2008 (9) TMI 512 - HC - Income Tax

Representative Assessee - Discretionary Trust executed in UK for benefit of persons in India. Trustee in UK not distributing income to beneficiaries in relevant accounting years. Trustee assessed in UK. Held that- income from trusts not assessable in hand of beneficiaries in India.

Issues Involved:
1. Interpretation and/or application of clauses 3(2) and 4 of the U.K. trusts.
2. Tax liability under section 166 of the Income-tax Act for income not distributed or receivable.
3. Adherence to the order of the Settlement Commission and the Supreme Court for earlier assessment years.
4. Double taxation of income taxed in the U.K. and India.
5. Inclusion of income from U.S. trusts for the assessment year 1987-88.

Issue-wise Detailed Analysis:

1. Interpretation and/or Application of Clauses 3(2) and 4 of the U.K. Trusts:
The primary issue was whether the U.K. trusts were discretionary or specific trusts. The appellant argued that the U.K. trusts were discretionary, emphasizing that the trusts were created to protect beneficiaries against creditors and to control the distribution of large sums of money. The appellant highlighted that the trust deeds allowed the trustees to retain income, which indicated a discretionary nature. The court noted that the Settlement Commission had previously interpreted the trusts as specific trusts due to the inaction of the trustees and the understanding of the beneficiaries. However, the court found this interpretation flawed, emphasizing that the sole trustee had the authority to manage the trust property and income, and since the trustees retained the income, it should be considered a discretionary trust.

2. Tax Liability Under Section 166 of the Income-tax Act:
The court examined whether the appellant could be taxed under section 166 for the income not distributed or receivable. The appellant contended that section 166 was not applicable as the income was retained by the trustees and not received by the beneficiaries. The court agreed, stating that section 166 could only be invoked if the income was actually received by the assessee. Since the income was retained by the trustees and not distributed, it could not be taxed in the hands of the appellant.

3. Adherence to the Order of the Settlement Commission and the Supreme Court:
The appellant argued that the Settlement Commission's order and the Supreme Court's decision were not binding for the current assessment years. The court concurred, noting that the previous decisions were based on the facts of those specific years and did not create a res judicata for subsequent years. The court emphasized that the facts and circumstances for the current assessment years were different, and the appellant had not received the income from the U.K. trusts, nor had it been shown as taxable in the returns.

4. Double Taxation of Income Taxed in the U.K. and India:
The appellant raised the issue of double taxation, arguing that the income taxed in the U.K. should not be taxed again in India. The court agreed, stating that the income from the U.K. trusts had already been taxed in the U.K., and taxing it again in India would result in double taxation. The court referenced the Supreme Court's observation that if the appellant proved the income was taxed in the U.K., it should not be taxed again in India.

5. Inclusion of Income from U.S. Trusts for the Assessment Year 1987-88:
The appellant contested the inclusion of income from the U.S. trusts for the assessment year 1987-88, arguing that no distribution had been made by the trustees. The court noted that the Tribunal had confirmed the addition based on the appellant's inability to substantiate the claim at the time of hearing. However, the court found that the income from the U.S. trusts had not been taxed in the preceding or succeeding years and should not be taxed for the assessment year 1987-88.

Conclusion:
The court allowed the appeals, ruling in favor of the appellant on all issues. The U.K. trusts were deemed discretionary, and the income retained by the trustees could not be taxed in the hands of the appellant under section 166. The previous decisions of the Settlement Commission and the Supreme Court were not binding for the current assessment years. The court also ruled against double taxation of the income already taxed in the U.K. and excluded the income from the U.S. trusts for the assessment year 1987-88.

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