2019 (8) TMI 178 - AT - Income Tax

Addition of foreign dividend income belonging to two trusts - irrevocable trust created for the benefit of children - AO took the view that the entire dividend income would belong to the assessee only - As per the trust deed, the income shall be accumulated and the minor children are entitled to receive it only after they attain majority. Accordingly, it was submitted that the foreign dividend income belonging to these two trusts are not liable to be included in the hands of the assessee and accordingly it was not offered to tax in India by the assessee. - AO took the view that the entire dividend income would belong to the assessee only. - AO further held that if the dividend income belonging to the trusts is paid to the trusts subsequently by the assessee, the same would amount application of income only HELD THAT - Since the tax status of the assessee is resident and ordinarily resident in India, he is liable to declare his global income, i.e., all income accruing or arising to the Individual or his minor children (if it is liable to be clubbed in his hands) globally shall be included in the total income of the assessee. Hence, before proceeding to club the dividend income accruing or received by the trusts created for the benefit of minor children, it is mandatory to show that the said income accrued or was received by the minor children. The tax authorities have taken the view that the dividend income relating to shares held by the trusts created for the benefit of children actually belongs to the assessee only and even if it is said to belong to his children, then the same is liable to be clubbed u/s 64(1A). They were constrained to hold so for reasons that the entire dividend income was received in the bank account of the assessee, it has been declared in the tax returns of the assessee, the trusts have not filed returns of income, there is no bank account in the name of trusts at that point of time etc. All these flaws/points have been addressed by the assessee by furnishing explanations before us in the form of additional evidences furnished before us. A.R has clarified the reasons for receiving and declaring entire income by the assessee, copies of amended tax return and copies of tax returns filed by trusts, bank account details of trusts, copies of letter issued by the company, amended dividend certificate etc. The assessee has clarified all the flaws pointed out by the tax authorities. Since these documents are additional evidences and since there was no occasion for the AO to examine them, we are of the view that the issue urged before us require fresh examination at the end of the AO in the light of discussions made supra, by duly considering additional evidences furnished by the assessee. We set aside the order passed by CIT(A) and restore the impugned issue to the file of the AO for examining it afresh in the light of discussions made supra by duly considering the additional evidences furnished by the assessee. - Appeal of the assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:
- Addition of foreign dividend income belonging to two trusts in the hands of the assessee.

Detailed Analysis:

1. Background and Facts:
The appeal concerns the addition of foreign dividend income related to two trusts made by the assessing officer for the assessment year 2013-14. The assessee, a director in an Indian company and a resident in India, also floated a company in the USA. The assessee declared a taxable income of ?156.45 lakhs and later revised it, including foreign dividend income of ?603.13 lakhs. The dividend was from M/s 24/7 Customer Inc., USA, with shares held by three trusts. The AO noted the total dividend received was ?900.50 lakhs, but the assessee offered only 66.98% of it, arguing that the remaining belonged to irrevocable trusts for his minor children.

2. Assessing Officer's (AO) Findings:
The AO did not accept the assessee's submissions, noting:
- The entire dividend was received in the joint bank account of the assessee and his wife.
- No explanation was provided for this.
- The entire dividend income was declared in the assessee's US tax return.
- The trusts did not file tax returns in the USA and had no bank accounts until FY 2015-16.
- The dividend income was used by the assessee.
- The shares were assigned to the trusts only in August 2012, though the trusts were formed in 2009.

The AO concluded that the entire dividend income belonged to the assessee and any subsequent payment to the trusts would be an application of income.

3. Assessee's Arguments:
The assessee argued that the minor children, being beneficiaries of the irrevocable trusts, were not entitled to the income until majority, making clubbing provisions inapplicable. The assessee cited several case laws to support this. However, the AO distinguished these cases, applying section 64(1A) of the Income Tax Act, which includes income accruing to a minor child in the total income of the parent.

4. CIT(A)'s Observations:
The CIT(A) agreed with the AO, noting:
- The trusts were formed as revocable in 2009 and converted to irrevocable in 2012, seen as a tax planning device.
- The core question was whether the dividend income was earned/received by the trusts or the settlor.
- The trusts did not have bank accounts, and the dividend was received in the assessee's account and declared in his US tax return.
- The CIT(A) confirmed the AO's view that any subsequent transfer to the trusts was an application of income.

5. Assessee's Additional Evidence:
The assessee provided additional evidence, explaining:
- The dividend-paying company inadvertently tagged all shareholders with the assessee's Social Security Number, leading to the entire dividend being reported and paid to the assessee.
- The delay in opening trust bank accounts was due to the need for all trustees to be present in the USA.
- The errors were rectified by amending US tax returns and filing returns for the trusts.

6. Tribunal's Findings:
The Tribunal noted:
- The AO's view that the dividend income belonged to the assessee due to its receipt in his account and declaration in his US tax return.
- The CIT(A) agreed with the AO, concluding that the dividend income should be assessed in the assessee's hands.
- The AO's application of section 64(1A) was incorrect as the dividend income accrued to the trusts, not directly to the minor children.
- The assessee clarified all flaws pointed out by the tax authorities with additional evidence.

7. Conclusion:
The Tribunal found that the assessee's explanations and additional evidence addressed the tax authorities' concerns. However, since these documents were new, the issue required fresh examination by the AO.

Final Decision:
The Tribunal set aside the CIT(A)'s order and restored the issue to the AO for fresh examination, considering the additional evidence provided by the assessee. The appeal was allowed for statistical purposes.