The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that a beneficiary of a determinate private trust cannot claim a proportionate share of the trust’s losses in his or her individual income tax return unless the trust’s income or loss has first been examined, verified, and determined in accordance with the provisions of the Income-tax Act, 1961. 

The bench of Vijay Pal Rao (Vice President) and Madhusudan Sawdia (Accountant Member) has observed that Section 160, trustees of a trust created by a duly executed written instrument are treated as representative assessees. Under Section 161, such trustees are assessable in a representative capacity in respect of the trust’s income or loss. Although Section 166 permits direct assessment of beneficiaries, it does not eliminate the statutory requirement that the trust’s income or loss must first be determined in accordance with law. 

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The assessee, Indira Kamineni, was one of the beneficiaries of KSN Trust, a private family trust in which she held a 70% beneficial share. For the Assessment Year 2018-19, she filed her return declaring nil income.

During scrutiny, the Assessing Officer noted that KSN Trust had allegedly incurred Loss from House Property: ₹1.73 crore and Loss from Other Sources: ₹1.66 crore

Based on her 70% beneficial interest, the assessee claimed ₹1.21 crore as loss under the head “Income from House Property”; and ₹81.30 lakh as loss under the head “Income from Other Sources.”

The Assessing Officer rejected these claims and completed the assessment under Section 143(3) of the Income-tax Act. 

On appeal, the Commissioner of Income Tax (Appeals) held that KSN Trust was a determinate private trust and that since the assessee’s share was specifically identifiable, she was entitled to claim the corresponding share of the trust’s losses in her individual return.

The Revenue challenged this finding before the ITAT. 

The Revenue contended that the CIT(A) had committed a legal error because KSN Trust had not filed any return of income for the relevant assessment year. Consequently, the trust’s income or loss had never been computed or verified under the Income-tax Act. Without determining the trust’s actual losses, a beneficiary could not be permitted to claim any proportionate share. The CIT(A) also failed to obtain a remand report or verify the correctness of the trust’s computation before granting relief. 

The assessee argued that KSN Trust was a non-discretionary (determinate) trust where the beneficiaries’ shares were fixed and known.

Relying on Sections 161 and 166 of the Income-tax Act, the assessee submitted that the income of such a trust could be assessed directly in the hands of the beneficiaries and, therefore, the corresponding share of loss was also allowable in the beneficiary’s return. 

The Tribunal undertook a detailed examination of Sections 160, 161 and 166 of the Income-tax Act dealing with representative assessees and assessment of trusts.

The Tribunal emphasized that the provision enabling direct assessment of beneficiaries cannot substitute the computation and verification process applicable to the trust itself.

The Bench noted that KSN Trust had admittedly not filed any return of income for the relevant year.

As a result, the alleged losses had never been subjected to examination, verification or determination under the Act.

According to the Tribunal, a beneficiary’s entitlement to claim a proportionate share of the trust’s losses can arise only after the trust’s income or loss has been properly computed in accordance with the law.

The Tribunal further observed that the CIT(A) had accepted the legal proposition relating to determinate trusts but failed to record any finding regarding the correctness or quantification of the losses claimed by the trust. No remand report was called for and no independent verification had been undertaken. 

Setting aside the appellate order, the ITAT restored the matter to the Assessing Officer with directions to first examine and determine the income or loss of KSN Trust in accordance with the Income-tax Act after granting adequate opportunity to the assessee; and thereafter decide whether, and to what extent, the assessee is entitled to claim any share of such loss in her individual assessment. 

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