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Mrs. Sharon Nayak Versus Deputy Commissioner of Income-tax

2016 (6) TMI 294 - ITAT BANGALORE

Addition as income falling within the purview of Section 56 (2)(vi) - income from other sources - amount received by the assessee from the discretionary trust - Held that:- What was received by the assessee as a beneficiary from the thirteen trusts were nothing but his own income in his status as a beneficiary of the said trust. What has flown from the trustee to the beneficiary is the income the trustee collected on behalf of the beneficiaries. That the character of income in the hands of the b .....

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y takes the same colour as that of the income in the hands of the trust, and once it is accepted that trust as such is not having a persona different or distinct from that of the beneficiary, it naturally flows that such income or receipt is not received without consideration. What is taxable u/s.56(2)(vi) of the Act, is receipt of money without consideration. We are therefore of the opinion that money received by the assessee from various trusts could not have been taxed u/s.56(2)(vi) of the Ac .....

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that the thirteen trusts had filed its return of income voluntarily after paying tax. What was done was only a processing of such return u/s.143(1) of the Act. It is true that the amounts paid to the assessee by various trusts were out of the balances which remained after paying taxes. However, if the assessee feels that taxes paid by the trust were refundable since the taxes were assessed in the hands of the beneficiary, it can move the appropriate authority for getting the relief. - Decided p .....

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h its ground nos.2 to 8, assessee assails addition of ₹ 91,01,821/- considered by the CIT (A) as income falling within the purview of Section 56 (2)(vi) of the Income-tax Act, 1961 ( the Act in short). 03. Chequered history of the case is that the assessee earning salary and professional income had filed his return for the impugned assessment year declaring income of ₹ 91,01,821/- from twelve trusts floated by assessee s employer M/s. Lintas Employees Financial Assistance Trust ( LEF .....

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st should be considered as emanating from her employer-employee relationship with LEFAT. As per the AO, it was on account of employer-employee relationship that the money was received by the assessee from the various trusts floated by LEFAT. He held it to be profits in lieu of salary u/s.17(3) of the Act and brought it to tax. 03. Assessee had moved in appeal before the CIT (A) who upheld the order of AO. CIT (A) also held that in case it was not considered as income taxable u/s.17(3) of the Act .....

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ler of the trusts and the assessee, there was no direct nexus between the payment effected by the trusts to the assessee. Thus as per the Tribunal, the amount received by the assessee would not fall within the meaning of profits in lieu of salary. However with regard to the alternative finding of the CIT (A) that the same would be chargeable u/s.56(2)(vi) of the Act, this Tribunal held that CIT (A) ought have issued a show-cause notice to the assessee and sought her explanation before coming to .....

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st because the trustees could receive contribution from others would not mean that the sum distributed by the trusts to the beneficiaries would fall u/s.56(2)(vi) of the Act. As per the assessee, by virtue of section 161 of the Act, character of income in the hands of the trusts as well as the beneficiaries was always the same. Assessee pointed out that the income earned by the trusts was assessed in the hands of the trust as capital gains and income from other sources. Assessment under income f .....

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placed on the judgments in the following cases : CIT v. Smt. Indramma [ITA No.2785/2005]- Kar.HC CIT v. Trustees of Gargiben Trust Trust and Others [130 ITR 479]- Bom HC Chaturbhuj Ragnavji Trist v. CIT (A) [50 ITR 693]- Bom HC Argument of the assessee was that the trust and beneficiaries were not two different entities and for this reliance was placed on the judgment of Hon ble Supreme Court in the case of CIT v. Managing Trustee, Nagore Dargha [57 ITR 321]. Assessee also relied on circular No .....

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tice u/s.143(2) of the Act, was served on the assessee. 07. CIT (A) after going through the contention of the assessee, relying on his predecessor s order, held that the judgment in the case of Smt. Indramma (supra) of the Hon ble jurisdictional High Court was not applicable on facts. As per the CIT (A), income received by the trustees of various trusts fell within Section 164(1)(iv) of the Act. In his opinion, a discretionary trust had to be considered as Association of Persons for the purpose .....

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of the beneficiary. In so far as pleading of the assessee that tax paid by the trust / fund should be given credit in the hands of the beneficiary employees, CIT (A) was of the opinion that this also could be not accepted since tax due from the assessee was in her own capacity as a separate taxable entity. He thus rejected the contention of the assessee and held that the amount was taxable u/s.56(2)(vi) of the Act. 08. Now before us, Ld. AR strongly assailing the order of CIT (A) submitted that .....

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omething which was belonging to a person could not be considered as a gift or a receipt without consideration. Ld. AR pointed out that the trusts filed return on 31.07.2008 and intimation u/s.143(1) of the Act was issued by the AO on 18.03.2010. As per the Ld. AR, assessee had filed her return for the impugned assessment year on 07.10.2008 and notice u/s.143(2) of the Act was issued on 20.08.2009. Further as per the Ld. AR, trusts had filed their respective returns after paying due taxes on the .....

