Beneficiary Not Eligible To Claim Unverified Loss Suffered By Family Trust

BRIEF FACTS OF THE CASE*

• The Assessee, Smt. Indira Kamineni, is an individual and one of the beneficiaries of a private family trust known as KSN Trust. She filed her return of income for Assessment Year 2018-19 under Section 139(1) of the Income-tax Act, 1961 (‘the Act’) on 30.03.2019, declaring nil total income.
• Thecasewasselected for limited scrutiny through CASS. During the course of assessment proceedings, the Assessing Officer (‘AO’) observed that KSN Trust had incurred:
  • Loss under the head "Income from House Property" amounting to Rs. 1,73,62,048/-;
  • Loss under the head "Income from Other Sources" amounting to Rs. 1,66,15,605/-.
• Since the Assessee was entitled to a 70% beneficial share in KSN Trust, she claimed the following losses in her individual return of income.
  • Lossunder"IncomefromHouseProperty":Rs.1,21,53,433/-; and
  • Lossunder"IncomefromOtherSources":Rs.81,30,924/-.
• TheAOdisallowed the aforesaid claims and completed the assessment under Section 143(3) r.w. Section 143(3A) and 143(3B) of the Act vide order dated 18.03.2021, resulting in a total addition of Rs. 2,02,84,357/-.
• Aggrieved by the assessment order, the Assessee preferred an appeal before the Commissioner of Income Tax (Appeals), NFAC, Delhi (‘CIT(A)’). In the CIT(A) allowed the appeal, holding that KSN Trust was a determinate trust and the Assessee, being entitled to 70% share therein, was eligible to claim the corresponding share of loss in her individual return of income. Aggrieved by the order of the CIT(A), the Revenue is in appeal beforethe HyderabadITAT.

REVENUE’S CONTENTIONS:

• TheDepartmentalsubmittedthatfollowing issuesarosefor consideration:
• Inthe absence of any return filed by the trust, the income or loss of the trust had never been determined in accordance with the provisions of the Act. Therefore, the Assessee could not claim a share of such loss in the individual return.
• TheDepartment further contended that the claim was based on an unverified loss, the quantum and computation of which had not been examined or determined under the Act.
• Even assuming that the trust had incurred a loss, the same required proper verification and examination. Accordingly, in light of the findings recorded in the remand report, the Department submitted that the relief granted by the CIT(A) warranted reconsideration and the matter be restored for fresh examination.

TAXPAYER’SCONTENTIONS:

• TheAssessee relied on the order of the CIT(A) and submitted that KSN Trust is a non-discretionary trust and the shares of the beneficiaries are determinate andknown.TheAssesseeisentitledtoa 70% shareinthetrust.
• Under Sections 161 and 166 of the Act, the income of a determinate trust can be assessed directly in the hands of the beneficiaries. Therefore, the Assessee was justified in claiming her share of the loss in the individual return of income.
• TheAssesseefurther submittedthat the CIT(A), after examining the facts of the case, had rightly allowed the claim. Accordingly, no interference with the order of the CIT(A) was called for..

ITAT’S RULING:

• TheTribunal examined Sections 160(1)(iv) and 160(2) of the Act and observed that a trustee appointed under a trust declared by a duly executed instrument in writing is treated as a representative assessee and deemed to be an assessee for the purposes of the Act. Since KSN Trust was constituted through a duly executed trust deed, its trustees were representative assessees under the Act.
• ReferringtoSection161(1), the Tribunal noted that where incomeis receivable by a trustee on behalf of or for the benefit of beneficiaries, the trustee is assessable in a representative capacity and tax is leviable and recoverable from him in the like manner and to the same extent as from the beneficiary. Thus, Section 161 contemplates assessment of the trustee in respect of the income or loss relatable to the trust.
• TheTribunal further observed that Section 166 merely preserves the power of the Revenue to assess the beneficiary directly in respect of income receivable on his behalf. However, it does not dispense with the requirement of determining the income or loss of the trust in accordance with law, nor does it absolve the representative assessee from the statutory obligations cast upon him.
• Inthe present case, no return of income had been filed by KSN Trust for the relevant year. Consequently, the losses claimed under the heads “Income from House Property” and “Income from Other Sources” had not been subjected to examination, verification, or determination under the provisions of the Act.
• TheTribunal found merit in the Revenue's contention that a beneficiary can claim a proportionate share of loss only after the loss of the trust has been determined and verified. Although the CIT(A) accepted that beneficiaries of a determinate trust can be assessed directly, no finding was recorded on the correctness or quantification of the losses claimed by KSN Trust, nor was any remand report obtained from the AO.
• Accordingly, the Tribunal held that the Assessee's claim to a share of loss could arise only after the trust's income/loss was determined under the Act. The CIT(A)'s order was set aside and the matter was restored to the AO to determine the trust's income/loss and thereafter examine the Assessee's claim.

AURTUS COMMENTS

• This ruling is a significant pronouncement on the interplay of Sections 160, 161, and 166 of the Act in the context of private family trusts and underscores the mandatory pre-condition of trust-level determination before a beneficiary's share of loss can be admitted.
• The ruling highlights the critical consequence of a trust's failure to file its return of income. Where a trust does not file a return, the losses claimed to have been incurred by it remain unexamined, unverified, andundetermined.
• It is important to note that the Tribunal did not hold that the Assessee was disentitled to claim a share of the trust's loss as a matter of principle. The decision turned entirely on the procedural pre-condition that the trust's income or loss must first be computed in accordance with the Act.

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