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Income Tax Appellate Tribunal, DELHI BENCH “E”, NEW DELHI
The present appeal has been filed by revenue against order dated 20.01.2011 passed by Ld. CIT (A)-30, New Delhi for assessment year 2007-08 on following grounds of appeal: (i) deleting the addition of Rs 1,50,00,000/- rightly made by the AO on account of ' profit in lieu of salary1 u/s 17(3)(ii) of the IT Act, 1961; not considering the fact that (a) the Trust was established by the settler/employer company for the welfare of the employees only, (b) the objectives of the trust make it amply clear that the sum received by the assessee is nothing but a reward for employment with the employer/settler company and (c) that the connection of the assessee with the Trust was only on account of his connection with the employer company; (ii) holding that the Trust is a discretionary trust without considering the discussion made by the AO in the assessment order in point no. I of sub para 3.1 which makes it clear that the trust is a specific or determinate trust and not a discretionary trust since all the beneficiaries of the trust are specially known and determinate and the trust deed no where mentioned that the income of the trust was to be distributed on the complete discretion of the trustees; (iii) not considering the fact that the amount of Rs 1,50,00,0007- is taxable in the hands of the assessee as (a) in the relevant computation of income, the trust has declared income in the Income & Expenditure account post distribution to the beneficiaries and hence this is not a case of double taxation or double assessment, (b) the assessee is the right person to be taxed for the said amount since his share is determinate & (c) the said income of the assessee falls within the scope of section 5 of the Act and chargeable to tax u/s 4 of the IT Act, 1961.
2. Brief facts of the case are as under: Assessee is a salaried employee and had filed return of income on 31.07.2007, declaring total income of Rs.1,14,929/-. Subsequently revised return was filed on 27.03.2008 at total income of Rs.97,50,123/- . Return was processed under section 143(1) of the Act and notices under section 143(2) and 142(1) was issued. In response to notices representative of assessee attended hearings and filed necessary documents.
3. Assessing officer observed that assessee is a beneficiary of private discretionary trust namely IL & FS Employees Welfare Trust(IEWT). He observed that trustees have distributed certain amounts which was available as surplus. Distribution of surplus was formulated based on length of service, level of seniority, contribution to group profitability and positioning, and creation of group Synergy through a collaborative working framework. Assessing officer however, made addition of Rs. 1,50,00,000/- in the hands of assessee.
4. Against assessment order assessee preferred an appeal before Ld. CIT(A), who allowed the claim of assessee.
5. Aggrieved by order of Ld. CIT(A) revenue is appeal before us now.
Ld. DR submitted that distribution of surplus by the trust has been made before tax being paid on it. He submitted that as trust has not paid tax, the same would be taxable in the hands of assessee. He placed his reliance upon order passed by Ld. AO.
On the contrary, Ld. AR submitted that IL & FS created Employees Welfare Trust for the benefit of its employees, as well as for the benefit of employees of subsidiaries and associates. He submitted that during year under consideration there was a deposit of Rs.1,50,00,000/- in the bank account of assessee by trust, as assessee was eligible beneficiary of IEWT. Ld. AR submitted that status of IEWT is of a discretionary trust, as its beneficiaries keep on changing. On recruitment, the employee becomes a beneficiary and on retirement he ceases to be beneficiary. IEWT has been filing its return of income in status of a discretionary trust every year in the past.
Ld. AR drew our attention towards assessment order passed in the case of trust for the year under consideration, wherein it has been categorically observed by Ld. AO therein that beneficiaries of trust are employee’s of company and employees of associate and affiliate companies without any specific ratio for sharing of income or trust fund. He also drew our attention to page 34 and 35 of small paper book, wherein returns and computation of income for the year under consideration in the case of trust is enclosed. Ld. AR submitted that on reading of income and expenditure account of trust, excess of income over expenditure for the year under consideration amount to Rs.1,146,122,353/-. He submitted that distribution to beneficiaries was Rs.616,337,183/- and employee welfare expenses was Rs.2,728,876/- during the year. He submitted in computation at page 35, trust included these expenses for the purposes of computing income as per income and expenditure account. He thus submitted that observations of Ld. AO regarding, no tax being paid on money distributed is incorrect.
Ld. AR placed his reliance upon decision of Hon’ble Delhi High Court in the case of Smt. Alpana Kirloskar vs. ACIT reported in (2014) 46 Taxmann.com 336.
We have perused submissions advanced by both sides in the light of records placed before us and decisions relied upon by Ld. AR.
