1989 (11) TMI 79 - AT - Income Tax

Summary

Issues:
Taxation of income earned by a trust in the hands of the assessee.

Analysis:
The appeal under the Income Tax Act for the assessment year 1980-81 raised the issue of whether the income earned by a trust, with the sole beneficiary being the assessee's son, should be taxed in the hands of the assessee. The assessment was reopened under section 263, and a sum of Rs. 38,000 earned by the trust was added to the assessee's income. The Dy. CIT (A) confirmed this addition. The authorized representative for the assessee argued that the trust should not be taxed based on precedents and submitted relevant documents, including the trust deed and dissolution deed. The revenue, however, relied on lower authorities' orders. The authorized representative further clarified that for the subsequent year, 1981-82, the trust itself was taxed, not the assessee. The ITAT considered the submissions and evidence presented. It concluded that the commission income of Rs. 38,000 earned by the trust should not be taxed in the hands of the assessee.

The ITAT found that the trust was legally constituted and there was no irregularity in its formation. The business was conducted by the trust, and the income was earned for the benefit of the assessee's minor son, the sole beneficiary. The ITAT noted that for the following year, 1981-82, a similar commission income of the trust was assessed in the trust's hands, not the assessee's. Certificates from the company confirmed the commission payment to the trust, supporting the assessee's claim that the income belonged to the trust and not the assessee. The ITAT referenced a Gujarat High Court decision stating that lifting the veil to determine the business's reality is not permissible for trusts. The ITAT also cited a Calcutta High Court decision supporting the assessee's position regarding the minor beneficiary. Additionally, a Tribunal decision emphasized that income from a different business should not be clubbed with the assessee's income.

In conclusion, the ITAT reversed the Dy. CIT (A)'s decision and allowed the appeal, holding that the commission income should have been taxed in the hands of the trust, not the assessee.