2025 (5) TMI 687 - AT - Income Tax

Family trust created by will cannot be taxed at Maximum Marginal Rate under Section 164(1) First Proviso

Nathiben Kalidas Patel Family Trust Versus The ITO Ward 1 (3) (1), Ahmedabad

ITAT Ahmedabad held that a family trust created by will cannot be taxed at Maximum Marginal Rate (MMR) under First Proviso to Section 164(1). The Central ... Family trust chargeable to tax at normal rate OR MMR in terms of First Proviso to Section 164(1) - HELD THAT:- Adjustment made by the CPC while processing the return of the assessee by levying tax at the MMR is not in accordance with law. It is not disputed that the assessee is a family trust created by a WILL as pointed out for the assessee. In terms of the provision of the First Proviso to Section 164(1) of the Act, such trusts are not be subjected to be taxed at MMR, but are to be taxed at rates applicable to AOPs and CBDT in its Circular No.557 dated 04.09.1990 has clarified that while treating such trust as AOPs, they are not to be taxed at MMR as specified in Section 167B of the Act, since the applicability of MMR has been specifically excluded by Section 164(1) First Proviso itself and this specific exclusion would override the general provision of Section 167B of the Act. Thus agree with assessee that as per the applicable provisions of law,clarified by the CBDT also, the assessee trust was not to be taxed at MMR. Even the coordinate Bench in case of Rajnikant Gulabdas Sheth Family Trust [1987 (1) TMI 113 - ITAT AHMEDABAD-C] has categorically held so. CPC has wrongly applied MMR for taxing the assesses income which should have been taxed at the normal rates applicable to AOP’s. The core legal issue considered by the Tribunal concerns the applicability of the Maximum Marginal Rate (MMR) of tax versus the normal slab rates to a discretionary trust created by a WILL. Specifically, whether a trust created by WILL, being the only such trust declared by the testator, is liable to be taxed at the MMR under Section 143(1) read with Sections 161, 164, and 167B of the Income Tax Act, 1961, or at the normal slab rates applicable to an Association of Persons (AOP).Another related issue is the correctness of the Addl./Joint Commissioner of Income Tax (Appeals) ('the CIT(A)') in upholding the tax adjustment made by the Central Processing Centre (CPC) under Section 143(1)(b) of the Act, which charged tax at MMR instead of the normal slab rate.In addition, the Tribunal considered the interpretation and application of the proviso to Section 164(1) of the Act, the interplay with Section 167B, and the relevance of the CBDT Circular No. 577 dated 04.09.1990, as well as pertinent judicial precedents.Issue-wise Detailed Analysis1. Applicability of Maximum Marginal Rate (MMR) versus Normal Slab Rates to a Discretionary Trust Created by WILLRelevant Legal Framework and Precedents: Section 164(1) of the Income Tax Act mandates that where the shares of beneficiaries in income are indeterminate or unknown, tax shall be charged at the MMR. However, the proviso to Section 164(1) carves out exceptions, including trusts declared by WILL where such trust is the only trust declared by the testator. In such cases, tax is charged as if the income were that of an AOP, i.e., at normal slab rates.Section 167B similarly provides for charging tax at MMR for AOPs or bodies of individuals where shares are unknown, but the proviso to Section 164(1) is a specific provision applicable to trusts created by WILL.The CBDT Circular No. 577 (1990) clarifies that the intention was never to subject trusts created by WILL, being the only such trust declared by the testator, to tax at MMR. The Circular emphasizes that specific beneficial provisions (such as the proviso to Section 164(1)) override general provisions (such as Section 167B).The ITAT Ahmedabad decision in ITO vs. Rajnikant Gulabdas Sheth Family Trust (1987) held that trusts qualifying under the proviso to Section 164(1) are to be taxed at normal rates and not at MMR.Court's Interpretation and Reasoning: The Tribunal agreed with the assessee's contention that the trust in question is a discretionary trust created by WILL and is the only such trust declared by the testator. Therefore, the proviso to Section 164(1) applies, exempting the trust from taxation at MMR.The Tribunal noted that the CIT(A) failed to appreciate this specific grievance and wrongly treated the applicability of MMR as undisputed, focusing instead on surcharge applicability. The Tribunal found that the CPC's adjustment applying MMR was contrary to the statutory provisions and the CBDT Circular.Key Evidence and Findings: The trust was undisputedly created by WILL and was the only such trust declared by the testator. The assessee's return applied normal slab rates, and the CPC's intimation applied MMR, creating a tax demand. The CBDT Circular and the ITAT precedent were placed on record supporting the assessee's position.Application of Law to Facts: The Tribunal applied the proviso to Section 164(1) and the CBDT Circular to conclude that the trust's income should be taxed at