2020 (12) TMI 736 - HC - Income Tax

Court excludes investments with no exempt income from Section 14A computation, deems trust as individual for tax, taxes voluntary contributions as other income.

The Commissioner of Income tax, Chennai Versus Shriram Ownership Trust

The Commissioner of Income tax, Chennai Versus Shriram Ownership Trust - [2021] 430 ITR 356 (Mad) Issues Involved:1. Computation of deduction under Section 14A of the Income Tax Act.2. Taxability of voluntary contributions received by a private discretionary trust under Section 56(2)(vii).3. Status of the assessee for tax purposes: whether it should be assessed as an individual or an association of persons (AoP).Detailed Analysis:1. Computation of Deduction under Section 14A:The first issue was whether the Tribunal was correct in holding that investments yielding no exempt income should be excluded while computing the deduction under Section 14A. The court referenced a previous decision in the assessee's own case for the assessment year 2013-14 and other relevant cases, including M/s. Marg Limited vs. CIT and ACIT vs. Vireet Investment (P) Ltd., which decided the issue in favor of the assessee. Therefore, the court answered this issue in favor of the assessee, asserting that investments yielding no exempt income should be excluded from the computation.2. Taxability of Voluntary Contributions under Section 56(2)(vii):The second and third issues were interconnected, focusing on the status of the assessee and the applicability of Section 56(2)(vii). The court had to determine whether the assessee, a private discretionary trust, should be assessed as an individual or an AoP, and whether the contributions received should be taxed under Section 56(2)(vii).Jurisdiction of JCIT:The assessee argued that the JCIT had no jurisdiction to issue directions under Section 144A because the scrutiny was limited. However, the court held that the assessee could not raise this contention as they had not filed a separate appeal against the Tribunal's decision on this procedural aspect. Thus, the court did not entertain this argument.Status of the Assessee:The court examined whether the assessee should be treated as an individual or an AoP. The JCIT had treated the assessee as an individual, noting that the trust was created for the benefit of identified beneficiaries who were individuals. The court referenced several decisions, including CIT vs. Indira Balkrishna and CIT vs. Venu Suresh Sheela Trust, which supported the view that a private discretionary trust could be treated as an individual for tax purposes.The court rejected the argument that the beneficiaries were not identifiable and that the trust should be treated as an AoP. It held that the beneficiaries were identifiable as they were top-level executives of the Shriram Group and, thus, the trust should be treated as an individual.Application of Section 56(2)(vii):The court addressed whether the term 'individual' in Section 56(2)(vii) should be interpreted to mean only living persons. The court referenced several decisions, including CIT vs. Sodra Devi and Banarsi Dass, which held that the term 'individual' could include juristic entities and not just living persons. Therefore, the court concluded that the assessee, being a representative assessee for the beneficiaries who were individuals, should be assessed as an individual. Consequently, the contributions received should be taxed under Section 56(2)(vii).Conclusion:The court set aside the Tribunal's decision, which had erroneously reversed the CIT(A)'s finding, and restored the CIT(A)'s order. The court held that the assessee trust should be assessed as an individual and that the contributions received should be taxed under Section 56(2)(vii) as income from other sources. The appeal was partly allowed, with the first substantial question of law answered in favor of the assessee and the second and third questions answered in favor of the Revenue.