(c) are deleted. The order was pronounced in the open court on 23.12.2013.

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