2025 (11) TMI 1903 - AT - Income Tax

Discretionary trust taxed at maximum marginal rate under s.164(1); status, correct rate remanded for verification and s.164(3)

ITAT held that for discretionary trusts with indeterminate beneficiary shares, s.164(1) generally mandates taxation at the maximum marginal rate unless ... Taxability u/s 164 - status of assessee as AOP/BOI - CIT(A) holding to charge income tax at maximum marginal rate @ 30% - return was filed under the status of AOP/BOI with sub-status of Business Trust - assessed in the status of an 'individual' and taxed at rates applicable to an individual instead of at the maximum marginal rate in terms of sections 160(1)(iv), 164(1) and 164(3) HELD THAT:- In the case of Surendranath Gangopadhyaya Trust [1982 (3) TMI 18 - CALCUTTA HIGH COURT] examined a case where the trust deed conferred discretion on the trustees in the allocation of income among beneficiaries and did not specify individual shares. The Hon’ble Madhya Pradesh High Court in Piarelal Sakseria Family Trust [1980 (10) TMI 8 - MADHYA PRADESH HIGH COURT] also dealt with the issue of taxation of discretionary trusts where the beneficiaries’ shares were not specified. The Court held that the statutory provisions contained in section 164 were designed to address situations where the allocation of income was uncertain and therefore capable of being manipulated to reduce tax liability. The Court noted that when the trust deed did not specify the proportionate entitlement of beneficiaries and the trustees retained discretion to distribute income, the beneficiaries’ shares were necessarily indeterminate. In such cases, the trustee, as a representative assessee u/s 160(1)(iv), was liable to be taxed at the maximum marginal rate. The Court also rejected the contention that the trust should be treated as an individual for tax purposes, holding that such treatment was only available where the trust satisfied the conditions contemplated in the proviso to section 164. Since the trust before it did not fall within any statutory exception, the Court held that the maximum marginal rate applied. These decisions in our considered view collectively establish the legal principle that in the case of discretionary trusts where the beneficiaries’ shares are indeterminate or unknown, the provisions of section 164(1) mandate taxation at the maximum marginal rate, and such taxation is automatic unless the trust falls within the narrow statutory exceptions provided in section 164(3) or the proviso to section 164 of the Act. In the present case, the application of section 164(1) and 164(3) requires factual verification as to whether the assessee satisfies the statutory exceptions and judicially recognized conditions laid down by the Hon’ble Gujarat High Court. Since no such examination has been undertaken, and the necessary documents including the complete Will and trust deed require verification, we deem it appropriate to restore the matter to the file of the Assessing Officer. Accordingly, while confirming the finding of the learned CIT(A) that the CPC was justified in applying maximum marginal rate based on the return as filed and that the order of the learned CIT(A) cannot be faulted on this ground, however, in the interests of justice, we set aside the issue of taxability under section 164 of the Act to the file of the Assessing Officer with a direction to carry out necessary verification as to whether the trust was created under a Will, whether it is the only trust declared by the testator, whether the beneficiaries are dependent relatives and identifiable, whether the trust satisfies the representative assessee conditions of section 160(1)(iv), and whether the shares of the beneficiaries are in fact determinate upon examination of the trust instrument, and thereafter to determine whether the assessee is entitled to be taxed in the status of an individual. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, on processing under section 143(1), the Centralized Processing Centre was justified in treating the assessee trust as an AOP/BOI and applying the maximum marginal rate under section 164(1) on the basis of the particulars furnished in the return of income. 1.2 Whether the assessee trust, claimed to be created under a Will, is entitled, upon proper verification of facts, to be assessed in the status of an 'individual' and taxed at rates applicable to an individual instead of at the maximum marginal rate in terms of sections 160(1)(iv), 164(1) and 164(3) and the jurisprudence of the jurisdictional High Court on testamentary family trusts. 1.3 Whether the assessee's contention that the issues involved were 'debatable' could bar adjustments under section 143(1) in the facts where the return itself disclosed status and answers triggering section 164(1). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of CPC's application of maximum marginal rate based on return as filed Legal framework (as discussed) 2.1 The Tribunal considered the scheme of section 160(1)(iv) (representative assessee - trustee) and section 164(1), which mandates tax at the maximum marginal rate where income for which such representative assessee is liable is not specifically receivable for any one person or where beneficiaries' individual shares are 'indeterminate or unknown'. Interpretation and reasoning 2.2 The Tribunal noted that the assessee itself, in the return of income, had: (a) selected the status 'AOP/BOI'; and (b) answered 'No' in the ITR fields relating to conditions linked with section 160(1)(iv) and section 164(3), including the determinacy of beneficiaries' shares and conditions for a Will trust exemption. 