In Anwar Basith v. ACIT, the Bangalore ITAT held that the income of minor beneficiaries can be clubbed to the income of parents under section 64(1)(a) of Income Tax Act, 1961.
The assessee was a partner of Firm, M/s. INJ Enterprises, along with her husband and three minor children with equal distribution of profit among the partners including the three beneficiaries. The partnership firm was dissolved in the year 1989 with a condition that all the 5 partners would possess the asset and the liability of the firm as co-owners and tenants in common and have equal shares in land & building. One of the sources of funds used by M/s. INJ Enterprises for construction and development of the aforesaid property was a loan from Dr. Nayeema Khan Trust for which the Firm was paying interest. The said Trust was formed by the assessee and her husband, Mr. Maqsood Ahmed as a trustee and their children as beneficiaries of the trust.
While completing assessment against the assessee, the AO noted that the interest amount specifically pertained to different beneficiaries as defined in the trust deed was to be apportioned equally 1/3rd among the 3 beneficiaries and hence, income relating to minor beneficiaries was to be added to the income of appellant under Section 64(1)(a) of the Income Tax Act.
On appeal, the first appellate authority sustained the addition and noted that the interest expenditure of Rs. 5,47,561/- had been claimed in the case of return of income of the co-owners of the property during the relevant previous year. The CIT(A) noted that as the income of the Trust depends on the claim of expenditure made by the co-owners, the working of assessing officer in the assessment order is fair and reasonable.
While dismissing the second appeal filed by the assessee, the bench noted that even before it, the assessee could not establish that the recipient i.e., trust has ever offered the receipt of interest to tax.
The bench noted that earlier, the High Court has remanded the matter back to the AO with a direction that if the assessee has made provision for payment of interest in the return filed by her and if the interest paid by the assessee is taken into account of the trust in the next assessment year or in subsequent years, it is for the revenue to compare both the accounts and pass appropriate order in order to find out whether the interest shown in the return of income is reflected in the accounts of the trust.
The bench, while confirming the first appellate order, noted that “the scope of the enquiry was limited as it has to be done as per the directions of the Hon’ble High Court. Since the assessee could not place any relevant evidence with regard to taking into account the interest received by the trust from the assessee while computing its income, the AO has rightly disallowed the claim of the assessee and the CIT(Appeals) confirmed the same.”
Read the full text of the Order below.
