1987 (7) TMI 137 - AT - Income Tax

Trustees of Aarti Trust assessed as beneficiaries, not Association of Persons. Appeal allowed, assessments directed on known shares.

AARTI TRUST INDIA. Versus FIRST INCOME TAX OFFICER.

The Tribunal held that the trustees of Aarti Trust should be assessed as beneficiaries under Section 161, not as an Association of Persons under Section ... - Issues Involved:1. Status of trustees for tax assessment.2. Applicability of Supreme Court decisions.3. Assessment of beneficiaries' shares.4. Disallowance of specific expenses.Detailed Analysis:1. Status of Trustees for Tax Assessment:The primary issue was whether the trustees of Aarti Trust (India) should be assessed as an Association of Persons (AOP) or as a representative assessee under Section 160 of the Income Tax Act. The ITO assessed the trust in the status of AOP, arguing that the trust's profits were earned on behalf of persons with a common interest under the trust deed, thereby constituting an AOP. The CIT(A) upheld this view, citing Supreme Court decisions in N.V. Shanmugham vs. CIT and CIT vs. Indira Balakrishna, which were deemed applicable to the case.2. Applicability of Supreme Court Decisions:The CIT(A) referenced the Supreme Court rulings in N.V. Shanmugham vs. CIT and CIT vs. Indira Balakrishna to justify the assessment of the trust as an AOP. However, the appellant argued that these decisions were not applicable, as the facts of the present case differed significantly. The appellant cited the Supreme Court decision in CWT vs. Trustees of H.E.H. Nizam's Family Trust, which established that where beneficiaries' shares are definite and determinate, the assessment should be made on the beneficiaries, not the trust.3. Assessment of Beneficiaries' Shares:The appellant contended that the shares of the beneficiaries were definite and determinate, thus the trust should be assessed under Section 161, not Section 164. The trust had previously been assessed under Section 161 for the assessment years 1980-81, 1981-82, and 1982-83, with the income allocated among the beneficiaries. The appellant cited several High Court and Tribunal decisions supporting this view, including CIT vs. Karelal Kundanlal Trust, CIT vs. S.V. Kumarswamy Reddiar Trust, and CIT vs. Gangadhar Sikaria Family Trust. The Tribunal agreed, noting that the beneficiaries' shares were specified and the Department had already assessed the beneficiaries directly on their shares of profit.4. Disallowance of Specific Expenses:The ITO had disallowed several expenses, including interest to beneficiaries, sales promotion expenses, legal and professional charges, sundry expenses, and entertainment expenses, totaling Rs. 30,764. However, since the Tribunal ruled that the trust should not be directly assessed under Section 164, the issue of disallowed expenses became redundant. The Tribunal dismissed this ground as infructuous.Conclusion:The Tribunal concluded that the CIT(A) was not justified in confirming the ITO's order. It directed that the assessments should be made under Section 161 on the beneficiaries in respect of their shares in the income of the trust, which are known and determinate. There would be no direct assessment on the trust under Section 164. Consequently, the appeal was allowed in part, and the third ground regarding disallowed expenses was dismissed as redundant.