By TIOL News Service

CHENNAI, MAR 14, 2019: THE issue is - Whether income earned by a revocable trust from contributions made by indentifiable beneficiaries through revocable transfer of funds is taxable only in the hands of such beneficiaries and not the trust. YES is the answer.

Facts of the case

The assessee trust was created by the State of Tamil Nadu to create Urban Infrastructure Fund for infrastructure development. The contributions to such fund by the three Companies HDFC, ICICI and IL&FS were made through contribution agreement. Upon filing the return for AY 2008-2009, the assessee claimed differential treatment of status u/s 61 on its income. The AO held that the trust was an irrevocable Trust and was commercial in nature and therefore taxable in the hands of the assessee. Further, the AO invoked section 164 and applied the maximum marginal rate of tax applicable to Associate of Persons. Similar order was passed by the AO for the AY 2009-10.

The CIT(A) upheld the AO's findings. The Tribunal, however, held that the assessee could not be taxed in respect of the income earned by it as the three contributors had already been taxed in respect of the income distributed to them. The Tribunal held that the trust was revocable trust. Therefore, invoking section 61, it was held that the income arising by virtue of a revocable transfer of assets shall be chargeable to the income of the contributor/transferor. Therefore, appeals for both the AYs was allowed. The Revenue then filed its appeals.

On hearing the appeals, the High Court held that,

++ section 62(2) clearly stands attracted to the present case. The funds transferred by the 3 constributors and beneficiaries to the Trust created by the settlor, State of Tamil Nadu were revocable after the specified period of three years. The settlor was also a contributor of funds to the Trust. Since the units were revocable after a period of 3 years, at any point of time, irrespective of the fact whether they have been actually revoked or not or contributions have been actually recalled or not, section 62(2) stands attracted and the such provisions clearly provide that the income in question would be taxed in the hands of the transferors which has, in fact, been taxed so far. The contention that section 164 is applicable fails to the ground on the bare reading of the section itself which provides application only if the share of the beneficiaries is unknown or indeterminate. The facts are otherwise. All the contributors were known and their identity was not in dispute. Therefore, the question of applying Section 164 to the facts of the present case does not simply arise. Therefore, the Tribunal was perfectly justified in invoking section 62(2) r/w section 61(1) which would apply only to the revocable transfer of the funds made for a period which is not specified and would be taxable in the hands of the Transferor/beneficiaries and not in the hands of the Trust. Thus, appeals are dismissed.

(See 2019-TIOL-579-HC-MAD-IT)