1987 (1) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of maximum marginal rate of tax to the assessee-trust.
2. Interpretation of provisos to section 164(1) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of Maximum Marginal Rate of Tax to the Assessee-Trust

The revenue appealed against the order of the AAC, which held that the assessee-trust was not assessable at the maximum marginal rate. The Income Tax Officer (ITO) had assessed the trust at the maximum marginal rate, arguing that one of the beneficiaries, Deviayaniben, had taxable income, and that the trust was not the only trust declared under the will of the settlor, Shri Pranlal Thakordas Shah. The ITO contended that the dissolution of the other trust did not alter the fact that two trusts were originally created.

The AAC, however, accepted the assessee's contention that since only one trust existed during the relevant accounting year, the trust should be assessed at the normal rate as per proviso (ii) to section 164(1). The AAC reasoned that the trustees were authorized to dissolve the trust under the will, and since the other trust was dissolved before the introduction of the Finance (No. 2) Act, 1980, the assessee-trust should benefit from the normal rate.

The Tribunal upheld the AAC's decision, agreeing that the provisions of proviso (ii) to section 164(1) should be construed reasonably. Since there was only one discretionary trust during the relevant accounting year, the maximum marginal rate was not applicable.

Issue 2: Interpretation of Provisos to Section 164(1) of the Income-tax Act, 1961

The ITO had rejected the assessee's claim under both provisos to section 164(1). The first proviso requires that none of the beneficiaries have taxable income or be beneficiaries under any other trust. The AAC and the Tribunal both noted that this proviso contains two limbs, and the assessee argued that fulfilling either condition should suffice. However, the AAC rejected this argument, stating that both conditions must be met.

The second proviso allows for normal tax rates if the trust is the only discretionary trust declared under a will. The AAC and the Tribunal found that since the other trust was dissolved before the relevant accounting year, the assessee-trust was the only trust in existence, thus qualifying for normal tax rates.

The Tribunal emphasized the need for a reasonable construction of the statute, citing Supreme Court judgments that support interpreting statutory provisions to achieve legislative intent and avoid manifestly unjust results. The Tribunal concluded that the AAC was correct in applying the normal tax rate under proviso (ii) to section 164(1), given that only one trust existed during the relevant accounting year.

Conclusion

The Tribunal dismissed the revenue's appeal, affirming the AAC's decision that the assessee-trust should be taxed at the normal rate under proviso (ii) to section 164(1) of the Income-tax Act, 1961. The Tribunal did not address the assessee's argument under proviso (i) as no appeal or cross-objection was filed by the assessee against the AAC's order on that point.