Tuesday, July 29, 2014

Beneficiaries of discretionary trust won’t be liable to tax if income of trust is taxed at maximum marginal rate

Where income from trust had already been assessed in hands of trustees at maximum marginal rate, beneficial share could not be assessed in hands of beneficiaries again.


a)Assessee was one of beneficiaries of a private discretionary trust. Trust's income was from dividend, which was exempt under section 10(34). The assessee received her beneficial share out of said dividend income and claimed it as exempt as income of trust had already been taxed in hands of trustees under section 164.

b)The Assessing Officer, however, was of the view that section 164 provided that it was only when no income was distributed amongst the beneficiaries by a private discretionary trust then the trust’s income was taxable in the hands of the trust.

c)Thus, he made additions on the ground that when the surplus was distributed by such trust, the receipt in the hands of beneficiary would be taxable as it becomes "income from other sources" in his hands. On appeal, the CIT(A) confirmed the addition. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The revenue had not denied the fact that the department had already assessed discretionary-trust at the maximum marginal rate.

2)Thus, it clearly emerged that the department had already exercised the option to tax the trust’s income directly in the hands of trustees in terms of sections 161 to 166. The assessee's stand was correct that as per the scheme of assessment of private discretionary trust department had to opt whether to assess the income in the hands of trust or beneficiaries. The option was clearly exercised first in the hands of trust as demonstrated by its assessment order.

3)In any case it had not been disputed that entire trust income from dividends was exempt under section 10(34) and what came in the hands as beneficial share retained the same colour and was also exempt under section 10(34). Therefore, alternatively also, the beneficial share being part of exempt dividend income, was exempt from tax and was to be excluded while computing the income of assessee.

4)Therefore, the department had already exercised the option to tax the income directly in the hands of the trust, there was no provision to review the option taken in the case of trust and again to change the option from one beneficiary to another, the impugned income was therefore held to be exempt in the hands of the assessee. – SMT. ALPANA KIRLOSKAR V. ACIT [2014] 46 taxmann.com 336 (Delhi - Trib.)