1984 (7) TMI 154 - AT - Income Tax

Summary

Issues Involved:
1. Whether the income from the trust should be assessed in the hands of the trustee or the beneficiary.
2. Determination of the nature of the beneficiary's interest in the trust (vested or contingent).
3. Applicability of tax rates and assessment procedures for trust income.

Issue-wise Detailed Analysis:

1. Whether the income from the trust should be assessed in the hands of the trustee or the beneficiary:

The appellants argued that the income should be assessed in the hands of the trustee, not the beneficiaries, as the beneficiaries had no vested right to the income until they reached the age of 25. The Tribunal noted that the beneficiaries did not receive any income during the relevant years, and the trustee had not exercised discretion to distribute any income. The Tribunal referenced the Supreme Court's clarification in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust, which indicated that the tax payable by the trustee should be the same as that payable by each beneficiary if assessed directly. However, due to the CBDT's circulars, the ITO was advised to adopt a course more beneficial to revenue, leading to complications in this and similar cases.

2. Determination of the nature of the beneficiary's interest in the trust (vested or contingent):

The Tribunal examined whether the beneficiaries' interest was vested or contingent. The appellants cited several court decisions supporting the view that the interest was contingent. The Tribunal found that the beneficiaries' interest was indeed contingent, as the trust could fail if the beneficiary did not survive until the age of 25. The Tribunal referenced the Gujarat High Court's decision in CWT v. Kum. Manna G. Sarabhai and CIT v. Smt. Kamalini Khatau, which held that a provision of benefit on attaining a certain age likely to be divested for the benefit of a survivor was not a vested but a contingent interest.

3. Applicability of tax rates and assessment procedures for trust income:

The Tribunal considered the implications of assessing the income in the hands of the trustee versus the beneficiary. It noted that the CBDT circulars bound the revenue to assess the income in a manner more beneficial to revenue. However, the Tribunal found that no income accrued to the beneficiaries during the relevant years, and thus, no direct assessment was possible on the beneficiaries. The Tribunal also reviewed the Supreme Court's decision in CIT v. Manilal Dhanji, which held that for income to be aggregated, it must accrue to the beneficiary or be a beneficial interest in the relevant year of account. The Tribunal concluded that the trustee alone was assessable, as the beneficiaries had neither received any benefit nor had any right to receive income during the relevant years.

Conclusion:

The Tribunal allowed the appeals, directing the ITO to exclude the income from the trusts from the assessments under appeal. The Tribunal held that the trustee alone was assessable, and no direct assessment was possible on the beneficiaries as no income had accrued to them during the relevant years. The Tribunal did not find it necessary to address other arguments related to past practices or the rate applicable to the trustee's assessment.