2019 (8) TMI 837 - AT - Income Tax

Taxability of withdrawals from private discretionary trust as income in hands of beneficiary and settlor - differentiating between the trust corpus and accretion of income - explanation of source of funds in the hands of the trust - assessment of trust - Penalty u/s 271(1)(c) - HELD THAT - No doubt, Dr A T Patel has made a statement, during the course of search operation recorded on 29.9.2011- and more specifically in response to question no. 3, that during seven years of his and his wife s employment in the United Kingdom, the assessee had accumulated funds, on which taxes were duly paid in the UK, which were parked in a bank account in British Virgin Islands. It was also explained that these monies were kept in BVI bank account since, in accordance with the legal requirements then in existence, they could not have kept these monies in the UK. Once this position is found to be correct, the taxation will no doubt be confined to the accretion part but that stage has not yet come. As for the impact of Pratibha Pankaj Patel 2018 (12) TMI 272 - ITAT AHMEDABAD on the facts of this case, that was a case in which the assessee before us was only a beneficiary and not the settlor. So far as the beneficiary is concerned, once the source of funds received by beneficiary is explained, taxation could possibly be confined only to the income component, and but that would not essentially hold good for the settlor as well. He has to explain the investments, which were not accounted for in his books of accounts or disclosed to the income tax authorities at any stage earlier, detected during the search operations. There is no escape from the onus of explaining the investments made by the assessee. The trust investments were made much earlier but since these investments were unaccounted and undisclosed, the assessee has to explain the source of these investments now. When the investment in trust itself stands unexplained and uncorroborated, the legal position with respect to taxability of such trust funds is altogether at a different level. As we so observe, we are conscious of the fact that the evidence of trust investments is found in the search proceedings and these investments in the trust were prima facie unaccounted and undisclosed to the tax authorities. Learned representatives fairly agree that the matter can be remitted to the file of the AO for examination de novo on all these aspects, including, but not limited to, in respect of the subsequent taxation of entire trust funds in the hands of the beneficiaries. All aspects remain open.

Summary

Issues:
- Condonation of delay in filing appeals
- Taxability of trust funds and partial withdrawals
- Differentiation between trust corpus and accretion of income
- Source of funds in the hands of the trust
- Remitting the matter to the Assessing Officer for fresh examination

Condonation of Delay:
The four appeals before the Appellate Tribunal ITAT Ahmedabad involved a common issue of delay in filing, which was attributed to the carelessness of the accountant due to health reasons. The delay of 404 days was sought to be condoned by the appellants, claiming it was beyond their control. After considering the rival contentions and material on record, the Tribunal found the explanation for the delay plausible and condoned it, allowing the appeals to proceed on merits.

Taxability of Trust Funds and Partial Withdrawals:
The appeals arose from a search operation revealing a private discretionary trust set up for family members. The trust funds were held in a tax haven, and partial withdrawals were made by beneficiaries. The Assessing Officer taxed the withdrawals as income and imposed penalties, which were confirmed by the CIT(A). The senior counsel argued that only accretion to the trust corpus should be taxed, not the entire withdrawal, citing a precedent. The matter was urged to be remitted for fresh examination in light of subsequent developments.

Differentiation Between Trust Corpus and Accretion of Income:
The debate centered on whether the source of funds in the trust was explained, with the senior counsel arguing for taxation limited to accretion. The Commissioner contended that the source of funds needed clarification before determining taxability. The Tribunal noted the need to establish the bonafides of the trust and source of funds, especially since the trust investments were unaccounted for and detected during the search operation. The matter was agreed to be remitted for a fresh examination by the Assessing Officer.

Source of Funds in the Hands of the Trust:
The Tribunal highlighted the importance of explaining the unaccounted investments made by the assessee in the trust, emphasizing the onus on the settlor to clarify undisclosed investments. The source of funds in the trust remained unexplained, requiring further scrutiny by the Assessing Officer to determine taxability and legality of the trust funds.

Remitting the Matter for Fresh Examination:
Ultimately, the Tribunal allowed the appeals for statistical purposes, remitting the matter to the Assessing Officer for a de novo examination on various aspects, including the source of funds, taxability of trust funds, and subsequent taxation of entire trust funds in the hands of beneficiaries. The decision was pronounced on July 31, 2019.