Income of Beneficiaries not Taxable in the hands of Trust : ITAT [Read Order]

In M/s. Abad Trust vs. Asst. Director of Income Tax (Exemption), the Cochin Bench of Income Tax Appellate Tribunal ( ITAT ) held that tax cannot be assessed at the hands of the Assessee-Trust and that income which comes to the share of a beneficiary has to be assessed as if it were the income of the beneficiary, and tax has to be levied accordingly.

The assessee is a family trust with 14 beneficiaries having equal determined shares. The assessment under section 143(3) of the I.T. Act along with reassessment under Section 147 of the Act led the A.O. to conclude the income of Rs.67 lacs. The Assessing Officer held the trust property belongs to the trust and not that of the beneficiaries and the shares of the beneficiaries though definite in the trust, they are not the co-owners of the property. Hence it was concluded by the A.O. that the rental income is to be assessed in the hands of the assessee-trust.

On appeal the CIT(A) dismissed the submission of the assessee that the income of the beneficiaries only can be assessed in the hands of the trust in a capacity of a representative assessee and confirmed the action of the A.O. in taxing the rental income in the hands of the assessee-trust.

Aggrieved an appeal was filed before the ITAT. The Counsel for the assessee submitted that the trust as such cannot be assessed to tax. It was submitted that separate assessments for each beneficiary has to be framed on the trustee as the representative assessee. It was contended that the tax to be paid by each beneficiary has to be paid by the trustee from the funds and debited to the accounts of the beneficiaries. It was further submitted that the assets of the trust are held by the trustees not as an owner of the same, but as the trusted person for and on behalf of the beneficiaries who are the actual / real owner of the assets of the trust. Therefore, it was submitted that the observation of the A.O. that the trust is the legal owner of the assets of the trust is against the legal position. The Departmental Representative reiterated the decisions of the CIT(A).

The bench comprising of Judicial Member George George K. & Accountant Member Chandra Poojari referring the decision of the High Court of Kerala in CIT v. T.A.V. Trust, observed “In other words the trustees or the trust have no ownership of the properties. It is only the beneficiaries who are the joint owners of the assets of the trust. When the beneficiaries become the joint owners’ section 26 of the Income Tax Act, comes into play and mandates the assessment of the beneficiaries shares in their respective hands. whenever an assessment is made on trustees under the Act, section 161(1) is necessarily attracted. In other words, under section 161 the tax shall be levied upon and recovered from a trustee in a like manner and to the same extent as it would be leviable and recoverable from the person represented by him. Thus, income which comes to the share of a beneficiary has to be assessed as if it were the income of the beneficiary, and tax has to be levied accordingly. tax on the share of each beneficiary will have to be separately calculated as if it formed a part of the beneficiary’s income. Tax payable by the Trust will be the sum total of the tax calculated on the share of each beneficiary.”