normal slab rates applicable to AOPs, not at MMR. The CPC's application of MMR was therefore erroneous.Treatment of Competing Arguments: The CIT(A) had held that the applicability of MMR was not in dispute and adjudicated only the surcharge rate, which the Tribunal found to be a mischaracterization of the issue. The Revenue representative did not contest the legal position or distinguish the precedent relied upon by the assessee.Conclusions: The Tribunal concluded that the CPC's levy of tax at MMR was illegal and contrary to law, and the tax demand created was to be deleted.2. Correctness of the CIT(A)'s Order Upholding CPC's AdjustmentRelevant Legal Framework and Precedents: Section 250 of the Income Tax Act empowers the Appellate Tribunal to adjudicate appeals against orders of the CIT(A). The CIT(A) is required to consider all grounds raised by the assessee, including legal and factual issues.Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) erred in law and on facts by not appreciating the core issue raised by the assessee regarding the applicability of MMR. Instead, the CIT(A) proceeded on an incorrect premise that the MMR applicability was not in dispute and focused solely on surcharge rates.Key Evidence and Findings: The Tribunal noted that the CIT(A)'s order reproduced the assessee's contention about the trust being created by WILL and the proviso to Section 164(1), but failed to adjudicate on this point.Application of Law to Facts: The Tribunal applied the principle that appellate authorities must consider and decide all grounds raised. The failure of the CIT(A) to address the main grievance was a legal error.Treatment of Competing Arguments: The Revenue did not challenge this finding and conceded the CIT(A)'s failure to address the issue.Conclusions: The Tribunal held that the CIT(A) erred in upholding the CPC's adjustment and that the order was liable to be set aside on this ground.3. Interpretation of Section 164(1) Proviso and Interaction with Section 167B and CBDT CircularRelevant Legal Framework and Precedents: Section 164(1) provides for charging tax at MMR where shares of beneficiaries are unknown but excludes trusts created by WILL (only such trust declared by the testator) via its proviso. Section 167B provides for MMR taxation of AOPs with unknown shares but is a general provision. The CBDT Circular No. 577 clarifies that the specific provision in Section 164(1) overrides the general provision in Section 167B.Court's Interpretation and Reasoning: The Tribunal emphasized the principle of specific provisions overriding general ones, holding that the proviso to Section 164(1) governs the taxation of trusts created by WILL, excluding them from MMR taxation under Section 167B.Key Evidence and Findings: The CBDT Circular explicitly states that trusts declared by WILL, being the only trust declared by the testator, are not to be taxed at MMR under Section 167B but at normal rates as per Section 164(1) proviso.Application of Law to Facts: The Tribunal applied this legal framework to the facts of the case, confirming that the CPC's application of MMR was contrary to the statutory scheme and CBDT's administrative instructions.Treatment of Competing Arguments: The Revenue did not dispute the Circular's applicability or the legal principle of specific overriding general provisions.Conclusions: The Tribunal held that the proviso to Section 164(1) excludes trusts created by WILL from MMR taxation, and this exclusion overrides Section 167B.Significant Holdings'The adjustment made by the CPC while processing the return of the assessee by levying tax at the MMR is not in accordance with law.''In terms of the provision of the First Proviso to Section 164(1) of the Act, such trusts are not to be subjected to be taxed at MMR, but are to be taxed at rates applicable to AOPs and CBDT in its Circular No.557 dated 04.09.1990 has clarified that while treating such trust as AOPs, they are not to be taxed at MMR as specified in Section 167B of the Act, since the applicability of MMR has been specifically excluded by Section 164(1) First Proviso itself and this specific exclusion would override the general provision of Section 167B of the Act.''The CPC has wrongly applied MMR for taxing the assessee's income which should have been taxed at the normal rates applicable to AOP's.''The adjustment, therefore made by CPC in the intimation u/s 143(1) of the Act, by creating a demand of Rs. 32,638/- is directed to be deleted.'Core principles established include that trusts created by WILL, being the only such trust declared by the testator, are to be taxed at normal slab rates applicable to AOPs and not at the MMR. The specific proviso to Section 164(1) overrides the general provisions of Section 167B. Administrative clarifications by the CBDT are authoritative in this regard. Appellate authorities must consider all grounds raised by the assessee and cannot ignore core issues.Final determination was in favor of the assessee, setting aside the CPC's adjustment and deleting the demand raised on account of incorrect application of MMR tax rate.