1989 (3) TMI 149 - AT - Income Tax

Summary

Issues:
1. Whether the assessee-trusts are to be taxed under section 21(1) or section 21(4).
2. Interpretation of clauses 15 and 16 of the trust deed regarding distribution of income and corpus.
3. Application of proviso to section 21(4) for trusts created for the benefit of relatives.
4. Power of trustees under clause 15 to distribute corpus or give loans.
5. Effect of subsequent recovery of loan from beneficiary on determining shares of beneficiaries.
6. Authority of trustees to make investments under clause 23 and its impact on tax assessment.

Analysis:
The judgment addresses the issue of taxation for assessee-trusts under section 21(1) or section 21(4) based on the determination of whether the shares of beneficiaries are specific or indeterminate. The trust deed empowered trustees to distribute income equally among beneficiaries and corpus based on specified conditions. The WTO held that beneficiaries' shares were indeterminate due to clauses 15 and 16, granting discretionary powers to trustees for corpus distribution. The argument invoking the proviso to section 21(4) was rejected as the trust's main dependency criterion was not met.

The interpretation of clauses 15 and 16 was crucial in determining the tax assessment. The trustees' authority under clause 15 to distribute corpus or provide loans was contested. The Commissioner and WTO upheld that trustees could distribute corpus, not limited to loans. The subsequent recovery of a loan from a beneficiary did not alter the indeterminacy of shares. The judgment emphasized that clause 15 allowed ad hoc payments, not affecting beneficiaries' shares, which were determinate under clause 16's proportional distribution.

Regarding investments under clause 23, the trustees' power was deemed usual for trust administration, not impacting share determinacy. The judgment concluded that trusts should be assessed under section 21(1) as clause 15 did not render beneficiaries' shares indeterminate. The AAC's decision was overturned, directing assessment under section 21(1) and allowing all appeals. The judgment highlighted the legal interpretation of trust clauses and their implications on tax assessments, emphasizing the importance of specific language and trustee powers in determining beneficiaries' shares and tax liabilities.