2017 (11) TMI 374 - AT - Income Tax

Scope of adjustment permissible under section 143(1) - Status of the trust - Held that - We find merit in the alternative contention of the learned counsel for the assessee that the issue relating to the determination of the status of the assessee as well as the rate of tax applicable to it is highly debatable and the same is beyond the scope of adjustment permissible under section 143(1). Therefore, accept the alternative contention raised by the assessee and setting aside the impugned order of the Ld. CIT (A), I direct the AO to take the status of the assessee as claimed in the return of income and levy tax accordingly. Appeal of the assessee is allowed.

Summary

Issues:
1. Applicability of maximum marginal rate of tax on a trust with a single beneficiary.
2. Interpretation of sections 161(1) and 164(1) of the Income Tax Act 1961.
3. Determination of trust status and tax rate applicability.

Issue 1: Applicability of Maximum Marginal Rate of Tax
The appeal concerned the imposition of the maximum marginal rate of tax on a single beneficiary private trust. The trust, with a minor beneficiary, had filed its return of income at the normal slab rate applicable to individuals. However, the Assessing Officer (AO) processed the return under section 143(1) and charged tax at the maximum marginal rate of 30%. The appeal challenged this decision, arguing that the provisions of section 161(1) should apply since the beneficiary was known and certain, entitling them to 100% of the income. The contention was that the maximum marginal rate should only apply if the beneficiary was unknown or shares were indeterminate.

Issue 2: Interpretation of Sections 161(1) and 164(1)
The argument before the Ld. CIT (A) revolved around the provisions of section 161(1) and 164(1) of the Income Tax Act. The appellant asserted that section 164(1) was not applicable as there was only one beneficiary, and income should be deemed to have been received by the trustees for the beneficiary. The Ld. CIT (A) upheld the AO's decision, considering various case laws and concluding that the first limb of section 164(1) applied due to the minor beneficiary and the trust's structure. The decision was supported by references to previous court judgments and interpretations of trust deeds.

Issue 3: Determination of Trust Status and Tax Rate Applicability
The Tribunal heard arguments from both sides regarding the trust's status and the applicable tax rate. The appellant contended that the trust had always been assessed as an individual in previous years and that changing its status to an Association of Persons (AOP) under section 143(1) was incorrect. The appellant cited case laws favoring their position and argued that the issue was debatable and beyond the scope of adjustment under section 143(1). The Tribunal accepted the alternative contention, ruling in favor of the appellant and directing the AO to consider the trust's status as claimed in the return of income for tax assessment.

This comprehensive summary outlines the key issues addressed in the legal judgment, including the applicability of tax rates to trusts, interpretation of relevant sections of the Income Tax Act, and the determination of trust status for tax assessment purposes.