2001 (12) TMI 191 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of protective addition made for interest received from K. Khodidas Patel Specific Family Trust.
2. Assessment of interest income in the hands of the beneficiary for various assessment years.
3. Impact of Kar Vivad Samadhan Scheme (KVSS) 1998 on the assessment of interest income.
4. Allowance of rebate under section 88.
5. Assessment of interest on fixed deposits in the hands of the beneficiaries.

Detailed Analysis:

1. Deletion of Protective Addition:
The primary issue raised by the revenue was that the CIT(A) erred in directing the deletion of the protective addition made for interest received from K. Khodidas Patel Specific Family Trust in the hands of the assessee. The interest received by the assessee, a beneficiary of the trust, was declared in the returns filed for the relevant assessment years. The Tribunal had previously held that interest paid to the beneficiaries is deductible from the income of the trust, based on the Gujarat High Court's decision in CIT v. Tanvi Sajni Family Trust, which established that the trust is a distinct legal entity separate from its beneficiaries.

2. Assessment of Interest Income:
For the assessment years 1988-89, 1991-92, and 1992-93, the appeals by the revenue were allowed, and the interest received from the trust was to be assessed in the hands of the assessee. For the assessment year 1990-91, the counsel for the assessee argued against the assessment of interest income on the grounds that the trust had paid tax on the interest amount under the KVSS, which would result in double taxation. However, the Tribunal did not accept this contention, emphasizing that the interest income belongs to the beneficiary and must be assessed in their hands, as supported by the Supreme Court's decision in ITO v. Ch. Atchaiah.

3. Impact of KVSS 1998:
The Tribunal considered the declaration made by the trust under the KVSS, which is a recovery scheme allowing the settlement of tax arrears. The counsel for the assessee argued that since the trust had paid the disputed tax under the KVSS, the interest received by the beneficiary should not be taxed again. However, the Tribunal held that the declaration under the KVSS does not alter the legal position that the interest income belongs to the beneficiary and must be assessed in their hands. The Tribunal also noted that the KVSS is not a litigation settlement scheme but a recovery scheme, and the Board's circulars clarifying the KVSS provisions do not apply to this case.

4. Allowance of Rebate under Section 88:
Regarding the cross-objection filed by the assessee for the assessment year 1991-92, the Tribunal held that since the interest income is assessable in the hands of the assessee, the rebate under section 88 is liable to be allowed in accordance with the law.

5. Assessment of Interest on Fixed Deposits:
For the assessment year 1991-92, the interest paid to the beneficiaries, including the fixed deposit interest, was held to be allowable. Therefore, the interest on the fixed deposits of the beneficiaries is liable to be assessed in their personal assessments.

Conclusion:
The Tribunal allowed the revenue's appeals for all the assessment years, holding that the interest income received by the assessee from the trust is liable to be assessed in the hands of the beneficiary. The cross-objection filed by the assessee was partly allowed, with the rebate under section 88 to be allowed in accordance with the law, and the interest on fixed deposits to be assessed in the beneficiaries' personal assessments.