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Facts
The assessee, a private trust with a minor determinate sole beneficiary, had its income tax return processed under Section 143(1), leading to a significant surcharge of 37% and interest. The assessee's rectification application under Section 154 was dismissed, and the subsequent appeal to CIT(A) was confirmed, leading to the present appeal.
Held
The Tribunal set aside the CIT(A)'s order and the CPC's intimation, directing the CPC to revise the assessment. It held that a private trust with a determinate sole beneficiary should be treated as a taxable entity with individual slab benefits, aligning with the principles of representative assessee taxation under Sections 160, 161, and 166, which allow for taxation at the beneficiary's individual rates.
Key Issues
The key legal issue was whether a private trust with a minor, determinate sole beneficiary should be subjected to a 37% surcharge under Section 143(1) or taxed at individual slab rates, requiring an interpretation of representative assessee provisions for trusts.
Sections Cited
250, 143(1), 154, 160, 161, 161(1A), 164, 164A, 167B, 166, 64(1A), 5, 4, 9, 163, 260A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCH “SMC”, JAIPUR
Before: Dr. S. SEETHALAKSHMI & SHRI GAGAN GOYAL
This appeal by assessee is directed against the order of CIT(A)-11 Mumbai dated 02.08.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised the following grounds of appeal: -
1.In the facts and circumstances of the case and in law, the Id. CIT(A) has erred in confirming the action of the ld. AO/Centralized Processing Centre (CPC) in making the adjustments in the intimation under Section 143(1) of the Income Act, 1961 (ITA) which are outside the purview of Section 143(1) of ITA. The action of the Id. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the demand made by the Id. AO/CPC of Rs. 1,01,850/- and confirmed by Id. CIT(A).
In the facts and circumstances of the case and in law, the Id. CIT(A) has erred in confirming the action of the Id. AO/CPC in calculating surcharge amounting to Rs. 91,500/-, on the total income of the assessee trust, for the year under consideration. The action of the ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the Surcharge of Rs. 91,500/- imposed by Id.AO/CPC and confirmed by Id. CIT (A).
3. The assessee trust craves its rights to add, amend or alter any of the grounds on or before the hearing. 2. The brief facts of the case are that the assessee is a private trust with Ms. Mantika Singhal as sole beneficiary filed its return of income at Rs. 7, 68,240/- on 27.07.2022. The return of the assessee trust was processed vide intimation u/s. 143(1) of the Act vide dated: 24.05.2023, wherein a surcharge @ 37% was charged amounting to Rs. 91,500/- and interest thereon amounting to Rs. 7,012/-. Against this intimation, the assessee filed an application u/s. 154 of the Act before the CPC, Bengaluru, but the same was also dismissed. The assessee being aggrieved with the action of the CPC, Bengaluru preferred an appeal before the Ld. CIT (A), NFAC-Delhi, who in turn confirmed the action of the CPC, Bengaluru. The assessee being further aggrieved with this order of the Ld. Addl. /JCIT (A)-11, Mumbai, preferred the present appeal before us.
We have gone through the intimation issued u/s. 143(1) of the Act by the CPC, Bengaluru, order of the Ld. Addl./JCIT (A)-11, Mumbai and submissions of the assessee before us. Order of the CPC, Bengaluru is not placed before us. The specific facts of the case are that as under:
A). Ms. Mantika Singhal was sole beneficiary of the trust’s income and corpus; B). Ms. Mantika Singhal was minor during the year under consideration; C). Share of beneficiary, i.e. sole beneficiary Ms. Mantika Singhal was determinate. D). Status of the assessee private trust is of Body of Individuals (BOI) and not of Association of Persons (AOP). As the formation of AOP is an active action by persons to carry out some business, venture or creation of source of income, whereas in the case of BOI, whomsoever may be the beneficiary do not have any such intentions and are together by virtue of action, will or order of an individual, court of administrator etc. to enjoy the income and wealth of corpus settled by an individual, family or court of administrators etc.
