Case Law Details
IN THE ITAT MUMBAI BENCH ‘A’
Ashok C. Pratap
V/s.
Additional Commissioner of Income-tax
IT Appeal NO. 4615 (MUM.) OF 2011
[ASSESSMENT YEAR 2007-08]
Date of Pronouncement – 18.07.2012
ORDER
I.P. Bansal, Judicial Member
The present appeal preferred by the assessee, is directed against the impugned order dated 15th March 2011, passed by the learned Commissioner (Appeals)-III, Mumbai, for assessment year 2007-08, on the following grounds:-
“Addition u/s 56[1] and 56[2][vi] on account of receipts from dissolution of Sant Trust:
1.1 The Learned Commissioner of Income Tax [Appeals] misdirected herself in law and on facts in construing the provision of Sant Trust, settled by Mrs Vinodini C Pratap, mother of the Appellant.
1.2 The Learned Commissioner of Income Tax [Appeals] misdirected herself in law and on facts in construing the provisions of The Indian Trusts Act.
1.3 The Learned Commissioner of Income Tax [Appeals] erred in law and on facts in holding that the amount received by the Appellant constitute income in the hands of the Appellant and applying the provisions of Section 2[24][iva] read with provisions of Section 56[1] and 56[2][vi] of the Income Tax Act, 1961.
1.4 Without prejudice, the Learned Commissioner of Income Tax [Appeals] failed to appreciate that the Author, Trustees and Beneficiaries of the Trust are related to each other and if the Appellant has received money from them the same cannot constitute income u/s 56 [2][vi], as it is covered by the exemption clause.
2. The Learned Commissioner of Income Tax [Appeals] has erred in treating a sum of Rs. 10,417, on account of expenditure on legal and Technical books, as capital expenditure instead of treating it as a revenue expenditure.
3. The Learned Additional Commissioner of Income Tax [Appeals] has erred in disallowing expenses of Rs. 3,52,493 u/s 14A, without appreciation that no expenditure was incurred by the Appellant for earning exempt income.
2. The assessee, in the present case, is a Barrister and practices law. He is a proprietor of Ashok Pratap & Co., Barristers and Advocates, and has filed his return of income at Rs. 3,92,04,185, which has been assessed at an income of Rs. 5,31,87,920, by assessment order dated 30th December 2009, passed under section 143(3)(ii) of the Income Tax Act, 1961 (for short “the Act”).
3. The main issue raised in this appeal is regarding addition of Rs. 1,36,00. 595, made on account of a trust dissolution proceedings which are added to the income of the assessee by applying the provisions of section 2(24)(iv)(a) r/w provisions of sections 56(1) and 56(2)(vi) of the Act.
4. The other issues which are raised in ground no. 2, have not been pressed by the learned Counsel for the assessee and, consequently, the same are dismissed as “not pressed”.
5. With respect to ground no. 3, it was the submissions of the learned Counsel for the assessee that it relates to disallowance made under section 14A of the Act, which has been computed with reference to rule 8D, which is not applicable to the year under consideration and, therefore, this issue has to be restored to the file of Assessing Officer with a direction to re-compute the same in accordance with the judgment of Hon’ble Jurisdictional High Court rendered in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 328 ITR 081 (Bom.).
6. After hearing both the parties, we restore this issue to the file of the Assessing Officer and direct him to re-compute the disallowance under section 14A, in accordance with the judgment of Hon’ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. (supra). Consequently, this ground is allowed for statistical purposes.
7. We now left with the main issue which is expressed in ground no. 1. It is necessary to narrate few facts to understand the issue.
8. The Assessing Officer has discussed this issue in Para-6 of his order. A private Trust namely “Sant Trust” was created by Mrs. Vinodini C. Pratap, mother of the assessee by trust deed dated 19th January 1978. The trustees of the said trust were the assessee and his wife namely Mrs. Sandhya A. Pratap, and the beneficiaries were two daughters of the assessee namely Ms. Natasha and Ms. Tanya, being grand-daughters of the settler. By letter dated 15th January 2001, the assessee and his wife were added as beneficiaries to the said trust and, thus, they became additional beneficiaries of the said trust.
9. Further, on 30th March 2001, two daughters of the assessee namely Ms. Natasha and Ms. Tanya, both being major, signed the document of release of Sant Trust by relinquishing their rights, title, interest, share and benefits in and from the property and assets of the said trust. Therefore, the said trust was dissolved as per the deed of dissolution dated 27th February 2007, and the assets were equally distributed between the two remaining beneficiaries i.e., the assessee and his wife Mrs. Sandhya A. Pratap.
