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Issues Involved
1. Whether the assessee trust should be assessed under section 161 or section 164 of the Income-tax Act, 1961. 2. The applicability of the Explanation to section 164 of the Income-tax Act, 1961. 3. The right of beneficiaries to transfer their beneficial interest in the trust. 4. The nature of the trust as a 'specific trust' or 'discretionary trust'. Detailed Analysis Issue 1: Assessment under Section 161 or Section 164 The primary issue in this appeal is whether the assessee trust should be assessed under section 161 or section 164 of the Income-tax Act, 1961. The assessee, a trust assessed as an Association of Persons (AOP), was previously assessed under section 161, treating it as a 'specified trust' with determinate shares of beneficiaries. The Income Tax Officer (ITO) initially assessed the trust for the year under appeal, considering it as a specific trust and taxing the income in the hands of the beneficiaries separately. Issue 2: Applicability of the Explanation to Section 164 The Commissioner of Income-tax (CIT) invoked section 263, arguing that the assessment was erroneous and prejudicial to the revenue's interest due to the Explanation inserted in section 164 effective from 1-4-1980. This Explanation stipulates that a trust should be treated as a discretionary trust if the beneficiaries are not identifiable from the trust deed. The CIT pointed out that six persons were not specified as beneficiaries in the trust deed, suggesting that the trust should be assessed as a discretionary trust. However, the Tribunal found that the Explanation to section 164 applies only to discretionary trusts and not to specific trusts. Since the assessee trust had determinate and specified shares of beneficiaries, the provisions of section 164 and its Explanation were not applicable. Issue 3: Right of Beneficiaries to Transfer Their Interest The beneficiaries had transferred their beneficial interest in the trust to other individuals, which was contested by the CIT. The Tribunal observed that under sections 3, 8, and 58 of the Indian Trusts Act, 1882, beneficiaries have the right to transfer their interest. The Tribunal cited Supreme Court decisions in CIT v. Smt. Kasturbai Walchand Trust and CIT v. Nawab Mir Barkat Ali Khan Bahadur, affirming that beneficiaries can assign their interest in a trust. The Tribunal concluded that such assignments do not alter the nature of the trust from specific to discretionary. Issue 4: Nature of the Trust The Tribunal emphasized that the assessee trust was consistently treated as a specific trust in prior assessments. The shares of the beneficiaries were determinate and specified, which is a characteristic of a specific trust. The Tribunal found no basis for the CIT's assertion that the trust should be treated as a discretionary trust. The Tribunal held that the CIT's order under section 263 was unjustified and set it aside, reaffirming the trust's status as a specific trust. Conclusion The Tribunal allowed the appeal, concluding that the assessee trust should continue to be assessed as a specific trust under section 161. The Explanation to section 164 was deemed inapplicable, and the beneficiaries' right to transfer their interest was upheld. The CIT's order under section 263 was set aside, reaffirming the trust's status and the assessment method used by the ITO.
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