Question And Answer
Subject: Capital Gains in case of Private Specific TrusT
Querist: Ronak Mota
Answered by:
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Date: April 22, 2022
Query asked by Ronak Mota

Facts :

A Private Specific Family Trust is there having four major persons as its beneficiaries.
Shares of all the beneficiaries are fixed and known as per the trust deed.

Said Trust owns commercial building through which it receives rental income.
Return of income of Trust is regularly filed and income from rent is allocated to beneficiaries according to their shares and said income is offered for tax by beneficiaries when they file their return of income (i.e of beneficiaries ) and returned income of Trust is always NIL and Trust does not pay any taxes on rental income.
Now the Trust intends to sell the building which is long term capital assets

On sale of building substantial Long term capital gain will be generated.

The trustees wants to allocate this capital gain to individual beneficiaries and wants individual beneficiaries to show the same in their return of income and pay the tax accordingly individually and they want to file Return of income of Trust with NIL income

Query 1 – Whether the trust can allocate this Long term capital gain in the hands of individual beneficiaries as per their shares and then the individual beneficiaries offer the said LTCG in their personal return of income and pay tax individually.

Query 2 – If the trust can allocate this LTCG as mentioned in Query 1 above then whether each individual beneficiary can claim deductions un der section 54EC or 54F against the said sale? I.e. whether individual beneficiaries can claim 50 lakhs each (under section 54EC) in their hands against LTCG per beneficiary.

Query 3 – If the trust cannot allocate this LTCG as mentioned in Query 1 then whether the trust can claim deductions like 54, 54F or 54EC in the hands of Trust itself?

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The long-term Capital Gains will be taxable in the hands of each beneficiary according to their share of interest.

Reference can be drawn to the erstwhile provisions of section 80L of the Income-tax Act, 1961. The Hon’ble ITAT – Madras in the case of Miss S. Radhika v. ITO [1991] 39 ITD 213 (Mad)(Trib) held as under:

“Regarding the grant of exemption under sections 80L and 80T the Income-tax Officer stated as follows in his assessment order: “While computing the income of the beneficiaries of the trust the assessee has claimed deductions under sections 80L and 80T in respect of each beneficiary, this is not correct. The income of the trust is computed and thereafter that income was apportioned among the beneficiaries. Deductions under sections 80L and 80T have to be given in computing the income of the assessee. In this case the income of the trust is computed and then it is apportioned among the beneficiaries. As such the deductions under sections 8OG, 80L & 80T are deducted in computing the income of the trust. I find that the method of computation of total income adopted by the Income-tax Officer is quite in consonance with both the Bombay High Court and the Supreme Court decisions cited above. Since the Allahabad High Court while deciding the case in Smt. Shakuntala Banerjee (supra) did not take note of either the Bombay High Court decision in Balwantrai Jethalal Vaidya’s case(supra) or the Hon’ble Supreme Court decision in H.E.H. Mir Osman Ali Bahadur’s case(supra) or followed their ratio. Hence I hold that I need not follow the ratio of Smt. Shakuntala Benerjee’s case(supra), since it was decided against the ratio of Balwantrai Jethalal Vaidya’s case(supra) and H.E.H. Mir Osman Ali Bahadur’s case(supra).”

Therefore, each assessee should be allowed deduction under section 54EC of the Act in their individual capacity.

Further, the Hon’ble Bombay High Court in the case of Mrs. Amy F. Cama v. CIT [1994] 237 ITR 82 (Bom.)(HC) held that trustee has to be assessed under Act as a representative assessee for and on behalf of beneficiaries and tax can be levied and recovered from trustee in like manner and to same extent as it would be leviable upon and recoverable from person represented by trustee and the assessee (trustee) would be entitled to deduction under section 54 of the Act.

The above case was followed by the Hon’ble Mumbai Tribunal in the case of Balgopal Trust v. ACIT [2017] 81 367 (Mumbai – Trib.) wherein it was held that ssessee, a private non-discretionary trust, created for sole beneficiary, was entitled to deduction under section 54F in respect of sale of flat and said deduction could not be denied merely on ground that assessee was not an individual or HUF.

Section 54EC is available irrespective of the nature of the taxpayer as long as the asset involved is a long term capital asset.

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