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2014 (10) TMI 614 - AT - Income TaxApplicability of the provisions of Sec.60, 61 and 63 - Obligation to pay tax by the trust Tax obligation has been fully discharged by beneficiaries of the assessee trust or not Held that - Assessee contended that the AO has not disputed in his remand report the fact that the Assessee trust is revocable but only says that beneficiaries are assessed at different places in India and it is very difficult to monitor all these beneficiaries as to whether they have filed their returns and even if filed, whether correct share of income received/receivable from the Assessee are admitted - To avoid such eventuality it would be correct to Assessee the trustee/representative Assessee - once the trust is accepted to be revocable then there is no question of assessing the transferee and it is only the transferor who can be assessed - It Sec.61 mandates that income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as income of the transferor and therefore the assessment in the hands of the transferee/representative assessee is not proper. U/s 164 as so replaced, a representative assessee' who receives income for the benefit of more than one person whose shares in such income are indeterminate or unknown, will be chargeable to income-tax on such income at the flat rate of 65% or the rate which would be applicable if such income were the total income of an AOP, whichever course would be more beneficial to the Revenue the object of the amendments to the provision was only that the distribution of the income should not be entirely at the discretion of the trustees and that the trust deed should regulate the shares. The power of revocation under Clause 13 of the Deed of Trust is a general power of revocation and the same would be sufficient for construing the transfer in the present case as a revocable transfer - it is not necessary that the power of revocation should be at the instance of the contributors/beneficiaries/ transferor and it can be at the instance of any person either settlor, trustee, transferee or the beneficiaries - Provisions of Sec.61 of the Act do not contemplate a power of revocation only at the instance of the transferor relying upon Additional Commissioner of Income-Tax, Gujarat Versus Surat Art Silk Cloth Manufacturers Association (And Other References) 1979 (11) TMI 1 - SUPREME Court - the existence of a power to revoke the transfer that has to be seen and not the manner in which/ or at whose instance such revocation is brought about. Following the decision in Jyotendrasinhji Versus SI Tripathi And Others 1993 (4) TMI 1 - SUPREME Court - Sec. 63(1) of the Act does not say that the deed of transfer must confer or vest an unconditional or an exclusive power of revocation in the transferor - the fact that concurrence of the trustee had to be obtained by the transferor/settler for revocation will not make the trust an irrevocable transfer - the deed contains a provision giving the transferor a right to re-assume power directly or indirectly over the whole or any part of income or assets within the meaning of s. 63(a)(ii) of the Act thus, Sec.61 read with Sec.63 of the Act which mandates that income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as income of the transferor will apply to the facts and circumstances of the present case and therefore the assessment in the hands of the transferee/representative assessee was not proper. Applicability of provisions of Sec.164(1) - Charge of tax where share of beneficiaries unknown Held that - There are two aspects to be noticed, the first aspect is the identification of the beneficiaries while the second aspect is with regard to ascertainment of the share of the beneficiaries - Clause 1.1.13 of the Trust Deed clearly lays down that beneficiaries means the Persons, each of whom have made or agreed to make contributions to the Trust in accordance with the Contribution Agreement the clause is sufficient to identify the beneficiaries - share income of the beneficiaries cannot be determined or known from the trust deed if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also the share to which each of them would be entitled without ambiguity, then it cannot be said that the Trust deed does not name the beneficiaries or that their shares are indeterminate - The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed - Even if the Trust deed authorises addition of further contributors to the trust at different points of time, in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate - Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust deed thus, the provisions of Sec.164(1) of the Act would not be attracted in the present case - identity by reference to the terms of the trust deed is sufficient and it is not necessary that the beneficiaries should be specifically named in the deed of trust Decided against revenue. Assessee trust to be assessed as AOP or not Held that - The beneficiaries contributed their money to the Assessee and a separate agreement was entered into between the Assessee and each beneficiary - There is no inter se arrangement between one contributory/ beneficiary and the other contributory/beneficiary as each of them enter into separate contribution arrangement with the Assessee - it cannot be said that two or more beneficiaries joined in a common purpose or common action and therefore the tests for considering the Assessee as AOP was satisfied - The beneficiaries have not set up the Trust - Therefore it cannot be said that the beneficiaries have come together with the object of carrying on investment in mezzanine funds which is the object of the trust - The beneficiaries are mere recipients of the income earned by the trust - They cannot be regarded as an AOP Decided against revenue. Income of a person has to be assessed in the correct and appropriate status Held that - Sec.161(1) by implication permits assessment of either the beneficiary or the Trustee - When the Trustee is assessed as representative assessee in respect of income received on behalf of the beneficiary, the section provides that tax shall be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him the order of the CIT(A) is upheld Decided against revenue.
