2024 (8) TMI 972 - AT - Income Tax

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

The ITAT Ahmedabad held that a discretionary trust's income is taxable at maximum marginal rate under Section 164(1) as beneficiaries' shares were ... Chargeability under Section 164(1) - maximum marginal rate and proviso for trust declared by will - Deeming fiction of taxation as an Association of Persons (AOP) - Allowability of deductions under Chapter VI-A despite deeming fiction - Credit for tax deducted at source as per Form 26ASChargeability under Section 164(1) - maximum marginal rate and proviso for trust declared by will - Deeming fiction of taxation as an Association of Persons (AOP) - Whether the trust is liable to be taxed at the maximum marginal rate under Section 164(1) read with the second proviso (trust declared by will being the only trust) as if its relevant income were the total income of an AOP - HELD THAT: - The trust was created by the testatrix' will and is not disputed to be the only trust declared by her. The will names the two sons and their families as beneficiaries but does not expressly state or ascertain the individual shares of beneficiaries; distribution of income and corpus is left to the absolute discretion of the trustees. Under Explanation 1 and the language of Section 164(1), where individual shares are indeterminate or unknown the relevant income is to be charged at the maximum marginal rate. The Tribunal found that the trustees' absolute discretion and the absence of specifically ascertainable shares render the beneficiaries' shares indeterminate and therefore the second proviso to Section 164(1) read with Section 167B is attracted. Accordingly, the relevant income is chargeable as if it were the total income of an AOP and taxable at the maximum marginal rate. [Paras 5, 6]The trust's income is chargeable under Section 164(1) read with proviso (ii) as if it were the total income of an AOP; taxation at the maximum marginal rate stands.Allowability of deductions under Chapter VI-A despite deeming fiction - Whether the deeming fiction under Section 164(1) can be extended to deny deductions under Chapter VI-A (such as Section 80C) and similar individual reliefs - HELD THAT: - While Section 164(1) effects a deeming that relevant income be treated as the total income of an AOP for charging tax, that fiction does not alter substantive entitlement to deductions available to individual beneficiaries. The trustees are representative assessees and the beneficiaries are individuals; the Tribunal held that the deeming cannot be extended to deny otherwise available deductions under Chapter VI-A and 80TTA. The AO is directed to consider the assessee's claim for deductions after due verification and grant them if warranted. [Paras 6]Deductions under Chapter VI-A and 80TTA cannot be denied merely by application of the deeming fiction; AO to verify and allow such deductions if substantiated.Credit for tax deducted at source as per Form 26AS - Whether the assessee is entitled to TDS credit shown in Form 26AS which was not given by the assessing authority - HELD THAT: - The Tribunal noted that there is no justification to deny the credit of TDS merely on account of filing the return in an incorrect ITR form so long as the correct income and tax liability are brought to tax. The Tribunal directed the Assessing Officer to consider the grievance regarding non-credit of TDS and to grant the credit after due verification if the claim is genuine and supported by Form 26AS and other documents. [Paras 6]TDS credit as per Form 26AS is to be considered and granted by the AO after due verification.Final Conclusion: Appeal partly allowed: the Tribunal upholds that the trust's relevant income is chargeable under Section 164(1) as if it were the total income of an AOP (taxable at maximum marginal rate) because beneficiaries' shares are indeterminate, but directs the Assessing Officer to verify and allow, if warranted, the assessee's claims for TDS credit and deductions under Chapter VI-A/80TTA; assessment otherwise stands corrected in accordance with these directions. 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.