4). Based on above facts, the only question raised before us is whether surcharge levied by the CPC, Bengaluru and further confirmed by the Ld. Addl./JCIT (A)-11, Mumbai is correct or not? To decide the issue, we need to analyse the provisions of section 160 of the Act as under:
B.—Representative assessees - General provisions Representative assessee. 160. (1) For the purposes of this Act, "representative assessee" means— (i) in respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163;
(ii) in respect of the income of a minor, lunatic or idiot, the guardian or manager who is entitled to receive or is in receipt of such income on behalf of such minor, lunatic or idiot;
(iii) in respect of income which the Court of Wards, the Administrator- General, the Official Trustee or any receiver or manager (including any person, whatever his designation, who in fact manages property on behalf of another) appointed by or under any order of a court, receives or is entitled to receive, on behalf or for the benefit of any person, such Court of Wards, Administrator-General, Official Trustee, receiver or manager;
(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees;
(v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees.
Explanation 1.—A trust which is not declared by a duly executed instrument in writing [including any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] shall be deemed, for the purposes of clause (iv), to be a trust declared by a duly executed instrument in writing if a statement in writing, signed by the trustee or trustees, setting out the purpose or purposes of the trust, particulars as to the trustee or trustees, the beneficiary or beneficiaries and the trust property, is forwarded to the Assessing Officer,— (i) where the trust has been declared before the 1st day of June, 1981, within a period of three months from that day; and (ii) in any other case, within three months from the date of declaration of the trust.
Explanation 2. —For the purposes of clause (v), "oral trust" means a trust which is not declared by a duly executed instrument in writing [including any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913), and which is not deemed under Explanation 1 to be a trust declared by a duly executed instrument in writing.
(2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act.
In our opinion, the assessee private trust is not falling in any of the categories mentioned (supra). But, still the assessee trust relied on clause (ii) of the Section 160(1) of the Act and clubbed the income with the income of the father of the sole beneficiary u/s. 64(1A) of the Act.
For further clarity on the issue, we deem it fit to analyze the provisions of section 161 of the Act as under:
Section - 161, Income-tax Act, 1961 - FA, 2024 Liability of representative assessee.
(1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, 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. (1A) Notwithstanding anything contained in sub-section (1), where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate:
Provided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.
(2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act.
6). In view of the provisions of section 161(1) of the Act, Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, 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. It clearly speaks about the manner in which assessment will be carried out and levy of tax, as it’s a case of known beneficiary and determinable share, i.e. beneficiary in this case is known and her share is also determinate. 7). To deal with the matter where either the beneficiaries are not known or shares are indeterminate or both, specific provisions in section 164, 164A and 167B of the Act are there. Moreover, we have examined the section 166 of the Act as under:
Direct assessment or recovery not barred. - Nothing in the foregoing sections in this Chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect of such income.
8). In the light of above provisions other than cases falling within the provisions of sections 164, 164A and 167B of the Act, section 166 of the Act mentioned (supra) is squarely applicable to the facts of the matter. Although, the assessee itself has chosen, for taxation in the hands of beneficiary and applied the provisions of section 64(1A) of the Act consequently. Whereas the same is chargeable to tax as per the provisions of section 166 of the Act and trust per se will be assessed in the capacity which is applicable to the beneficiary, i.e. an individual. To support this view, we heavily placed reliance on decision of the Hon’ble Jurisdictional High Court, Jodhpur Bench and Hon’ble Apex Court in the case of Smt. Kamalini Khatau as under:
[2001] 117 TAXMAN 495 (RAJ.) ACIT vs. Ajay Vijay Traders Section 161, read with section 260A, of the Income-tax Act, 1961 - Trust - Assessment of - Assessment year 1978-79 - One ‘G’ had created a trust by trust deed dated 12-4-1982 for benefit of children of his sister - Shares of beneficiaries were specific and determined and trustees were only representatives of assessee-beneficiaries - Assessing Officer, invoking provisions of section 161(1A), assessed trustees in status of AOP and taxed total income for assessment year 1997-98 at maximum rate - Whether marginal rate and not maximum rate would apply - Held, yes FACTS One ‘G’ had created a trust by trust deed dated 12-4-1982 for the benefit of the children of his sister. The shares of beneficiaries were specific and determined and trustees were only the representatives of the assessee-beneficiaries. The Assessing Officer, invoking the provisions of section 161(1A), assessed the trustees in the status of AOP and taxed the total income for the assessment year 1997-98 at the maximum rate. On appeal, the Commissioner (Appeals) relying on the judgment of the Supreme Court in CWT v. Trustees of H.E.H. Nizam’s Family (Remainder Wealth) Trust [1977] 108 ITR 555, held that the tax was leviable at marginal rate and not at maximum rate. The Tribunal concurred with the finding of the appellate authority.