Issues Involved:
1. Status of the trust as an Association of Persons (AOP). 2. Applicability of Section 164(1) of the Income Tax Act. 3. Applicability of Sections 61, 62, and 63 of the Income Tax Act. 4. Identification and ascertainment of beneficiaries and their shares. 5. Double taxation and assessment of income in the hands of the right person. Detailed Analysis: 1. Status of the Trust as an AOP: The Revenue contended that the trust should be assessed as an AOP because the definition of "Person" under Section 2(31) of the Income Tax Act includes an AOP, and there is no separate status for Trusts. However, the Tribunal observed that the beneficiaries did not come together for a common purpose or action, which is a requisite for constituting an AOP as per the Supreme Court's decision in CIT vs. Indira Balkrishna. The Tribunal concluded that the beneficiaries are mere recipients of the income earned by the trust and cannot be regarded as an AOP. Furthermore, the Tribunal noted that the form of return of income did not provide a separate status for Trusts, leading to the trust being incorrectly categorized as an AOP. 2. Applicability of Section 164(1) of the Income Tax Act: The AO applied Section 164(1), arguing that the individual shares of the beneficiaries were indeterminate or unknown. The Tribunal found that the trust deed provided a clear mechanism for determining the shares of the beneficiaries, and the beneficiaries were identifiable as per Clause 1.1.13 of the Trust Deed. The Tribunal relied on the CBDT Circular No.281 and judicial precedents to hold that the provisions of Section 164(1) were not attracted as the beneficiaries and their shares were determinable. 3. Applicability of Sections 61, 62, and 63 of the Income Tax Act: The Tribunal agreed with the CIT(A) that the trust was a revocable trust under Section 61, as the trust deed contained provisions allowing for the termination of the trust and the return of contributions to the beneficiaries. The Tribunal emphasized that the power of revocation need not be at the instance of the beneficiaries alone; it can be at the instance of any person, including the settlor or trustee. Thus, the income arising from the revocable transfer should be assessed in the hands of the beneficiaries, not the trustee. 4. Identification and Ascertainment of Beneficiaries and Their Shares: The Tribunal noted that the trust deed explicitly identified the beneficiaries as those who made contributions to the trust. The Tribunal referred to judicial precedents and CBDT Circular No.281 to conclude that the beneficiaries were identifiable and their shares were determinable based on the trust deed. The Tribunal held that the trust deed's provisions were sufficient to ascertain the beneficiaries and their respective shares. 5. Double Taxation and Assessment of Income in the Hands of the Right Person: The Tribunal highlighted that the income of the trust had already been offered to tax by the beneficiaries. The Tribunal referred to CBDT Circulars and judicial precedents to emphasize that once the income is taxed in the hands of the beneficiaries, it cannot be taxed again in the hands of the trustee. The Tribunal also noted that the AO's approach of assessing the trust while not giving credit for tax paid by the beneficiaries was unreasonable. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that the trust was a revocable trust and should not be assessed as an AOP. The Tribunal concluded that the income arising from the trust should be assessed in the hands of the beneficiaries, as the trust deed provided a clear mechanism for identifying the beneficiaries and determining their shares. The Tribunal also emphasized that double taxation should be avoided, and the income should be taxed in the hands of the right person, i.e., the beneficiaries.
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