1993 (7) TMI 115 - AT - Income Tax

Trust income from letting premises & interest classified as 'income from other sources' by Tribunal.

The Tribunal held that the income from letting out premises and interest should be classified as 'income from other sources,' the trust was deemed a ... - Issues Involved:1. Whether the income derived by the Sadanand Family Benefit Trust from letting out premises and interest should be assessed as 'income from business' or 'income from other sources'.2. Whether the trust should be treated as a discretionary trust or a specific trust.3. Application of Section 161(1A) of the Income Tax Act.4. Whether the assessment should be done on the trust or the beneficiaries.5. Validity of additional grounds of appeal raised by the assessee.Issue-wise Detailed Analysis:1. Income Classification:The primary issue was whether the income from letting out premises and interest should be classified as 'income from business' or 'income from other sources.' The Income Tax Officer (ITO) initially assessed the income under Section 143(1), treating it as business income and taxing it at the maximum marginal rate under Section 161(1A). The assessee contended that the income should be assessed under 'income from other sources.' The Tribunal found that the income from letting out premises and interest had been consistently assessed as 'income from other sources' in previous years, and no new facts justified a departure from this classification. Therefore, the Tribunal held that the income should be assessed as 'income from other sources.'2. Nature of Trust:The ITO and CIT(A) treated the trust as a discretionary trust, arguing that the shares of the beneficiaries were not fixed and could change due to certain events, making the trust discretionary. The assessee contended that the trust was a specific trust with determinate shares for the beneficiaries. The Tribunal examined the trust deed and found that the beneficiaries and their shares were determinable on the last day of the accounting period. Therefore, the Tribunal held that the trust was a specific trust and not a discretionary trust.3. Application of Section 161(1A):Section 161(1A) was introduced by the Finance Act, 1984, effective from 1st April 1985, and provided that if the income of a trust includes profits and gains of business, it should be taxed at the maximum marginal rate. The assessee argued that since the trust had a share of loss from a partnership firm, Section 161(1A) should not apply. The Tribunal held that the words 'profits and gains' in Section 161(1A) include business losses as well. Therefore, the application of Section 161(1A) was justified even in the case of a loss. However, the Tribunal emphasized that the trust should be assessed as a representative assessee in respect of the income of each beneficiary separately.4. Assessment on Trust or Beneficiaries:The assessee argued that the beneficiaries had already been assessed on their shares of the trust's income, and therefore, the trust should not be assessed again. The Tribunal agreed with the assessee, citing the principle that once the beneficiaries are assessed, the trust should not be assessed on the same income. The Tribunal relied on the decision in CIT vs. V.H. Sheth & Ors., which held that once the ITO assesses an assessee directly on their share of income from a trust, it is not open to assess the same income again in the hands of the trust.5. Additional Grounds of Appeal:The assessee raised additional grounds of appeal during the hearing, arguing that the ITO erred in assessing the trust as an Association of Persons (AOP) and that the beneficiaries had already been assessed on their shares of the trust's income. The Tribunal admitted the additional grounds, citing the Full Bench decision in Ahmedabad Electricity Co. Ltd. vs. CIT, which held that the Tribunal has wide powers to consider all matters relating to the subject matter of the appeal. The Tribunal found that the additional grounds were related to the subject matter of the appeal and admitted them for consideration.Conclusion:The Tribunal concluded that the income from letting out premises and interest should be assessed as 'income from other sources,' the trust should be treated as a specific trust, and the application of Section 161(1A) was justified even in the case of a loss. However, the trust should be assessed as a representative assessee in respect of the income of each beneficiary separately. The additional grounds of appeal were admitted, and the Tribunal held that once the beneficiaries are assessed, the trust should not be assessed on the same income. The appeals were partly allowed.