2019 (3) TMI 1038 - HC - Income Tax

Income attribution to trust - invoking section 61 - income taxable in the hands of the beneficiaries OR trust - revocable trust or not - tribunal held that the Assessee Trust could not be taxed in its own hands in respect of the income earned by it as the aforesaid three contributors/beneficiaries which had already been taxed in respect of the said income distributed to them by the said Trust - whether income arising by virtue of a revocable transfer of assets shall be chargeable to the income of the transferor and shall be included in his total income? - section 164 applicability - HELD THAT - Not only the 3 companies in question viz., HDFC, ICICI and IL&FS but the Government of Tamil Nadu itself contributed the funds from time to time in the said Trust Fund created in the Trust Deed. Both of them were entitled to revoke the same after a period of 3 years. The number of shares, their extent of benefits and their identity have not been found in dispute. Therefore, the question of applying Section 164 of the Act to the facts of the present case does not simply arise because will be applicable only if the share of the beneficiaries is unknown or indeterminate. Tribunal was perfectly justified in invoking Section 62(2) of the Act read with Section 61(1) of the Act which would apply only to the Revocable Transfer of the funds made for a period which is not specified and these above circumstances, it would be taxable in the hands of the Transferor/beneficiaries and not in the hands of the Trust. As a matter of fact, the findings rendered by the Tribunal are mere findings of facts and on application of relevant provisions of the Act which, in the facts of the case, does not give rise to a substantial question of law requiring our consideration under section 260A of the Act. The appeals are, thus, found devoid of merits and the same are liable to be dismissed. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Trust Deed - Revocable vs. Irrevocable Trust status
2. Classification of Assessee as commercial entity
3. Liability determination for an indeterminate Trust
4. Granting relief to Assessee despite withdrawal of status under Section 61

Issue 1: Interpretation of Trust Deed - Revocable vs. Irrevocable Trust status:
The Revenue challenged the Tribunal's decision regarding the nature of the Trust created by the State of Tamil Nadu, arguing that the Trust was irrevocable as per the Trust Deed's clause 29. However, the Tribunal held that the Trust was revocable based on the provisions of Section 61 of the Income Tax Act. The Tribunal emphasized that the Trust was revocable as per the Trust Deed and contributor's agreement, leading to the conclusion that the income derived by the Trust should be taxed in the hands of the beneficiaries.

Issue 2: Classification of Assessee as commercial entity:
The Tribunal determined that the Assessee Trust was not operating with a commercial motive, despite submitting Form 3CB and 3CD complying with Section 44AB. The Tribunal found that the Trust was revocable and not commercial in nature, as the beneficiaries were identifiable, and the Trust was structured in a way that allowed contributors to cancel units and receive value.

Issue 3: Liability determination for an indeterminate Trust:
The Tribunal analyzed the Trust's status as an indeterminate one under Explanation 1(ii) to Section 164, along with Section 160(1)(vi). It was noted that the Trust's liability was directed towards the representative Assessee, given the lack of explicit beneficiary details in the Trust Deed. The Tribunal concluded that the income should be taxed in the hands of the beneficiaries based on the supplementary contribution agreement.

Issue 4: Granting relief to Assessee despite withdrawal of status under Section 61:
The Tribunal granted relief to the Assessee Trust, even though the Assessee withdrew the status claimed under Section 61 for a subsequent assessment year. The Tribunal's decision was based on the revocable nature of the Trust and the taxation principles outlined in Section 61 and 161(1) of the Income Tax Act. The Tribunal found that the income had already been taxed in the hands of the beneficiaries, supporting the decision to allow the Assessee's appeals for the relevant assessment years.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the application of Sections 61, 62, and 164 of the Income Tax Act in determining the taxation liability concerning the Trust's income. The Court found that the Trust was revocable, leading to the income being taxable in the hands of the beneficiaries rather than the Trust itself. The Court dismissed the appeals, stating that no substantial question of law arose, and upheld the Tribunal's findings based on the relevant provisions of the Act.