2005 (7) TMI 88 - HC - Income Tax

Whether, the assessee-trust was a non-discretionary trust for the purposes of the applicability of appropriate rate of tax? - resolutions adopted by the trustees and the demarcation of shares made by them in favour of the beneficiaries in the ratio of 50 50 as indicated hereinabove, clearly indicates that the power vested in the trustees, the board of trustees was exercised by them at their meeting held on June 28, 1980, wherein the shares of the beneficiaries were defined though initially the trust was a discretionary trust, i.e., up to March 31, 1980. But after having defined the specific shares of each beneficiary, the definite trust came into existence. - In that view of the matter, the trust has to be held to be a non-discretionary trust. If that be so, the question referred has to be answered in the affirmative, i.e., in favour of the assessee

Summary

Issues:
Interpretation of trust as discretionary or non-discretionary for tax purposes.

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, where the question was whether the assessee-trust was a non-discretionary trust for tax rate applicability. The factual background revealed the creation of the trust by one individual with trustees and beneficiaries identified. The trustees passed a resolution defining the shares of beneficiaries, transforming the trust from discretionary to non-discretionary. The Income-tax Officer initially treated the trust as discretionary, taxing it at the maximum marginal rate. However, the Appellate Assistant Commissioner and the Tribunal both ruled in favor of the assessee, recognizing the trust as non-discretionary post the resolution defining beneficiary shares.

The High Court analyzed the evidence, including resolutions and beneficiary shares, to determine the nature of the trust. It concluded that the trustees' actions in defining specific shares transformed the trust into a non-discretionary one, aligning with the evidence on record. Citing a relevant case, the court held in favor of the assessee, stating that once the trust became non-discretionary, the tax treatment should reflect this change. Therefore, the court answered the referred question in favor of the assessee, disposing of the reference with no costs incurred.