2012 (7) TMI 583 - AT - Income Tax

Taxability of Income as assessee trust - maximum marginal rate. - CIT(A) held that the trust cannot be held as an association of a person as the constituent persons have not come together to earn income in question - DR asked for the applicability of sec 161(1A) in respect of the license fee received by the assessee trust in subletting out the property in question - Held that - The provisions of sec. 161 (1A) are applicable only when the income of the trust is business income and the activity of subletting is a single isolated activity and there is no structured, systematic activity with frequency, therefore, the addition is not sustainable - the individual income has been already taxed in their hands as stated by the appellant, there can be no double taxation of the same amount - the assessee trust merely sub-let out the leased property and the income is held to be liable to tax as income from other sources and not income from house property or income from business - provisions of sec. 161(1A) are not applicable in the case of the assessee. - in favour of assessee.

Summary

Issues:
Applicability of sec 161(1A) in taxing trust income as business income.

Analysis:
The revenue appealed against the CIT(A)'s order for AY 2006-07, challenging the direction not to tax a sum in the hands of the trust. The Assessing Officer found the trust's claim of nil income unacceptable due to beneficiaries' income exceeding the taxable limit. The AO treated the net surplus as business income, invoking sec. 161(1A) based on a Supreme Court decision. However, the CIT(A) ruled in favor of the trust, citing precedents and holding that beneficiaries should be taxed as representatives under sec. 161(1) where income has already been taxed. The revenue argued that sec. 161(1A) should apply due to the trust's business activities, but the trust contended that past acceptance of income as other sources precluded this. The tribunal considered the applicability of sec. 161(1A) to the trust's income from subletting property.

The tribunal analyzed sec. 161(1A) in conjunction with sec. 160(1)(iv) to determine the tax treatment of trust income involving business activities. It noted the CIT(A)'s finding that the trust's subletting activity was isolated and not structured systematically, leading to deletion of the addition. Citing the Bombay High Court's decisions, the tribunal agreed that the trust was not an association of persons and beneficiaries should be taxed as representatives under sec. 161(1). Further, it found no evidence of the trust engaging in systematic business activities beyond the single subletting instance, aligning with the Gujarat High Court's precedent on taxing income from other sources.

Referring to the Gujarat High Court's decision, the tribunal emphasized that where a trust merely sublets property without systematic business activities, income should be taxed as other sources, not as income from house property or business. Consequently, the tribunal held that sec. 161(1A) did not apply to the trust's situation, upholding the CIT(A)'s decision and dismissing the revenue's appeal.