2017 (8) TMI 231 - AT - Income Tax

Tribunal rules in favor of taxpayer in salary vs. capital receipt case

The tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 1,50,00,000 made by the AO under 'profit in lieu of salary' u/s 17(3)(ii) of the ... Nature of receipt from the trust - distribution of surplus by the trust - reward for employment - Addition on account of 'profit in lieu of salary u/s 17(3)(ii)' - assessee is a beneficiary of private discretionary trust - assessment of income - Held that:- 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. See CIT vs. Kamalini Khatau [1994 (5) TMI 1 - SUPREME Court] - Decided against revenue Issues Involved:1. Deletion of addition of Rs. 1,50,00,000 made by the AO under 'profit in lieu of salary' u/s 17(3)(ii) of the IT Act, 1961.2. Determination of the trust as a discretionary or determinate trust.3. Taxability of the amount of Rs. 1,50,00,000 in the hands of the assessee.Issue-wise Detailed Analysis:1. Deletion of Addition of Rs. 1,50,00,000:The revenue filed an appeal against the CIT(A)'s order, which deleted the addition of Rs. 1,50,00,000 made by the AO under 'profit in lieu of salary' u/s 17(3)(ii) of the IT Act, 1961. The AO contended that the sum received by the assessee from the IL & FS Employees Welfare Trust (IEWT) was a reward for employment and should be taxed as salary. However, the CIT(A) ruled in favor of the assessee, stating that the amount received was not taxable as salary but as a capital receipt from a discretionary trust. The tribunal upheld the CIT(A)'s decision, noting that the trust had already paid taxes on the distributed surplus, and the distribution was in line with the trust's objectives.2. Determination of Trust as Discretionary or Determinate:The AO argued that the trust was a specific or determinate trust because the beneficiaries were known and determinate. However, the CIT(A) and the tribunal found that the trust was a discretionary trust, as the beneficiaries could change over time, and the trustees had the discretion to distribute the income. The tribunal referred to the trust's assessment order and the income and expenditure account, which showed that the trust had been filing returns as a discretionary trust for several years. The tribunal also cited the Supreme Court's decision in CIT vs. Kamalini Khatau, which clarified the assessment of discretionary trusts.3. Taxability of Rs. 1,50,00,000 in the Hands of the Assessee:The AO contended that the amount of Rs. 1,50,00,000 was taxable in the hands of the assessee, as the trust had not paid tax on it. The CIT(A) and the tribunal disagreed, stating that the trust had already been assessed to tax on the income distributed to the beneficiaries. The tribunal noted that the income of a discretionary trust could be assessed either in the hands of the trust or the beneficiaries, but not both. The tribunal also referred to the CBDT circulars and instructions, which supported this interpretation. The tribunal concluded that the amount received by the assessee was a non-taxable capital receipt, as the trust had already paid taxes on it.Conclusion:The tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 1,50,00,000 made by the AO. The tribunal found that the trust was a discretionary trust, and the amount received by the assessee was a non-taxable capital receipt, as the trust had already paid taxes on it. The tribunal's decision was based on the interpretation of sections 161 to 166 of the IT Act, 1961, and the Supreme Court's ruling in CIT vs. Kamalini Khatau.