Taxation of Entity Related Issues (Private Trusts, HUF,AOP,BOI, Succession, Company and Firm) 8 th January to 11 th January, 2015 48 th Residential Refresher Course Bombay Chartered Accountants Society Anantha Resort Udaipur, Rajasthan 1 Pradip N Kapasi Chartered Accountant
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Taxation of Entity Related Issues (Private Trusts, HUF,AOP,BOI, Succession,
Company and Firm)
8th January to 11th January, 2015
48th Residential Refresher Course
Bombay Chartered Accountants Society
Anantha Resort
Udaipur, Rajasthan
1Pradip N Kapasi
Chartered Accountant
Private Trusts
2Pradip N Kapasi
Chartered Accountant
Validations- General
Indian Trusts Act, 1882 Concurrent list of Constitution of India Author, Trustees, Beneficiaries Fiduciary relationship Agreement between settlor and trustees Transfer of Property to trustees Trustees are Custodian of Property Not agents- Trustees Terms of settlement Settlement for an unborn person
Subject to rule against perpetuity
3Pradip N Kapasi
Chartered Accountant
Validations- Income Tax No special provisions for a Private Trust Charge, computation and Residential status
Special provisions Assessment, Representative assessee, recovery of tax
Constituted as a Trust under Indian Trust Act, 1882 Business model- Medium of Investment Collection- Investment- Income- Distribution
Business practice- open ended fluctuating body of beneficiaries entry and exit possible
Judicial view India Advantage Fund, 50 taxmann.com 350 (Bang.) In Re, 224 ITR 473 (AAR) Raptakos Brett & Co. (P.) Ltd., 177 ITR 202 (Bom.)
11Pradip N Kapasi
Chartered Accountant
Direct Assessment of Beneficiary In case of Discretionary Trust Beneficiary not identified or share not defined
Direct assessment not possible
Possible to assess beneficiary on distribution of income S.5 or s.166
Jyotendrasinhji, 201 ITR 611 (SC)
Moti Trust, 236 ITR 37 (SC)
Kamilini Khatau, 201 ITR 109 (SC)
Trustees only assessable- other view Alpana Kirloskar, 150 ITD 311 (Delhi)
Better view12
Pradip N Kapasi Chartered Accountant
Determination of Tax Base
Tax base for Discretionary Trust
Seeking exemption under clause (i) of 1st Proviso
Income of Trust possible only where distributed
Other income only to be considered
13Pradip N Kapasi
Chartered Accountant
Rate of tax for Beneficiary
Where taxed in beneficiary’s hands - rate
R. Sreevidya, 84 ITD 222 (Cochin)
Case of a discretionary and specific trust, as well
S.161(1A) and S.164
MMR where taxed in the hands of trustees
Scope of s.166 restricted to option and not to taxes
Option once exercised to be taken to logical end
14Pradip N Kapasi
Chartered Accountant
Rate of Tax on Discretionary Trust
S.21 of Wealth Tax Act –maximum rate 3%
Assessment in status of ‘individual’
Wealth Tax at Ordinary Rates
Pradip D. Kothari Trust, 27 ITD 176 (Mad.)
Pradip N Kapasi Chartered Accountant
15
A Trust through Will Where more than one relative ‘Any’ relative- s.161(1A), s.164, cl.(ii) to 1st & 2nd Proviso
‘Exclusively’
Where independent income of a beneficiary Dependency for support and maintenance
Independent income not an imperdiment
Where income subsequent to settlement Compliance- on settlement or on claim of relief
Declaration under a Will Chunilal Raichand Trust, 189 ITR 631 (Bom.)
Gunvantlal Jivanlal Family Trust, 133 ITR 162 (Bom.)
16Pradip N Kapasi
Chartered Accountant
A Trust through Will Settlement of a Charitable Trust- in addition Trust is the ‘only’ trust ‘so declared’ by him.
V.M.R. Trust, 253 ITR 491 (Mad.)
