Determinate Beneficiaries to be Taxed as “Individual”, Not as “Association Of Persons” at Marginal Rate: ITAT [Read Order]

In a recent ruling, the Income Tax Appellate Tribunal ( ITAT ) "SMC" Bench in Mumbai, ruled that determinate beneficiaries should be taxed as “Individual” and not as “Association Of Persons” at a marginal rate.

The ruling was given in the case filed by the executor of the estate of the late Amirali J. Dossa. The case centered on a dispute regarding tax rates applied to the estate of Dossa, who passed away on November 14, 2013, and left a trust to manage his estate among his heirs.

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The executor of the estate/appellant, Shri Mayur A. Shah, appealed against a previous ruling by the Commissioner of Income Tax (Appeals) [CIT (A)], issued on January 19, 2024, for the assessment year 2022-23. In dispute was the treatment of the estate for tax purposes as an "Association of Persons" (AOP) subject to the maximum marginal rate, rather than as an "Individual," which would attract a lower rate.

The appellant contended that the CIT(A) erred in upholding the assessment officer’s (AO) decision to apply the maximum marginal rate. It was argued that since the estate's beneficiaries were clearly defined — two wives and a minor son of the deceased — and since the minor son had reached adulthood by the relevant assessment year, the estate should not be taxed at the AOP rate. Rather, the rate applicable to an individual should apply. Additionally, the appellant contested the interest charged under Sections 234B and 234C of the Income Tax Act 1961 (ITA), totaling Rs. 30,402, was excessive and unwarranted.

The trust created under Mr. Dossa's will specified the inheritance for his legal heirs. The estate had been distributed to the two wives of Mr. Dossa, leaving only the minor son’s share undisbursed, which was managed within the estate account. However, since the minor son had reached the age of majority three years prior to the assessment year in question, the executor argued that the estate's tax treatment should be modified accordingly.

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At the hearing before ITAT on October 10, 2024, the appellant reiterated that the shares of each beneficiary were determinate and not subject to variability, which should justify taxation at the individual rate rather than at the AOP marginal rate. Notably, the appellant referenced the outcome of the previous year’s assessment (A.Y. 2021-22), in which the CIT(A) had sided with the estate on similar grounds, allowing a more favorable tax treatment.

Upon review, the ITAT bench comprising Judicial Member Smt. Beena Pillai and Accountant Member Smt. Renu Jauhri, agreed with the appellant’s argument, affirming that the estate’s beneficiaries were indeed determinate. This status warranted individual tax rates rather than the higher rates applicable to AOPs. The Tribunal further noted that applying the maximum marginal rate went beyond the scope of adjustments permissible by the Centralized Processing Centre (CPC) under Section 143(1) of the tax legislature, which is intended only for prima facie adjustments.

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Consequently, the ITAT directed the AO to apply individual tax rates for the estate of Mr. Dossa. The Tribunal pronounced its decision on October 14, 2024, in the open court, granting relief to the appellant and instructing that the excessive tax and interest charges be removed.

To Read the full text of the Order CLICK HERE

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