2018 (4) TMI 1831 - AT - Income Tax

Assessment of trust - Assessment in hands of the beneficiaries - Whether income from deposit was not correctly admitted in the hands of the beneficiaries or not admitted, it has to be assessed in the hands of the assessee trust? - HELD THAT - Observation of the AO in the show cause notice that the intention of the ITAT is to grant relief only in respect of interest income which is offered for taxation by the beneficiaries is not correct. This Tribunal is of the considered opinion that the intention of the ITAT in the order 2017 (6) TMI 1331 - ITAT CHENNAI is in respect of the entire income received from various sources and distributed to investors has to be taxed as such in the hands of the beneficiaries, therefore, there is no need for any exclusion in respect of the income admitted by the beneficiaries or not admitted by the beneficiaries. Since the details of the income and expenditure is not available in the Profit Loss account or in the document filed before this Tribunal, this Tribunal remitted back the matter to the file of the Assessing Officer for a limited verification to collect information from beneficiaries and allow pass through status in the hands of the assessee. AO misunderstood the direction of the Tribunal by picking up same words here and there. Hence, this Tribunal is of the considered opinion that the Assessing Officer is not correct in saying that in case the income is not admitted / incorrectly admitted, it has to be assessed in the hands of the assessee. This Tribunal is of the considered opinion that whether the income is admitted by the respective beneficiaries or not, since pass through status was given to the assessee-Fund, the entire income has to be assessed only in the hands of the beneficiaries and not in the hands of the trust / Fund. The order of this Tribunal is modified / clarified accordingly.

Summary

Issues:
1. Interpretation of provisions of Section 10(23FB) and Section 115U of the Income-tax Act, 1961.
2. Assessment of interest income in the hands of beneficiaries or the assessee-Fund.
3. Misunderstanding by the Assessing Officer regarding the Tribunal's order.
4. Clarification on the pass-through status of the assessee-Fund for interest income.

Analysis:
1. The Tribunal analyzed the provisions of Section 10(23FB) and Section 115U of the Income-tax Act, 1961, to determine the tax treatment of income from venture capital undertakings. It was established that the income received by investors from such undertakings is exempt from taxation, and the income in the hands of the investor is to be treated as if it were directly earned from the venture capital undertaking.

2. The main issue revolved around the assessment of interest income in the hands of beneficiaries or the assessee-Fund. The Tribunal clarified that since the assessee was a determinate trust, the interest income should be directly assessed in the hands of the beneficiaries and not in the hands of the Fund. The Tribunal emphasized that the Fund acted as a pass-through vehicle, and tax liability should only be with the respective beneficiaries.

3. The Assessing Officer's misunderstanding of the Tribunal's order led to a show cause notice being issued to assess the interest income in the hands of the Fund. The Tribunal pointed out that the Assessing Officer misinterpreted the Tribunal's direction and clarified that the entire income should be assessed only in the hands of the beneficiaries, irrespective of whether the income was admitted by them or not.

4. The Tribunal provided clarification on the pass-through status of the assessee-Fund for interest income. It emphasized that the Fund should act as a pass-through vehicle, and the entire income, including interest income, should be assessed in the hands of the beneficiaries. The Tribunal modified and clarified its order to ensure that the Assessing Officer understood the correct tax treatment of the income.

In conclusion, the Tribunal allowed both Miscellaneous Petitions filed by the assessee, emphasizing the correct interpretation of the provisions of the Income-tax Act and ensuring that the interest income is assessed in the hands of the beneficiaries in line with the pass-through status of the Fund.