Trust amounts to Association of Person u/s 40(b) of Income Tax Act: Bombay HC [Read Order]

The Bombay High Court ruled that the appellant trust qualified as an association of persons under Section 40(b) of the Income Tax Act, 1961, and upheld the disallowance of interest paid to beneficiaries.

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Mehta Jaising Combine was established as a Private Specific Trust during the relevant period, and Ms. Indira B. Jaising settled it. For the benefit of 32 beneficiaries, including minor beneficiaries whose legal guardians were not the trustees, six trustees were entrusted with carrying out the Trust's mission. As an Association of Persons, the assessee has been filing income returns on a regular basis. Since the current year's income was deducted from the forwarded losses, the assessee submitted their income as an Association of Persons for the Assessment Year 1995–1996 and declared their income to be "Nil."

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Applying the test outlined in the Supreme Court's ruling to CIT v. INDIRA BALKRISHNA, the Assessing Officer stated that the beneficiaries had voluntarily joined forces by putting their money into the trust with the explicit understanding that the trust would use the money for the project they were working on. The Assessing Officer further ruled that the trust is subject to Section 161 of the Income Tax Act's assessment as an Association of Persons through the trustees.

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An appeal was preferred by the assessee. The assessee's appeal was denied by the Commissioner of Income Tax (Appeal). Following that, the assessee appealed to the Income Tax Appellate Tribunal. The assessee's appeal was dismissed by the Appellate Tribunal in a decision.

The assessee argued that the term "individual" encompasses a group of individuals and that the provisions of Section 161(1A) of the Act do not alter the assessee's status with regard to the tax rate. As in the situation of a discretionary trust when the beneficiaries' shares are unknown or indeterminate, it is argued that the provisions of Section 164(1) apply in the particular facts and circumstances of this case.

The department said that both the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) had upheld the order issued by the Income Tax Officer in the appeal. By no means can the facts that the authorities documented be described as perverted. Therefore, it is argued that the appeal under Section 268 of the Income Tax Act does not call for interference with a fact finding that is founded on careful appreciation.

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The division bench of Chief Justice Alok Aradhe and Justice M. S. Karnik has observed that the assessee, while filing the return, had described itself as an Association of Persons for which neither any attempt has been made to correct the so called mistake nor any explanation has been offered for making such a mistake.

The court held that the order passed by the Assessing Officer as well as the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal is based on meticulous appreciation of evidence.

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