2022 (1) TMI 1029 - AT - Income Tax

Addition towards contribution received by the assessee as income u/s.56(2)(vii) r.w.s 2(24)(xv) - Private Discretionary Trusts (PDTs) is not to be treated as an individual, but as AOP for purpose of taxation - HELD THAT - We find that the Hon ble Madras High Court had considered an identical issue in assessee s own case 2020 (12) TMI 736 - MADRAS HIGH COURT for assessment year 2014-15 and after considering relevant facts has very categorically held that the assessee is representative assessee as defined u/s.160(1)(iv) of the Act, and benefit derived by the assessee on behalf of beneficiaries is to be taxed as an individual and hence, any contribution received by the trust is taxable as income from other sources u/s.56(2)(vii) r.w.s. 2(24)(xv) of the Income Tax Act, 1961. We reverse order of the learned CIT(A) and sustain additions made by AO towards contribution received by the Trust as income liable to be taxed u/s.56(2)(vii) of the Income Tax Act, 1961. Accordingly, ground no.2 3 are decided in favour of the Revenue. Addition u/s.14A r.w.s. 8D - CIT-A remitting back the issue of disallowance under section 14A for fresh consideration - HELD THAT - It is well settled principle of law by the decisions of various courts, including decision of the Hon ble Delhi High Court in the case of Joint Investments Pvt.Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT where it was categorically held that disallowances contemplated u/s.14A shall not exceed exempt income earned for relevant assessment year. In this case, the assessee has earned dividend income of ₹ 6,10,506/-, whereas the Assessing Officer has determined disallowance to the extent of ₹ 2,41,61,838/-. Therefore, we are of the considered view that the Assessing Officer has erred in disallowance of expenses in excess of exempt income earned for the year. Hence, we direct the Assessing Officer to restrict disallowance of expenses to the extent of exempt income earned by the assessee for relevant assessment year, while deciding the issue as per directions of the learned CIT(A). Contention of the Revenue with regard to powers of the learned CIT(A) in light of provisions of section 251(1)(a) - We find that at first stage, the learned CIT(A) had given relief to the assessee in light of decision of the Hon ble Delhi High Court in the case of Joint Investments Pvt.Ltd.(supra) and thus, we are of the considered view that there is no error in the reasons given by the learned CIT(A) to remit the issue back to file of the Assessing Officer to recompute disallowance u/s.14A of the Income Tax Act, 1961. Hence, the grounds taken by the Revenue are rejected.

Summary

Issues Involved:
1. Classification of Private Discretionary Trusts (PDTs) for tax purposes.
2. Taxability of contributions received by the trust under section 56(2)(vii) of the Income Tax Act.
3. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Private Discretionary Trusts (PDTs) for Tax Purposes:
The Revenue contended that the Private Discretionary Trusts (PDTs) should be treated as individuals for tax purposes, citing various sections of the Act such as 80L, 54F, and 194A, which treat PDTs as individuals for benefits. The CIT(A) had held that PDTs should be treated as an Association of Persons (AOP) for tax purposes. However, the Tribunal reversed the CIT(A)'s decision, following the Hon’ble Madras High Court’s ruling in the assessee’s own case for the assessment year 2014-15, which held that the trust should be taxed as an individual. The High Court had determined that the trust is a representative assessee as defined under section 160(1)(iv) of the Act, and any contributions received should be taxed as income from other sources under section 56(2)(vii) r.w.s. 2(24)(xv).

2. Taxability of Contributions Received by the Trust under Section 56(2)(vii):
The Assessing Officer (AO) had added ?75 lakhs received by the trust as corpus fund to the total income, treating it as taxable under section 56(2)(vii) r.w.s. 2(24)(xv). The CIT(A) deleted this addition, following the ITAT Chennai’s decision in the assessee’s case for the assessment year 2014-15, which held that the contribution received cannot be considered as income from other sources. However, the Tribunal, adhering to the Madras High Court’s decision, reversed the CIT(A)’s order and upheld the AO’s addition, concluding that the contributions received are taxable as income under section 56(2)(vii).

3. Disallowance under Section 14A:
The AO had disallowed ?2,41,61,838/- under section 14A, relating to expenses incurred for earning exempt income. The CIT(A) directed the AO to recompute the disallowance by excluding certain expenses not attributable to exempt income. The Tribunal upheld the CIT(A)’s decision to remit the issue back to the AO, but directed that the disallowance under section 14A should not exceed the exempt income earned, following the Hon’ble Delhi High Court’s ruling in Joint Investments Pvt. Ltd. The Tribunal found no error in the CIT(A)’s approach and rejected the Revenue’s contention regarding the CIT(A)’s powers under section 251(1)(a).

Conclusion:
The appeal filed by the Revenue was partly allowed. The Tribunal reversed the CIT(A)’s decision regarding the taxability of contributions received by the trust and upheld the AO’s addition under section 56(2)(vii). However, the Tribunal upheld the CIT(A)’s direction to recompute the disallowance under section 14A, ensuring it does not exceed the exempt income earned.