Parents- residing with brother- Partly dependent Relative- s.2(41)- lineal ascendants- both parents Dependency independent of parenthood Stay of dependent not relevant Dependence for support and maintenance
Need not be ‘Exclusively’, ‘fully’
Settlement by sister, also Compliance of conditions qua Will of the deceased Impossibility of control For support and maintenance- more persons
17Pradip N Kapasi
Chartered Accountant
Minor Beneficiary Trust Is income taxable during minority
S.4 and 6- Arising, Accruing, Received
S. 160- Receives or entitled to receive
S.161(1)- Received by or accruing to
Beneficiary/ies of a specific trust
Not accrued or received by beneficiaries
Not to be clubbed u/s 64
Doshi M.R., 211 ITR 001 (SC) – Amendment of 1971
Mutammal (N.), 227 ITR 656 (Mad.) – Post amendment
S.4 to 6 of Income Tax Act or DTAA S.160 to 167 to apply In hands of Representative Assessee or Trustees Status qua beneficiary unless a discretionary trust Specific Trust
World income if resident Indian income if Non Resident or Resident but NOR
Discretionary Trust Indian income of Trust World income if sole beneficiary –Resident
Status of income On settlement-Accrual or receipt-Distribution
Business Trust Pass-through status for interest only
Specific provision for tax at MMR- Outside s.161 and s.164
Transaction, Capital Gains tax costs, DDT for transfer by SPV
Rental income and Capital Gains of SPV liable to DDT
Gains on transfer of shares of SPV liable to MAT
Taxable capital gains on transfer of units by sponsors
Denial of benefit of s.10(38) exemption
Difficulty in claiming expenditure and s.14A
Base period for indexation of units for sponsors
24Pradip N Kapasi
Chartered Accountant
Securitization Trusts
Non securitization income taxable
Disallowance of expenditure u/s 115TA(4)
No specific exemption for capital gains
on transfer of units of trust
in the hands of unit holders
Disallowance of expenditure on investment in units u/s 14A
Unit holders liability to MAT- DDT on distribution
DDT on subsequent distribution
25Pradip N Kapasi
Chartered Accountant
Hindu Undivided Family
26Pradip N Kapasi
Chartered Accountant
Status of a daughter Classical or Shastrik law- her status
Hindu Succession Act before amendment
Hindu Succession Act post amendment w.e.f. 9th September 2005
Snapshot of s.6 (Relevant part) 6.(1) On and from the commencement of the Hindu Succession (Amendment) Act, 2005, in a
Joint Hindu family governed by the Mitakshara law, the daughter of a coparcener shall,-
(a) by birth become a coparcener in her own right in the same manner as the son;
(b) have the same rights in the coparcenary property as she would have had if she had been a son;
(c) be subject to the same liabilities in respect of the said coparcenary property as that of a son,
and any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference to a daughter of a coparcener:
Provided that nothing contained in this sub-section shall affect or invalidate any disposition or alienation including any partition or testamentary disposition of property which had taken place before the 20th day of December, 2004.
(2) Any property to which a female Hindu become entitled by virtue of sub-section (1) shall be held by her with the incidents of coparcenary ownership and shall be regarded, notwithstanding anything contained in this Act, or any other law for the time being in force, as property capable of being disposed of by her by her testamentary disposition.
27Pradip N Kapasi
Chartered Accountant
Status of a daughter
Synopsis of relevant part Co-parcener by birth
Same rights and liabilities as of a son
Right of disposition of her share
Right to demand partition
Incidence of co-parcenary Joint title and possession over HUF property
Devolution by survivorship and not by succession
Limited right of disposition
Pradip N Kapasi Chartered Accountant
28
Status of a daughter
Family of a father and a daughter
Ingredient of a taxable entity of HUF
Joint Hindu Family
Unity of title and possession
No individual rights of disposition
Need for more than one co-parcener satisfied
Case of two daughters without a male
Co-parcenary in existence
Relevance of a male member as a head or karta
29Pradip N Kapasi
Chartered Accountant
Status of a daughter
HUF with two female co-parceners only
Verappa Chettiar, 76 ITR 467 (SC)
Sandhya Rani Dutta, 248 ITR 201 (SC)
Yashodamma (T.), 146 ITR 445 (AP)
Relevance of a male member as Karta post HSA
Claim in appeal- prospective amendment
Not possible for A.Y. 2003-04
Possible for A.Y. 2006-07
30Pradip N Kapasi
Chartered Accountant
Status of a daughter
Daughter’s daughter and granddaughter
Provisions of S.6(1) and (2) of HSA, 1956.
