2023 (4) TMI 1108 - AT - Income Tax

Reopening of assessment u/s 147 - Assessment of trust - undisclosed rental income received by the assessee trust - assessee trust has not filed return of income for the AY 2010-11 and, therefore, there is escapement of income in respect of rental income received by the assessee trust from the property - HELD THAT - On perusal of the Income tax returns of the beneficiaries which were also available with the Assessing Officer at the time of reassessment proceedings as has been recorded a finding in the reassessment order that the assessee has produced the Income tax returns of the beneficiaries. As noticed that the beneficiaries have shown their share of rental income of the property held under the trust and in such case there is no escapement of income by the assessee trust as the trust was formed as a specific trust for the benefit of the beneficiaries of the family of Late Shri Gyan Chand Khanna. There is a direct live link between the rental income received by the trust and the income shown by the beneficiaries in the respective returns as per their respective share of rental income as specified in the trust deed and, therefore, there is no escapement of income at all. We hold that the reopening of the assessment is bad in law. We set aside the order of theCIT(Appeals) and quash the reassessment made by the Assessing Officer u/s 143(3) r.w.s. 147 - Decide in favour of assessee.

Issues:
- Reopening of assessment without escapement of income
- Taxation of trust income in the hands of beneficiaries
- Assessment of income in the hands of trust or beneficiaries

Reopening of Assessment Without Escapement of Income:
The appeal was filed against the order of the Ld. Commissioner of Income Tax(Appeals) for the AY 2010-11, challenging the reopening of the assessment. The grounds raised included the error in upholding the reopening without any income escapement warranting the notice under section 148 of the I.T. Act. The appellant argued that the reassessment order was invalid and unsustainable due to the variance between the reason recorded and the reassessment order. The appellate tribunal found that there was no escapement of income as the beneficiaries had declared their share of rental income in their individual returns as per the trust deed, establishing a direct link between the income received by the trust and that declared by the beneficiaries. Consequently, the reassessment was deemed bad in law, and the order of the Ld.CIT(Appeals) was set aside, quashing the reassessment made by the Assessing Officer.

Taxation of Trust Income in the Hands of Beneficiaries:
The trust, a private specific trust, owned a property in New Delhi, generating rental income. The Assessing Officer brought the gross rental income of the trust under tax, arguing that the trust should be taxed directly rather than through beneficiaries or trustees. The Ld.CIT(A) upheld this action, stating that taxes paid by the beneficiaries might be less than what the trust would be liable for, thus justifying the taxation of the trust's income. However, the appellant contended that once income is shown in the beneficiaries' hands, it cannot be taxed again in the trust's hands. Referring to a circular of the CBDT, the appellant argued that once the choice is made to tax the beneficiaries, the trust cannot be taxed on the same income. The tribunal agreed with the appellant, emphasizing that the beneficiaries had already filed their returns, showing their respective shares of rental income, thereby rejecting the notion of income escapement and ruling against the taxation of trust income in this case.

Assessment of Income in the Hands of Trust or Beneficiaries:
The trust deed specified that the income generated from the property was to be passed on to the beneficiaries, who duly declared their share of rental income in their individual returns. Despite this, the Assessing Officer sought to tax the trust directly. The tribunal observed a direct link between the rental income received by the trust and that declared by the beneficiaries, as per the trust deed provisions. This led to the conclusion that there was no escapement of income, rendering the reassessment invalid. Consequently, the tribunal set aside the Ld.CIT(A)'s order and quashed the reassessment made by the Assessing Officer for the AY 2010-11.

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