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2014 (8) TMI 601 - HC - Income TaxRate of tax on allocation of income of Trust to beneficiaries - Maximum marginal rate u/s 164 Specific Trust or Discretionary Trust Held that - With respect to the AY 1982-83 and 1983-84, Commissioner took a view that the assessee Trust was subjected to income allotted to Schedule-II to tax at the maximum marginal rate in the hands of the Trustees is the beneficiaries income receivable by the beneficiaries to the extent of 50% after 19 years - the shares which are allotted to the respective beneficiaries even with respect to Schedule-I and Schedule-II are specific shares and it can be said to be determinative shares - Merely because 50% of the income and their respective shares were to be accumulated as a special fund in the hands of the trustees for 19 years and the same were to be paid after a period of 19 years, it cannot be said that the Trust is discretionary Trust and/or the Trust is not a specific Trust - the assessee Trust is a specific Trust and therefore, not subjected to the tax at the maximum marginal rate u/s 164 of the Income Tax Act, 1961- Decided in favour of Assessee.
Issues:
1. Determination of tax liability for income allocated to beneficiaries of a specific Trust. 2. Interpretation of Trust Deed provisions regarding income distribution to beneficiaries. 3. Application of Section 164 of the Income Tax Act, 1961 to Trust income. Issue 1: Determination of tax liability for income allocated to beneficiaries of a specific Trust The High Court considered whether the Trust in question should be taxed at the maximum marginal rate under Section 164 of the Income Tax Act, 1961. The Court analyzed the nature of the Trust and the specific shares allocated to beneficiaries in Schedule-I and Schedule-II of the Trust Deed. It was crucial to determine if the Trust was discretionary or specific in its allocation of income to beneficiaries. Issue 2: Interpretation of Trust Deed provisions regarding income distribution to beneficiaries The Trust Deed outlined that 50% of the Trust's income was to be distributed to beneficiaries in Schedule-I, while the other 50% was to be accumulated for 19 years for beneficiaries in Schedule-II. The Court examined the specific shares allocated to each beneficiary in both schedules to ascertain whether the Trust operated as a specific Trust based on the provisions of the Trust Deed. Issue 3: Application of Section 164 of the Income Tax Act, 1961 to Trust income The Commissioner had previously directed that income allocated to Schedule-II beneficiaries be taxed at the maximum marginal rate. However, the Court, after considering the Trust Deed and the specific shares allotted to beneficiaries, concluded that the Trust should not be subjected to the maximum marginal rate tax under Section 164. The Court emphasized that the determinative shares allocated to beneficiaries in both schedules indicated the Trust's specificity, thereby exempting it from the higher tax rate. In summary, the High Court ruled in favor of the Trust, stating that it was a specific Trust based on the specific allocation of shares to beneficiaries in the Trust Deed. Consequently, the Trust was not liable to be taxed at the maximum marginal rate under Section 164 of the Income Tax Act, 1961. The judgment resolved the issues raised regarding the tax treatment of the Trust's income and provided clarity on the application of relevant legal provisions in such cases.
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