10. It is the case of the Assessing Officer that though the amount has been received by the assessee being beneficiaries at the time of dissolution of the trust but still that amount retains the character of income, as envisaged in section 2(24)(iva) of the Act, because the assessee cannot act in dual capacity. According to the Assessing Officer, if the assessee claims to be a trustee, his status will remain always as of trustee and if the assessee claims to be one of the beneficiaries, he has no right to dissolve the trust. The Assessing Officer also noticed that the trust of the assessee was never registered under section 12AA of the Act.
11. On the aforementioned facts, the Assessing Officer applied the provisions of section 77(b) of the Indian Trust Act, and added a sum of Rs. 1,36,00,595, to the total income of the assessee.
12. The aforementioned action of the Assessing Officer was challenged before the learned Commissioner (Appeals) by raising various issues and quoting various provisions of the Indian Trust Act as well as the judicial pronouncements on the issue. The learned Commissioner (Appeals), after considering various provisions and case laws, has recorded her conclusion in Para-2.1.7, by making reference to sections 4, 11, 58 and 77 of the Indian Trust Act. She held that the two daughters of the assessee having became major and being beneficiaries, were entitled to modify the terms of the trust and such action is permitted in the Indian Trust Act. Referring to section 58, which regulates the right to transfer beneficial interest, the learned Commissioner (Appeals) found that it did not prohibit the action of the original two beneficiaries. By their first action, the original beneficiaries diluted their beneficiary rights from the said trust and requested for the trust to be made a discretionary trust. Section 11 of the Indian Trust Act which empowers the trustee to execute the trust. The trustees were bound to act in consonance with the consent of all the beneficiaries. The original two beneficiaries, by their action on 30th March 2001, had completely relinquished their rights, title, interest, share and benefits in to and from the property and assets of the said trust including accumulated income. She further observed that though in the letter of relinquishment, which is named as release of Sant Trust, it is not stated but in effect the said relinquishment has resulted in the trust receiving the entire rights, title, interest, share and benefits in to and from the property and assets of the said trust including accumulated income of the original two beneficiaries. She observed that neither there is specific transfer nor gift by Ms. Natasha and Ms. Tanya, to their parents. The modification in the terms of contract by consent of all the beneficiaries is in accordance with the provisions of Indian Trust Act and according to the various rulings of the Courts. It is on these grounds, the learned Commissioner (Appeals) has observed that the reasons enumerated in the body of the order passed by the Assessing Officer, cannot be accepted that the trust was unlawful within the provisions of section 77(b) of the Indian Trust Act, and in this manner, the learned Commissioner (Appeals) has upheld the validity of the Trust. She also observed that the Assessing Officer was wrong in observing that the assessee cannot act in dual capacity, as, according to the provisions of the Indian Trust Act, the assessee could act in dual capacity. She also noticed that, according to the details furnished in the shape of return of income filed by the said trust, it has paid maximum marginal rate of tax being a discretionary trust. The dissolution proceeds received by the assessee as beneficiaries are shown by the assessee in his individual capacity and the said trust has filed its return of income for the period ending 31st March 2007 separately. She held that the assessee did not receive the said sum of Rs. 1,36,00,595, in his capacity as “Trustee” i.e., representative assessee for the purpose of the trust. Having recorded these conclusions, the learned Commissioner (Appeals) has further referred to the provisions of section 56(2)(vi). According to her, the said trust does not fall within the ambit of the word “Relative”, described in the provisions of section 56(2)(vi), therefore, the exemption from the applicability of the provisions of section 56(2)(vi) is not available to the assessee as the said sum of money, the aggregate of which exceeds Rs. 50,000, was received without consideration, cannot be said to have been received from any relative or on the occasion of the marriage of the individual, or under a will or by way of inheritance, or in contemplation of death of the payer, or from any local authority as defined in the explanation to clause (20) of Section 10, or from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution registered under section 12AA. It is in this manner, the learned Commissioner (Appeals) has confirmed the addition made by the Assessing Officer.
13. Before us, the learned Sr. Advocate, after narrating the facts, submitted that the learned Commissioner (Appeals) has accepted the validity of the trust after referring to the relevant sections of Indian Trust Act. He submitted that the learned Commissioner (Appeals) has also accepted the validity of the amendment and dissolution of trust, etc. The learned Commissioner (Appeals), having accepted all these things, has wrongly concluded that the amount received by the assessee on dissolution of trust is liable to be assessed under section 56(2)(vii), as the same is a money the aggregate of which is exceeded to Rs. 50,000, was without consideration and it was not from relative. He submitted that the said amount cannot be said to be received without consideration as the same was received by the assessee as per the terms of dissolution deed. He submitted that it is not even the case of the assessee that the said trust was ever registered under section 12AA of the Act or it was the institution described in clause (23C) of section 10. Even if it is not so, the amount received by the assessee on dissolution of trust in the capacity of its beneficiaries, it cannot be taxed under section 56(2)(vi) as the same is not a money received without consideration. He submitted that it has been made clear in the findings recorded by the learned Commissioner (Appeals) that the trust in question has suffered the tax at maximum marginal rate, therefore, he pleaded that the reasoning given by the learned Commissioner (Appeals) to uphold the action of the Assessing Officer is contrary to law. He submitted that while the learned Commissioner (Appeals) has accepted the validity of the trust, modification thereto and the Revenue did not prefer any appeal against those findings of the learned Commissioner (Appeals), it is the case of the assessee that addition has wrongly been sustained by the learned Commissioner (Appeals) and the same is required to be deleted.
