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2017 (2) TMI 722 - KARNATAKA HIGH COURT

2017 (2) TMI 722 - KARNATAKA HIGH COURT - TMI - Applicability of provisions of Sec.164(1) - whether the assessee trust cannot be assessed as on AOP? - ITAT held that the assessee trust cannot be assessed as on AOP even though the requirements of section 164(1) were not met - Held that:- By no interpretative process the explanation to Section 164 of the Act, which is pressed in service can be read for determinability of the shares of the beneficiary with the quantum on the date when the Trust dee .....

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er their investment made or to say in other words, in proportion to the investment made. Once the benefits are to be shared by the beneficiaries in proportion to the investment made, any person with reasonable prudence would reach to the conclusion that the shares are determinable. Once the shares are determinable amongst the beneficiaries, it would meet with the requirement of the law, to come out from the applicability of Section 164 of the Act. - Under the circumstances, we cannot accept .....

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of the Trustees which has already been shown in the present case. - Decided in favour of the assessee. - ITA NO.191/2015 C/W ITA NOS.446/2015, 447/2015, 448/2015, 449/2015 & 450/2015 - Dated:- 1-2-2017 - MR. JAYANT PATEL AND MR. A N VENUGOPALA GOWDA APPELLANTS (BY SRI. K.V. ARAVIND, ADVOCATE) RESPONDENT: (BY SRI.JEHANGIR MISTRI, SR. COUNSEL FOR SMT.VANI H, ADVOCATE) ORDER JAYANT PATEL J., All the appeals are preferred by the Revenue raising various questions, but in our view the only one common .....

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be assessed at the maximum marginal rate in the status of AOP. Hence it is not relevant whether the necessary ingredients for formation of an AOP are fulfilled by the assessee or not? 2. We may also record that the other questions are mainly dependent upon the answer to the above referred question and if the answer is in negative, then only the other questions may arise. Hence, we may refer to the said aspects at the later stage. 3. We have heard Mr. K.V.Aravind, learned Counsel appearing for t .....

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ax under the Income Tax Act, (hereinafter referred to as the Act for the sake of brevity). However, when the questions arose for assessment of the respective Trust, the Assessing Officer found that, as the shares of the beneficiaries are non-determinable, income needs to be taxed in the hands of the Trustees at the maximum marginal rate and accordingly the assessment orders were issued. 5. The matters were carried in appeal before the CIT (Appeals) and the CIT (Appeals) found that the shares wer .....

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f the AO is based on the applicability of the provisions of Sec.164(1) of the Act, we deem it appropriate to adjudicate on the issues raised in ground No.4 to 7 as well. The provisions of Sec. 164(1) of the Act and Expln.-1 to Sec.164 are relevant in this regard. Sec.164(1) lays down that where any income or any part thereof in respect of which the persons mentioned in cl.(iv) of sub-section(1) of Section 160 is liable as representative assesee or any part thereof (i) is not specifically receiva .....

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nation 1 to Sec.164 lays down that any income or part thereof to which Section 164(1) applies shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or dee .....

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al rule as laid down in Sec. 161(1) is that income received by a trustee on behalf of the beneficiary shall be assessed in the hands of the trustee as representative assessee and such assessment shall be made and the tax thereon shall be levied upon and be recovered from the representative assessee "in like manner and to the same extent as it would be leviable upon the recoverable from the person represented by him". To the above rule, however, three exceptions have been incorporated i .....

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on whose behalf and for whose benefit the income is receivable are indeterminate or unknown, such income, again, will be taxed at the "maximum marginal rate". (c) In certain other circumstances, set out in the proviso to s.164(1), the relevant income will be assessable not at the maximum rate but at the rate applicable to it as if it were the total income of an AOP. 62. In the present case the AO has not invoked the provisions of Sec.161(1A) of the Act or the proviso to Sec.164(1) of .....

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share of the beneficiaries. 64. On the aspect of identification of the beneficiaries, it is the plea of the learned counsel for the Assessee that so long as the trust deed gives the details of the beneficiaries and the description of the person who is to be benefited, the beneficiaries cannot be said to be uncertain. CBDT Circular No.281 dated 22.9.1980 wherein the CBDT has explained the scope of Sec.164 with regard to stating the name of the beneficiaries in the trust deed. In the said circular .....

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rder, instrument or deed. We find that Clause 1.1.13 of the Trust Deed clearly lays down that beneficiaries means the Persons, each of whom have made or agreed to make contributions to the Trust in accordance with the Contribution Agreement. We are of the view that the above clause is sufficient to identify the beneficiaries. 65. On the aspect of ascertainment of share of the beneficiaries, we find that Article 6.5 of the Trust Deed clearly specifies the manner in which the income of the Assesse .....

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ficiary and are bound by the provisions of the trust deed and is duty bound to follow the distribution mechanism specified in the trust deed. The further aspect that may require consideration in the present case is with regard to the clause in the Trust Deed which authorises addition of further contributors to the trust at different points of time in addition to initial contributors. From this clause can it be said that share income of the beneficiaries cannot be determined or known from the tru .....

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The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. Even if the Trust deed authorises addition of further contributors to the trust at different points of time, in addition to initial contributors, than the same would not make the beneficiaries unknown .....

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nilal Bapalal (supra) has taken a view that identity by reference to the terms of the trust deed is sufficient and it is not necessary that the beneficiaries should be specifically named in the deed of trust. Consequently Grounds 4 to 7 raised by the Revenue are held to be without merit." and ultimately the Tribunal found that the grounds raised by the Revenue on the non-ascertainability of the shares of the beneficiaries and consequently the chargeability of the income in the hands of the .....

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eed of trust etc. Such finding of fact can be arrived at after interpretation of the terms and conditions of the Trust Deed as well as the other facts and circumstances which may be germane to reach the conclusion on the finding of fact. If the matter is to rest on the question of finding of fact, in our view, such question of finding of fact would be outside the scope of judicial review in the present appeals which would be limited to substantial questions of law. 7. However, the learned Counse .....

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es of the beneficiaries would result into non- determinable shares. He submitted that the Tribunal has not properly examined the matter and such finding of fact by the Tribunal could be said as perverse. 8. In our view, it is by now well settled that the perversity can be tested in two ways. One, if any finding of fact is not supported by record and is on some hypothesis or surmises. The second test is, that the finding arrived at which any person with reasonable prudence may not record. Then it .....

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ncy. 10. In our view, the contention is wholly misconceived for three reasons. One is that by no interpretative process the explanation to Section 164 of the Act, which is pressed in service can be read for determinability of the shares of the beneficiary with the quantum on the date when the Trust deed is executed and the second reason is that the real test is the determinability of the shares of the beneficiary and is not dependent upon the date on which the trust deed was executed if one is t .....

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