S. 164: The explanation to s. 164 cannot be read for determinability of the shares of the beneficiary with the quantum on the date when the Trust deed is executed. The real test is whether shares are determinable even when even or after the Trust is formed or may be in future when the Trust is in existence

From the order of the ITAT Bangalore in DCIT vs. India Advantage Fund-VII, the High Court had to consider the following question at the instance of the department:

“Whether, the Tribunal, on the facts and in the circumstances of the case was right in holding that the assessee trust cannot be assessed as on AOP even though the requirements of section 164(1) were not met, inasmuch as the shares of the beneficiaries were indeterminate/unknown and hence the assessing officer was justified in invoking the provisions of section 164(1) of the Act and make the assessee liable to be assessed at the maximum marginal rate in the status of AOP. Hence it is not relevant whether the necessary ingredients for formation of an AOP are fulfilled by the assessee or not?”

HELD by the High Court dismissing the appeal:

(i) By no interpretative process the explanation to Section 164 of the Act, which is pressed in service can be read for determinability of the shares of the beneficiary with the quantum on the date when the Trust deed is executed and the second reason is that the real test is the determinability of the shares of the beneficiary and is not dependent upon the date on which the trust deed was executed if one is to connect the same with the quantum. The real test is whether shares are determinable even when even or after the Trust is formed or may be in future when the Trust is in existence. In the facts of the present case, even the assessing authority found that the beneficiaries are to share the benefit as per their investment made or to say in other words, in proportion to the investment made. Once the benefits are to be shared by the beneficiaries in proportion to the investment made, any person with reasonable prudence would reach to the conclusion that the shares are determinable. Once the 24 shares are determinable amongst the beneficiaries, it would meet with the requirement of the law, to come out from the applicability of Section 164 of the Act.

(ii) Under the circumstances, we cannot accept the contention of the Revenue that the shares were non-determinable or the view taken by the Tribunal is perverse. On the contrary, we do find that the view taken by the Tribunal is correct and would not call for interference so far as determinability of the shares of the beneficiaries are concerned.

(iii) Once the shares of the beneficiaries are found to be determinable, the income is to be taxed of that respective sharer or the beneficiaries in the hands of the beneficiary and not in the hands of the Trustees which has already been shown in the present case.

(iv) Under the circumstances, in any case, it cannot be said that the Tribunal has committed error. Accordingly, the question is answered in affirmative against the Revenue and in favour of the assessee.

(v) If the assessment under Section 164(1) of the Act is not maintained in the hands of the Trustees, the other question raised by the Revenue, in our view, would not arise. The examination of such questions inspite of our answer to the above referred question would only be a mere academic exercise which Court would not undertake and Court would rather decide the questions which are really required to be decided. Hence, we find that the other questions which are raised in the appeals, as such, would not arise nor would be required to be considered.