1994 (11) TMI 156 - AT - Income Tax

Summary

Issues Involved:
1. Whether the Assessing Officer (AO) was justified in taxing the income arising to the trustees of "Bharat Trust" at the maximum marginal rate under Section 164(1) of the IT Act, 1961.
2. Disallowance of advertisement expenses of Rs. 90,423 under Rule 6B(2) of the IT Rules.
3. Disallowance of Rs. 18,881 towards bonus payment to the employees.

Detailed Analysis:

1. Taxation of Income at Maximum Marginal Rate:
The central issue in the appeal was whether the AO was justified in taxing the income arising to the trustees of "Bharat Trust" at the maximum marginal rate under Section 164(1) of the IT Act, 1961 read with Explanation I. The trust deed executed on 31st December 1979, specified two sets of beneficiaries in Schedules I and II. The AO concluded that the income should be taxed at the maximum marginal rate, citing that a trust is not a person under Section 9 of the Indian Trusts Act and cannot hold or transfer property under Section 5 of the Transfer of Property Act. The AO also noted that the trustees had absolute discretion over the income distribution, and the beneficiaries of Schedule II had no vested or contingent rights in the income for 19 years.

The appellate authority, however, found that the trust was specific and non-discretionary with known and determinate beneficiaries and shares. The appellate authority reversed the AO's decision, holding that Section 164(1) was not applicable and that the income should be assessed under Section 161(1) of the IT Act. The Tribunal supported this view, emphasizing that the beneficiaries and their shares were specific and determinate, and the income had already been taxed in the hands of the beneficiaries, preventing double taxation. The Tribunal referred to several case laws, including the Supreme Court's decision in CWT vs. Trustees of H.E.H. Nizam's Family (Remainderman's Wealth Trust), which mandated that assessments on trustees should be made in accordance with the special provisions for trusts.

2. Disallowance of Advertisement Expenses:
The AO disallowed advertisement expenses amounting to Rs. 90,423 under Rule 6B(2) of the IT Rules. The appellate authority allowed the deduction, providing valid and cogent reasons. The Tribunal upheld this decision, agreeing with the reasoning provided by the appellate authority.

3. Disallowance of Bonus Payment:
The AO disallowed Rs. 18,881 towards bonus payments to employees. The appellate authority allowed this deduction, and the Tribunal upheld the decision, finding the reasons provided by the appellate authority to be valid and cogent.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the appellate authority's decision that the income of "Bharat Trust" should be assessed under Section 161(1) and not at the maximum marginal rate under Section 164(1). The Tribunal also upheld the deductions for advertisement and bonus expenses as allowed by the appellate authority.