ACIT, NEW DELHI vs. SHRI R.C. BAWA, NEW DELHI

The facts in brief are that assessee is an individual declaring income of Rs. 2,06,18,459/- on 31.10.2007. He was an employee of IL & FS Ltd., which had created a trust, “IL&FS Employees’ Welfare Trust” for the welfare of its employees, vide trust deed executed on 23rd August, 1990, which was an irrevocable trust. Assessee was also one of the beneficiaries of this discretionary trust. The trust had distributed sum of Rs. 2 crores to the assessee as a beneficiary during the financial year 2006-07. The trust had also paid the taxes on the entire income earned by it and it was stated that, after payment of the taxes on its income, distribution was made to the beneficiaries. Thus, it was claimed by the assessee, that on such receipts, he is not subjected to income tax, because already tax has been paid by the Trust and therefore, sum of Rs. 2 crores was treated as capital receipt. Certificate issued by IL&FS Trust was also filed which read as under: - “IL&FS Employees’ Welfare Trust (IEWT) is a discretionary Trust, which has formed under a Scheme institute for “the welfare of employees”. The fundamental objective of the IEWT is to utilize the Trust Funds for the benefit of the employees of IL & FS and its subsidiaries/affiliates, as defined under the Trust Deed and amendments thereto. During the F.Y. 2006-07, the IEWT has earned a profit on sale of the shares held by its. The IEWT has fully disclosed this income in its income tax return, which has been filed by it on July 6, 2007 and has discharged its tax liability at the appropriate rate as per the Income Tax Act, 1961 on the same. The Trust having discharged its tax liability, the same income would not be taxable in the hands of the beneficiaries at the time of distribution.”

Ld. AO held that, assessing authority can assess a representative assessee on the income in respect of which he was a representative assessee, but he was not bound to do so and he could assess either the representative assessee or the person represented by him in view of the judgment of Hon’ble Supreme Court in the case of CR Nagappa vs. CIT (1969) 73 ITR 626. He also took note of income tax return filed by the Trust for the Asstt. Year 2007-08, which was at Rs. 1,41,19,02,958/- wherein income was shown from long term capital gain, short term capital gain and also income from business. Further, from the perusal of computation of income, he noted that the Trust has declared income as per Income and Expenditure Account of Rs. 52,97,85,170/- and it has been declared in the computation that, this income has been arrived at after distribution to beneficiaries. Thus, there is no case of double taxation. After detailed discussion, he held that the receipt in the case of the assessee is taxable u/s 17(3) (ii) and there is no exemption under any section that such receipt will not be taxed in any provision of act. Accordingly, he taxed the entire amount of Rs. 2 crores received by the assessee.

Before the Ld. CIT(A), it was submitted that IL&FS Ltd. has created a Trust and the Trust fund was to be utilised for benefit of welfare of its employees which was defined in the following manner: - I. “Housing facilities to the employees of the Company or subsidizing loans taken by employees for purchase of residential premises. II. Relief in any distress caused to the employees by the elements of nature or otherwise. III. Medical relief, health, educational relief including grants, in- aid in support of schools, hospitals, sanitoriains or any other Institutions. IV. Scholarships to employees and their dependents. V. Any other welfare objects or purposes which are conducive to be beneficial to the employees of the Company. Provided always that the Trust fund shall be utilised for the benefit of the employees only.” 4.1 It was further submitted that Trust is a discretionary trust and the shares of beneficiaries were undetermined, therefore, trustee alone 4 was liable to be taxed u/s 164. Even if assessment is to be made u/s 164 at the discretion of the AO, then in that case, it has either to be assessed in the hands of the trust or in the hands of the beneficiary. Since it has already been assessed and taxed in the hands of the Trust, therefore, same cannot be taxed in the hands of the assessee. It was clarified that, in so far as the observation and the finding of the AO that trustee’s entire income has not been taxed or it was distribution only amount was offered for tax is not correct. AO had misunderstood that the income declared by the trust was only after the distribution of its income amongst the beneficiaries, because according to the AO, business income declared was after the distribution to the beneficiaries. One important fact brought on record was that, the AO in the case of the Trust has made disallowance of expenses claimed under the head distribution to beneficiaries and the income computed in the case of the Trust was as under :- “Profit and Gains from Business or Profession :- Income as per Income & Expenditure Account (Rs.) (after the distribution to the beneficiaries): 52,97,85,170/- Add: Disallowances Legal & Professional expenses incurred on i) sale of shares: 40,95,483/- ii)interest expenses incurred on strategic investments: 2,14,10,072/- iii) staff welfare expenses not allowable (including distribution to beneficiaries):61,90,66,059/- --------------------------- Rs. 64,45,71,614/- 4.2. Thereafter assessee referred to various judgements and CBDT circular incorporated in detail in the impugned order, that once tax has been paid by the beneficiaries of the trust, then the trust cannot be taxed.