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submitted that it mattered little as to whether a different AO was assessing the trust and the beneficiary. 09. Continuing his arguments Ld. AR, submitted that a question was raised before the Hon ble jurisdictional High Court in the case of Smt. Indramma (supra), whether an assessment could be considered as passed on an assessee on filing of the return and on issue of intimation u/s.143(1) of the Act, Ld. AR pointed out that the Hon ble jurisdictional High Court had answered this question in t .....

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of the judgment of Hon ble Apex Court in the case of Managing Trustees, Nagore Durgha (supra). Thus as per the Ld. AR, trustee always received income on behalf of the beneficiary and the same income when distributed amongst the beneficiaries could not be taxed in the hands of the latter. 10. For buttressing his stand further. Ld. AR submitted that the AO was very well aware that assessments of the trust stood completed before the assessment was made on the assessee u/s.143(3) of the Act. In any .....

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dgment of Hon ble Apex Court in the case of ITO v. Kewal Ram [60 ITR 74]. Thus according to him, direction given by the CIT (A) to tax the sum u/s.56(2)(vi) of the Act, had to be set aside. 11. Per contra, Ld. DR strongly supporting the order of CIT (A) submitted that reliance placed by the assessee on the judgment of Hon ble jurisdictional High Court in the case of Smt. Indramma (supra) was incorrect. According to him in the said case there was an assessment already done on the trust and it was .....

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ment in the hands of beneficiary invoking jurisdiction vested on him u/s.166 of the Act. Facts of the said case appearing in para 7 of the judgment show that the return of income was filed by the trust on behalf of the assessee, who was the beneficiary, disclosing therein the interest of the beneficiary. The beneficiary had also filed return in the status of an individual for the said period. She had appended a note to such return wherein it was mentioned that the share of the beneficiary income .....

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SION 1. The assessee is a beneficiary in M/s. A.S.K. Bros. Family Trust, No. 44, Race Course Road, Bangalore - 560 001 bestowed with 54/411 share of beneficial interest . The share of beneficial income for the Assessment Year 1992-93 has been excluded from the above computation of Total Income as the said income is assessable in the hands of the Trustee in respect of each of the beneficiary in terms of Sec 161(1) of I.T. Act, 1961. 2. The assessee is 8 beneficiary in M/s. A.S. Chinnaswamy Raju B .....

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prior to the reassessment. That the mere processing of a return on an intimation being sent does not amount to taking opinion. Section 143(1) prohibits taking an opinion and requires the Department to compute the taxes collectable where two opinions are possible: He was of the opinion that the provisions of Section 161 provides only for taxing the income in the hands of the representative assessee whereas Section 166 enabled the assessing officer to assess the beneficiary directly. That the cho .....

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individual returns wherein she has dearly mentioned in the Note which has been submitted along with the return with regard ; ta her beneficial interest. The Revenue contends that the power under Section 166 overrides the provisions of Section 161 in as much as, notwithstanding the return of income being filed under Section 161, the assessing officer in terms of Sect ion 166 can assess either the beneficiary or the Trustee Under these circumstances, the assessment has been reopened. 13. Interpret .....

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icer to reopen the assessment in terms of Section 166 of the Act . The citations relied upon by the Revenue to contend that the assessing officer has the power under Section 166 to assess either the beneficiary or the Trustee does not require any elaboration. The returns have been filed for the year 1992-93 both by the Trustee as well as b) the beneficiary. The assessments have taken place for both the returns. Having accepted the returns filed by making an assessment, the assessing officer cann .....

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int of time. The discretion as envisaged wider Section 166 could have been exercised prior o any assessment by the assessing officer. Having assessed both the returns, the assessing officer is not authorized in law to re-exercise his discretion under section 166. (b) It is to be further noticed that the trustee has filed the returns disclosing the beneficial interest of the beneficiary and the same has been assessed to tax arid tax has been paid thereon. Hence, the beneficial income has been tax .....

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. Consequently, the view taken by the Appellate Authority and the Tribunal is just and proper and in accordance with law. (c) In the returns filed under Section 139(1) by the beneficiary a note was appended to it . In terms of the note as extracted hereinabove at para-11, the beneficiary has clearly stated that the very same income is assessable in the hands of the trustee which forms part of the return filed by the trustee under Section 161(1) of the Act. While processing the returns under Sect .....

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r was well aware of the said disclosure a notice for reassessment would be wholly opposed to law. (d) In view of the various anomalies being brought about with regard to the interpretation of Section 161 and 166 by the assessing officers, the CBDT has issued a Circular No.157, dated 26th December, 1974 which reads as follows:- [2527] Assessment of discretionary trusts u/s. 1641166 of the Income-tax Act, 1961-correct procedure Attention is invited to Board Instruction No. 45/78/66-ITJ(5), dated 2 .....

