K.v.patel Family Trust v. Commissioner Of Income Tax

O/ITR/67/1995 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE NO. 67 of 1995With INCOME TAX REFERENCE NO. 11 of 2001 For Approval and Signature: HONOURABLE MR.JUSTICE M.R. SHAH Sd/- andHONOURABLE MR.JUSTICE K.J.THAKER HONOURABLE MR.JUSTICE K.J.THAKERSd/-=========================================1.Whether Reporters of Local Papers may be allowed to see Nothe judgment ?2.To be referred to the Reporter or not ?No3.Whether their Lordships wish to see the fair copy of the Nojudgment ?4.Whether this case involves a substantial question of law as to Nothe interpretation of the constitution of India, 1950 or any order made thereunder ?5.Whether it is to be circulated to the civil judge ?No ============================================= K.V.PATEL FAMILY TRUST....Applicant(s) Versus COMMISSIONER OF INCOME TAX....Respondent(s) =============================================Appearance: MR SN SOPARKAR, SR. ADVOCATE with MRS SWATI SOPARKAR, ADVOCATE for Applicant MR MR BHATT, SR. ADVOCATE with MRS MAUNA M BHATT, ADVOCATE for Respondent =============================================CORAM: HONOURABLE MR.JUSTICE M.R. SHAHandHONOURABLE MR.JUSTICE K.J.THAKER Date : 05/08/2014COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] As common question of law and facts arise in both these References and with respect to the very one Trust i.e. K.V. Patel Family Trust, Ahmedabad, both these references are decided and disposed of together by this common judgment and order. [2.0] In both these cases the respective references have been made by the learned Income Tax Appellate Tribunal (hereinafter referred to as “Tribunal”) to consider the following common question of law. “Whether on the facts and law and in the circumstances of the case, the Tribunal was right in law in holding that income, which according to the Trust Deed was required to be allocated to the Ten beneficiaries of the Second Schedule of the Trust Deed, having aggregate beneficial share of 50%, was liable to be taxed at maximum marginal rate u/s.164 of the I.T. Act?” [3.0] That the facts leading to the present references in nut-shell are as under: [3.1] That one Shri Babubhai Ishwarbhai Patel settled Trust Deed dated 04.06.1980 appointing three persons viz. (1) Shri Karsanbhai K. Patel, (2) Shri Khodidas Vandas Patel, (3) Smt. Shantaben K. Patel as trustees to hold the Trust fund including the initial Corpus of Rs.1000/- for the benefit of two sets of beneficiaries enumerated in Schedule-I and II to the said Trust Deed. It appears that as per Trust Deed, Schedule-I contains 10 beneficiaries who have specific shares in the Trust as per Clause III(b)(i) of the Trust Deed and the Schedule-II contains the said 10 beneficiaries of Schedule-I with specific shares as per clause III(b)(ii) of the Trust Deed. That as per the Trust Deed the distribution of the income is to be made as directed in the Trust Deed i.e. 50% of the income of the Trust shall be received by the beneficiaries of Schedule-I and 50% of the income of the Trust shall be received by the Trustees of the Trust on behalf of the beneficiaries of the Schedule-II of the Trust Deed. As per the Trust Deed, the income of the beneficiaries in the Schedule-II is receivable for and on behalf of them by the Trustees of the Trust, as the said income is to be accumulated as a special fund, Corpus for a period of 19 years. Meaning thereby, 50% of the income of the beneficiaries as mentioned in Schedule-II was required to be accumulated as a special fund and was required to be paid to the respective beneficiaries after a period of 19 years. The beneficiaries of Schedule-I and Schedule-II are as under: K.V. Patel Family Trust Schedule-I forming part of this Trust Deed vide Clause III(b)(i) (50.0% of Income) As per the Trust Deed, the income of the beneficiaries in the Schedule-II is receivable for and on behalf of them by the Trustees of the Trust, as the said income is to be accumulated as a special fund, Corpus for a period of 19 years. Meaning thereby, 50% of the income of the beneficiaries as mentioned in Schedule-II was required to be accumulated as a special fund and was required to be paid to the respective beneficiaries after a period of 19 years. The beneficiaries of Schedule-I and Schedule-II are as under: K.V. Patel Family Trust Schedule-I forming part of this Trust Deed vide Clause III(b)(i) (50.0% of Income) K.V. Patel Family Trust Schedule-II forming part of this Trust Deed vide Clause III(b)(ii) (50.0% of Income) O/ITR/67/1995 JUDGMENT The assessee Trust filed the return of income for the AY 1982-83 and AY 1983-84. The AO observed that the assessee is a specific Trust and beneficiaries of the Trust are specific as well as their shares and the distribution of the income is to be made as directed in the Trust Deed i.e. 50% of the income of the Trust shall be received by the beneficiaries of Schedule-I and 50% of the income shall be received by the trustees of the Trust on behalf of the beneficiaries of the Schedule-II of the Trust Deed. Accordingly, the AO passed the assessment orders treating the