NATHIBEN KALIDAS PATEL FAMILY TRUST,AHMEDABAD vs. THE ITO, WARD-1(3)(1), AHMEDABAD

Ld. Counsel for the assessee pointed out that the assessee went in appeal before the Ld. Addl/JCIT(A) and explained the entire facts and law on the issue pointing out that the assessee was a trust created under WILL filing its return regularly and being assessed at the normal rate of tax as per the provisions of Kalidas Patel Family Trust vs. ITO] A.Y. 2021-22 - 3 – law as contained in the proviso to Section 161(1A) of the Act, providing for such trusts created by Will to be assessed at normal rates of tax and not at MMR. Ld. Counsel for the assessee pointed out that the Ld. Addl/JCIT(A) while adjudicating the issue went on a completely different tangent and held that there was no dispute regarding the applicability of MMR of tax but the only dispute was the applicability of surcharge of highest income slab i.e. 37 % in the case of the appellant. That he went on thereafter to adjudicate the applicability of the rate of surcharge and confirmed the rate applied by CPC in this regard. He drew my attention to para 4.1.1 of the order of the Ld. CIT(A) pointing out the adjudication made by the Ld. Addl/JCIT(A) as above.

Ld. Counsel for the assessee, thereafter, drew my attention to the relevant provisions of law in this regard. He contended that there is no dispute with regard to the fact that the assessee is a trust created by WILL which fact was pointed out to the Ld. Addl/JCIT(A) also. He drew my attention to page 2 of the order of Ld. Addl/JCIT(A) reproducing assesses contention before it of the fact that the trust was declared by a WILL dated 03.05.1995. Thereafter, he drew my attention to the provisions of Section 164 of the Act which deals with “charge of tax when share of beneficiary is unknown” as under:

He pointed out that while Sub-section (1) provided the levy of tax at the MMR where the shares of beneficiaries of a trust are unknown, he pointed out the Proviso to this Section carved out an exception to the same stating taxed to be charged in exceptional cases on the income as if it were the total income of an AOP. He drew my attention to the exceptions mentioned in the proviso and pointed out that the Second Proviso included trust declared by any person by WILL, being the only trust so Kalidas Patel Family Trust vs. ITO] A.Y. 2021-22 - 5 – declared by him. Ld. Counsel for the assessee, therefore, contended that in terms of the Proviso to Section 164(1) of the Act, trusts which are created by WILL is not to be subject to tax at the MMR but at the rates which are specified for association of persons(AOP). He, thereafter, drew my attention to Section 167B of the Act, which deals with the charge of tax where shares of members in AOP or BOI is unknown as under:

He pointed out that the same also provided for tax to be charged at the MMR in case of AOP’s, but he contended that the CBDT had clarified way back in 1990, vide Circular No.577 dated 04.09.1990, that the provisions of Section 167B of the Act would not apply to income of a trust declared by any person by WILL, Kalidas Patel Family Trust vs. ITO] A.Y. 2021-22 - 6 – where such trust is only trust declared by him. Copy of the circular was placed before us and it was pointed out therefrom that the CBDT had clarified that it was never the intention to subject the income of such trust to tax at the MMR. The CBDT, it was pointed out, had clarified that where a specific provision had been made in law in relation to any matter and where that provision is beneficial to the taxpayer, it is to be governed by that special provision and not by any other general provision.

The contents of the Circular are as under:

This matter has been examined in the Board. There was never an intention to subject the income of the aforesaid trusts to income-tax at the maximum marginal rate. It is also well-settled that where a specific provision has been made in the law in relation to any matter and where that provision is beneficial to the taxpayer, that matter is to be governed by that special provision and not by any other general provision relating to that subject. Therefore, the income of a trust declared by any person by will, where such trust is the only trust so declared by him, will continue to be charged to tax in the manner prescribed in the first proviso to section 164(1), as hitherto.

