2008 (2) TMI 640 - HC - Income Tax

Revocation of trust - by sole beneficiary - The respondent trust was created in the year 1981 when the sole beneficiary Mr. Nelson was a minor aged 14 years. The trust was to be operative until the beneficiary became 21 years of age and thereafter the trust property was to be transferred to the beneficiary - on becoming major - sole beneficiary revoked the trust and took over the assets and business of the trust and started carrying on business as the proprietor - Assessing Officer held that the trust is continuing business and consequently the respondent was assessed as a trust Even though the beneficiary was also assessed in his individual capacity on the same income the respondent - Held that - trust otherwise created can be revoked only- (a) where all the beneficiaries are competent to contract by their consent ; (b) where the trust has been declared by a non-testamentary instrument or by word of mouth-in exercise of a power of revocation expressly reserved to the author of the trust ; or (c) where the trust is for the payment of the debts of the author of the trust and has not been communicated to the creditors-at the pleasure of the author of the trust - sole beneficiary opted to revoke the trust in exercise of his authority under section 78 of the Trusts Act the Department cannot insist and hold that the trust will continue in force till the duration as stated in clause 2 of the trust deed - Appeal is dismissed

Summary

Issues:
Whether the sole beneficiary of a trust can revoke the trust before its duration.

Analysis:
The case involved a trust created in 1981 with the sole beneficiary being a minor. The trust was to be operational until the beneficiary turned 21, after which the assets were to be transferred to him. However, upon reaching the age of majority in 1984, the beneficiary revoked the trust and took over the assets, starting a business in his individual capacity. The Revenue argued that the trust should continue until the beneficiary reached 21, citing clause 2 of the trust deed. The Calcutta High Court precedent was presented, stating that a trust can be revoked with the beneficiary's consent. The Court referred to clause 78 of the Indian Trusts Act, which allows beneficiaries to revoke a trust if they are competent to contract. Despite clause 2 stating the trust's duration until the beneficiary turns 21, the Act permits revocation upon the beneficiary reaching majority. The Court agreed with the Tribunal that the trust ceased to exist after the beneficiary's revocation, concluding that no further assessment on the trust was permissible. The appeals were dismissed based on this interpretation.