No express or implied provision
Daughter’s interest an absolute property
Capable of disposition
Co-parcenary interest or membership for descendants of a daugher
Absence of legislative intent
Position under classical law- son of a co-parcener
31Pradip N Kapasi
Chartered Accountant
Female constituting her own HUF
Daughter’s HUF
Family of husband and children with her as Karta
Need for a co-parcenary
Need for a male Karta
No express or implied statutory provisions
Position under Classical law
Ingredients of an HUF
32Pradip N Kapasi
Chartered Accountant
Claim of heirs on daughter’s death
Death of daughter and her share in father’s HUF
Legal heirs claim as her legatees and heirs- s.6 and s.30
Devolution by succession and not by survivorship
33Pradip N Kapasi
Chartered Accountant
Character of inherited property
Whether HUF or Individual- 3 situations Provisions of s.8 and s.30 and s.6(3) of HSA, 1956 Chandersen’s decision, 161 ITR 370 (SC) Receipt on deemed partition u/s 6 and 30
Retains ancestral character qua son’s family
Receipt on succession to father’s absolute property Absolute receipt post HSA, 1956
Receipt on succession to father’s inherited property Ancestral character or not qua son’s family
34Pradip N Kapasi
Chartered Accountant
Status of HUF post deemed partition u/s 6 or s.30 of the HSA, 1956
Total partition of HUF or partial Statutory effect limited to deceased’s share No deeming fiction for total partition
Income and wealth post partition Fiction creates a right in favour of legal heirs Right requires exercise Effective only on implementation and possession Taxable in HUF’s hands in intervening period Taxable in legal heir’s hands post implementation
Nature of property on subsequent marriage of the male Hindu
Re-Characterisation of property ancestral on marriage Receipt when no family Immediate holding ‘absolute’ with rights of disposition Reversal of absolute character on marriage
Essentials for AOP Joining together voluntarily of 2 or more persons Business- unity of purpose Joint actions and management and decisions Profit motive- but see Explanation to s.2(31) Sharing of profits and losses Degree of permanency- Real and substantial Agency- Binding powerJoint ownership and Infrastructure
38Pradip N Kapasi
Chartered Accountant
Status of an AOP Irrelevant factors
Joining together for contract or asset Common management Liability sharing
Factors relevant for Non-AOP Independent activities Independent profit centres Independent accountability Separate books of accounts Skills and funds Averments of not an AOP
Unintended consequences S. 2(47)-’transfer’ and stock valuations Multiple assessments and tax credits Denial of DTAA benefits Unlimited liability
Pradip N Kapasi Chartered Accountant
39
Taxation of BOI and its members Rate of tax Specific provisions u/s 167B for MMR
Provisions of s.164(1) for discretionary trust not to apply
Share of member in BOI’s income- taxability BOI a taxable entity- S.2(31)
Income taxable in the hands of BOI
No specific provisions for inclusion in member’s hands
No specific provision for exclusion u/s 10
Liability to MAT
‘Rate purposes’ inclusion – s.86 Scope restricted to members of AOP
Inapplicable to members of BOI
40Pradip N Kapasi
Chartered Accountant
Capital Gains and AOP/BOI
Eligibility for concessional rate of taxation u/s 111A or 112
Specific provisions for concession
overrides general provision for MMR
S.167B does not override other provisions of the Act.
Niranjan Narottam, 128 Taxman 25 (Ahd.)
41Pradip N Kapasi
Chartered Accountant
Taxation at MMR
MMR on part of income or entire income
S.164 taxes only a part of income at MMR
Specific provision of s.167B to apply MMR in all cases
42Pradip N Kapasi
Chartered Accountant
Higher Rate of Tax
Higher rate of tax for ‘specific’ AOP- s.167B
Income of relevant year- annual exercise
Specific exclusion for share in income of AOP
43Pradip N Kapasi
Chartered Accountant
Taxation of Wealth
Wealth tax on Discretionary AOP
No provision for taxing an AOP- not an assessee
Charge of wealth tax u/s 3(2)
Maximum rate inapplicable
Aparna Ashram, 205 Taxman 362 (Delhi)
George Club, 191 ITR 368 (AP)
Club of Mahabaleshwar, 44 ITD 520 (Pune)
44Pradip N Kapasi
Chartered Accountant
Rate of tax in hands of members
Rate when taxed in members’ hands
S.167B applicable to AOP/BOI
MMR Inapplicable to members- ordinary rates
45Pradip N Kapasi
Chartered Accountant
S. 167B and Clubs
No member with share in AOP
Provisions of s.167B only where shares are unknown
Secunderabad Club, 79 TTJ 610 (Hyd.)
46Pradip N Kapasi
Chartered Accountant
Treatment of losses Tax treatment of losses- AOP or members
AOP a person u/s 2(31)- a taxable entity
No specific provisions for share of member but for S.67A
Provisions applicable to taxation of income to apply
Ch. Atchaiah, 218 ITR 239 (SC)
Pradeep Agencies, 111 ITD 346 (Del.)(SB)
Lalita M. Bhatt, 234 ITR 319 (Bom.)
Birla Tyres, 88 TTJ 1 (Cal.)(TM)
Sutlej Industries, 31 SOT 261 (Del.)
Hindustan Times, 13 ITR (T) 406 (Del.)
47Pradip N Kapasi
Chartered Accountant
Treatment of losses Right to carry forward to next year
Losses of AOP to be c/f by AOP only
No provision for c/f by members
Distant possibility where AOP’s income below taxable limit
Members’ right to claim- a possibility S.86 applicable to income only- 1st and 2nd proviso