Similarly, other cases covered by the first proviso to section 164(1) and the first proviso to section 164(3) would also not attract the provisions of section 167B. Accordingly, tax will be payable in such cases at the rate ordinarily applicable to the total income of an association of persons and not at the maximum marginal rate.”

Ld.Counsel for the assessee contended therefore that the CBDT had clarified that trusts created by WILL would be Kalidas Patel Family Trust vs. ITO] A.Y. 2021-22 - 7 – governed for taxation purposes by the proviso to section 164(1) of the Act and would therefore be required to pay taxes on their income as per the normal rates applicable to AOP’s and not at MMR. The assessee accordingly, he contended could not be subjected to tax at MMR but on the slab rate applicable.

He further pointed out that this issue had been dealt at length by the ITAT, Ahmedabad in the case of ITO vs. Rajnikant Gulabdas Sheth Family Trust, reported in [1987] 20 ITD 668 (AHD.) holding that trust which qualified to be excluded by virtue of the First Proviso to Section 164(1) of the Act are to be taxed at normal rate and not at MMR. Copy of the judgement was placed before me and attention drawn to the relevant findings of the ITAT as under:

On the plain reading of the aforesaid provisions of the Act, we are of the view that the AAC was fully justified in holding that by virtue of proviso (ii) to section 164(1) the assessee would be required to be taxed at normal rate. It is no doubt true that initially under the will two discretionary trusts were created by late Pranlal Thakordas Shah. However, much prior to the introduction of Finance (No. 2) Bill, on 18-6-1980, Shri Pranlal Thakordas Trust was dissolved on 1-5-1979 with the result that during the relevant accounting year, there was only one discretionary trust created under the will. Keeping in mind the aforesaid observations of the Hon'ble Supreme Court, we are of, the view that the provisions of proviso (ii) to section 164(1) have to be construed reasonably and not in the manner, the ITO has construed. Since there was only one discretionary trust created under the will, we are of the view that the AAC was fully justified in holding that maximum marginal rate was not applicable to the assessee.

In the result, the appeal is dismissed.”

The Ld. DR fairly agreed with the fact pointed out by the Ld. Counsel for the assessee that the Ld. Addl/JCIT(A) had failed to adjudicate on this specific grievance raised by the assessee before it of being wrongly taxed at the MMR. He agreed that the Ld. Addl/JCIT(A) had wrongly noted the said issue to be not in dispute. Further, Ld. DR was unable to controvert the legal position on the issue as pointed out by the Ld. Counsel for the assessee before us nor he was able to distinguish the case law relied upon by the Ld. Counsel for the assessee in the case of Kalidas Patel Family Trust vs. ITO] A.Y. 2021-22 - 9 – Rajnikant Gulabdas Sheth Family Trust (supra), in support of his contention that family trust is chargeable to tax at normal rate and not at MMR in terms of First Proviso to Section 164(1) of the Act.

I have carefully considered the contentions of both the parties, as also the relevant provisions of law, CBDT Circular and the case law referred to before me. I completely agree with the Ld. Counsel for the assessee that the adjustment made by the CPC while processing the return of the assessee by levying tax at the MMR is not in accordance with law. It is not disputed that the assessee is a family trust created by a WILL as pointed out by the Ld. Counsel for the assessee before me. In terms of the provision of the First Proviso to Section 164(1) of the Act, such trusts are not be subjected to be taxed at MMR, but are to be taxed at rates applicable to AOPs and CBDT in its Circular No.557 dated 04.09.1990 has clarified that while treating such trust as AOPs, they are not to be taxed at MMR as specified in Section 167B of the Act, since the applicability of MMR has been specifically excluded by Section 164(1) First Proviso itself and this specific exclusion would override the general provision of Section 167B of the Act. Thus I agree with the Ld.Counsel for the assessee that as per the applicable provisions of law ,clarified by the CBDT also, the assessee trust was not to be taxed at MMR. Even the coordinate Bench of the ITAT in case of Rajnikant Gulabdas Sheth Family Trust (supra) has categorically held so.

In the result, the appeal filed by the assessee is allowed.