1989 (4) TMI 156 - AT - Income Tax

Issues Involved:
1. Validity of the trust
2. Assessment of trust income
3. Rule against perpetuity
4. Determination of beneficiaries' shares
5. Application of Section 60 of the Income-tax Act, 1961
6. Discretionary nature of the trust
7. Protective assessment by the ITO

Issue-wise Detailed Analysis:

1. Validity of the Trust:
The CIT(A) held that the trust was not valid, leading to the assessment of the trust as an Association of Persons (AOP) at the maximum marginal rate because the shares of the beneficiaries were not known and indeterminate. The CIT(A) thus confirmed the assessment order passed by the ITO and dismissed the appeal filed by the assessee.

2. Assessment of Trust Income:
The assessee argued that the CIT(A) erred in concluding that the trust's income should be assessed in the hands of the settlor. The assessee contended that the trust is a valid and specific trust, and the income should be assessed in the hands of the beneficiaries to the extent of their share income derived from the trust. Alternatively, the trustee should be assessed to the same extent as individual beneficiaries of the trust.

3. Rule Against Perpetuity:
The ITO concluded that the rule of perpetuity was applicable because the trust deed allowed for unborn children to be beneficiaries and the trust duration was linked to the settlor's death, potentially extending beyond the minority of the unborn children. The ITO deemed the transfer of trust property by the settlor invalid, making the entire income of the trust assessable in the hands of the settlor. However, the Tribunal found that the modern rule of perpetuity contained in Sections 14 and 17 of the Transfer of Property Act was not violated by the trust deed.

4. Determination of Beneficiaries' Shares:
The ITO argued that the shares of the beneficiaries were not exactly equal, pointing out a slight difference in the share of the 12th beneficiary, Master Alish Kumar Chordiya, compared to others. The CIT(A) agreed, stating that this discrepancy indicated that the shares of the beneficiaries were left to the discretion of the trustees. However, the Tribunal found that the shares specified in the trust deed were known and ascertainable, and there was no contradiction in the provisions of the trust deed.

5. Application of Section 60 of the Income-tax Act, 1961:
The ITO applied Section 60, arguing that the settlor was not completely disassociated from the trust and trust property. However, the Tribunal found that the settlor was specifically excluded from the trust fund, income, and inheritance as a legal heir of the beneficiary, making Section 60 inapplicable.

6. Discretionary Nature of the Trust:
The ITO concluded that the trust was discretionary because the trustees had the discretion to alter the shares of the beneficiaries. However, the Tribunal found that the trust was specific, with the trustees required to distribute the income in specified fractions and the corpus of the trust fund equally, making it not a discretionary trust.

7. Protective Assessment by the ITO:
The ITO subjected the total income to the maximum marginal rate of tax applicable to AOP in a protective manner. The Tribunal directed the ITO to assess the income substantively under Section 161(1) and not protectively under Section 161(4) of the Income-tax Act, 1961, as the trust was found to be specific and valid.

Conclusion:
The Tribunal reversed the order of the CIT(A) and directed the ITO to assess the income substantively under Section 161(1) of the Income-tax Act, 1961. The appeal was allowed, recognizing the trust as valid and specific, with known and determinate shares for the beneficiaries.

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