2014 (5) TMI 473 - AT - Income Tax

Addition made u/s 56(2)(vi) - Fair Value Trust (FVT) Gift received without consideration by the appellant from the trust option to assess the appellant as beneficiary u/s 166 or otherwise, in respect of share of income received by the appellant as a beneficial owner under the trust - assessing the income in the hands of the trustees as a representative assessee u/s 161 - Held that - The FVT was already assessed by the department at Pune at the maximum marginal rate has not been denied by the revenue - the assessment in the case of another beneficiary of the same trust Shri Atul Kirloskar having been finalized u/s 143(3) on 1-12-2011 i.e. prior to the assessee s assessment dated 29-12-2011 also has not been disputed - the beneficial share from the same trust has been allowed to be exempt being already assessed in the hands of the trust - the department has already exercised the option to tax the trust income directly in the hands of trustees in terms of sections 161 to 166 - The fact that in the case of another beneficiary of the same trust for the same year i.e. Shri Atul Kirloskar his beneficial income from trust has been held to be exempt as not includible having been taxed in the hands of trust - Both the assessments stand testimony to the fact that option has not only been exercised by the department but it has been also implemented in the case of other beneficiary there was no justification in assessing the amount of beneficial share from trust in the hands of the assessee again. As per the scheme of assessment of private discretionary trust department has to opt whether to assesses the income in the hands of trust or beneficiaries - The option is clearly exercised first in the hands of trust as demonstrated by its assessment order. This is reconfirmed by the assessment of Shri Atul Kirloskar - department cannot take a course to review, re-opt or rewrite what has been statutorily exercised and change its stand from beneficiary to beneficiary - it has not been disputed that entire trust income is from dividends exempt u/s 10(34) and what comes in the hands as beneficial share retains the same colour and is also exempt u/s 10(34) Relying upon Jyotendrasinhji Versus SI Tripathi And Others 1993 (4) TMI 1 - SUPREME Court - the beneficial share being part of exempt dividend income is exempt from tax and is to be excluded while computing the assessee. The action taken by the department is contrary to the settled scheme and interpretation of sections 161 to 164 and CBDT Circular - the department having already exercised the option to tax the income directly in the hands of the trust, there is no provision to review the option taken in the case of trust and again to change the option from one beneficiary to another, the income is therefore held to be exempt in the hands of the assessee Decided in favour of Assessee.

Summary

Issues Involved:

1. Taxability of beneficial share received from a private discretionary trust.
2. Applicability of Section 56(2)(vi) vs. Section 164 and Section 166.
3. Consistency in tax treatment of trust income and beneficiary income.
4. Double taxation and exemption of dividend income under Section 10(34).

Issue-wise Detailed Analysis:

1. Taxability of Beneficial Share Received from a Private Discretionary Trust:
The assessee, a beneficiary of the "Fair Value Trust" (FVT), received a beneficial share of Rs. 1 crore from the trust's dividend income, which was claimed as exempt under Section 10(34). The trust's income had already been assessed at the maximum marginal rate under Section 164 in the hands of the trustees. The Assessing Officer (AO) issued a show cause notice questioning the exemption claim, but the assessee argued that the income had already been taxed in the hands of the trustees and thus should not be taxed again.

2. Applicability of Section 56(2)(vi) vs. Section 164 and Section 166:
The AO contended that the beneficial share should be taxed as "income from other sources" under Section 56(2)(vi), as it was received without consideration and the trust did not qualify as a 'relative.' The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision but stated that the income was assessed as normal income under Section 166, not under Section 56(2)(vi). The CIT(A) relied on judicial precedents to support the view that the income could be taxed in the hands of the beneficiary.

3. Consistency in Tax Treatment of Trust Income and Beneficiary Income:
The assessee argued that the department had already exercised the option to tax the trust income in the hands of the trustees under Section 164, as evidenced by the assessment of another beneficiary, Shri Atul Kirloskar, whose beneficial share was treated as exempt. The assessee contended that the department could not change its stance arbitrarily and should maintain consistency in its assessments.

4. Double Taxation and Exemption of Dividend Income Under Section 10(34):
The assessee argued that taxing the beneficial share again would result in double taxation, which is prohibited by law. The assessee also contended that since the trust's income was from dividends, which are exempt under Section 10(34), the beneficial share should also be exempt. The CIT(A) did not agree with treating the beneficial income as a gift but confirmed the addition by holding that the AO had invoked the right sections while taxing the beneficial shares.

Conclusion:
The Income Tax Appellate Tribunal (ITAT) held that the department had already exercised the option to tax the trust income directly in the hands of the trustees. Therefore, the same income could not be taxed again in the hands of the beneficiary. The ITAT also noted that the beneficial share was part of exempt dividend income under Section 10(34) and should retain its exempt status. The ITAT emphasized the rule of consistency and found no justification for the department's contradictory stance. Consequently, the ITAT allowed the assessee's appeal, holding that the impugned income was exempt in the hands of the assessee.

Order Pronounced:
The assessee's appeal was allowed, and the order was pronounced in open court on 28-04-2014.