2005 (2) TMI 40 - HC - Income Tax

1. Whether Tribunal was right in holding that the applicant-trust is a discretionary trust and hence maximum marginal rate of tax has to be applied? - 2. Whether Tribunal was right in holding that the rectification deed effected by the authority would not relate back and could not cure the alleged defect in the trust deed? 3. Whether Tribunal was justified in refusing to follow the general principle of law viz. when the shares are not specified in the deed the beneficiaries take the shares in equal proportion? - Tribunal has proceeded on the basis that the income was not actually received by the beneficiaries and it is open to the Revenue to make a direct assessment on the trust. Accordingly without expressing any opinion on the point raised by learned counsel for the assessee that since the Revenue has already exercised the option to tax the beneficiaries it is not open to the Assessing Officer to assess the income of the trust in the hands of the trustee we answer the questions of law referred to us in the affirmative against the assessee and in favour of the Revenue but with a direction to the Tribunal to consider the question afresh whether it is permissible for the Revenue to assess the income of the trust in the hands of the trustee and whether the Revenue has actually exercised the option while making the assessment on the beneficiaries

Summary

Issues:
1. Determination of whether the trust is a discretionary trust or a specific trust.
2. Validity and implications of the deed of rectification in relation to the trust.
3. Assessment of trust income in the hands of the trustee in light of beneficiary taxation.

Analysis:

Issue 1: Determination of Trust Type
The case involved a dispute regarding the classification of the trust as either discretionary or specific. The Tribunal initially held that the trust was discretionary due to the absence of explicit beneficiary shares in the deed of settlement. The Deputy Commissioner of Income-tax (Appeals) disagreed, stating that the shares were determinate. However, the High Court upheld the Tribunal's decision, citing Explanation l(ii) to section 164 of the Income-tax Act, which requires explicit and ascertainable beneficiary shares in the trust deed. As the deed did not specify individual shares, the trust was deemed discretionary.

Issue 2: Validity of Deed of Rectification
The deed of rectification, executed subsequent to the assessment years in question, aimed to rectify the lack of beneficiary share specification in the original trust deed. The High Court ruled that the rectification deed could not retroactively alter the trust's nature. As per Explanation l(ii) to section 164, the rectification did not relate back to the original deed, maintaining the trust's discretionary status.

Issue 3: Assessment of Trust Income
Regarding the assessment of trust income in the hands of the trustee, the Court noted an argument that since beneficiaries were already taxed on their shares, taxing the trust again was unjustified. The Tribunal's decision to tax the trust income was based on the premise that the income was not received by the beneficiaries directly. However, the Court highlighted the need for reconsideration in light of the Supreme Court's subsequent decision in Moti Trust v. CIT [1999] 236 ITR 37. The Court directed the Tribunal to reassess whether the Revenue could tax the trust income in the trustee's hands, considering the Supreme Court rulings.

In conclusion, the High Court affirmed the Tribunal's classification of the trust as discretionary, upheld the non-retroactive effect of the rectification deed, and directed a fresh consideration by the Tribunal on the assessment of trust income in alignment with relevant Supreme Court decisions.