Are voluntary contributions received by private discretionary trust taxable income? Madras High Court answers

  1. Are voluntary contributions received by private discretionary trust taxable income? Madras High Court answers
Under dispute was the taxability of a sum of Rs 25 crores pooled into a trust meant to dole out retiral benefits to the senior officials of six companies of the same group.
Are voluntary contributions received by private discretionary trust taxable income? Madras High Court answers
Justices TS Sivagnanam and Bhavani Subbaroyan
Meera Emmanuel

The Madras High Court recently ruled that a private discretionary trust, being a representative assessee of identified beneficiaries, is liable to be treated as an individual for the purpose of taxation (The Commissioner of Income tax v. Shriram Ownership Trust).

Among other findings, the Court also emphasised that when the assessee does not challenge a tribunal ruling in appeal, he is not entitled to call on the High Court to frame additional questions of law by invoking Section 260A (4) of the Income Tax Act.

It may be noted that Section 260A (4) lays down that an appeal before a High Court shall be heard only on the questions formulated by the Court.

The proviso to this sub-clause, however, clarifies this would not take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

Declining to delve into submissions made by the respondent-assessee to examine an additional substantial question of law that concerned jurisdiction, the Bench of Justices TS Sivagnanam and Bhavani Subbaroyan explained:

“The assessee having not filed an appeal as against the findings rendered by the Tribunal on the issue of jurisdiction and procedural aspects followed by the Assessing Officer, he cannot stated to be an aggrieved person over such finding in the absence of an appeal at their instance under sub-section (2) of Section 260A of the Act. Unless and until the aggrieved person is before the Court by way of an appeal, the question of calling upon the Court to frame an additional substantial question of law by invoking its power under sub-section (4) of Section 260A of the Act does not arise… The underlying principle being that the revenue cannot be worse of in their appeal at the instance of the assessee who has not filed an appeal over such finding of the Tribunal.

“… the revenue cannot be worse of in their appeal at the instance of the assessee who has not filed an appeal over such finding of the Tribunal.”
Madras High Court

Senior standing counsel R Hemalatha, along with senior standing counsel T Ravikumar appeared for the revenue (appellant), whereas, advocate R Sivaraman appeared for Shriram Ownership Trust/assesee (respondent).

Factual background

The income tax returns filed for the year 2014-15 by the Shriram Ownership Trust(assessee) came into dispute when a sum of Rs 25 crores that it termed as “addition to corpus” was held to be taxable “income from other sources” under Section 56 (2) (vii) of the Income Tax Act by the tax authorities.

The assessee was a private discretionary trust set up to allocate retirement benefits to senior employees from the Shriram group of companies. The Rs 25 crores in question was pooled in from six Shriramgroup companies.

The assessee asserted that these were voluntary contributions made to the trust, which was an Association of Personswithin the meaning of the Explanation to Section 2(31) of the Income Tax Act. As such, they could not be taxed as an individual. Therefore, it was contended this amount could not be taxed under Section 56 (2), which was only applicable to individuals and Hindu Undivided Families (HUF).

Both the Joint Commissioner of Income Tax (JCIT) and the Commissioner of Income Tax (CIT) disagreed and treated the Rs 25 crores as income from other sources,recommending that the amount be taxed accordingly. On appeal, the ITAT reversed these findings and ruled in the assessee’s favour, prompting the Revenue authorities to move the Madras High Court in appeal.

Assessee adopted ingenious method to circumvent Income Tax Act: Court

The High Court ultimately allowed the

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