2017 (2) TMI 722 - HC - Income Tax

Applicability of provisions of Sec.164(1) - whether the assessee trust cannot be assessed as on AOP? - ITAT held that the assessee trust cannot be assessed as on AOP even though the requirements of section 164(1) were not met - Held that - By no interpretative process the explanation to Section 164 of the Act, which is pressed in service can be read for determinability of the shares of the beneficiary with the quantum on the date when the Trust deed is executed and the second reason is that the real test is the determinability of the shares of the beneficiary and is not dependent upon the date on which the trust deed was executed if one is to connect the same with the quantum. The real test is whether shares are determinable even when even or after the Trust is formed or may be in future when the Trust is in existence. In the facts of the present case, even the assessing authority found that the beneficiaries are to share the benefit as per their investment made or to say in other words, in proportion to the investment made. Once the benefits are to be shared by the beneficiaries in proportion to the investment made, any person with reasonable prudence would reach to the conclusion that the shares are determinable. Once the shares are determinable amongst the beneficiaries, it would meet with the requirement of the law, to come out from the applicability of Section 164 of the Act. Under the circumstances, we cannot accept the contention of the Revenue that the shares were non-determinable or the view taken by the Tribunal is perverse. On the contrary, we do find that the view taken by the Tribunal is correct and would not call for interference so far as determinability of the shares of the beneficiaries are concerned. Once the shares of the beneficiaries are found to be determinable, the income is to be taxed of that respective sharer or the beneficiaries in the hands of the beneficiary and not in the hands of the Trustees which has already been shown in the present case. - Decided in favour of the assessee.

Issues Involved:
1. Applicability of Section 164(1) of the Income Tax Act.
2. Determinability of beneficiaries' shares under the Trust Deed.
3. Assessment of income in the hands of Trustees versus beneficiaries.

Issue-wise Detailed Analysis:

1. Applicability of Section 164(1) of the Income Tax Act:
The primary issue for consideration was whether the Tribunal was correct in holding that the assessee trust could not be assessed as an Association of Persons (AOP) under Section 164(1) of the Income Tax Act, given that the shares of the beneficiaries were indeterminate or unknown. The Revenue contended that the assessing officer was justified in invoking Section 164(1) to assess the trust at the maximum marginal rate due to the indeterminability of the beneficiaries' shares.

2. Determinability of Beneficiaries' Shares under the Trust Deed:
The Tribunal examined whether the shares of the beneficiaries were determinable based on the Trust Deed. It was noted that the Trust Deed specified the manner in which income was to be distributed among the beneficiaries. The Tribunal found that the Trust Deed provided a clear formula for determining the shares of each beneficiary, thus making the shares determinable. The Tribunal cited CBDT Circular No. 281, which clarified that beneficiaries need not be named explicitly; they must be identifiable based on the Trust Deed. The Tribunal concluded that the provisions of Section 164(1) were not applicable as the beneficiaries and their shares were identifiable.

3. Assessment of Income in the Hands of Trustees versus Beneficiaries:
The Tribunal's finding that the shares of the beneficiaries were determinable led to the conclusion that the income should be taxed in the hands of the beneficiaries rather than the Trustees. The Tribunal referenced various judicial precedents, including the Hon'ble Madras High Court's decisions, which supported the view that identification by reference to the terms of the Trust Deed suffices, and it is not necessary for beneficiaries to be explicitly named.

Judgment Analysis:
The High Court upheld the Tribunal's decision, agreeing that the determinability of the beneficiaries' shares was a finding of fact based on the interpretation of the Trust Deed. The Court noted that such findings of fact are outside the scope of judicial review unless they are perverse. The Court defined perversity as findings not supported by the record or based on hypotheses or surmises. The Court found that the Tribunal's findings were reasonable and supported by the Trust Deed's provisions.

The Court rejected the Revenue's contention that the shares should be quantified at the time of the Trust Deed's execution. It emphasized that the real test is whether the shares are determinable, even if they are to be determined in the future. The Court concluded that the shares were determinable based on the beneficiaries' investments, meeting the legal requirements to avoid the applicability of Section 164.

Conclusion:
The High Court dismissed the appeals, affirming the Tribunal's decision that the shares of the beneficiaries were determinable and the income should be taxed in the hands of the beneficiaries, not the Trustees. The Court found no error in the Tribunal's judgment and ruled in favor of the assessee, answering the primary question in the affirmative against the Revenue. Consequently, other questions raised by the Revenue were deemed irrelevant and not addressed.

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