2024 (8) TMI 972 - AT - Income Tax

Discretionary trust income taxed at maximum rate under Section 164(1) but individual deductions allowed for beneficiaries

Smt. Pashiben Prajapati Family Trust (DISC) Versus The Income-tax Officer, Ward-3 (3) (5), Ahmedabad

The ITAT Ahmedabad held that a discretionary trust's income is taxable at maximum marginal rate under Section 164(1) as beneficiaries' shares were ... Taxing the assessee at maximum marginal rate - Denial of credit of TDS as per 26AS and taxed the assessee at the maximum marginal rate at 42.17% - HELD THAT:- Since, both the sons are Joint Trustees of the assets of the Trust as well to the income accruing thereof , it could be very well said that she cherished and desired that both the branches of families of her sons(including both the sons) who are beneficiaries of the Trust should have equal share, but individually the shares of beneficiaries were not determined and defined in her WILL, and it was left to the absolute discretion of the Trustees to deal with the income arising out of the Trust Fund as well to deal with the assets on dissolution of the assets and corpus of the Trust, with the limitation that it has to be for benefit of beneficiaries but the specific share of each beneficiary on whose behalf income is received by the Trustees are indetermined and unknown, as the same is not specified in the WILL. Under this fact situation, section 164(1) read with clause (ii) to Explanation 1 to Section 164 will become relevant and shall come into play, and such relevant income shall be chargeable to tax at maximum marginal rate. As could be seen vide the terms of WILL, that the trustees have the absolute discretion to apply the income as well the corpus of the Trust. The beneficiaries no doubt under the WILL of Smt. Pashiben Shambhubahi Prajapati have an ‘interest’ and ‘right’ to be considered as a potential recipient of benefits under the Trust by Trustees , but that ‘interest’ or ‘right’ does not stretch to claiming a particular and specific share in the income and the corpus of the Trust in the absence of determinate and known share specified in the WILL, and thus, each beneficiary does not have specific enforceable right to claim any part of the income or the corpus of the trust , but rather it is a ‘right’ to be considered by the Trustees, and hence it is merely an hope that the discretion shall be exercised by Trustee in his favour . But at the same time, it could not be said that the Trustees can use their discretion in an arbitrary manner , rather it has to be used by Trustees in the fair and judicious manner , otherwise the beneficiaries have other recourses under the Indian Trust Act, 1882 and under the court of equity, if the discretion is used by Trustee maliciously or capriciously, but it will not militate against the Trust being a discretionary trust liable and chargeable to tax under the Income-tax Act, 1961 to be taxed u/s 164(1) read with clause (ii) to first proviso to Section 164(1) , keeping in view the fact situation in the instant case. At this stage it will be relevant to refer to CBDT Circular No. 577, dated 04.09.1990. It will also be relevant to refer to judgment and order of Hon’ble Supreme Court in the case of CIT v. Smt Kamalini Khatau, [1994 (5) TMI 1 - SUPREME COURT] and Gosar Family Trust [1995 (4) TMI 2 - SUPREME COURT] Thus, hold that the income of the assessee shall be chargeable to be taxed under the provisions of Section 164(1) read with clause(ii) of the first proviso to Section 164(1), as it were the total income of an association of person(AOP). Denial of deduction u/s 80C and 80TTA - All the beneficiaries under the Trust are individuals, and it is by virtue of deeming fiction created u/s 164(1) read with clause(ii) of the first proviso to Section 164(1), that the tax will be charged on the relevant income, in the instant case, as if it were the total income of an association of person(AOP), but that deeming fiction cannot be extended to denial of deduction u/s 80C and 80TTA as the trust per-se is not a person defined u/s 2(31) and the trustees in the instant case are to taxed as representative assessee u/s 160(1)(iv) of the 1961 Act, and the beneficiaries of the Trust in the instant case being all individuals, in my considered view, deduction u/s 80C cannot be denied to the assessee albeit by deeming fiction u/s 164(1) read with clause (ii) of first proviso , the tax shall be charged on the relevant income as if it were total income of an AOP, but that deeming fiction cannot extend to an extent of denial of deduction u/s 80C and 80TTA which is otherwise available to individuals , as all the beneficiaries under the instant Trust being individuals. Denial of TDS credit - Reasons and justification for the Revenue to deny the benefit of credit of TDS claimed by the assessee. The AO shall consider grievance of the assessee as to non credit of TDS and non allowability of deduction u/s 80C, and shall grant the same, after due verifications, if so warranted. Chargeability to income-tax and scope of income is defined under the 1961 Act by the provisions of Section 4 and 5 of the Act, and it is irrelevant as to any deficiency in the prescribed ITR Forms, as the mandate of the 1961 Act is to collect correct income-tax from the correct assessee for the correct assessment year, strictly in accordance with the provisions of the 1961 Act , and any lacuna/deficiency etc. in the prescribed form of return of income(Form-ITR) is irrelevant. There is no reasons and justification to punish the assessee’s, if at all there was any deficiency in the prescribed ITR Forms, so long as the correct income as per mandate of the 1961 Act is brought to tax in the hands of the assessee. The appeal of the assessee is partly allowed Issues Involved:1. Taxation at Maximum Marginal Rate2. Non-grant of TDS Credit3. Levy of Interest under Sections 234A, 234B, and 234CIssue-wise Detailed Analysis:1. Taxation at Maximum Marginal Rate:The primary contention of the assessee was that the trust should not be taxed at the maximum marginal rate of 42.17% but at normal rates applicable to individuals, as stipulated under the second proviso to Section 164(1) of the Income-tax Act. The trust was declared by a WILL and is the only trust declared by the deceased, thus qualifying for individual tax rates with basic exemption limits and deductions under Chapter VI-A. The assessee argued that due to a change in the ITR forms and an incorrect PAN character, the return was filed in ITR-5 instead of ITR-2, leading to higher taxation.The tribunal noted that the trust was indeed declared by a WILL and was the only trust so declared. However, the shares of the beneficiaries were indeterminate and unknown, as the WILL did not specify the exact shares. This invoked Section 164(1) read with Section 167B(2)(i), which mandates taxation at the maximum marginal rate when beneficiary shares are indeterminate. Despite the trust being the only one declared by the WILL, the tribunal upheld the revenue's decision to tax at the maximum marginal rate due to the indeterminate shares of the beneficiaries.2. Non-grant of TDS Credit:The assessee claimed that the lower authorities erred in not granting TDS credit as per Form 26AS amounting to Rs. 68,042. The tribunal instructed the AO to consider the grievance regarding the non-credit of TDS and to grant the same after due verification, if warranted.3. Levy of Interest under Sections 234A, 234B, and 234C:The assessee contested the levy of interest under Sections 234A, 234B, and 234C, totaling Rs. 87,761. Since the substantive ground of taxing at the maximum marginal rate was upheld, the consequential ground regarding the interest was also dismissed.Conclusion:The tribunal partly allowed the appeal, directing the AO to verify and grant the TDS credit and deductions under Section 80C and 80TTA, if applicable. However, the tribunal upheld the taxation at the maximum marginal rate due to the indeterminate shares of the beneficiaries, in line with Section 164(1) read with Section 167B(2)(i). The levy of interest under Sections 234A, 234B, and 234C was also upheld.