2016 (6) TMI 294 - AT - Income Tax

Addition as income falling within the purview of Section 56 (2)(vi) - income from other sources - amount received by the assessee from the discretionary trust - Held that - What was received by the assessee as a beneficiary from the thirteen trusts were nothing but his own income in his status as a beneficiary of the said trust. What has flown from the trustee to the beneficiary is the income the trustee collected on behalf of the beneficiaries. That the character of income in the hands of the beneficiary remains the very same, is clear from the judgment of Hon ble Apex Court in the case of Managing Trustees, Nagore Durgha (1965 (4) TMI 13 - SUPREME Court ). Character of the income in the hands of the thirteen trusts were under the heads capital gains and / income from other sources. The nature of income from other sources was dividends and interest and not the type of income falling u/s.56(2)(vi) of the Act. Once the character of the income in the hands of the beneficiary takes the same colour as that of the income in the hands of the trust, and once it is accepted that trust as such is not having a persona different or distinct from that of the beneficiary, it naturally flows that such income or receipt is not received without consideration. What is taxable u/s.56(2)(vi) of the Act, is receipt of money without consideration. We are therefore of the opinion that money received by the assessee from various trusts could not have been taxed u/s.56(2)(vi) of the Act. At best it could have been considered under the same heads in which the concerned trusts had received the income. Accordingly we set aside the orders of the CIT (A) and remit the issue regarding appropriate classification of the income in the hands of the assessee and apportioning it in the same ratio as such income bears to the income of the various trusts under different heads, to the file of the AO. AO shall proceed after giving a due opportunity to the assessee. What we find is that the thirteen trusts had filed its return of income voluntarily after paying tax. What was done was only a processing of such return u/s.143(1) of the Act. It is true that the amounts paid to the assessee by various trusts were out of the balances which remained after paying taxes. However, if the assessee feels that taxes paid by the trust were refundable since the taxes were assessed in the hands of the beneficiary, it can move the appropriate authority for getting the relief. - Decided partly in favour of assessee for statistical purpose.

Summary

Issues Involved:
1. Taxability of income received from discretionary trusts under Section 56(2)(vi) of the Income-tax Act, 1961.
2. Classification of income received from trusts.
3. Double taxation and credit for taxes paid by trusts.

Issue-wise Detailed Analysis:

1. Taxability of Income Received from Discretionary Trusts under Section 56(2)(vi):
The assessee contested the addition of ?91,01,821/- considered by the CIT (A) as income under Section 56(2)(vi) of the Income-tax Act, 1961. The AO initially treated the sum received from the trusts as profits in lieu of salary under Section 17(3) of the Act, linking it to the employer-employee relationship. The CIT (A) upheld this view and alternatively held it taxable under Section 56(2)(vi). The Tribunal noted that the trusts were discretionary and there was no direct nexus between the payment and the employment. Thus, the sum could not be considered as profits in lieu of salary. However, the Tribunal remanded the issue of taxability under Section 56(2)(vi) back to the CIT (A) for fresh consideration.

2. Classification of Income Received from Trusts:
The assessee argued that the amounts received were encashment of pre-existing rights as a beneficiary and not gifts or sums without consideration under Section 56(2)(vi). The Tribunal observed that the income received by the trust was already assessed under capital gains and income from other sources, not under Section 56(2)(vi). The Tribunal held that the income in the hands of the beneficiary retains the same character as in the hands of the trust. Therefore, the sum received could not be taxed under Section 56(2)(vi) as it was not received without consideration. The Tribunal directed the AO to classify the income appropriately and apportion it in the same ratio as the trust's income.

3. Double Taxation and Credit for Taxes Paid by Trusts:
The assessee contended that once the trust's income was assessed, the same income should not be taxed again in the hands of the beneficiary, citing cases like CIT v. Smt. Indramma and others. The Tribunal upheld the CIT (A)'s view that the AO had the option to assess either the trust or the beneficiary, but not both. The Tribunal acknowledged the assessee's right to seek relief for taxes paid by the trusts but noted that there was no provision for the Tribunal to direct the AO to give credit for such taxes. The Tribunal suggested that the assessee could move the appropriate authority for relief.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, setting aside the CIT (A)'s order regarding the classification of income and remanding the issue to the AO for proper classification and apportionment. The Tribunal also addressed the issue of double taxation, affirming the AO's discretion to assess either the trust or the beneficiary but not both, and suggested the assessee seek relief from the appropriate authority for taxes paid by the trusts. The judgment emphasized the importance of proper classification and apportionment of income received from discretionary trusts and upheld the principle against double taxation.