1986 (5) TMI 94 - AT - Income Tax

Summary

Issues:
Assessment of trust income as one unit or separately for individual beneficiaries under the Income Tax Act.

Analysis:
The appeal was filed against the order of the CIT(A) Pune, confirming the ITO's order for the assessment year 1984-85. The trust in question was settled by Shri M.P. Gera on trust on 31st Jan., 1979, with trustees authorized to use the funds for the benefit of the beneficiaries. The trustees carried on business and earned income, which was distributed among nine beneficiaries. The ITO held that the business was carried on by the beneficiaries as an Association of Persons (AOP), and therefore, the entire income of the trust should be assessed as one unit. The CIT(A) dismissed the appeal, leading to the current appeal before the Appellate Tribunal.

The appellant contended that the past practice of assessing the beneficiaries individually was correct, and the current decision by the Department was not warranted by law. The trustees operated the business independently of the beneficiaries, who derived their income from other sources. The appellant argued that the beneficiaries did not constitute an AOP/BOI and that the ITO had the option to assess the trustees instead of the beneficiaries, considering various factors. The appellant cited a previous decision to support their argument.

In response, the departmental representative acknowledged the previous decision and agreed that the trustees cannot be assessed as one unit. However, they argued that the ITO could still assess the trustees in a similar manner as the beneficiaries would have been assessed, even if it resulted in some loss of revenue. The departmental representative emphasized that the assessment on the trust should not be quashed entirely but modified accordingly.

The Appellate Tribunal examined the contentions and relied on the previous decision to hold that the trustees cannot be assessed as a unit of assessment. The trustees are liable to be assessed, but the tax demand should be restricted to what would be payable if the trustees were assessed in the same manner as individual beneficiaries. The Tribunal emphasized that there was no AOP/BOI of beneficiaries and refrained from commenting further on the correctness of the option exercised by the ITO. The Tribunal expressed hope that the ITO assessing individual beneficiaries would exclude income to avoid double taxation and hardship.

In conclusion, the appeal was partly allowed, with the Appellate Tribunal ruling that the trustees cannot be assessed as a unit but should be assessed in a manner similar to individual beneficiaries to prevent double taxation and hardship.