1995 (4) TMI 2 - SC - Income Tax

Discretionary Trust - Whether, in law and on facts and having regard to the provisions of sub-section (1) of section 164 of the Income-tax Act, 1961, the assessee is entitled to the concessional rate of tax - Whether, in law and on facts and in view of the provisions of the trust deed, the trust cannot be subjected to maximum marginal rate of tax

Summary

Issues Involved:
1. Entitlement to concessional rate of tax under section 164(1) of the Income-tax Act, 1961.
2. Applicability of maximum marginal rate of tax to the trust.

Detailed Analysis:

Issue 1: Entitlement to Concessional Rate of Tax
The primary issue was whether the assessee trust is entitled to a concessional rate of tax under section 164(1) of the Income-tax Act, 1961. The High Court held that the trust income is chargeable at the maximum marginal rate. The court noted that the trust deed created a discretionary trust where the income was not specifically receivable on behalf of any one person, and the individual shares of beneficiaries were indeterminate or unknown.

The court referred to section 164(1) which states that tax shall be charged at the maximum marginal rate when the income is not specifically receivable on behalf of any one person or where the shares of beneficiaries are indeterminate or unknown. The proviso to this section allows for a concessional rate if none of the beneficiaries has any other income exceeding the maximum amount not chargeable to tax in the case of an association of persons. Here, the first category beneficiaries did not have taxable income, while the second category beneficiaries did, leading to the conclusion that the trust income is liable to be charged at the maximum marginal rate.

Issue 2: Applicability of Maximum Marginal Rate of Tax
The second issue was whether the trust could be subjected to the maximum marginal rate of tax. The High Court ruled that the income is chargeable at the maximum marginal rate. The trust deed was scrutinized, revealing that the trustees had absolute discretion in distributing the income among the first category beneficiaries or accumulating it for the second category beneficiaries. This discretion meant that the income was receivable on behalf of both categories of beneficiaries, making the maximum marginal rate applicable.

The court emphasized that for the purpose of section 164, it is sufficient that the income is receivable by the trustees for the benefit of the persons named in the trust, regardless of whether the beneficiaries actually receive the income. The court stated, "The real question is whether the persons named in the trust have an interest, whether vested or contingent, in the income that is receivable on their behalf." Both categories of beneficiaries were found to have an interest in the trust income, justifying the application of the maximum marginal rate.

Conclusion
The Supreme Court upheld the High Court's judgment, dismissing the appeals and confirming that the trust income is chargeable at the maximum marginal rate. The court found no distinction between the two categories of beneficiaries concerning the income of the trust. Both categories had only an expectation, not a right, to receive income, making them beneficiaries within the meaning of section 164(1). The court also noted that the policy of law under section 164(1) aims to discourage discretionary trusts by charging their income at the maximum marginal rate except in specified situations. The appeals were dismissed with costs.