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have come to the notice of the Board of such double assessment. 2. According to the scheme of the Income-tax Act, 1961, even as it was under the Income-tax Act of 1922, the general principle is to charge al l income only once. The Board desire to reiterate the earlier instructions in this regard. In order that there is no loss of revenue the Income-tax Officer should keep this point in view at the time of raising the initial assessment either of the trust or the beneficiaries and adopt a course .....

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may be beneficial to the Revenue. Having once exercised the option it will not be open to the ITO to assess the same income for the same period in the hands of other persons namely the beneficiary or the Trustee. As stated earlier, having accepted the assessments made by the Trust and the beneficiary, the exercise of discretion as vested under Section 166 of the Act is not available to the assessing officer once again Moreover the sad income has suffered tax by the returns filed by the trustee .....

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esaid reasons the first substantial quest ion of law is answered in favour of the assesee and against the revenue. 13. The second quest ion of law i s as to whether the Tribunal was correct in holding that an order of assessment has been passed when only a return has been submitted and when an intimation under section 143(1) of the Act has been issued. 14. The first difference we note from the facts as available in the assessee s case from that of the judgment in the case of Smt. Indramma is tha .....

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in which beneficiaries income was shown. Copies of the returns filed by the respective trusts floated by LEFAT have been placed before us vide paper book pages 1 to 100. Computation of income in the case of one of the trusts, namely, Lintas Employees Sports Trust, is taken as an example. It gives a detailed computation of the long-term and shortterm capital gains and income from other sources as under : The return filed by the trustees of Lintas Employees Sports Trust, does not disclose the exte .....

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ll prior to intimation u/s.143(1) of the Act was issued to the Trust. As for the argument of the Ld. AR that acknowledgement for filing of return, when there is no issue of notice u/s.143(2) of the Act, could be deemed as an assessment, we are unable to accept. This argument is contrary to the view taken by the Hon ble Apex Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd [291 ITR 500]. It was held by their Lordships that processing of return u/s.143(1) of the Act, was only cler .....

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/s.143(2) of the Act on the assessee, we can definitely say that the option stood exercised by the AO to assess the assessee and not the trust. It was not the case of reopening of assessment in terms of Section 166 of the Act. What the Hon ble jurisdictional High Court had laid down was that AO, once he had exercised an authority to assess either the trustee or the beneficiary, the same discretion could not be available, once exercised. 16. That Revenue has an option to assess and recover the ta .....

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earing on these appeals. In C. R. Nagappa v. CIT [1969] 73 ITR 626 (SC), the assessee had executed several trust deeds settling specific properties for the benefit of his minor children. Under each deed he had settled certain properties for the benefit of a named minor child and had vested the properties in four trustees, namely, himself, his two wives and a married daughter. Under each of the trust deeds a portion of the income was to be utilised immediately for the benefit of the beneficiary a .....

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ax Officer could assess a representative assessee as regards the income in respect of which he was a representative assessee, but he was not bound to do so. He could assess either the representative assessee or the person represented by him, and this was expressly so enacted in section 166. The Income-tax Officer could assess the person represented in respect of the income of the trust property and the appropriate provisions of the Act relating to the computation of his total income and the mann .....

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under section 161(1), that income could not by virtue of section 161(2) be assessed in the hands of the beneficiaries was contrary to the plain terms of section 166. Section 161(2) did not purport to deny the Income-tax Officer the option of assessing the income in the hands of the person represented by the representative assessee. It merely enacted that when a representative assessee was assessed to tax in the exercise of the option of the Revenue, he could be assessed only under the provision .....

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) : " . . . . it is clear that every case of an assessment against a trustee must fall under section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III. . . . Section 41 only comes into play after the income has been computed in accordance with Chapter III. Then the question of payment of tax arises and it is at that stage that section 41 issues a mandate to the taxing Department that, when they are d .....

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athi [1993] 201 ITR 611 (SC), a Bench of two learned judges of this court founded their judgment principally upon C. R. Nagappa's case [1969] 73 ITR 626 (SC) and concluded that by virtue of section 166 the Revenue had an option in the case of the income of a discretionary trust either to make an assessment upon the trustees or to make an assessment upon the beneficiaries. In CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 (SC), this court was dealin .....

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whose behalf the assets are held. . . . Sub-section (2) stated that nothing contained in sub-section (1) would prevent either the direct assessment of the person on whose behalf the assets were held or recovery from him of the tax payable in respect thereof. This was a case in which the late Nizam of Hyderabad had created several trusts. For the purposes of the judgment it was sufficient that the provisions of what was called "the family trust" were referred to. By the trust deed, the .....

