2022 (6) TMI 1027 - AT - Income Tax

Assessment of trust - Intimation of the CPC by applying the maximum marginal rate of tax on the income which was below the taxable limit - Whether CIT-A erred in directing to tax income at maximum marginal rate through the trust is registered under public charitable trust Act therefore tax should be charged at normal rate of tax - whether the rate of an individual should be applied or the maximum marginal rate of tax in the manner as provided under the provisions of section 164? - HELD THAT - Admittedly, the person has filed the return of income in the representative capacity in the manner as provided under clause (iv) of section 160 of the Act. To this proposition, there is no dispute. It is also not under challenge that the trust on hand is a non-discretionary trust meaning thereby the beneficiaries of the trust are not known. In other words the trust being public trust was formed to carry out the charitable activities. This fact was not controverted by the learned CIT-A. Indeed learned CIT-A accepted that the assessee as public charitable trust It is the admitted position that the members of the trustees are not entitled to any share in the income of the Association of persons. Accordingly, we are of the view that the circular issued by the CBDT as discussed above is squarely applicable in the given facts and circumstances. Thus we hold that the rate applicable as to an individual for charging the income tax after allowing the basic exemption limit, shall be applicable to the assessee on hand. Hence the ground of appeal of the assessee is allowed.

Summary

Issues:
1. Application of maximum marginal rate of tax on income below taxable limit for a trust registered under public charitable trust Act.

Analysis:

Issue 1: Application of Maximum Marginal Rate of Tax
The primary issue in this case revolved around the application of the maximum marginal rate of tax on the income of a trust below the taxable limit. The assessee contended that as a registered public charitable trust, it should be taxed at the normal rate rather than the maximum marginal rate. The dispute arose when the intimation under section 143(1) applied the maximum marginal rate without considering the exemption applicable to individuals. The assessee argued that since it did not extend benefits to specific individuals, it should be considered an artificial judicial person and taxed at the normal slab rate. Reference was made to a CBDT circular from 1982 stating that trusts where members and trustees do not receive any share of income should be taxed at the normal rate. However, the CIT (A) disregarded these arguments, noting that the assessee was not registered under section 12A of the Act, thus liable to be taxed at the maximum marginal rate under section 164(1) of the Act.

Analysis Continued:
Upon further examination, it was established that the trust, although registered under the Bombay Public Trust Act 1950, did not possess registration under section 12A of the Act. This absence of registration under section 12A implied that the trust was ineligible for the exemptions provided under section 11 of the Act. The crux of the matter lay in determining whether the rate applicable to an individual or the maximum marginal rate should be applied as per section 164 of the Act. It was acknowledged that the trust filed its income tax return in a representative capacity under section 160(iv) of the Act, and being a non-discretionary trust, the beneficiaries were unknown, aligning with the purpose of carrying out charitable activities. The CBDT circular No. 320 of 1982 was cited to support the argument that trusts where members or trustees do not receive any income share should be taxed at the ordinary rate applicable to associations of persons, not the maximum marginal rate.

Final Decision:
After thorough deliberation, the Tribunal ruled in favor of the assessee, allowing the appeal. It was concluded that the rate applicable to an individual for income tax, after considering the basic exemption limit, should be applied to the trust. The decision was based on the trust's structure as a public charitable trust and the absence of entitlement of members or trustees to any share in the income. Therefore, the grounds of appeal were upheld, and the appeal of the assessee for both assessment years, 2016-17 and 2017-18, was allowed, setting aside the application of the maximum marginal rate of tax.