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TMI Blog2014 (5) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of assessing the same in the hands of the trustees as a representative assessee u/s 161, the action of the learned Commissioner (Appeals) in holding that the AO had assessed the income not u/s 56(2)(vi) but as normal income u/s 166 or otherwise and in confirming the addition on the ground that section 56(2) had been inadvertently mentioned by the AO is entirely wrong on facts and in law and the addition made u/s 56(2)(vi) should have been deleted." 3. Brief facts are: The assessee is one of the beneficiaries of a private discretionary trust, known as "Fair Value Trust" ("FVT"), which has been settled way back on 11-12-20000. The trust's income is from dividends, which are exempt in this year under sec 10(34 ). As the nomenclature of the trust suggests, the shares of the beneficiaries are indeterminate and trust income is distributed among the respective beneficiaries at the end of the year as per the discretion of trustees. The said FVT submitted its return of income at Pune, offering the exempt dividend income. As already mentioned the private discretionary trust income is assessed at maximum marginal rate u/s 164 in the hands of the trustees as provided by sec. 164 vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the beneficiary. Therefore, it was held to be in the nature of "income from other sources" in the hands of the assessee in terms of sec. 56(2)(vi). Further, since the trust does not fall within the meaning of the term 'relative' as provided in the explanation thereto, the same was taxed as taxable gift after giving a statutory deduction of Rs. 50,000/-. Thus, the resultant beneficial share amounting to Rs. 99,50,000/- was added and taxed in the hands of the assessee. While doing so ld. AO relied on various judgments mentioned in his order. 3.3. Aggrieved, assessee preferred first appeal before the CIT(A), raising mainly following contentions: (i) The FVT was a discretionary trust in as much the share of individual beneficiaries on whose behalf and for whose benefit the income was receivable were indeterminate and u/s 164(1), the tax was already charged to tax by department at the maximum marginal rate in the hands of the trustees as representing the beneficiaries. Thus the option of taxing the trust income in the hands of trustees stands already exercised by the department. (ii) Apart from exercising the option of directly taxing the income in the hands of FVT, in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The trustees has been already assessed prior to beneficiaries assessment, as evidenced by the aforementioned order of the trust, there is no provision in the Act to review the option by beneficiary's AO, Besides there is no loss to the revenue whether the income was assessed in the hands of the trustees as representative assessees or in the hands of the individual beneficiaries as in both cases same provisions about maximum marginal rate and exemption u/s 10(34) are applicable . The revenue in all the earlier assessment years, has adopted this course of action and exercised the option of assessing the entire trust income in the hands of trustees and allowing claim of exemption of dividend income and direct assessment has been made on the beneficiaries. The exercise of option has been already exercised by department, which cannot be reviewed under any provision of the Act. In the garb of interpretation of sec 164 and 166 which is contrary to CBDT circulars and settled legal position AO has taken a somersault and added the income once again in the hands of assessee. This has resulted in double assessment of the same very income which is wholly illegal, unsustainable and unwarranted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as a gift by the trust to the appellant. This amount was received by the appellant by virtue of her legal right as a beneficiary named in the Trust Deed. It is this very income which has been assessed to tax in the hands of the trustees as representative assessee at maximum marginal rate of tax. There is not a single case law or an authority to support the view that the income received by beneficiary from a trust constituted a Gift. (xiii) Without prejudice, even if the stand of the learned A.O. is accepted that the beneficiaries could be directly assessed is accepted, the dispute still remains only of academic interest. As perusal of statement of accounts of the Fair Value Trust would show the trust had derived only dividend income which was exempt from tax u/s 10(34) which has been distributed among beneficiaries. Even for the sake of argument if this income is again directly sought to be assessed in the hands of the beneficiaries, the same is still covered by exemption u/s 10(34). The income whether assessed in the hands of the trust or beneficiaries, retain the same character as assessable in the hands of the trust. While directly assessing the beneficiaries in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C); and CIT Vs. Dr. Anand Sarabhai Trust (1998) 231 ITR 524 (SC), it was held that these judgments supported the above interpretation. (4) It was a settled law that revenue had a clear option to assess and recover tax either from trustees or from the beneficiaries of a discretionary trust in respect of income which has been distributed and received by the beneficiaries. AO's order was thus upheld by holding that assessing officer had invoked right sections while taxing the beneficial shares in assessee's hands. (5) Thus, AO's application of sec. 56(2) was held to be inadvertent and not tenable. AO's order was upheld qua the applicability of sec. 164 as interpreted by him and the reference to sec. 56(2) was held to be inapplicable. 3.6. Aggrieved, assessee is before us. 4. Ld. Counsel for the assessee vehemently argues that it has not been disputed by department that the FVT has been assessed to tax at Pune prior to the assessment of the assessee. This clearly indicates that the department has already exercised the option u/s 164 of assessing the trust income in the hands of the trust/ trustees at the maximum marginal rate as provided u/s 164. Once that option is exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the same cannot be brought to tax in the hands of other person. 4.4. It is pleaded that AO and CIT(A) both have wrongly applied the decision of Hon'ble Supreme Court in the case of Kamalini Khatau (supra), it rather helps the assessee 's case in as much as it also lays down that such income can be either assessed in the hands of trust or beneficiary, it does not authorize tax from both. It is clear from following observation: "We hold accordingly that the revenue had the option to assess and recover tax from either of the trustees or the beneficiaries of a discretionary trust in respect of such income thereof as has been distributed and received by the beneficiaries". 4.5. Further reliance is placed on: (i) Jyotindera Sinhji vs. S.L. Tripathi & others (1993) 201 ITR 611 (SC), holding that revenue has option to tax income in the hands of either the beneficiaries or trustees. Double taxation of income in the hands of trust and beneficiary is not permissible. (ii) Nagappa (CR) Vs. CIT (1969) 73 ITR 626, holding that there cannot be assessment of the same income once in the hands of the representative assessee and again in the hands of beneficiary. 4.6. It is alternatively su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me when computed either in the hands of the trustees or in the hands of the beneficiary. Such dividend income passed on by the trustees to the beneficiaries will still remain a dividend income in the hands of the beneficiaries if the department opts to directly assess the beneficiaries. Provisions of section 165 indicate that when part only of the income of the trust is chargeable under the Act, the beneficiary's share of income should be taken to be derived proportionately from the chargeable and non chargeable portions of the trust income and should be assessed accordingly. 5. Ld. DR, on the other hand, relied on the order of CIT(A) and further relied upon the ratio of decisions in the cases of Moti Trust Vs. CIT 236 ITR 37(SC); and CIT Vs. Dr. Anand Sarabhai Trust 231 ITR 524 (SC). 6. We have heard rival contentions and perused the material available on record. The fact that the FVT was already assessed by the department at Pune at the maximum marginal rate has not been denied by the ld. DR. Similarly, the assessment in the case of another beneficiary of the same trust Shri Atul Kirloskar having been finalized u/s 143(3) on 1-12-2011 i.e. prior to the assessee's assessment dat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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