Introduction: The recent judgment from the Income Tax Appellate Tribunal (ITAT) Chennai in the case of “Dinroze Estate Vs ITO” brings up an intriguing discussion about the application of tax rates for trusts with known beneficiaries. The ITAT directed that such trusts should be taxed at rates applicable to individual assesses, and not at the maximum marginal rate of 30%. This article aims to delve into the nuances of this decision.
Background: The Dispute Over Tax Rates: Dinroze Estate, assessed as an Association of Persons (AOP), filed an appeal for the Assessment Year 2014-15 against the maximum marginal rate of 30% imposed on its income. The estate argued that, since the beneficiaries were known, the tax should be levied at individual rates. This reasoning was based on a similar treatment in the Assessment Years 2017-18 and 2018-19.
ITAT’s Argument: Why Individual Rates?
The ITAT scrutinized the case under the lens of Sec. 161 of the Income Tax Act, drawing attention to a Supreme Court ruling. ITAT emphasized that tax should be assessed for each beneficiary trust separately, essentially treating their income as that of an individual.
Counterpoint: The Commissioner of Income Tax (Appeals): The CIT(A) rejected the rectification based on Sec. 166, thereby confirming the tax rate applied by the Centralized Processing Centre (CPC). The CPC had taxed the estate at the maximum marginal rate of 30%.
Preceding and Subsequent Years: A Pattern?
The ITAT brought into light the tax treatment for Dinroze Estate in other assessment years, pointing out that individual rates were accepted by the revenue in prior years. This historical context further bolstered the ITAT’s decision to direct the application of individual tax rates.
The Final Verdict: ITAT’s Direction: The ITAT rejected the computations made by CPC and directed the Assessing Officer (AO) to apply the rates as computed by the assessee. This means that the trust’s income should be taxed at individual rates rather than at the maximum marginal rate of 30%.
Conclusion: The ITAT Chennai’s ruling in Dinroze Estate Vs ITO provides much-needed clarity on the application of tax rates for trusts with known beneficiaries. The tribunal has directed that individual rates should apply, thereby offering a precedent that may impact similar cases in the future. Trusts with known beneficiaries may find this ruling beneficial for strategic tax planning, and tax professionals should take note for future reference.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of the order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 24-01-2023 in the matter of rectification intimation u/s 154 issued by Centralized Processing Centre, Bengaluru (CPC) on 10-07-2019.The assessee is assessed as an Association of Person (AOP). The return of the estate was filed considering the provisions of Sec. 161 of the Act.
The trust earns income primarily under the head ‘income from house property’.
2. The grievance of the assessee is application of correct rates of taxes. The assessee has computed tax at rates which are applicable to an individual assessee whereas CPC has taxed the returned income at Maximum margin rate of 30%. The assessee’s reasoning was that the assessee is a specified trust wherein the names of the beneficiaries are known and their shares are determinate. It was pointed out that similar rate was charged for AYs 2017-18 and 2018-19 against which the rectification of the assessee was allowed. Therefore, rejection of similar rectification in this year was not justified. In AYs 2011-12 to 2013-14 also, the rates adopted by the assessee were accepted. Reliance was also placed on the decision of Hon’ble Supreme Court in the case of CWT vs. Trustees of E.H. Nizam family (Remianidner Wealth) trust (108 ITR 555) in support of application of Sec. 161. It was held that though Trust had filed single return, the department has to pass order in the hands of the Trustees representing each beneficiary trust separately in respect of his share of income treating the status as an individual. In other words, the department has to pass that many number of assessments as there are beneficiaries. However, Ld. CIT(A) confirmed the intimation issued by CPC by relying on the provisions of Sec.166. Aggrieved, the assessee is in further appeal before us.
3. We find that the trust earns income primarily under the head ‘income from house property’. Therefore, the provisions of Sec.161 (1A) would have no applicability. Secondly, the option of direct assessment as envisaged by Sec.166 could not be applied while processing the return of income since only prima-facie adjustments could be made u/s 143(1). Thirdly, in all the preceding as well as in subsequent years, the rates as adopted by the assessee has been accepted by the revenue which is evident from following tabulation as made by Ld. AR before us: –
STATEMENT SHOWING THE RETURNS FILED AND REFUND GRANTED TREATING AS INDIVIDUAL
|Date of filing||Ack No.||Income from house property||Refund Recd. taxing at normal rates|
|8||2014-15||Subject matter of appeal before Hon’ble Tribunal|
|11||2017-18||04/08/2017||132535930040817||328,640||Demand raised on 21/11/2018 as AOP. Rectification filed on 11/3/2019 6/11/2019 Rectification passed and refund granted.|
|12||2018-19||24/07/2018||886706480240718||89,799||Demand raised on 11/01/2019 as AOP Rectification filed on 11/3/2019 6/11/2019 Rectification passed and refund granted.|
For all the aforesaid reasons, the computations made by CPC could not be accepted. The Ld. AO is directed to accept the rates of taxes as applied by the assessee.
4. The appeal stand allowed.
Order pronounced on 9th August, 2023.