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2025 (5) TMI 687 - AT - Income TaxFamily 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.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this matter are: - Whether a discretionary family trust created by WILL is liable to be taxed at the Maximum Marginal Rate (MMR) under Section 143(1)(b) of the Income Tax Act, 1961, when the trust's income shares among beneficiaries are indeterminate or unknown. - Whether the proviso to Section 164(1) of the Income Tax Act exempts such a trust from being taxed at MMR and instead mandates taxation at normal slab rates applicable to an Association of Persons (AOP). - Whether the provisions of Section 167B, which impose MMR on AOPs with unknown shares of members, apply to trusts created by WILL that are the only trust declared by the settlor. - Whether the Addl./Joint Commissioner of Income Tax (Appeals) erred in upholding the levy of tax at MMR by the CPC in the intimation under Section 143(1) of the Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Maximum Marginal Rate (MMR) of Tax to a Discretionary Trust Created by WILL Relevant Legal Framework and Precedents: Section 164(1) of the Income Tax Act provides that where income is received by a representative assessee on behalf of beneficiaries whose shares are unknown or indeterminate, 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 settlor, which are to be taxed as if their income were that of an AOP at normal slab rates. Section 167B addresses taxation of AOPs with unknown shares and generally mandates MMR, but the CBDT Circular No.577 dated 04.09.1990 clarifies that Section 167B does not apply to trusts declared by WILL where such trust is the only trust declared by the settlor, and that such trusts are to be taxed under the proviso to Section 164(1). The ITAT, Ahmedabad in the case of Rajnikant Gulabdas Sheth Family Trust 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 noted that the assessee trust is a discretionary family trust created by WILL and is the only trust declared by the settlor. The Tribunal emphasized the significance of the proviso to Section 164(1), which exempts such trusts from MMR taxation and mandates taxation at rates applicable to AOPs. The Tribunal further relied on the CBDT Circular clarifying that the general provision under Section 167B does not override the special provision under Section 164(1) proviso. The Tribunal observed that the Addl./JCIT(A) erred in treating the applicability of MMR as undisputed and failed to address the assessee's specific grievance. Key Evidence and Findings: The assessee's return declared income of Rs. 1,04,610/- and applied slab rates for AOPs, resulting in no tax payable. The CPC, however, applied MMR and raised tax demand of Rs. 32,638/-. The assessee's appeal before the Addl./JCIT(A) was dismissed without addressing the core issue of MMR applicability. Application of Law to Facts: The Tribunal applied the proviso to Section 164(1) and the CBDT Circular to conclude that the trust should be taxed at normal slab rates applicable to AOPs, not at MMR. The CPC's adjustment was thus contrary to law. Treatment of Competing Arguments: The Revenue's representative conceded that the Addl./JCIT(A) did not adjudicate the issue properly and did not dispute the legal position or the precedent cited by the assessee. No valid distinction was offered against the case law relied upon. Conclusion: Taxation of the assessee trust at MMR was illegal and contrary to the statutory proviso and CBDT Circular. The trust's income is to be taxed at normal slab rates applicable to AOPs. Issue 2: Applicability of Section 167B to Trusts Declared by WILL Relevant Legal Framework and Precedents: Section 167B imposes MMR on AOPs with unknown shares. However, the CBDT Circular No.577 clarifies that Section 167B does not apply to trusts declared by WILL that are the only trust declared by the settlor, as these are governed by the proviso to Section 164(1). Court's Interpretation and Reasoning: The Tribunal accepted the CBDT Circular's authoritative clarification that the general provision under Section 167B is overridden by the special provision in Section 164(1) proviso for trusts created by WILL. The Tribunal held that the CPC's application of Section 167B leading to MMR taxation was erroneous. Key Evidence and Findings: The circular explicitly states that trusts declared by WILL where such trust is the only trust declared by the settlor are not to be taxed at MMR under Section 167B but at normal rates applicable to AOPs. Application of Law to Facts: Since the assessee trust falls within the category described in the circular and proviso, Section 167B's MMR taxation does not apply. Treatment of Competing Arguments: The Revenue did not dispute this position and conceded the point. Conclusion: Section 167B is not applicable to the assessee trust; hence, MMR tax under this section is not leviable. Issue 3: Correctness of the Addl./JCIT(A) Order Relevant Legal Framework and Precedents: The Addl./JCIT(A) upheld the CPC's levy of tax at MMR but did so by mischaracterizing the issue. The Tribunal referred to the precedent ITAT decision in Rajnikant Gulabdas Sheth Family Trust, which held that trusts qualifying under the proviso to Section 164(1) are taxable at normal rates. Court's Interpretation and Reasoning: The Tribunal observed that the Addl./JCIT(A) failed to appreciate the assessee's contention that the trust is the only discretionary trust under the WILL, which exempts it from MMR. The Addl./JCIT(A) wrongly treated the issue as undisputed and proceeded to decide on surcharge applicability instead. Key Evidence and Findings: The Tribunal found that the Addl./JCIT(A) did not address the main grievance and erred in law by upholding the CPC's adjustment. Application of Law to Facts: The Tribunal set aside the Addl./JCIT(A) order to the extent it upheld MMR taxation and directed deletion of the tax demand raised by CPC. Treatment of Competing Arguments: The Revenue accepted the error in the Addl./JCIT(A) order but did not challenge the Tribunal's legal position. Conclusion: The Addl./JCIT(A) order is set aside on the issue of MMR taxation. 3. SIGNIFICANT HOLDINGS "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." "There was never an intention to subject the income of the aforesaid trusts to income-tax at the maximum marginal rate. It is also well-settled that where a specific provision has been made in the law in relation to any matter and where that provision is beneficial to the taxpayer, that matter is to be governed by that special provision and not by any other general provision relating to that subject." (CBDT Circular No.577 dated 04.09.1990) "On the plain reading of the aforesaid provisions of the Act, we are of the view that the AAC was fully justified in holding that by virtue of proviso (ii) to section 164(1) the assessee would be required to be taxed at normal rate." (ITAT, Ahmedabad in Rajnikant Gulabdas Sheth Family Trust) The Tribunal held that the CPC's adjustment levying tax at MMR was "not in accordance with law" and directed deletion of the demand raised.
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