Are voluntary contributions received by private discretionary trust taxable income? Madras High Court answers

Under dispute was the taxability of a sum of Rs 25 crores pooled into a trust meant to dole out retiral benefits to the senior officials of six companies of the same group.
Are voluntary contributions received by private discretionary trust taxable income? Madras High Court answers
Justices TS Sivagnanam and Bhavani Subbaroyan

The Madras High Court recently ruled that a private discretionary trust, being a representative assessee of identified beneficiaries, is liable to be treated as an individual for the purpose of taxation (The Commissioner of Income tax v. Shriram Ownership Trust).

Among other findings, the Court also emphasised that when the assessee does not challenge a tribunal ruling in appeal, he is not entitled to call on the High Court to frame additional questions of law by invoking Section 260A (4) of the Income Tax Act.

It may be noted that Section 260A (4) lays down that an appeal before a High Court shall be heard only on the questions formulated by the Court.

The proviso to this sub-clause, however, clarifies this would not take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

Declining to delve into submissions made by the respondent-assessee to examine an additional substantial question of law that concerned jurisdiction, the Bench of Justices TS Sivagnanam and Bhavani Subbaroyan explained:

"The assessee having not filed an appeal as against the findings rendered by the Tribunal on the issue of jurisdiction and procedural aspects followed by the Assessing Officer, he cannot stated to be an aggrieved person over such finding in the absence of an appeal at their instance under sub-section (2) of Section 260A of the Act. Unless and until the aggrieved person is before the Court by way of an appeal, the question of calling upon the Court to frame an additional substantial question of law by invoking its power under sub-section (4) of Section 260A of the Act does not arise ... The underlying principle being that the revenue cannot be worse of in their appeal at the instance of the assessee who has not filed an appeal over such finding of the Tribunal."
"... the revenue cannot be worse of in their appeal at the instance of the assessee who has not filed an appeal over such finding of the Tribunal."
Madras High Court

Senior standing counsel R Hemalatha, along with senior standing counsel T Ravikumar appeared for the revenue (appellant), whereas, advocate R Sivaraman appeared for Shriram Ownership Trust/assesee (respondent).

Factual background

The income tax returns filed for the year 2014-15 by the Shriram Ownership Trust (assessee) came into dispute when a sum of Rs 25 crores that it termed as "addition to corpus" was held to be taxable “income from other sources” under Section 56 (2) (vii) of the Income Tax Act by the tax authorities.

The assessee was a private discretionary trust set up to allocate retirement benefits to senior employees from the Shriram group of companies. The Rs 25 crores in question was pooled in from six Shriram group companies.

The assessee asserted that these were voluntary contributions made to the trust, which was an Association of Persons within the meaning of the Explanation to Section 2(31) of the Income Tax Act. As such, they could not be taxed as an individual. Therefore, it was contended this amount could not be taxed under Section 56 (2), which was only applicable to individuals and Hindu Undivided Families (HUF).

Both the Joint Commissioner of Income Tax (JCIT) and the Commissioner of Income Tax (CIT) disagreed and treated the Rs 25 crores as income from other sources, recommending that the amount be taxed accordingly. On appeal, the ITAT reversed these findings and ruled in the assessee's favour, prompting the Revenue authorities to move the Madras High Court in appeal.

Assessee adopted ingenious method to circumvent Income Tax Act: Court

The High Court ultimately allowed the revenue's appeal in so far as the taxability of the Rs 25 crores as "income from other sources" was concerned. The Bench observed:

"The authority on examining the factual position found that the assessee has adopted a ingenious method for the purpose of circumventing the provisions of the Act by accepting the gift on behalf of the individuals thereby acting as a conduit . Unfortunately, the Tribunal did not examine this aspect of the matter but proceeded on a different footing which we decline to approve

On a perusal of the facts and the material on record, the Bench proceeded to opine that it has no hesitation to hold that the assessee was rightly assessed as an “individual” by the Assessing Officer, as affirmed by the CIT, which was erroneously reversed by the Tribunal. Affirming the findings of the JCIT and the CIT, the High Court's judgment said:

"... the assessee Trust is a representative assessee as it represents the beneficiaries who are identified individuals and therefore to be assessed as an 'individual' only. Consequently, the contribution of Rs.25 Crores is to be assessed as income under Section 56(1) under the head 'income from other sources'."

In this regard, the Bench reasoned:

  • Section 161(1) of the Act states that every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received in favour of him beneficially. The representative assessee shall be liable to assessment in his own name in respect of that income.

  • Such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in Chapter XV of the Act, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.

  • The assessee, in this case, has received the Rs 25 crores on behalf of the beneficiaries who have been identified. If that is so, then the assessee is a representative assessee as defined under Section 160(1)(iv) of the Act and the benefit is derived by the assessee on behalf of the beneficiaries and to be taxed as an “individual”.

  • The assessee in the instant case or the trustees are only the representatives of the beneficiaries and the income is required to be taxed in the like manner and to the same extent as it would be in respect of beneficiaries.

  • The argument that the beneficiaries are not known cannot be accepted because the Deed of Trust, as well as the Supplemental Deed, would show that the beneficiaries are top-level executives of the Shriram Group of Companies who will be extended financial benefits on attaining the age of 60 years and the set of persons who would be benefited have also been mentioned in the annexures.

  • The assessee in the instant case, having received the money on behalf of its beneficiaries, should be treated as a representative of those beneficiaries and therefore, has to be assessed as an “individual”.

  • To become an Association of persons, as opposed to an individual, persons have to be joined together for a common purpose. In this case, the assessee-trustees have not joined in for a common purpose. They became trustees having been appointed under a Deed of Trust/Supplementary Deed. Therefore, the assessee cannot contend that they have joined together in common for purpose of carrying on an activity. As such, the trust is liable to be treated as an individual.

The Court, however, ruled in the assessee's favour on the question of "whether the Tribunal was right in holding that the investment which yielded no exempt income was to be excluded while computing deduction under Section 14A when the Act as well as the Rules do not provide for any such exception?"

The Bench found that this question has already been answered in the assessee's favour in view of earlier rulings including M/s.Marg Limited, Pragathi Krishna Gramin Bank vs. JCIT, ACIT, Circle 17(1), New Delhi vs. Vireet Investment (P) Ltd. etc.

[Read judgment]

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