14. On the other hand, the learned Departmental Representative, relying on the orders passed by the authorities below, submitted before us that the addition has rightly been sustained by the learned Commissioner (Appeals) and her order should be upheld.
15. We have carefully considered the rival contentions in the light of the material placed before us. Since the findings of the Assessing Officer that the trust is illegal and its terms could not be modified, have been reversed by the learned Commissioner (Appeals) and the Revenue has not preferred any appeal against those findings, we proceed to decide the present issue only in the light of the provisions of section 56(2)(vi) by application of which the learned Commissioner (Appeals) has sustained the addition. It will be appropriate to quote relevant portion of section 56(2)(vi) of the Act, which reads as follows:-
F.—Income from other sources
Income from other sources.
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) …………
(i) to (v) …………
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi);]
[(vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 [but before the 1st day of October, 2009], the whole of the aggregate value of such sum:
Provided that 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 (23C) of section 10; or
(g) from any trust or institution registered under section 12AA.
Explanation.—For the purposes of this clause, “relative” means—
(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi);]”
16. The aforementioned provisions will describe that the income of every kind which is not to be excluded from the total income under the Income Tax Act, 1961, shall be chargeable to income tax under the head “Income From Other Sources”, if it is not chargeable to income tax under any of the heads specified in section 14, items (a) to (e). Sub-section (2) describes that, in particular and without prejudice to the generality of sub-section (1), the income described in various clauses, inter-alia, including clause (vi) which has been reproduced above, the income shall be chargeable to income tax under the head “Income From Other Sources”. Clause (vi) of s/section (2) of section 56 of the Act will describe that in a case where any sum of money, the aggregate of which exceeds Rs. 50,000, is received without consideration by an individual or HUF in any previous year from any person or persons and/or after 1st April 2006 (but before 1st October 2009), the whole of aggregate value of such sum shall be liable to be assessed under the head “Income From Other Sources”. Ingredients for application of clause (vi) will be – (i) that there should be a sum of money; (ii) that its aggregate value exceeds Rs. 50,000; (iii) that it should be received “without consideration” by an individual or HUF; and (iv) in any previous year, from any person, between the period 1st April 2006 and 1st October 2009. The said clause will not be applicable to the persons described in clauses (a) to (g), as mentioned in the proviso to clause (vi), which is reproduced above; The word “Relative” has been defined in Explanation which is also reproduced above. Unless all the aforementioned ingredients are fulfilled, the provisions of clause (vi) of s/section (2) of section 56 of the Act could not be applied. It is the main case of learned Counsel for the assessee that the amount has not been received by the assessee without consideration and that part of the condition cannot be said to have been fulfilled, therefore, it will be material to see that as to whether this amount can be said to have been received without consideration. If it is held that the said amount is not received by the assessee without consideration, then clause (vi), s/section (2) of section 56 of the Act will not be applicable. The facts are not in dispute. The assessee has received this amount on dissolution of trust in the capacity of beneficiaries. The status of beneficiary has already been accepted by the learned Commissioner (Appeals) when she has held that “in the background of the provisions of Indian Trust Act and the dissolution of the trust, appellant did not receive the sum of Rs. 1,36,595, in his capacity as a trustee i.e., representative assessee for the purpose of trust”. The fact that the assessee has received the amount in the capacity of beneficiaries has also not been controverted, therefore, the amount received by the trust is in pursuance of dissolution of trust. The amount received in pursuance of dissolution of trust cannot be termed to be an amount received by the beneficiaries “without consideration”. The fact that the trust had borne the tax at maximum marginal rate on its income has also not been controverted. Therefore, in our considered opinion, the addition cannot be upheld on the applicability of clause (vi) of sub-section (2) of section 56 of the Act, as the money received by the assessee is not “without consideration“.
17. In view of our aforementioned findings, we do not consider it necessary to go into the other submissions of the learned Sr. Advocate, which, inter-alia, includes the arguments that this amount cannot be assessed for the reasons that it will tantamount to taxing the income twice and also the argument that, in any case, as the trust was created by mother of the assessee, its exclusion will also fall within the purview of clause (vi) of the Explanation described in clause (vi) of the Explanation where the word “Relative” has been defined as “lineal ascendant or descendant of the spouse of the individual“, etc.
18. In view of the above discussion, we delete the addition and allow the ground of the assessee.
19. In the result, assessee’s appeal is partly allowed.
