In a recent decision, the division bench of the Karnataka High Court ruled that once the shares of the beneficiaries are found to be determinable, the income is to be taxed of that respective sharer or the beneficiaries in the hands of the beneficiary and not in the hands of the Trustees.
While completing assessment against the assesses, 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.
The Tribunal quashed the order and held that the assessee trust cannot be assessed as on AOP even though the requirements of section 164(1) were not met, inasmuch as the shares of the beneficiaries were indeterminate/unknown and hence the assessing officer was justified in invoking the provisions of section 164(1) of the Income Tax Act and make the assessee liable to be assessed at the maximum marginal rate in the status of AOP.
The bench noted the fact that shares were determinable as per the order of the Tribunal, which the final fact finding authority.“Examining the matter in the present case it appears that it is not the case of the Revenue that the findings so recorded is such, which no man with reasonable prudence would arrive at such finding.”
The Revenue contended that on the date of execution of the Trust Deed, the shares should specifically come in existence with the quantification and it need not depend upon the future share of the benefits or upon any future contingency.
Rejecting the contention, the bench said that it is wholly misconceived for the following reasons.Firstly, 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. Secondly, 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 to connect the same with the quantum. “The real test is whether shares are determinable even when even or after the Trust is formed or may be in future when the Trust is in existence. In the facts of the present case, even the assessing authority found that the beneficiaries are to share the benefit as per 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 Income Tax Act.”
Read the full text of the Judgment below.
