Shakuntala Balvantray Trust Vs ITO (ITAT Ahmedabad)
The ITAT Ahmedabad, in the case of Shakuntala Balvantray Trust Vs ITO, addressed the tax rate applicable to a private discretionary trust established by a will. The assessee, a trust created by late Smt. Shakuntala Balvantrai for the benefit of her daughter and grandchildren, earned only interest income, which was subsequently distributed to the beneficiaries. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had applied the maximum marginal rate (MMR) under Section 164 of the Income Tax Act, 1961, arguing that the beneficiaries’ individual incomes, apart from the trust’s benefits, were not ascertainable. The assessee appealed this decision, contending that their case fell under specific exceptions within Section 164.
The assessee’s counsel argued that the trust, being a “trust at will” and the sole trust declared by the deceased, qualified for the exception outlined in the first proviso to Section 164(1)(ii) of the Act. This proviso stipulates that where relevant income is receivable under “a trust declared by any person by will and such trust is the only trust so declared by him,” tax shall be charged “as if it were the total income of an association of persons.” To support this, the counsel referred to CBDT Circular No. 577 dated 04-09-1990. This circular explicitly clarifies that there was no intention to subject the income of such trusts (declared by will and being the only trust) to the maximum marginal rate. It further emphasized that specific beneficial provisions should take precedence over general provisions. Therefore, the income of such trusts should be taxed at the rate ordinarily applicable to an association of persons, not at the maximum marginal rate.
The ITAT Ahmedabad, after considering the arguments and the cited legal provisions and circular, ruled in favor of the assessee. The tribunal noted that the Assessing Officer had applied Section 164 without properly considering the specific exception provided in its first proviso. The ITAT directed the Assessing Officer to tax the trust’s income at the rate applicable to an association of persons, effectively overturning the application of the maximum marginal rate. This decision, which applied to all three assessment years in question due to identical facts and issues, highlights the importance of adhering to specific statutory exceptions and clarifying circulars when determining tax liability for trusts.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The present appeals have been preferred by the assessee against the order passed by Commissioner of Income Tax (Appeals)/Additional/ Joint Commissioner of Income Tax (Appeals)-5 Mumbai [hereinafter referred to as “CIT(A)”] dated 30-12-2024 arising out of the order passed u/s. 143(1) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Years 2021-22 to 2023-24. Since facts and issues involved in all the captioned appeals are identical, hence the same have been heard together and are being disposed of by the common order. ITA No. 1/Ahd/2025 is taken as a lead case for the purpose of narration of facts.
ITA No. 1/Ahd/2025 A.Y. 2021-22
2. The assessee has taken the following grounds of appeal:-
“1.1 The order u/s 250 passed on 30.12.2024 for A.Y. 202122 by NFAC [CIT(A)] Add) 3CIT(A)-5 Mumbai (for short (CIT(A)) confirming the total demand of Rs 1,07,150 by applying maximum rate instead of normal rate under proviso to sec 164(1), though it is the only discretionary trust settled under the WILL of Late Shakuntala Balvantray is wholly illegal, unlawful and against the principles of natural justice.
1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering the past records and five written submissions uploaded from time to time before confirming the raising taxes at MMR instead of normal rate under proviso to sec 164(1)
1.3 The Ld CIT(A) has grievously erred in law and or on facts in upholding that the appellant Trust was liable to tax at MMR though it is the only discretionary trust settled under the WILL of Late Shakuntala Balvantray.
1.4 That in the facts and circumstances of the case as well as in law the Ld. CIT(A) has grievously erred in upholding that the appellant Trust was liable to tax at MMR though it is the only discretionary trust settled under the WILL of Late Shakuntala Balvantray.
1.5 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought to have allowed further opportunity of video conference when the hearings were scheduled from time to time thereafter.
3. The brief facts of the case are that the assessee trust is a ‘trust at will’, which was created by late Smt. Sakuntalla Balvantrai, for the benefit of her daughter and children of her daughter. The only income of the trust is the interest income which is distributed to the beneficiaries. The Assessing Officer applied the provisions of section 164 of the Act and held that since the income of the beneficiaries, apart from the aforesaid benefits of the trust, was undetermined, he therefore, applied the tax at the maximum marginal rate on the income of the assessee trust. The ld. CIT(A) upheld the aforesaid action of the Assessing Officer.
4. Before us, the ld. counsel for the assessee has submitted there are only three beneficiaries of the said trust created by late Sakuntalla Balvantrai. The ld. counsel of the assessee submitted that the case of the assessee trust falls under the exceptions as provided u/s. 164 of the Act. He has invited our attention to first proviso to section 164(1) of the Act which is reproduced as under:-
“Provided that in a case where-
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ii) the relevant income or part of relevant income is receivable under “[a trust declared by any person by will and such trust is the only trust so declared by him]; or
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tax shall be charged “[on the relevant income or part of relevant income as if it] were the total income of an [association of persons]:”
5. The ld. counsel has further drawn our attention to page no. 34 of the paper book which is a copy of the CBDT Circular No. 577 dated 04-09-1990. The contents of which are reproduced as under:-
“1. A question has been raised whether the provisions of section 167B of the Income-tax Act, 1961, which generally provide for charging of tax at the maximum marginal rate on the total income of an association of persons where the individual shares of members in the income of such association are indeterminate or unknown, would also apply to income under a trust declared by any person by will where such trust is the only trust declared by him. Such trusts, it would be noticed, are referred to at item No. (ii) in the first proviso to section 164(1) of the Act.
2. This matter has been examined in the Board There was never an intention to subject the income of the aforesaid trusts to income-tax at the maximum marginal rate It is also well-settled that where a specific provision has been made in the law in relation to any matter and where that provision is beneficial to the taxpayer, that matter is to be governed by that special provision and not by any other general provision relating to that subject. Therefore, the income of a trust declared by any person by will, where such trust is the only trust so declared by him, will continue to be charged to tax in the manner prescribed in the first proviso to section 164(1), as hitherto.
3. Similarly, other cases covered by the first proviso to section 164(1) and the first proviso to section 164(3) would also not attract the provisions of section 167B Accordingly, tax will be payable in such cases at the rate ordinarily applicable to the total income of an association of persons and not at the maximum marginal rate.”
6. In view of the aforesaid legal position, the Assessing Officer is directed to charge the tax on the trust at the rate ordinarily applicable to total income of association of persons and not at the maximum original rate.
7. In the result, the appeal of the assessee is treated as
8. Since the facts and issue involved in all the captioned appeals are identical, hence our findings given above will mutatis mutandis apply to the other two appeals also.
9. In the combined result, all the three appeals of the assessee are treated as allowed.
Order pronounced in the open court on 28-04-2025
