2018 (4) TMI 1062 - AT - Income Tax

Reopening of assessment - income assessable in the hands of trust - income of the trust liable for tax at the maximum marginal rate OR normal rate applicable to an AOP - apportionment and determination of proportionate tax attributable to the beneficiary - Held that - The beneficiaries are the owners of the property of the trust and the trustees have only the duty and responsibility to manage the same in accordance with the power granted to the trustees by the Trust deed. When the beneficiaries become the joint owners section 26 of the Income Tax Act, comes into play and mandates the assessment of the beneficiaries shares in their respective hands. In the instant case, admittedly, the only source of income of the assessee-trust is income of the house property, therefore, section 161(1A) of the I.T.Act and proviso to section 164(1) of the I.T.Act is not applicable. Since the beneficiaries are actual / real owners of the property, the share of the beneficiaries are also determined. There has to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the income of each beneficiary. Tax on the share of each beneficiary will have to be separately calculated as if it formed a part of the beneficiary s income. Tax payable by the Trust will be the sum total of the tax calculated on the share of each beneficiary. With these directions, we set aside the reassessment order to the file of the Assessing Officer for reframing the assessment. - Decided in favour of assessee for statistical purposes..

Issues Involved:
1. Validity of the reopening of assessment.
2. Jurisdiction of the Assistant Director of Income Tax (Exemption) to assess the Trust.
3. Assessment of income in the hands of the Trust versus beneficiaries.
4. Levy of interest under sections 234B and 234C.
5. Granting of interest under section 244A.

Issue-wise Detailed Analysis:

1. Validity of the Reopening of Assessment:
The assessee challenged the reopening of the assessment under section 147 of the Income Tax Act, arguing it was merely a change of opinion without any legal backing. The Tribunal examined whether the reopening was justified, considering the initial assessment was completed under section 143(3) accepting 'nil' income. The Tribunal noted that the reopening was based on the observation that the property was owned by the Trust and not the beneficiaries, thus section 26 was not applicable. The Tribunal concluded that the reopening of the assessment was valid as the Assessing Officer had reasons to believe that income had escaped assessment.

2. Jurisdiction of the Assistant Director of Income Tax (Exemption) to Assess the Trust:
The assessee contended that the Assistant Director of Income Tax (Exemption) lacked jurisdiction to assess the Trust. However, this issue was not adjudicated by the Commissioner of Income Tax (Appeals) (CIT(A)). The Tribunal did not provide a specific ruling on this jurisdictional challenge in the judgment.

3. Assessment of Income in the Hands of the Trust versus Beneficiaries:
The core issue was whether the rental income should be assessed in the hands of the Trust or the beneficiaries. The Tribunal emphasized that the beneficiaries are the real owners of the trust property, and the Trust merely holds the property on behalf of the beneficiaries. Citing various judicial precedents, including the Hon’ble Bombay High Court in Bhavna Nalinkant Nanavati v. CIT and the Hon’ble Apex Court in CWT v. Trustees of NEH Nizam’s family Trust, the Tribunal held that the income should be assessed in the hands of the beneficiaries. The Tribunal directed that there should be as many assessments on the trustee as there are beneficiaries with determinate and known shares, specifying the tax due for each beneficiary.

4. Levy of Interest under Sections 234B and 234C:
The assessee argued that the CIT(A) did not provide a clear finding on the levy of interest under sections 234B and 234C. The Tribunal did not delve into this issue in detail, as the primary focus was on the assessment of income in the hands of the beneficiaries.

5. Granting of Interest under Section 244A:
Similar to the levy of interest, the issue of granting interest under section 244A was not specifically addressed by the Tribunal in the judgment. The main contention revolved around the correct assessment of income, which was resolved in favor of the beneficiaries.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to reframe the assessment by calculating the tax on the share of each beneficiary as if it formed part of their income. The reassessment order was set aside, and the matter was remanded to the Assessing Officer for fresh consideration in line with the Tribunal's findings. The appeal was thus allowed for statistical purposes.

← Previous Next →