By TIOL News Service

BANGALORE, JUNE 16, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether income of minor beneficiaries deserves to be clubbed to the income of partners of the firm u/s 64(1)(a) of the I-T Act. YES is the answer.

Facts of the case:

The assessee - an individual had filed a return of income declaring income of Rs.1,84,950. During the course of scrutiny, the AO has noted that assessee has constructed a building in 1989 for which fund had been received from a firm called M/s. INJ Enterprises in which the assessee was a partner along with her husband, Mr. Maqsood Ahmed. The children of the partners viz., Master Mohamed Iqbal, Ms. Nadia Ahmed and Master Mohamed Jesim have been admitted to the benefits of partnership. It was also provided in the partnership deed that benefits of partnership shall be distributed among the partners and 3 beneficiaries in equal shares of 1/5th of the profit of the firm. The partnership firm was dissolved on 11.07.1989 and it was provided that all the 5 partners would possess the asset and the liability of the firm as co-owners and tenants in common and have equal shares in land & building. One of the source of funds used by M/s. INJ Enterprises for construction and development of the aforesaid property was a loan of Rs.14,28,280 received from Dr. Nayeema Khan Trust formed by assessee and her husband, Mr. Maqsood Ahmed as a trustee and their children as beneficiaries of the trust. The AO noted that the interest amount specifically pertained to different beneficiaries as defined in the trust deed was to be apportioned equally 1/3rd among the 3 beneficiaries. Therefore, income relating to minor beneficiaries was to be added to the income of appellant u/s. 64(1)(a) of the Act. Accordingly, out of interest income of Rs.5,47,561 deducted from the property income, addition of Rs.3,65,040 was made towards share of minor children of appellant as two beneficiaries out of 3 were minors during the relevant previous year.

On appeal, the ITAT held that,

++ it reflects from the order of CIT(A) that the AO has noted that assessee has deducted interest paid to Dr. Nayeema Khan Trust for computing the income from property. The income was reduced on account of interest on principal and compounded at the accumulated figure of loan amount from Dr. Nayeema Khan Trust. The AO further noted that Dr. Nayeema Khan Trust had filed return of income for the AYs 1990-91 & 1991-92 on account of interest received from INJ Enterprises, but return was not filed for subsequent years as no interest income was received by the trust. The assessee could not establish that the recipient i.e., trust has ever offered the receipt of interest to tax. Despite clear directions of the High Court, assessee could not place the relevant evidence in this regard. The scope of enquiry was limited as it has to be done as per the directions of the High Court. Since the assessee could not place any relevant evidence with regard to taking into account the interest received by the trust from the assessee while computing its income, the AO has rightly disallowed the claim of the assessee and the CIT(A) confirmed the same.The issue with regard to reopening of assessment was already examined in the first round of appeal and in the second round of appeal only on account of directions of the High Court. As no such direction was issued in this regard, the lower authorities have not adjudicated the issue of reassessment afresh. All the three beneficiaries of the Trust were the children of the appellant. The income in the hands of the Dr. Nayeema Khan Trust was assessable in the AY 1993-94 as per the findings made pursuant to the direction of the High Court of Karnataka. Therefore, there was no basis for the contention that income of minor children should not have been added to the income of the appellant. The tribunal stated that the arrangement amounted to payment and receipt of amount by the same person in different capacities. It was further held that interest expenses in the hands of appellant was to be treated as paid to the trustee or to herself and income accrued to the minor children was to be clubbed u/s. 64(1)(a) of the Act.

(See 2017-TIOL-892-ITAT-BANG)