2025 (6) TMI 148 - AT - Income Tax

Tax Treatment of Private Family Trust: Income Taxed at Normal Rates, Not Maximum Marginal Rate for AY 2016-17

Lipi Jain Family Trust Versus Income Tax Officer (Exemption), Ward Gwalior, Madhya Pradesh

ITAT Agra allowed the assessee's appeal regarding tax treatment of a private family trust. The tribunal determined that the trust's income should be taxed ... Taxability of the income of the assessee as per maximum marginal rate(“MMR”) as against the normal rate of the tax - assessee is a private family trust where the beneficiary is not having any taxable income - CIT(A) dismissed the appeal of the assessee by observing that the assessee has filed the return of income in form ITR-7 and not in form ITR-5 though the same was filed at a later stage along with the application u/s 154 HELD THAT:- In the instant case, it is seen that at first occasion, the assessee has filed the return in form i.e. ITR-7 which is not meant for private trust, however, along with rectification application, the assessee has filed the ITR-5 and submit that where the trust is created solely for the benefit of specified beneficiaries, tax should not be charged at MMR, more particularly when the beneficiary is not having any taxable income. As the assessee trust was created by will of Shri Babulal Jain exclusively for the benefit of relatives dependent for their support and maintenance, therefore, it is private family trust. Assessee since beginning claimed that it had no beneficiary who is having taxable income. In view of the fact and in view of the proviso to section 164(1) of the Act, income of the assessee is to be taxed at the normal rate. Therefore, we direct the AO to charge tax at normal rate of tax as against MMR charge on the income declared by the assessee. Appeal of the assessee is allowed. The Appellate Tribunal (ITAT Agra) allowed the assessee's appeal against the CIT(A)'s order upholding tax at the maximum marginal rate (MMR) for Assessment Year 2016-17. The key issue was whether a private family trust's income should be taxed at MMR or normal rates. Although the assessee initially filed return in ITR-7 (not applicable to private trusts), it subsequently filed ITR-5 with a rectification application. The trust, created by will exclusively for specified beneficiaries who have no taxable income, qualifies as a private family trust. Citing the proviso to section 164(1) of the Income Tax Act, 1961, the Tribunal held that 'income of the assessee is to be taxed at the normal rate' rather than MMR. The AO was directed accordingly. The appeal was thus allowed.