Ld. CIT(A) after considering the entire submissions of the assessee and the observation and the finding of the AO, held that the submission made by the assessee are correct, because in the assessment of the trust and/or beneficiaries, the income is to be assessed either as a representative assessee representing the trust; or in the hands of the beneficiaries who receive the distribution of profit or relevant income. In order to rebut the finding of the AO that it is the Trust who has actually paid the taxes even on the amount distributed to the beneficiaries, has recorded the following finding of facts: - “The AO finds that the sum received by the assessee constitutes part of the special distribution IL&FS employees and senior personnel in the group pursuant to the sale of equity shares of Indian Leasing & Financial Services Ltd. (ILFS) held by the Employee Welfare Trust to Abu Dhabi investment Authority, the AO's observation in para no. X at page 9 is as under: - "The facts remains that the assessee is an employee of the settler company. Ordinarily under the Act, any such benefit from the employer to the employee would clearly have been chargeable to tax as salary. Further, had the assessee directly invested in the investment securities/instruments, he would have been chargeable to tax on the income earned out of such investment. Instead, through the device of formation of the Trust by the employer company, exemption has been claimed on the sums distributed to the employee-beneficiaries by the trust on the income earned from the investments. As is clear from the objectives of the trust detailed earlier, the scheme has been devised in recognition of and as a reward for, the contribution of the assessee-employee to the profits and success of the employer company's business. Specifically, the sum received by the assessee constitutes part of the special distribution to IL&FS employees and senior personnel in the Group pursuant to the sale of equity shares of IL&FS held by the EWT to Abu Dhabi investment Authority. Thus, trust had owned equity shares of the Employer Company and sold it during the A.Y.2007-08 to the Abu Dhabi company at a higher profit margin. ILFS is a listed company in Bombay Stock Exchange. However, since Employer's company's share capitals money is sold to foreign company, the Employee Welfare trust gained a lot on sale of such share and earned huge capital gain on such sale. The trust had paid the taxes u/s 164(1)(iv) on such long term capital gains, and then part of profit is distributed to beneficiaries of the trust. Since the trust had already paid the taxes vide JCIT, R-19(3), Mumbai's order dated 18-11-2009 for A.Y.2007-08, where that AO had assessed the income of trust at Rs.141,30,92,160/- where long term capital gain is Rs.139,72,15,480/- (P.B. page no. 10), the major part of income is on business/long term Capital gains on sale of such shares of Employer Company held by trust. The trust is filing income/expenditure statement in its return of income. Since, the trust had already been assessed u/s 143(3) by JCIT, Range 19(3), Mumbai, there is no need to tax the distribution of profits/dividends to the beneficiaries of the trust again, as per the existing law u/s 160 to 166 of I.T. Act, 1961. The appellant being one of beneficiaries, got the receipt from trust as non taxable receipt, hence capital receipt in his hand.”

After, referring to the ratio and principle laid down in the judgment of the Hon’ble Supreme Court in the case of CIT vs. Kamalini Khatau 209 ITR 101 (1994), Ld. CIT(A) held that addition made by the AO cannot be sustained.

Before us, Ld. Counsel submitted that this precise issue had come up for consideration before this Tribunal in respect of similar employees of IL&FS, wherein the Tribunal has deleted identical addition. In support he relied upon the following two decisions: - i. ACIT vs Manu Kochar, ITAT, Delhi Bench New Delhi in dated 27.04.2017; ii. ACIT vs. Sanjay Sethi, ITAT, C Bench New Delhi in ITA No. 1652/Del/2011 dated 13.12.2017.