2020 (10) TMI 1095 - HC - Income Tax

Assessment of trust - Determinate Trust or indeterminate Trust - Whether Tribunal was right in law in holding that the assessee as a discretionary trust ignoring the fact that the beneficiaries and their share of interest in the trust are determinable at all points of time? - Tribunal held that the provisions of Section 160 is not applicable and the assessee is liable to be taxed on the entire income? - as per tribunal entire receipt is taxable in the hands of assessee even though the income and expenditure have been distributed and intimated to the beneficiaries? HELD THAT - In the light of the decision of this Court in the case of CIT vs. M/s.TVS Shriram Growth Fund 2020 (10) TMI 665 - MADRAS HIGH COURT section 164 of the Act gets attracts only when the shares of the beneficiaries are unknown, which is manifest from the marginal heading of that Section itself, viz., Charge of tax where the share of the beneficiaries unknown. That Section comes into play only where any income or any part thereof is not specifically receivable on behalf of or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown, and in such case, the relevant income, or part of the relevant income shall be charged at the maximum marginal rate. In order to attract Section 164(1) of the Act, the beneficiaries on whose benefit, such income or such part thereof is receivable are indeterminate and unknown. Thus substantial questions of law are to be answered in favour of the assessee.

Issues Involved:
1. Determination of trust status and beneficiaries' interest
2. Applicability of Section 160 for taxation
3. Taxability of entire trust income in the hands of the assessee
4. Treatment of income offered by some beneficiaries in their returns
5. Exclusion of income assigned to another trust for the same beneficiaries
6. Allowance of corresponding expenditure if income is taxable

Issue 1: Determination of trust status and beneficiaries' interest:
The appeal questions whether the Tribunal correctly considered the assessee as a discretionary trust despite determinable beneficiaries. Referring to a previous case, the Court analyzed the trust's nature, beneficiary identification, and assessment principles. The Court emphasized that the income taxable in the hands of the representative assessee is limited to what the beneficiaries could be deemed to have received. Section 164 applies only when beneficiary shares are indeterminate or unknown.

Issue 2: Applicability of Section 160 for taxation:
The judgment discussed the applicability of Section 160 regarding income received by a trustee for beneficiaries. It highlighted that the tax levied on the representative assessee should mirror what would be levied on the beneficiaries. The Court clarified the extent of liability and assessment procedures for representative assessees under Section 161.

Issue 3: Taxability of entire trust income in the hands of the assessee:
The Tribunal's decision to tax the entire trust income in the assessee's hands was challenged. The Court, citing relevant legal provisions, emphasized that only income received or deemed to be received by beneficiaries can be taxed. It reiterated that the tax should be levied on the representative assessee in a manner consistent with the beneficiaries' tax liability.

Issue 4: Treatment of income offered by some beneficiaries in their returns:
The judgment addressed the scenario where some beneficiaries had already offered income in their returns. It questioned the Tribunal's decision to tax the entire income in the assessee's hands, ignoring the beneficiaries' tax compliance. The Court stressed that income should be taxed based on actual receipt or accrual by the beneficiaries.

Issue 5: Exclusion of income assigned to another trust for the same beneficiaries:
The Court examined whether income assigned to another trust for the same beneficiaries should be excluded from the assessee's income. It evaluated the distribution of income and expenditure among beneficiaries and trusts. The judgment emphasized that income should be taxed in the hands of the respective beneficiaries based on determinable shares.

Issue 6: Allowance of corresponding expenditure if income is taxable:
Lastly, the Court discussed allowing corresponding expenditure if the entire income is held taxable in the assessee's hands. It highlighted the need for a balanced approach, where income and expenditure distribution should align. The judgment concluded by allowing the appeal and answering the substantial questions of law in favor of the assessee based on the legal interpretations provided.

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