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2017 (5) TMI 1411 - AT - Income TaxStatus of indeterminate trust - charge of tax where share of beneficiaries unknown - pass through treatment - Held that - Admittedly, on the date of institution of the Trust deed, the identities of the contributors/beneficiaries are unknown. Therefore, the assessee trust cannot be held as a Determinate Trust. Further, before the Assessing Officer, the assessee s AR, vide his letter dated 09.12.2015, has emphasized the assessee is not governed by the provisions of section 10(23FB) of the Act. Therefore, the assessee cannot get pass through status. Therefore, the ld. CIT(A) has held the assessee is an indeterminate trust. The decision of the Madras High Court in the case CIT v. P. Sekar Trust dated 2009 (4) TMI 38 - MADRAS HIGH COURT is not applicable to the facts of the present case, because, in it, the beneficiaries are incorporated on the day of institution of the trust deed and moreover, they did not receive any income in that year. Further the individual share of the beneficiaries is ascertainable on the date of the trust. When the beneficiaries have no income to be taxed, then how will the representative assessee become taxable? But in the present case, the names of the beneficiaries are not specified in the trust and the individual shares of the beneficiaries are not ascertainable on the date of the institution of the trust. Therefore, the assessee cannot be categorised itself as a determinate trust and find no reason to interfere with the orders of the ld. CIT(A) on this issue - Decided against assessee. Taxability of interest income in the hands of the assessee - Held that - Since the Assessing Officer has observed that the above beneficiaries have been transferred to TSGF subsequent to the interest earning period and therefore, the interest income cannot be the income of TSGF. The Assessing Officer has further observed that the interest was earned while the assessee held the entire funds as its own before transfer to TSGF. Hence, the income passed on to TSGF was only application of income earned by the assessee and therefore, the same cannot be allowed as expenditure. The assessee has not filed any details of having transferred the interest income to TSGF so that the assessee cannot be tax on the interest income, which were not retained by it. Under the above circumstances, we are of the opinion that the Assessing Officer has rightly brought to tax the interest income in the hands of the assessee since the transfer of 639 beneficiaries to TSGF was accomplished subsequent to the interest earning period and therefore, interest income cannot be taxed in the hands of TSGF.- Decided against assessee. Disallowance of 50% of the management expenses - Held that - By the shifting of substantial portion of the funds to TSGF, during the year, TSGF is also equally benefitted. Hence, in all fairness 50% of such expenses pertain to TSGF and hence the balance portion of 50% of the Management fee of ₹. 40,35,344/- is allowed as expenditure in the hands of the assessee and the balance was brought to tax. Since the expenses required to be shared and therefore, the ld. CIT(A) has observed that the disallowance made by the Assessing Officer is quite reasonable. The Assessing Officer has given proper reason for making the disallowance, which was confirmed by the ld. CIT(A). Before us, the ld. Counsel for the assessee could not controvert the above findings of the Assessing Officer with valid reason to take different view. Thus, the ground raised by the assessee is dismissed.
Issues Involved:
1. Determination of the assessee trust as an indeterminate trust. 2. Verification of interest income of 639 beneficiaries before transfer to TVS Shriram Growth Fund (TSGF). 3. Taxability of income in the hands of TSGF and the assessee. 4. Disallowance of 50% of the management expenses. Issue-wise Detailed Analysis: 1. Determination of the Assessee Trust as an Indeterminate Trust: The primary issue was whether the assessee trust could be classified as a determinate trust. The assessee argued that the trust deed and contribution agreement specified the names of the beneficiaries and their respective shares of income. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the trust was indeterminate because the beneficiaries were not specified in the trust deed at the time of its institution. The Tribunal upheld this conclusion, noting that for a trust to be considered determinate, the beneficiaries and their shares must be ascertainable at the date of the trust deed. The Tribunal referenced sections 161 to 164 of the Income Tax Act, which outline the taxation principles for trusts, emphasizing that the trust must be irrevocable and non-discretionary to qualify for a "pass-through" status. Since the assessee trust did not meet these criteria, it was deemed an indeterminate trust, and the income was taxed in the hands of the representative assessee. 2. Verification of Interest Income of 639 Beneficiaries Before Transfer to TSGF: The assessee contended that the interest income related to 639 beneficiaries who opted to roll over their capital to TSGF should not be taxed in the hands of the assessee. The AO observed that the interest was earned while the funds were still held by the assessee before being transferred to TSGF. Therefore, the interest income was considered the income of the assessee trust and not TSGF. The Tribunal agreed with the AO's findings, stating that the transfer of beneficiaries to TSGF occurred after the interest earning period, and thus, the interest income could not be attributed to TSGF. 3. Taxability of Income in the Hands of TSGF and the Assessee: The assessee argued that taxing the same income in the hands of both TSGF and the assessee would result in triple taxation. However, the Tribunal dismissed this ground, stating that the taxability of income in the hands of any other assessee (TSGF) was not the subject matter of the present appeal. The Tribunal focused solely on the taxability of income in the hands of the assessee trust. 4. Disallowance of 50% of the Management Expenses: The assessee claimed that the entire management fee paid to TVS Capital Funds Ltd. should be allowed as an expenditure. The AO disallowed 50% of the management expenses, reasoning that since a substantial portion of the funds was transferred to TSGF, the expenses should be shared. The CIT(A) upheld this disallowance, and the Tribunal agreed, noting that the disallowance was reasonable and the assessee's counsel could not provide valid reasons to take a different view. Conclusion: The Tribunal dismissed the appeal filed by the assessee, upholding the findings of the AO and CIT(A) on all issues. The assessee trust was classified as an indeterminate trust, the interest income was taxed in the hands of the assessee, and the disallowance of 50% of the management expenses was deemed reasonable. The decision emphasized the importance of meeting specific criteria for trusts to qualify for "pass-through" status and the necessity of clear beneficiary identification in trust deeds.
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