Beneficiary Cannot Be Taxed Again when Trust already Paid Tax on Income: ITAT Deletes ₹1.24 Cr. Addition [Read Order]

The Mumbai of the Income Tax Appellate Tribunal, examined whether income distributed to a beneficiary by a private discretionary trust that had already paid tax could once again be brought to tax in the hands of the beneficiary, ultimately ruling against the tax addition in a case concerning income tax liability.

In this case, the appellant, Ajay Balvantray Parekh, a beneficiary of SANMP Private Beneficiary Trust, received a distribution of ₹1,24,56,045 during the Assessment Year (A.Y.) 2020-21.

The assessment originated when the Assessing Officer (AO), while framing the assessment under Section 143(3) read with Section 144B of the Income Tax Act, 1961, treated the distribution received from the trust as taxable, first characterizing it as “Income from Other Sources” in the assessment order and then as “Income from Business” in the computation sheet.

The National Faceless Appeal Centre affirmed this view.

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The appellant, represented by Madhur Agarwal and Fenil Bhatt, argued that he is one of eight beneficiaries of SANMP Private Beneficiary Trust, and the trust had already paid tax on the dividend income it earned from domestic companies. They also submitted that taxing the same income again violates established principles of non-double-taxation, also supported by CBDT Circular No. 157 dated 26.12.1974, which clarifies that if tax has already been paid by a trust, the same cannot again be taxed in the hands of its beneficiary.

It was further submitted that similar distributions had been consistently accepted by tax authorities for multiple years - A.Y. 2017-18 through 2019-20 and 2022-23 through 2024-25, including for the other seven beneficiaries. The decision of the Karnataka High Court in Mrs. Sharon Nayak vs. DCIT (2022), upholding the same principle based on the Circular was also contended

The respondents, represented by Surendra Mohan, supported the orders of the lower authorities but agreed that necessary directions may be issued regarding tax credit. Furthermore, it was submitted that the issues related to levy of interest under Section 234A and Section 234B were consequential.

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The bench comprising of Judicial Member,Pawan Singh and Accountant Member,Renu Jauhri held that there was no dispute about the facts of trust income distribution. It was observed that the Revenue had accepted similar treatment in all other relevant A.Y.s, both for the appellant and the other beneficiaries of the trust.

The bench observed the CBDT Circular and the Karnataka High Court judgment cited by the appellant, holding that once the trust has paid tax on its income, taxing the same income again in the hands of the beneficiary is unjustified. Accordingly, the ITAT deleted the addition of Rs. 1.24 crore.

With respect to the credit of taxes paid on regular assessment, the AO was directed to verify and allow such credit. Further, levy of interest under Section 234A and Section 234B was held to be consequential, directing the AO to take appropriate action while giving effect to the order. Therefore, the appeal was partly allowed.

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