By TIOL News Service

MUMBAI, AUG 08, 2016: THE issue is - Whether if the trustees of a trust are treated as a representative assessee by Section 160(1), in that case such trustees are liable to be taxed in respect of income received by trust at the rate specified in Section 164(1). YES is the answer.

Facts of the case

The assessee Trust was governed by the provisions of the Trust Deed. It had been assessed as a specific Trust. This was so as the shares of the beneficiaries were determinate and tax was levied in the hands of the beneficiaries for AYs 1978-79 and 1979-80. The aforesaid Trust Deed was modified by the Rectification Deed dated 21st October, 1979. By this Rectification Deed, the power given to the Trustees in the Trust Deed dated 2nd August, 1976 to the effect that in its absolute discretion, the trustees by Resolution, can decide the shares of the beneficiaries in the Trust, was withdrawn. On the basis of the Rectification Deed, it was contended by the Revenue and so held by the Tribunal that on the date of execution of the Trust Deed, it was not a specific trust but a discretionary trust for the reason that the discretion/powers of the trustees was withdrawn only by Deed of Rectification. Therefore, Section 164 would be applicable and in particular, reliance was placed upon Explanation 1(ii) of Section 164  which provides that in case the individual shares of the beneficiaries is not expressly stated in the instrument on the date of execution of the deed of trust, then it would be considered to be a discretionary Trust. In such a case, the tax is to be paid by the Trustees of the Trust.

Held that,

++ the Assessment Order determined the total income at Rs.1.54 lakhs, while categorically holding that no demand is payable by the Trust as the income of the Trust is divided amongst the beneficiaries as per the Trust Deed. Consequently, the tax was recoverable from the beneficiaries of the Trust. Therefore, the option as provided under Section 166 of the Act was exercised by the Revenue. This option as held by the Apex Court is available even in case of discretionary Trusts. Therefore, even in case the Revenue's contention is upheld on merits, it would not yet exclude the application of option in Section 166 which in this case has already been exercised. Therefore, the substantial question of law as raised for our opinion is being returned un-answered as it has now became academic in view of the decision of the Apex Court rendered in Jyotendrasinhji. The above decision was rendered after the making of the statement of case along with the question of law framed by the Tribunal for our opinion. Accordingly, Reference disposed of in the above terms.

(See 2016-TIOL-1661-HC-MUM-IT)