The fact that distribution is not denied by Ld. DR or authorities below. Also from computation of income and returns filed by the trust placed in the paper book, it eminates clear that trust has already been assessed to tax, in terms of section 161 to 166 of the Act. Assessee’s stand is correct that as per scheme of assessment of private discretionary trust, the Department has to opt whether to assess the income in the hands of trust or beneficiaries. In the present case, option has been clearly exercised in the hands of the trust as demonstrated from computation of income and income and expenditure account placed in the paper book in the case of trust. The action of Ld. AO is again contrary to settled scheme and interpretation of section 161 to 164 lead in consonance with the CBDT circular No. 157-F. No. 228/8/73-IT (A-II), dated 26.12.1974 and CBDT instruction F Nos. 45/78/66-IT J(5), dated 24.02.1967. We may also refer to the findings of Ld. CIT(A) which has been reproduced hereinbelow for the sake of convenience: 5. I have considered the written submissions and arguments of the AR very carefully. I have read the assessment order, grounds of appeals and other documents in the paper book and legal submissions of the ARs. The AO gives a finding that such receipt, as it is received by appellant in his bank account from the Employer's Welfare Trust established/settled by Employer is taxable as profit in lieu of salary u/s 17(3)(ii). This is the first year, such a heavy amount is distributed to all employees from the welfare trust as per their duty/responsibility in the organization. Since the trust is discretionary trust, there is also a discretion with the trustees to share the profits and gains in the manner they liked at that time. The AO had relied on following case laws in his order u/s 143(3) in this case:- 1) CIT v. KamaliniKhatau[1994]209ITR 101 (SC) 2) CIT v. Dr.Anand Sarabhai Trust [231 ITR 524 (1998) 3) Emil Webber v. CIT (1978) 114 ITR 515 The AO had also clearly analysed section 17(3)(ii) and explanations therein for definition of profit in lieu of salary." This definition of profit in lieu of salary 'u/s 17(3)(ii) is an inclusive definition, which is given in ‘para XI/page-9 of assessment order'. Her interpretation is that profit in lieu of salary includes any payment (other than...............from other fund to the extent to which it does not consist of contribution by the assessee. (emphasis added). The ARs are interpreting the assessment of trust and beneficiaries u/s 160 to 167 of the I.T.Act, which appears to be correct interpretation of law. In the assessment of trust and/or beneficiaries, the income is to be assessed either in the hands of representative assessees representing the trust OR in the hands of the beneficiaries who receive the distribution of profits or relevant income, u/s 164(l)(iv) in this case. The trust is a separate entity in the Income Tax Act. The trust is represented by trustees for the management and control of activities of the trust. The AO finds that 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 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-mployee 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 hed 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 jn 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(l)(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.139,72,15,4807-, 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. This is also confirmed by Hon'ble Supreme Court in the case of CIT vs. Kamalini Khatau 209 ITR 101(1994) the operating part of this judgement is produced as under:- "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 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 receive4 its income in the accounting year, cannot be taxed thereon because section 164 does not provide for such contingency. The principal contention raised by Mr. Salve on behalf of the asses-see must, accordingly, be rejected. Why, then, should the beneficiary of a discretionary trust stand on a footing different from that of the beneficiary of a specific trust? It is true that the language of section 166 does not avail the Revenue because it states that sections 160 to 165 do not 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". The section 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 thereon 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 for, as aforestated, section 166 is merely clarificatory section of the Act 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 thereon under section 4. In C. R. Nagappa's case [1969] 73 ITR 626 (SC) this was clearly stated. It was said that it was implicit in the terms of section 161(1) that the Income- tax Officer could assess a representative assessee as regards the income in respect of which he was a representative assessee, but he was not bound to do so. He could assess the representative assessee or the person represented by him. It must also be remembered, as was said in the case of Nizam's Family Trust [1977] 108 ITR 555 (SC), that when a trustee is assessed to tax upon the income of the trust it is "really the beneficiaries who are sought to be assessed in respect of their interest in the trust properties through the trustee". 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 even when such interest is identified in the accounting year and that the trustees who represent them alone are so liable so that tax can be recovered only from them. We hold, accordingly, that 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."
In view of above discussion and respectfully following ratio laid down by Hon’ble Supreme Court in the case of CIT vs. Kamalini Khatau reported in (1994) 209 ITR 101’s we are of the opinion that the findings of Ld. CIT(A) cannot be found fault with. Accordingly, grounds raised by revenue stands dismissed. In the result appeal filed by the revenue stands dismissed. Order pronounced in the open court on 27th April, 2017.