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2015 (2) TMI 121 - HC - Income TaxTax Liability of Trust - whether Assessee Trust is a discretionary Trust and, therefore, charged tax at the maximum marginal rate under Section 164 and not under Section 161 of the Act? - Held that - Attempt to contend that if the beneficiary of Second Level Trust is a discretionary Trust or the shares are uncertain of the beneficiaries of Second Level Trust, the beneficiary of the First Level Trust can also be taxed at the maximum marginal rate under Section 164 of the Act, in our view cannot be accepted because the relationship between the Trustees in representative capacity and the answerability of the Trustees to the beneficiary is limited to the beneficiary of a particular Trust as per the Trust Act and it cannot be stretched or reached to the beneficiaries of the beneficiary and then again beneficiaries beneficiary. It is true that for the purpose of tax, the provisions of the Act are to be considered and the Act provides for assessment in representative capacity, but the representative capacity of the Trustees of the First Level Trust is to represent the beneficial interest of the beneficiary of its Trust, it cannot reach to the Third Level Trust or the beneficiaries of the Third Level Trust as sought to be canvassed. Had the option been not available under Section 164 of the Act to the Assessing Officer, possibly the beneficiaries of Second Level Trust could also not be considered, but as such option is expressly made available under Section 164 of the Act, we are inclined to read and interpret that for the purpose of tax under the Act, the Assessing Officer may be in a position to find out the status of the beneficiaries of the First Level Trust and while finding out the status of the beneficiaries of the First Level Trust, he may look upon the taxable liability of the beneficiaries of Second Level Trust, who are the beneficiaries of First Level Trust and if the tax payable is higher, while making assessment of the First Level Trust, option may be resorted to under Section 164 of the Act to that extent only, but such cannot be permitted again to reach to the Third Level Trust and to find out the taxable liability of the beneficiaries of the Third Level Trust. Hence, the said contention to that extent of the Revenue cannot be accepted. The question arise for reaching to the beneficiaries of the second level with third level trust for the assessment of first level trust, the impugned orders of the Tribunal cannot sustain for charging tax at the maximum marginal rate under section 164 of the Act. - Decided in favour of assessee. Income recognition - whether once the amount credited in the books of account was on contingencies of the remuneration available, it could not be considered as real income? - Held that - Tribunal after considering the terms of the agreement has recorded the finding of fact that as per the agreement, the income which had already accrued in favour of the assessee trust during the completion of accounting year cannot be treated as no income merely because the respective societies sent notices after many years demanding the refund of the aforesaid amount. Nothing is brought to our notice that the agreement expressly provided for the refund of the amount already paid by way of remuneration nor there is any adjudication by any authority that the assessee was under obligation to refund the amount. Under these circumstances, when the Tribunal has recorded ultimate finding of fact. Whether a particular income was real income as per the terms and conditions of the agreement of the assessee or not in our view is essentially a question of fact which would be beyond the scope of judicial scrutiny in the present appeals before this Court. Same will be the position for examining references which would be limited to only substantial questions of law. Hence, we find that the second substantial question of law as sought to be canvassed by the respective appellants or the assessee would not arise for our consideration further as sought to be canvassed - Decided against assessee.
Issues Involved:
1. Taxation of Trusts: Whether the Appellate Tribunal erred in holding that discretionary trust beneficiaries should be taxed at the maximum marginal rate under Section 164 of the Income Tax Act, 1961. 2. Real Income: Whether the Tribunal was right in taxing the income of the Assessee as real income. Issue-wise Detailed Analysis: 1. Taxation of Trusts: The primary issue revolves around the distinction between specific trusts and discretionary trusts for tax purposes. The core question is whether the Appellate Tribunal erred in law by holding that the income of discretionary trust beneficiaries should be taxed at the maximum marginal rate under Section 164 instead of Section 161 of the Income Tax Act, 1961. The court examined the statutory provisions under the Indian Trust Act, 1882, and the Income Tax Act, 1961. Section 161 deals with the liability of representative assessees, where the tax is levied as if the income were received by the representative assessee beneficially. Section 164, on the other hand, applies when the shares of the beneficiaries are indeterminate or unknown, resulting in taxation at the maximum marginal rate. The court observed that if the share of each beneficiary is specific, the trust is termed a specific trust, and tax is charged at normal rates under Section 161. However, if the shares are indeterminate, the trust is termed a discretionary trust, and tax is charged at the maximum marginal rate under Section 164. The court further discussed the representative capacity of trustees, emphasizing that trustees represent the interests of the beneficiaries. If some beneficiaries are discretionary trusts, the Assessing Officer may assess the tax at the higher rate applicable to discretionary trusts. However, the court rejected the contention that the assessment should consider the status of beneficiaries at multiple levels (second or third level trusts), as it would create chaotic and uncertain situations. The court concluded that the Assessing Officer could examine the status of first-level trust beneficiaries and apply Section 164 if they are discretionary trusts. However, this does not extend to beneficiaries of second or third-level trusts. Thus, the Tribunal's orders charging tax at the maximum marginal rate under Section 164 were not sustainable. 2. Real Income: The second issue concerns whether the Tribunal was correct in taxing the income of the Assessee as real income. The Assessee contended that the income credited in the books was contingent and should not be considered real income. The Tribunal examined the agreements and found that the income had accrued to the Assessee trusts based on legally enforceable agreements with housing societies. The Tribunal noted that the income could not be converted into "no income" merely because the societies sent notices years later asking for refunds. The Tribunal found that the Assessees had incurred expenditures and performed work as per the agreements, indicating that the income was real. The court upheld the Tribunal's findings, stating that whether a particular income is real income based on the terms of the agreement is a question of fact. The court found no substantial question of law to interfere with the Tribunal's decision. Conclusion: The court ruled in favor of the Assessees on the first issue, holding that the Tribunal erred in applying Section 164 for first-level trusts without considering the specific shares of beneficiaries. On the second issue, the court upheld the Tribunal's decision that the income was real and taxable. All tax references and appeals were disposed of accordingly.
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