2024 (3) TMI 538 - AT - Income Tax

Revocable trust wins appeal on mutual fund capital gains taxation under Sections 61 and 63

M/s. Reporter Family Private Trust, Mumbai Versus Assessing Officer-ITO (IT) 26 (1) (1), Mumbai

The ITAT Mumbai allowed the appeal of a revocable trust regarding reopening of assessment for income from mutual fund investments. The HC found that ... Reopening of assessment - income arising from the revocable transfer of assets - taxability in the hands of trust or transferor/settler - HELD THAT:- We find that there is no dispute that assessee is a ‘revocable trust’ - The assessee had purchased units of mutual funds during the A.Y. 2010-11 and the same has already been offered to tax in the income tax return of the settler for the A.Y. 2010-11 in the return of income filed on 31/07/2010. In the said return of income, the settler had offered the capital gain on mutual funds of the revocable family private trust. The copies of the returns have been filed before us in the paper book which was also filed before the ld. CIT(A). Once, these facts were brought on record, we do not find any reasons as to how the appellate authority can brush aside all those documents and simply endorse the exparte assessment order that the ld. AO has reopened the assessment to ascertain the sources and not the income earned out of those mutual funds. First of all he has to ascertain as to in whose case such income should be taxable whether in the hands of the revocable trust or in the hands of the transferor / settler. From the plain reading of Section 61 r.w.s. 63 of the Act, the income arising from revocable transfer of assets is taxable in the hands of the transferor, i.e., the settler of the revocable trust and it is to be clubbed in the total income of the transferor and not in the total income of the transferee of the assets. As already noted that clause 1.2.4 of the trust deed which provides that settler may revoke this trust deed and the entire trust fund shall be reinvested in the settler absolutely. Thus, even as per the terms of the trust deed, the income or any source of investment in the mutual funds was ought to be taxable in the hands of the settler. Thus, even as per law, the income could not have been taxed in the hands of the assessee trust. That apart, if it has been brought on record that already income has been offered in the hands of the settler, then taxing the same amount again in the hands of the trust is wholly arbitrary. If the ld. CIT (A) intended to ask the source, then at least same should have been confronted to the settler before stating that ld. AO reopened the case to ascertain the sources and not the income earned out of those mutual funds. Nowhere in the assessment order, the ld. AO had stated that he is questioning the source of mutual funds. Nowhere in the assessment order, the ld. AO had stated that he is questioning the source of mutual funds.National Faceless Appeal Centre should have at least perused the documents which was filed and also have been incorporated in the impugned order and if there was any query or doubt about the taxability of the income in the hands of the assessee-trust should have been confronted to the assessee. Such a casual way of ignoring of facts and materials placed on record and law vitiates the whole system of justice. It has been further brought on record before us that on similar issue, assessee’s case was selected for scrutiny for A.Y. 2011-12 to 2013-14 wherein the notices were served on the correct address. Assessee had brought all these facts on record and ld. AO thereafter had accepted the assessee’s contention and no addition was made on account of any income / purchase of investment of mutual funds - Assessee appeal allowed. Issues:The judgment involves challenging the addition of income earned from the purchase of mutual funds by a revocable private trust for the assessment year 2010-11.Summary:The appeal was filed against the order passed by NFAC Delhi for the quantum of assessment under sections 147 and 144. The trust, a revocable private trust settled by Mr. Burjor Hormosji Reporter and Mrs. Aloo Burjor Reporter, had purchased units of mutual funds amounting to Rs. 2,59,21,343 during the relevant financial year. The trust was identified as a non-filer and proceedings were initiated to assess the income. The trust argued that as a revocable trust, it was not required to offer the income earned for tax purposes, as it had already been offered to tax by the settler of the trust. The trust provided various submissions and cited relevant case laws to support its position.The CIT(A) upheld the action of the Assessing Officer, stating that the trust did not explain the sources of investment and confirmed the addition of income from mutual funds. However, the tribunal found that the income arising from a revocable transfer of assets should be taxable in the hands of the transferor, i.e., the settler of the trust. As the settler had already offered the income to tax in their return, taxing the same amount again in the hands of the trust was deemed arbitrary. The tribunal criticized the casual way in which facts and materials were ignored, leading to the deletion of the entire addition confirmed by the CIT(A).Therefore, the tribunal allowed the appeal of the assessee, setting aside the order of the CIT(A) and deleting the addition made on account of income from the purchase of mutual funds.Separate Judgement:No separate judgment was delivered by the judges in this case.