1989 (1) TMI 149 - AT - Income Tax

Summary

Issues Involved:
1. Determination of whether the assessee is a discretionary trust or a non-discretionary trust.
2. Applicability of Section 164A of the Income Tax Act.
3. Interpretation of Explanation 1 to Section 160 and Explanation 1 to Section 164(3) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Determination of whether the assessee is a discretionary trust or a non-discretionary trust:

The primary issue revolves around the classification of the assessee as either a discretionary trust or a non-discretionary (definite) trust, which impacts the rate of tax applicable. The trust was initially created orally on 25th May 1979 by Smt. Pushpa P. Shah, with Rs. 5,000 handed over to two trustees. The trustees and a witness later provided affidavits detailing the purpose, powers, and beneficiaries of the trust. A resolution passed on 23rd June 1980 by the Board of Trustees allocated specific shares to the beneficiaries, making the trust a definite trust from 1st April 1980.

The Income Tax Officer (ITO) treated the trust as discretionary, arguing that the shares of the beneficiaries were not definite and ascertainable at the trust's inception. The Assistant Appellate Commissioner (AAC) disagreed, concluding that the trust should be treated as non-discretionary since the shares were determined by the resolution.

2. Applicability of Section 164A of the Income Tax Act:

The Revenue argued that Section 164A, which taxes income from oral trusts at the maximum marginal rate, should apply. Section 164A states, "Where a trustee receives or is entitled to receive any income on behalf of or for the benefit of any person under an oral trust, then, notwithstanding anything contained in any other provision of this Act, tax shall be charged on such income at the maximum marginal rate."

The Tribunal found that the trust, initially oral, ceased to be an oral trust due to the declaration made on 17th August 1981, as per Explanation 1 to Section 160(1). This declaration included particulars of the trust, trustees, beneficiaries, and trust property, thus converting the oral trust into one declared by a duly executed instrument in writing. Consequently, Section 164A was deemed inapplicable.

3. Interpretation of Explanation 1 to Section 160 and Explanation 1 to Section 164(3) of the Income Tax Act:

Explanation 1 to Section 160(1) deems a trust declared by a duly executed instrument in writing if a written statement setting out the trust's particulars is forwarded to the ITO within specified periods. The assessee complied with this requirement on 17th August 1981.

Explanation 1 to Section 164(3) states that income is not considered specifically receivable on behalf of any person unless expressly stated in the trust instrument and identifiable on the instrument's date. The Tribunal agreed with the assessee that the beneficiaries' shares were ascertainable from the statement filed on 17th August 1981, thus meeting the requirements of Explanation 1 to Section 164(3).

Conclusion:

The Tribunal upheld the AAC's decision, concluding that the trust should not be treated as discretionary because the shares of the beneficiaries were determinate as per the resolution passed by the trustees. The trust ceased to be an oral trust by virtue of the declaration under Explanation 1 to Section 160(1). Therefore, the provisions of Section 164A and Explanation 1 to Section 164(3) did not apply, and the appeal by the Revenue was dismissed.