[1994] 74 TAXMAN 392 (SC) CIT vs. Smt. Kamalini Khatau Section 166, read with sections 5,161 and 164, of the Income-tax Act, 1961 - Trustees - Direct assessment or recovery not barred - Assessment year 1969-70 - Whether revenue has option to assess and recover tax from either trustees or beneficiaries of a discretionary trust in respect of such income thereof as has been distributed and received by beneficiaries in course of accounting year - Held, yes - Whether section 166 is merely clarificatory - Held, yes Section 164 of the Income-tax Act, 1961 - Trust - Charge of tax where shares of beneficiaries unknown - Whether section 164 is code in itself dealing with all matters relating to discretionary trust - Held, no - Whether section 164 creates a charge on income of discretionary trust - Held, no - Whether section 164 makes trustees of discretionary trust liable to assessment or recovery of tax on income of trust - Held, no FACTS The assessee was one of the beneficiaries of certain discretionary trusts. During the assessment year 1969-70 the assessee received certain amounts pursuant to the resolutions of the trustees to distribute the same from out of the income of the six trusts for the accounting year. The assessee contended before the ITO that the payment of income under the said six trusts to any one or more of the beneficiaries thereof depended upon the discretion of the trustees and, accordingly, the shares of the beneficiaries thereof were indeterminate and unknown and, therefore, the income of the trust was, taxable only in the hands of the trustees thereof, having regard to the provisions of section 164. The ITO rejected the contention of the assessee and assessed the said amount in her hands relying upon the provisions of section 166. On appeal, the AAC affirmed the view taken by the ITO. On second appeal, the Tribunal held that no part of the income of the said six trusts was receivable on behalf or for the benefit of any of the beneficiaries thereof and the provisions of section 164 were, therefore, attracted. The Tribunal rejected the revenue's contention that section 166 was applicable. On reference, the order of the Tribunal was upheld by the majority judgment of the High Court. On appeal to the Supreme Court: HELD The trustee even of a discretionary trust is joy reason of the terms of section 160, a representative-assessee. Section 161(1) of the Act, sets out the liability of a representative- assessee. Section 161(2) gives the representative-assessee a further measure of protection by making it explicit that 'he shall not in respect of that income be assessed under any other provisions of this Act'. This is of significance for 'any other provisions of this Act' must plainly mean any provision of the Act other than section 161. Section 164 states that tax shall be levied upon the income of a discretionary trust as if it were the total income of an AOP except that if it or part of it is actually received by a beneficiary, it or that part of it becomes chargeable to tax at the rate applicable to the total income of the beneficiary if that course is beneficial to the revenue. Section 164 does not create a charge on the income of a discretionary trust. The word 'charged' in the context in which it is used in section 164 means only 'levied'. Section 164 does not make the trustee of a discretionary trust liable to assessment or the recovery of tax on the income of the trust. It is section 161, therefore, which has to be read to make the trustee even of a discretionary trust liable to assessment and recovery of tax on income received by him as a trustee. Further, section 161 protects the representative-assessee by stating that assessment upon him shall be deemed to be only in his representative capacity, by mandating that tax can be levied upon and recovered from him only in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him and by stating that he may not be assessed under any provisions of the Act. Section 164 does not give any of these protections, as clearly, they must be given to all representative-assessees. The liability of a trustee of a discretionary trust to be assessed to tax in respect of its income and to recovery thereof is created by section 161 and it also states that he is not liable to such assessment under any other provisions of the Act. Section 164 sets out only how such tax shall be charged when the income is not distributed and when the income is distributed? It does appear, therefore, that section 164 cannot be read as being a code in itself applicable to and dealing with all matters relating to the taxation of the income of a discretionary trust. Consequently, it cannot be held that the beneficiary of a discretionary trust, even if he has received its income in the accounting year, could not be faxed thereon because section 164 does not provide for such contingency. Section 166 is clearly clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that