2006 (7) TMI 239 - AT - Income Tax

Summary

Issues Involved:
1. Whether the income of a Main Trust assessed on a substantive basis and settled under the Kar Vivad Samadhan Scheme (KVSS) can be assessed again in the hands of the corresponding beneficiaries assessed on a protective basis.
2. Jurisdiction of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961.
3. Refund of tax and interest to the beneficiary trusts.

Issue-wise Detailed Analysis:

1. Main Trust Income and KVSS Settlement:
The primary controversy was whether income assessed substantively in the hands of the Main Trust and settled under KVSS could be reassessed in the hands of the beneficiaries on a protective basis. The Tribunal noted two conflicting views:
- One view supported the assessees, stating that since the Main Trust availed the KVSS benefit, the same income should not be taxed again in the hands of the beneficiaries to avoid double taxation.
- The other view held that the Main Trust and beneficiary trust are separate entities, and the settlement under KVSS for the Main Trust does not preclude assessment in the hands of the beneficiaries.

The Tribunal concluded that the Main Trusts had settled their substantive assessments under KVSS, and thus, the corresponding protective assessments in the hands of the beneficiary trusts should fade away. The CBDT's instructions clarified that once a substantive assessment is settled, the protective assessment becomes invalid, and any tax paid by the beneficiary trusts should be refunded.

2. Jurisdiction under Section 263:
The Commissioner of Income-tax invoked section 263 to revise the orders passed by the Assessing Officer, arguing that:
- The Assessing Officer failed to consider the legal implications of KVSS.
- The benefits of KVSS were erroneously extended to the beneficiaries.
- No tax paid under KVSS is liable to be refunded.

The Tribunal found that the Commissioner had no jurisdiction to revise the orders since the substantive assessments had already been settled under KVSS, and the High Court had held that the same income could not be taxed in the hands of different assessees. The Tribunal emphasized that the CBDT's circulars and the High Court's judgments were binding, and the Commissioner could not override them.

3. Refund of Tax and Interest:
The Tribunal upheld the Assessing Officer's decision to refund the tax paid by the beneficiary trusts, along with interest. It was noted that:
- The refund of tax was a natural consequence of excluding the income from the protective assessments.
- Interest on the refund was compensatory and should be paid since the delay was not attributable to the assessees.

The Tribunal rejected the revenue's argument that the delay was caused by the assessees' conduct, stating that the delay was due to the ongoing litigation and the subsequent settlement under KVSS.

Conclusion:
The Tribunal quashed the revision orders passed by the Commissioner of Income-tax, restored the orders of the Assessing Officer, and allowed the appeals in favor of the assessees. The Tribunal reiterated that the same income could not be taxed twice, and the settlement under KVSS for the Main Trusts precluded any further assessment in the hands of the beneficiary trusts.