2.3 On this factual premise, the Tribunal held that the CPC merely processed the return as filed and applied section 164 on the basis of the assessee's own declarations; the action of CPC and the finding of the appellate authority upholding such processing could not be faulted. 2.4 By accepting the CIT(A)'s conclusion that section 164(1) was correctly invoked at the processing stage on the disclosed data, the Tribunal impliedly rejected the assessee's argument that the issue was so 'debatable' as to fall outside the scope of section 143(1) adjustments in the present factual matrix. Conclusions 2.5 The Court held that CPC's application of maximum marginal rate under section 164(1) was justified on the basis of the return as filed, and the CIT(A)'s findings sustaining such action 'cannot be faulted' and 'remain undisturbed'. Issue 2 - Entitlement of a testamentary family trust to be taxed as an 'individual' instead of at maximum marginal rate Legal framework (as discussed) 2.6 The Tribunal set out and examined the following provisions: (a) Section 160(1)(iv): defining a trustee of a trust (including one declared by a Will) as 'representative assessee' in respect of trust income. (b) Section 164(1): charging provision requiring taxation of such representative assessee at the maximum marginal rate where beneficiary shares are not specifically receivable or are 'indeterminate or unknown'. (c) Section 164(3): carving out exceptions in certain cases, inter alia, where income is receivable under a trust declared by Will which is the only trust so declared; or where beneficiaries' other incomes are within prescribed limits; or where the trust is created before 1 March 1970, etc., in which cases income is to be charged as if total income of an AOP. 2.7 The Tribunal discussed decisions of the jurisdictional High Court: (a) Deepak Family Trust v. CIT and Harsiddh Specific Family Trust v. CIT: holding that where a trust is created under a Will, is the only such trust by the testator, beneficiaries are identifiable dependent relatives, and the trustee is assessable as representative assessee under section 160(1)(iv), the trust is to be assessed in the status of an 'individual' and taxed at the rates applicable to an individual, not at the maximum marginal rate. (b) CIT v. Kantilal Harilal Family Trust: reiterating that where beneficiaries' shares in a discretionary trust are indeterminate, Explanation 2 to section 164 mandates application of the maximum marginal rate, leaving no discretion to apply lower or individual rates. 2.8 The Tribunal also referred to supporting decisions of other High Courts (C.V. Divakaran Family Trust, Surendranath Gangopadhyaya Trust, Piarelal Sakseria Family Trust) which consistently hold that in discretionary trusts with indeterminate shares, section 164(1) operates as a mandatory charging provision at the maximum marginal rate, subject only to narrow statutory exceptions. Interpretation and reasoning 2.9 Synthesising the statutory provisions and the above jurisprudence, the Tribunal distilled that: (a) For discretionary trusts with indeterminate or unknown beneficiary shares, section 164(1) read with Explanation 2 generally mandates taxation at the maximum marginal rate. (b) However, where the trust is a testamentary family trust falling within the exception structure of section 164(3) and the conditions identified by the jurisdictional High Court are satisfied (trust under a Will; only such trust of the testator; identifiable dependent relatives as beneficiaries; assessment as representative assessee under section 160(1)(iv)), the trust is to be treated as an 'individual' and taxed at individual rates. (c) Determination of whether the assessee falls in the exceptional category hinges on factual verification of the Will, the trust deed, identity and dependency of beneficiaries, uniqueness of the trust under the Will, and the actual determinacy of beneficiaries' shares upon examination of the trust instrument, as opposed to mere labels in the return. 2.10 The Tribunal found that no such factual enquiry had yet been carried out by the lower authorities, and the necessary primary documents - full Will and trust deed - had not been examined to test the assessee's claim to the Gujarat High Court line of relief. Conclusions 2.11 The Court held that: (a) The issue of whether the assessee trust is entitled to be assessed in the status of an 'individual' and at individual slab rates, or is liable to tax at the maximum marginal rate under section 164(1), requires detailed factual verification. (b) The matter of taxability under section 164 is to be set aside and restored to the file of the Assessing Officer with directions to verify: * whether the trust was created under a Will; * whether it is the only trust declared by the testator; * whether the beneficiaries are identifiable dependent relatives; * whether the trust satisfies the representative assessee conditions of section 160(1)(iv); and * whether, upon examination of the trust instrument, the shares of the beneficiaries are in fact determinate; and thereafter to determine afresh whether the assessee is to be taxed in the status of an individual in line with the Gujarat High Court decisions or at the maximum marginal rate under section 164(1). (c) The appeal is allowed for statistical purposes, with the issue remanded to the Assessing Officer for fresh adjudication consistent with this framework.