Income from Revocable Transfer of Assets to be Taxed in Hands of Settler and Not in Trust | ITAT

Case Details: M/s. Reporter Family Private Trust vs. AO - [2024] 160 taxmann.com 459 (Mumbai-Trib.)

Judiciary and Counsel Details

• Amit Shukla, Judicial Member & Gagan Goyal, Accountant Member
• Tejveer Singh & Ms Wrutuja Soni for the Appellant.
• Smt Mahita Nair for the Respondent.

Facts of the Case

Assessee was a Revocable Private Trust and didn’t file the return of income for the disputed Assessment Year. As per AIR information, the assessee had purchased units of mutual funds worth more than Rs. 2.5 crores. Based on this information, a reopening notice was issued, which was unserved. Later, the Assessing Officer (AO) issued a show-cause notice to pass the best judgment assessment, and an addition was made on account of the purchase of mutual funds.

On appeal, the Commissioner (Appeals) upheld the additions made by the Assessing Officer (AO). Aggrieved by the order, the assessee filed an appeal before the Mumbai Tribunal.

ITAT Held

The Tribunal held that there was no dispute that the assessee was a ‘revocable trust’. It purchased mutual fund units, and income from such funds was offered to tax in the Income Tax Return of the Settler. The settler had offered the capital gain on mutual funds of the revocable family private trust.

From the plain reading of section 61, read with section 63, the income arising from the revocable transfer of assets is taxable in the hands of the transferor, i.e., the settler of the revocable trust. It is to be clubbed in the total income of the transferor and not in the total income of the transferee of the assets. It is noted that from the trust deed, the settler may revoke the deed, and the entire trust fund shall be reinvested in the settler. Thus, even as per the terms of the trust deed, the income or any source of investment in the mutual funds ought to be taxable in the hands of the settler. Thus, even as per law, the income could not have been taxed in the hands of the assessee-trust.

Further, it was brought on record that income has already been offered in the hands of the settler, and then taxing the same amount again in the hands of the trust is wholly arbitrary. AO did not question the source of mutual funds.

In addition to similar issue for the other assessment years, the AO accepted the assessee’s contention, and no addition was made on account of any income/purchase of mutual funds investment. Accordingly, the additions were deleted.