sections 160 to 165 do not bar the direct assessment of the person on whose behalf or for whose benefit the income is receivable or the recovery from such person of the tax payable thereof, provided that is permissible under any other provisions of the Act. Even so, since the word used in section 166 is 'receivable' it cannot apply to a discretionary trust for it cannot be said that the income thereon is 'receivable 'for one or more beneficiaries, it being left to the discretion of the trustees whether or not the income should be distributed to one or more of the beneficiaries or not at all. But that is not to say that the beneficiary of a discretionary trust, because he does not fall within the ambit of section 166, may not be assessed upon income received by him and tax recovered from him thereon if that is permissible under any other provisions of the Act. Section 5 defines the total income of any person to include income received by him or received on his behalf or which accrues or arises to him. A person may be directly assessed in respect of such income. The income of a discretionary trust which is within the accounting year distributed to and received by the beneficiary would, therefore, be subject to assessment in his hands and tax thereon would be recoverable from him. Such income would squarely fall within the broad sweep of total income under section 5 and the beneficiary would be liable to assessment and recovery of tax thereof under section 4. In the absence of an express provision it is difficult to hold that the beneficiaries of a discretionary trust are not liable to be assessed in respect of their interest in the trust properties even when such interest is identified in the accounting year and that the trustees who represented them alone are so liable so that tax can be recovered only from them. Thus, the revenue has the option to assess and recover tax from either the trustees or the beneficiaries of a discretionary trust in respect of such income thereof as has been distributed and received by the beneficiaries in the course of the accounting year.
9). In view of the above, order of the Ld. Addl./JCIT (A)-11, Mumbai is set aside and intimation issued by the CPC, Bengaluru issued u/s. 143(1) of the Act found to be erroneous and without following the procedure laid down by the statute. Moreover, the amount of tax even suo-moto offered by the assessee found to be on higher side considering the provisions of law discussed above in the light of judicial pronouncements of Hon’ble Jurisdictional High Court and Apex Court. Actually, the mechanism adopted by the assessee for calculation of tax will defeat the scheme of law (Tax offered may be higher or lower, is immaterial). It’s a genuine tax planning categorically provided in statute and all the citizens are legally entitled to it. None of the mistake neither from the assessee’s side nor from the revenue’s side can alter the position of law applicable. The Tribunal being final fact finding authority, duty bound to explore the facts present before it and to apply the law as applicable.
10). As the CPC, Bengaluru is a virtual set-up of the Revenue and no personal interaction is possible, but in the case of first appellate authority that is not so and the powers of the CIT (A) are coterminous with that of the AO. We further relied upon the circular No. 14(XL-35) of 1955, dated 11-4-1955 issued by the CBDT as under:
Department not to take benefit of assessee’s ignorance Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessees on whom it is imposed by law, officers should— (a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.
This circular of the Board is in the favour of the assessee and still prevailing and binding on the Tax Administration/Appellate Authorities.
In view of the above discussion on law and facts applicable to case, order of the Ld. Addl. /JCIT(A)-11, Mumbai is set aside and CPC, Bengaluru is directed to revise the intimation, treating the assessee private trust as taxable entity with slab benefits applicable to an individual.
In the result, the appeal of the assessee is allowed in above terms.
Order pronounced in the open court on 24thday of January 2025. Sd/- Sd/- (Dr. S. SEETHALAKSHMI) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Jaipur, िदनांक/Dated: 24/01/2025 Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. आयकर आयु� CIT 3. 4. िवभागीय �ितिनिध, आय.अपी.अिध., Sr.DR., ITAT, 5. गाड� फाइल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar)
ITAT, Jaipur Details Date Initials Designation 1 Draft dictated on PC on 24.01.2025 Sr.PS/PS 2 Draft Placed before author 24.01.2025 Sr.PS/PS 3 Draft proposed & placed before the Second JM/AM Member 4 Draft discussed/approved by Second Member JM/AM 5. Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS/PS 7. File sent to the Bench Clerk Sr.PS/PS 8 Date on which the file goes to the Head clerk 9 Date of Dispatch of order