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atter reached the High Court upon a reference by the Income-tax Appellate Tribunal and thereafter this court. The question that was considered was whether assessment could be made on the trustees under section 3 apart from and without reference to section 21. The answer was seen to depend upon the true meaning and effect of sections 3 and 21 and the interrelation between them. Section 3 was the charging section and it levied the charge of wealth-tax on the net wealth of the assessee on the relev .....

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on date would be includible in the net wealth of the assessee assessable to wealth-tax. An argument was advanced on behalf of the trustees that assets held by a trustee in trust for others could not be said to be assets "belonging to" the trustee so as to be included in his net wealth. The assets so held were not the trustee's property in any real sense. They were the property of the beneficiaries and the beneficiaries were the true owners. The trustee could not, therefore, be asse .....

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e which left no room for doubt. For this purpose, it was assumed that the trustee of a trust could be assessable in respect of the trust properties under section 3 even in the absence of section 21. But section 3 imposed the charge of wealth-tax subject to the other provisions of the Act and these other provisions included section 21. Section 3 was, therefore, made expressly subject to section 21 and had to yield to that section in so far as the latter made special provision for the assessment o .....

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the provisions of section 21, would be to refuse to give effect to the words "subject to the other provisions of this Act in section 3", to ignore the maxim "generalia specialibus non derogant" and to deny mandatory force and effect to the provisions of section 21. The court noted that in C. R. Nagappa's case [1969] 73 ITR 626, the observations of Chagla C. J., quoted above had been approved and the court went on to state that the same consideration must apply in the int .....

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espect of the trust properties held by a trustee, wealth-tax could be levied upon him in the like manner and to the same extent as it would be leviable on the beneficiary for whose benefit the trust properties were held. This provision could apply only where the trust properties were held by the trustee for the benefit of a single beneficiary or, where there were more beneficiaries than one, the individual shares of the beneficiaries in the trust properties were determinate and known. Where such .....

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trust properties which belonged to him. The beneficiary would always be assessable in respect of his interest in the trust properties, since such interest belonged to him and the right of the Revenue to make direct assessment on him in respect of such interest stood unimpaired by the provisions enabling assessment to be made on the trustee in a representative capacity. Sub-section (2) made this clear. What was important to note was that in either case what was taxed was the interest of the benef .....

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the beneficiaries for whose benefit the trust properties were held were an individual. The beneficial interest was treated as if it belonged to one individual beneficiary and assessment was made on the trustee in the same manner and to the same extent as it would be made on such fictional beneficiary. In this case too it was the beneficial interest which was assessed to wealth-tax in the hands of the trustee. It may be added that this court in the case of CWT v. Kirpashankar Dayashanker Worah [ .....

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he order of the CIT (A) that the AO had the power to assess the assessee on the amounts received by him from the trust as a beneficiary therein. 18. Now the question that remains to be answered is whether the amount received by the assessee from the discretionary trust could be considered as his income u/s.56(2)(vi) of the Act. Section 56(2)(vi) of the Act, is reproduced hereunder : 56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following i .....

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hat this clause shall not apply to any sum of money received (a) from any relative ; or(b) on the occasion of the marriage of the individual ; or(c) under a will or by way of inheritance ; or(d) in contemplation of death of the payer ; or(e) from any local authority as defined in the Explanation to clause (20) of section 10 ; or(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause .....

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spouse of the person referred to in clauses (ii) to (vi). 19. For bringing a sum of money to be taxable under the above section, it is required that the money should have been received by an assessee without consideration. The question before us is whether the money received by the assessee from thirteen trusts as a beneficiary could be considered as amounts received without consideration. In a trust, whether discretionary or otherwise, the trustees hold the property and income for the benefit o .....

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s does not mean that they are the owners of the income. At this juncture, the judgment of Hon ble Apex Court in the case of Managing Trustees, Natore Dargha (supra), is very pertinent. Their Lordships held as under at page 234 of their judgment : In general law the property does not vest in a receiver or manager but it vests in a trustee, but both trustees and receivers are included in section 41 of the Act. The common thread that posses through all of them is that they function legally or factu .....

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e deemed to receive the income on behalf of another person or persons or manage the some for him or their benefit. None of them has any beneficial interest in the income; he collects the income for the benefits of others, 20. Thus what was received by the assessee as a beneficiary from the thirteen trusts were nothing but his own income in his status as a beneficiary of the said trust. What has flown from the trustee to the beneficiary is the income the trustee collected on behalf of the benefic .....

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f the beneficiary takes the same colour as that of the income in the hands of the trust, and once it is accepted that trust as such is not having a persona different or distinct from that of the beneficiary, it naturally flows that such income or receipt is not received without consideration. What is taxable u/s.56(2)(vi) of the Act, is receipt of money without consideration. We are therefore of the opinion that money received by the assessee from various trusts could not have been taxed u/s.56( .....

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