1967 (3) TMI 37 - HC - Income Tax

Under trust deed trustees were given absolute discretion to accumulate income or use it for benefit of any one or more of beneficiaries to the exclusion of others - in such case trustees were assessable at maximum rate under proviso to section 41 of IT Act 1922

Issues Involved:
1. Applicability of Section 41 of the Indian Income-tax Act.
2. Determination of whether the shares of the beneficiaries are "indeterminate or unknown."

Issue-wise Detailed Analysis:

1. Applicability of Section 41 of the Indian Income-tax Act:
The central question was whether the income arising from the trust should be taxed "in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable" as per Section 41 of the Indian Income-tax Act, or whether the proviso to Section 41 would apply because the individual shares of the persons on whose behalf the income, profits, or gains are receivable are "indeterminate or unknown."

The trust created by Lady Ratanbai Mathuradas Vissanji on 1st October 1944, and the subsequent deed of release executed by Pratapsinh and Pushpabai on 3rd April 1955, led to a situation where the income from the trust was to be managed by the trustees for the benefit of the four children of Pratapsinh. The Income-tax Officer initially assessed the income on the trustees as an association of persons but later changed the basis and assessed the income at the maximum rate, citing that the shares of the beneficiaries were "indeterminate and unknown."

2. Determination of whether the shares of the beneficiaries are "indeterminate or unknown":
The primary issue was whether the shares of the four children were "indeterminate or unknown" under the proviso to Section 41. The trust deed had several clauses detailing the distribution of income and corpus among the beneficiaries. Particularly relevant were clauses (3) and (4), which provided the trustees with absolute discretion to accumulate or distribute the income for the maintenance, education, and benefit of the children.

The Appellate Assistant Commissioner and the Tribunal held that the income was specifically received on behalf of the beneficiaries whose shares were determinate and known. They observed that the trustees did not utilize their discretion to spend any part of the income for the maintenance, education, etc., of the children and instead credited the income to the respective accounts of the children in fixed proportions.

However, the High Court disagreed, emphasizing that the trustees' discretion under clause (4) made the shares of the children indeterminate and unknown. The court noted that the trustees could apply the income for the benefit of any one or more of the children to the exclusion of others, making the shares indeterminate. The court also highlighted that the trustees' actions in crediting fixed amounts to the children's accounts did not alter the provisions of the trust deed, which governed the distribution of income.

The court further clarified that the assessment of income tax should focus on the provisions of the trust deed rather than the trustees' actions. The court concluded that the shares of the children were indeterminate and unknown during the period between the relinquishment by Pratapsinh and Pushpabai and the distribution of the corpus when the youngest child attained the age of 18 years.

The court also addressed the Tribunal's error in applying Section 19 of the Transfer of Property Act, which pertains to vested interests, to the issue of whether the shares were indeterminate and unknown. The court clarified that the vested interest of the children did not determine the shares' determinacy for tax purposes.

Conclusion:
The High Court answered the question in the affirmative, holding that the shares of the four children were indeterminate and unknown for the purposes of the application of the first proviso to Section 41. Consequently, the income from the trust was liable to be taxed at the maximum rate. The assessees were directed to pay the costs of the Commissioner.

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