2016 (7) TMI 211 - HC - Income Tax

Revision u/s 263 on Protective basis - Maximum marginal rate u/s 164 - whether the income did not accrue or arise to the specific beneficiary (the assessee) ? - whether CIT had no jurisdiction u/s 263 of the Act for direction for invoking the provisions of section 164(1) of the Act and also giving further finding that the statement in writing submitted under Explanation 1 to section 160(1) signed by one of the Trustees was not valid and hence the provisions of section 164A could not be applicable resu8lting in levy of tax at maximum marginal rate of tax? Held that - As decided in Neo Trust 1992 (1) TMI 138 - ITAT AHMEDABAD-B if a specific trust is having its beneficiaries, few as individuals and few as discretionary trusts, but share of each of individual as well as discretionary trusts is specific, keeping in view that trustees of First Level Trust are to be considered as representative assessee and they represent share of beneficiary, Assessing Officer can assess income of First Level Trust at maximum marginal rate as per section 164 to extent of respective share of such beneficiary trust (discretionary trust) and at normal rate as per section 161 to extent of share of individual beneficiaries. It is further held by this court that however if Second Level Trust which is a beneficiary of First Level Trust is found to be specific, then assessment of First Level Trust should rest there and assessment of First Level Trust would be made as per section 161; it would be wrong to contend that if beneficiary of Second Level Trust is a discretionary trust, then beneficiary of First Level Trust can also be taxed at maximum marginal rate under section 164 inasmuch as relationship between trustees in representative capacity and answerability of trustees to beneficiary is limited to beneficiary of a particular trust as per Trust Act and it cannot be stretched or reached to beneficiaries of beneficiary and then against beneficiaries beneficiary. Also see KV. Patel Family Trust Versus CIT 2014 (8) TMI 601 - GUJARAT HIGH COURT In view of the aforesaid legal position, we answer the reference in favour of assessee

Summary

Issues:
1. Whether the Tribunal was justified in confirming the order of the CIT passed under Section 263 of the Income Tax Act on a 'Protective basis'?
2. Whether the Tribunal was justified in holding that the income did not 'accrue' or 'arise' to the specific beneficiary in the relevant year and concluding that the beneficiary could not be taxed at the maximum marginal rate under section 164(1) of the Act?
3. Whether the Tribunal was justified in not dealing with the jurisdiction of the CIT under section 263 for invoking section 164(1) and holding that the statement in writing submitted under Explanation 1 to section 160(1) was not valid, thus, not applying section 164A for taxing at the maximum marginal rate?

Analysis:

Issue 1:
The case involved a reference by the Income Tax Appellate Tribunal regarding the justification of confirming the CIT's order under Section 263 on a 'Protective basis.' The Tribunal's decision was questioned, leading to a legal inquiry into the correctness of this confirmation.

Issue 2:
The Tribunal's interpretation of whether the income accrued or arose to the specific beneficiary for taxation at the maximum marginal rate under section 164(1) was challenged. The case revolved around the distribution of income from a Trust and whether the specific beneficiary could be taxed at the maximum marginal rate.

Issue 3:
Another aspect of the case concerned the Tribunal's decision not to address the jurisdiction of the CIT under section 263 for invoking section 164(1) and the validity of the statement submitted under Explanation 1 to section 160(1). The application of section 164A for taxing at the maximum marginal rate was also disputed.

The Trust in question had specific beneficiaries listed in Schedule I and Schedule II of the Trust Deed. The distribution of income was outlined in the Trust Deed, with 49% allocated to individual beneficiaries in Schedule I and 51% to trustees of the Deferred Trusts in Schedule II. The income for the Deferred Trusts was to be accumulated for 19 years without immediate distribution.

The CIT(A) invoked revisional powers under section 263, directing the levy of tax at the maximum marginal rate on the income of the Main Trust. The Tribunal's decision on this matter was challenged, leading to a detailed legal analysis of the Trust's structure and income distribution.

The Court referred to previous decisions involving similar Trust structures to support its ruling. It was held that specific shares allotted to beneficiaries indicated a specific Trust, not subject to taxation at the maximum marginal rate under section 164. The Court emphasized the importance of the share allocation in determining the nature of the Trust for tax purposes.

In conclusion, the Court ruled in favor of the assessee, citing precedents and legal interpretations to support its decision. The matter was remanded to the Tribunal for further action based on the Court's order, answering the reference against the revenue and in favor of the assessee.