Supreme Court Dismisses Assessee's Appeal on Tax Rate for Discretionary Trust Income; Maximum Marginal Rate Applies Under Section 164(1) of Income-tax Act, 1961. The Court Held That Corpus Beneficiaries Who May Receive Accumulated Income Are Also 'Beneficiaries' for Proviso (i) to Section 164(1), So Concessional Association of Persons Rate Is Denied When Any Such Beneficiary Has Other Taxable Income.

Case Note & Summary

The litigation concerned the rate of tax applicable to income of a private discretionary trust assessed in the hands of trustees under the Income-tax Act, 1961. The assessees, including Gosar Family Trust, Jamnagar, had created trusts with similar recitals. The Income Tax Tribunal had held that the trust income should be taxed at the rate applicable to an association of persons under proviso (i) to Section 164(1) of the Act, but the Gujarat High Court, on a reference under Section 256(2), answered the two questions in favour of the Revenue, holding that the maximum marginal rate applied. The assessees appealed to the Supreme Court. By a trust deed dated October 3, 1981, Hirji Pethraj Shah created the Gosar Family Trust with a corpus of Rs. 500. The trust was to last eighteen years but could be terminated after two years. The trustees had absolute discretion to distribute income among the first category beneficiaries, or to accumulate it. The corpus and accumulated income were to be distributed among the second category beneficiaries at the end of the trust period. One beneficiary, Lakhmaben Gosar Jakharia, was common to both categories. None of the first category beneficiaries had taxable income, but the second category beneficiaries did. The trust was discretionary, and the individual shares of beneficiaries were indeterminate or unknown. The core question of law was whether the income of the trust taxed in the hands of trustees was chargeable at the maximum marginal rate or at the rate applicable to an association of persons within the meaning of Section 164(1) and its proviso (i). This depended on whether the second category corpus beneficiaries were 'beneficiaries' for the purpose of proviso (i), which requires that none of the beneficiaries have other taxable income exceeding the maximum amount not chargeable to tax in case of an association of persons or be a beneficiary under any other trust. The assessees argued that only the first category beneficiaries were entitled to income, while the second category were entitled only to corpus, so proviso (i) applied and the concessional rate was available. They relied on Bombay High Court decisions in Commissioner of Income Tax v. B.A. Sanghrajka Trust and Commissioner of Income Tax v. Mrs. Pushpaben Family Trust. The Revenue contended that the trustees received income for the benefit of the entire class of beneficiaries, including the second category, because they could accumulate income for eventual distribution to them; since the second category beneficiaries had other taxable income, proviso (i) was not satisfied. The Supreme Court examined Section 164(1) and noted that it charges tax at maximum marginal rate where income is not specifically receivable on behalf of any one person or where individual shares are indeterminate. The first proviso provides for concessional rate if none of the beneficiaries have other income exceeding the threshold or is a beneficiary under another trust. The Court held that the trustees received or were entitled to receive the income on behalf of both sets of beneficiaries. The discretion to distribute or accumulate did not change the nature of the receipt; actual receipt by beneficiaries was not necessary. The fact that the first category beneficiaries had no enforceable right to receive income and the second category had no right to receive income until termination indicated that the income was receivable by the trustees for the whole class of beneficiaries. Accordingly, the Supreme Court upheld the High Court's decision and dismissed the appeals, holding that the trust income was chargeable at the maximum marginal rate under Section 164(1) of the Income-tax Act, 1961, because the second category beneficiaries were also beneficiaries for the purpose of proviso (i) and they had other taxable income.

Headnote

Issue of Consideration

Final Decision

The Supreme Court upheld the High Court's decision and dismissed the appeals, holding that the trust income was chargeable at the maximum marginal rate under Section 164(1) of the Income-tax Act, 1961, because the second category beneficiaries were also beneficiaries for the purpose of proviso (i) and they had other taxable income.

Law Points