1981 (6) TMI 76 - AT - Income Tax

Summary

Issues:
1. Whether the trust created by oral declaration and subsequent written declaration is subject to tax under sections 160(1)(iv) and 164.
2. Whether the subsequent written declaration alters the original trust created orally.
3. Whether the beneficiaries mentioned in the subsequent written declaration have contingent interests in the trust.

Analysis:
1. The case involved trusts of connected families with common grounds and facts. The main issue was whether the trust, created orally and subsequently evidenced in writing, is subject to tax under sections 160(1)(iv) and 164. The dispute centered on whether the trust was created by a duly executed instrument in writing or through oral declaration. The Department argued that the subsequent written declaration constituted the trust instrument, while the assessee contended that the oral trust was valid and effective, not falling under the purview of sections 160(1) and 164. The Tribunal considered previous orders and upheld the assessee's claim, directing the tax to be computed under general provisions of the Act, not under sections 160(1)(iv) and 164.

2. Another issue was whether the subsequent written declaration altered the original trust created orally. The Department claimed that the written declaration made the trust irrevocable and added beneficiaries not mentioned in the oral declaration. However, the Tribunal found that the subsequent written declaration did not create a new trust but merely evidenced the existing oral trust. The additions in the written declaration were considered clarificatory and did not substantially modify the original trust, which was presumed irrevocable unless stated otherwise.

3. The question of beneficiaries mentioned in the subsequent written declaration was also addressed. The Tribunal determined that the beneficiaries mentioned in the written declaration had contingent interests in the trust, which may or may not materialize. It was clarified that for income tax purposes, beneficiaries are determined based on the state of affairs during the relevant previous year when the income is chargeable, not on potential future events. Therefore, the beneficiaries for tax assessment were those envisaged in the oral declaration, not those added in the subsequent written declaration. The Tribunal upheld the assessee's position that the income of the trust should be assessed under general provisions of the Act, not under sections 160(1)(iv) and 164, directing the Income Tax Officer to recompute the tax accordingly.