Representative Assessee
Introduction
A representative assessee is liable for tax on income received or entitled to be received on behalf of another person. The Income-tax Act deems a representative assessee as an assessee for tax purposes.
Categories of Representative Assessee
- Agent of a Non-Resident:
o An agent of a non-resident is a person in India who can be made responsible for paying tax on income earned in India by a non-resident. Such an agent may be anyone employed by or on behalf of the non-resident, having a business connection with him, from or through whom he receives income, acting as his trustee, or someone who has acquired a capital asset from him.
o The Assessing Officer must provide an opportunity of being heard before treating someone as an agent.
o An independent broker acting in the ordinary course of business or a person from whom non-resident purchases goods from India for export is not considered an agent.
- Guardian or Manager of a Minor, Lunatic, or Idiot:
o The guardian or manager of a minor, lunatic or idiot is treated as a representative assessee and is taxable on the income he receives or is entitled to receive on behalf of such person.
o A guardian may be a natural guardian (like father or mother), one appointed by a will, one appointed by a court, or a person empowered by law (e.g., under the Court of Wards). For an unmarried Hindu girl, the natural guardian is first the father and, after him, the mother; for an illegitimate girl, it is the mother first and then the father (excluding step-parents).
o A person cannot act as a natural guardian if he has ceased to be a Hindu or has renounced the world to live as an ascetic.
- Court of Wards, Administrator-General, Official Trustee, Receiver, or Manager:
o The Court of Wards, Administrator-General, Official Trustee, or any Receiver or Manager appointed by a court is treated as a representative assessee when they receive or are entitled to receive income on behalf of another person.
o An Administrator-General may step in to manage the estate of a deceased person (where assets exceed Rs. 10 lakh) if no legal heir or representative applies for probate or administration within a month and if there is a risk of misappropriation or waste of the estate. .
- Trustee Appointed by an Instrument
o A trustee managing income for beneficiaries is assessed as a representative assessee.
o If no formal trust deed exists, a written declaration must be submitted to the Assessing Officer within three months from the date of declaration of the trust.
- Oral Trust:
o A trustee under an oral trust is treated as a representative assessee and taxed at the maximum marginal rate.
Liability of Representative Assessee
- A representative assessee is treated as an assessee under the Income-tax Act and is liable for tax on the income he receives or manages on behalf of someone else.
- His liability is the same as that of the actual beneficiary. He can claim the same exemptions, deductions, and benefits as the beneficiary, and the assessment is made in his representative capacity (not mixed with his personal income).
- In case of a trustee, if the trust income includes business profits, the entire income is generally taxed at the maximum marginal rate (the highest rate applicable to an Association of Persons). However, if the trust is created by a will, solely for the support of dependent relatives, and is the only trust so declared, then normal tax rates apply instead of the maximum marginal rate.
Rights of Representative Assessee
- A representative assessee has the right to recover from the actual beneficiary any tax he has paid on that person’s behalf, and he may keep aside the same amount out of any money of the beneficiary in his possession.
- In case of dispute, he may obtain a certificate from the Assessing Officer, which serves as his authority to retain that amount until the final liability is decided.
Assessing Officer’s Powers
- Direct Assessment of Beneficiary:
o The Assessing Officer can assess either the representative assessee or the beneficiary but not both.
- Tax Recovery from Beneficiary’s Property:
o The tax can be recovered from assets managed by the representative assessee on behalf of the beneficiary.
Assessment of Representative Assessee
- Agent of a Non-Resident:
o The agent files returns using his PAN in a representative capacity. The status and tax rate shall be that of the person he is representing.
- Guardian or Manager of a Minor, Lunatic, or Idiot:
o The guardian files returns using his PAN in a representative capacity. The status and tax rate shall be that of the person he is representing.
- Court of Wards, Administrator-General, Official Trustee, Receiver, or Manager [Section 164]:
o Tax is charged at the maximum marginal rate if beneficiaries’ shares are indeterminate.
o If all beneficiaries have incomes below the exemption limit, normal tax rates apply.
- Trustee Under an Instrument:
o A trustee, when assessed as a representative assessee, is taxed at the maximum marginal rate (MMR) if income is indeterminate, unknown, or includes business profits, treating the trust like an AOP.
o If beneficiaries’ shares are determinate and known, the trustee is taxed at the rate applicable to each beneficiary, or the Assessing Officer may assess beneficiaries directly.
o Income is taxed at the AOP rate instead of MMR in the following cases:
(a) When none of the beneficiaries has taxable income above the exemption limit or is a beneficiary of another trust.
(b) Where the trust is declared by a person by ‘will’ and such trust is the only trust declared by him.
(c) Where a pre-1970 non-testamentary trust is created exclusively for dependents/relatives.
(d) Where business income arises from a trust declared by any person by ‘will’ exclusively for a dependent relative.
(e) Where trustees hold income for employee welfare funds.
- Oral Trust:
o Tax is levied at the maximum marginal rate.