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 court held in favor of the assessee, determining that investments yielding no exempt income should be excluded from the computation under Section 14A ... Assessment of Trust - voluntary corpus donations - Whether the assessee is a discretionary Trust - Additions u/s Section 56(2)(vii) read with Section 2(24)(iva) - AOP u/s 2(31)(v) - Power of JCIT to issue directions u/s 144A - HELD THAT:- the JCIT had afforded sufficient opportunity to the assessee and followed the procedure under Section 144A. - there is no procedural infirmity in the assessment order passed under Section 143(3) read with Section 144A of the Act - Further, the assessee is precluded from raising any contention with regard to the jurisdiction of the JCIT to issue direction under Section 144A of the Act nor anything about the procedure followed by the Assessing Officer pursuant to such direction. The underlying principle being that the revenue cannot be worse of in their appeal at the instance of the assessee who has not filed an appeal over such finding of the Tribunal. Status of the assessee - whether assessee trust is to be assessed as an individual or as an association of persons and whether the assessee if has to be treated as an individual would stand excluded from the purview of Section 56(2)(vii) of the Act on the ground that it is not a natural living person? - HELD THAT:- the contention of the assessee that consequent upon the insertion of explanation to Section 2(31), a representative assessee representing individuals is to be treated as an AoP is an argument which cannot be accepted. Those individuals (Beneficiaries) have not come together with a common purpose and they do not have any role in the operation or administration of the Trust. Therefore, the assessee cannot be treated as an AoP. To take a decision in the matter, the facts are very essential. A trustee appointed under a trust created under a Deed of Trust has to be treated as a representative assessee in terms of section 160 of the Act provided he receives or he is entitled to receive any money on behalf of or benefit of any person. Such trustee is deemed to be an assessee for the purposes of the Act. This position becomes clear if one carefully examines section 161(1) of the Act The argument that the beneficiaries are not known cannot be accepted because the Deed of Trust as well as the Supplemental Deed would show that the beneficiaries are top level executives of the Shriram Group of Companies who will be extended financial benefit on attaining the age of 60 years and the set of persons who would be benefited have also been mentioned in the annexures. It is to be further noted that the names of those persons, who are yet to attain 60 years, are well within the knowledge of the assessee and more particularly, to the six group concerns, which extended the gratis and, all those beneficiaries are individuals and therefore, the assessee in the instant case, having received the perquisite on behalf of its beneficiaries, should be treated as a representative of those beneficiaries and therefore, has to be assessed as an “individual”. In the case on hand, it is accepted by the assessee that it is a discretionary Trust. They have not joined in for a common purpose. They became trustees having been appointed under a Deed of Trust/Supplementary Deed. Therefore, the assessee cannot contend that they have joined together in common for purpose of carrying on an activity. The term “individual” used in the Act does not mean only a human being but wide enough to include a group of persons constituting a unit for the purposes of the Act. It was pointed out that the reference to wife, daughter and child of an individual in Section 4 of the Wealth Tax Act would not lead to the construction of the expression “individual” in Section 3 of the said Act as referable only to a single human being. Bearing in mind the law laid down in the above referred decisions and also taking note of the observations of the Hon'ble Supreme Court in Indira Balkrishna [1960 (4) TMI 7 - SUPREME COURT], that there can be no universal application as to how to come to a conclusion as to status of an assessee, we, on a careful analysis of the facts of the case and noting the recitals in the Deed of Trust and Supplementary Deed, schedules thereof, have no hesitation in our mind to hold that the assessee was rightly assessed as an “individual” by the Assessing Officer as affirmed by the CIT(A), which was erroneously reversed by the Tribunal. Scope of the term 'Individual' as referrred u/s 56(2)(vii) - HELD THAT:- The reference to clauses (a), (b) and (c) in the proviso under Section 56(2)(vii) would not apply to a representative assessee and no amount has been received from any relative of the individual beneficiary or on account of marriage of the individual beneficiary and the income received on behalf of the representative assessee. Therefore, the contention of the assessee that the assessee being not a living person cannot be brought under Section 56(2)(vii). The assessee is required to be assessed as an “individual”, the beneficiaries have been identified and are identifiable and Section 161 would apply because the income is specifically receivable on behalf of or for the benefit of any one person who are known and whose shares are determinate. The factual positions as brought by the JCIT and the CIT clearly show that the methodology adopted by the assessee was to circumvent the provisions of the Act. We do not agree with reasons given by the Tribunal holding that the sum received by the assessee could not have been considered as income from other sources under section 56(2)(vii) read with Section 2(24)(xv) and accordingly, the same is set aside and the order passed by the CIT(A) is restored. Disallowance u/s 14A - whether the Tribunal was right in holding that the investment which yielded no exempt income was to be excluded while computing deduction u/s 14A when the Act as well as the Rules do not provide for any such exception - HELD THAT:- As decided in own case substantial question of law has to be answered in favour of the assessee in the light of the decision in the case of M/s.Marg Limited [2020 (10) TMI 102 - MADRAS HIGH COURT] - Further, in the case of ACIT, Circle 17(1), New Delhi vs. Vireet Investment (P) Ltd.[2017 (6) TMI 1124 - ITAT DELHI] also decided the said issue in favour of the assessee. 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.