assessee Trust as a specific Trust and under Section 161 of the Income Tax Act, 1961. It appears that the CIT, Gujarat, Central Ahmedabad called for the record and examined the same and decided to proceed under Section 263 of the Income Tax Act, 1961. A show cause notice was issued to the assessee calling upon to show cause as to why the aforesaid assessment orders passed by the AO be not set aside and why the direction should not be given to the ITO to make necessary O/ITR/67/1995 JUDGMENT inquiries for taxing some part of the income of the Trust at the maximum marginal rate under section 164(1) of the Income Tax Act, 1961. The assessee made written submissions and thereafter considering the same, the learned CIT set aside the assessment orders for both the years i.e. 1982-83 and 1983-84 and directed the ITO to subject the income allotted to Schedule-II to tax at the maximum marginal rate in the hands of the Trustees and to take consequential action for the levy of statutory interest under section 139 etc. That the assessee preferred appeals before the learned Tribunal and the learned Tribunal has dismissed both the appeals of the assessee and thereafter at the instance of the assessee, present reference application being Income Tax Reference Application No.67/2005 is made. However, in the subsequent year for AY 1984-85 and 1985-86, the learned Tribunal took the contrary view and held that the assessee Trust is a specific Trust and therefore, at the instance of the Revenue the Income Tax Reference No.11/2001 is made to consider the following substantial questions of law. “1.Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to consider the assessee Trust as a specific Trust?in directing the Assessing Officer to consider the assessee Trust as a specific Trust? 2.Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to adopt the status of the assessee’s trust as ‘Individual’?in directing the Assessing Officer to adopt the status of the assessee’s trust as ‘Individual’? 3.Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to allow interest paid to the beneficiary?”in directing the Assessing Officer to allow interest paid to the beneficiary?” “1.Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to consider the assessee Trust as a specific Trust?in directing the Assessing Officer to consider the assessee Trust as a specific Trust? 2.Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to adopt the status of the assessee’s trust as ‘Individual’?in directing the Assessing Officer to adopt the status of the assessee’s trust as ‘Individual’? 3.Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to allow interest paid to the beneficiary?”in directing the Assessing Officer to allow interest paid to the beneficiary?” [4.0] Having heard Shri S.N. Soparkar, learned Counsel appearing on behalf of the assessee Trust and Shri M.R. Bhatt, learned Counsel appearing on behalf of the respondent Revenue and considering the issues/questions referred to this Court, the short question which is posed for consideration of this Court is whether the assessee Trust can be said to be a “Specific Trust” or the said Trust is liable to pay the tax at maximum marginal rate as provided under section 164 of the Income Tax Act, 1961? [4.1] Having heard the learned Counsel appearing on behalf of the respective parties, it appears that with respect to the AY 1982-83 and 1983-84, Commissioner took a view that the assessee Trust was subjected to income allotted to Schedule-II to tax at the maximum marginal rate in the hands of the Trustees is the beneficiaries’ income receivable by the beneficiaries to the extent of 50% after 19 years. [4.2] Having heard learned Counsel appearing on behalf of the respective parties and considering the Trust Deed more particularly the share allotted to the respective beneficiaries – Schedule-I and Schedule-II, it appears that the shares which are allotted to the respective beneficiaries even with respect to Schedule-I and Schedule-II are specific shares and therefore, the same can be said to be determinative shares. Merely because 50% of the income and their respective shares were to be accumulated as a special fund in the hands of the trustees for 19 years and the same were to be paid after a period of 19 years, it cannot be said that the Trust is discretionary Trust and/or the Trust is not a specific Trust. In the facts and circumstances of the case and the specific percentage of shares allotted/given to the respective beneficiaries as reproduced hereinabove, with respect to the beneficiaries mentioned in Schedule-I and the beneficiaries mentioned in Schedule-II, it is to be held that the assessee Trust is a specific Trust and therefore, not subjected to the tax at the maximum marginal rate under section 164 of the Income Tax Act, 1961. [5.0] In view of the above and for the reasons stated above and in the facts and circumstances of the case, questions referred to this Court are answered accordingly in favour of the assessee and against the Revenue. With this, both these references are disposed of. Sd/- (M.R. SHAH, J.) Sd/- (K.J. THAKER, J.) Ajay