1983 (7) TMI 33 - HC - Income Tax

Summary

Issues:
1. Validity of the trust under Income-tax Act, 1961
2. Exercise of option by the Income-tax Officer to include income from the trust in the hands of beneficiaries
3. Determination of beneficiaries' shares in the income of the trust under s. 164(1) of the Act

Issue 1: Validity of the Trust

The court examined whether the trust created by Ramkaran, settling his inherited property, was invalid due to its origin as ancestral property. The court found that the property inherited by Ramkaran was his father's individual property, not ancestral, and thus, he had full authority to create a trust over it. The court concluded that the trust was valid, as the property did not suffer from any legal defects. Therefore, the Tribunal's decision upholding the trust's validity was deemed justified.

Issue 2: Exercise of Option by Income-tax Officer

The Tribunal had held that the Income-tax Officer (ITO) did not exercise his option to include the trust's income in the beneficiaries' assessments, based on the ITO's statement that the orders were subject to rectification. However, the court disagreed with this finding. Citing precedents, the court emphasized that the ITO's assessments were not provisional and that he was aware of the beneficiaries' shares in the trust. Therefore, the court concluded that the ITO had indeed exercised his option to assess the beneficiaries individually, contrary to the Tribunal's ruling.

Issue 3: Determination of Beneficiaries' Shares

Regarding the determination of beneficiaries' shares in the trust income, the court analyzed the trust deed's provisions. The deed authorized trustees to spend income based on beneficiaries' essential needs and overall advancement, not equally among them. As the shares were not specified and were subject to varying needs, the court agreed with the Tribunal that the shares were indeterminate. Consequently, the court held that the provisions of s. 164(1) of the Act applied, affirming the Tribunal's decision. The court distinguished various precedents cited by the assessee's counsel, finding them inapplicable to the current case.

In conclusion, the court answered the referred questions as follows:
1. Validity of the trust - Affirmative, against the assessee.
2. Exercise of option by the ITO - Negative, in favor of the assessee.
3. Determination of beneficiaries' shares - Affirmative, against the assessee. The court directed that each party bear its own costs in the reference.