1968 (11) TMI 25 - HC - Income Tax

Income of the trust - applicability of maximum rate in terms of first proviso to s. 41(1) of the IT Act 1922

Issues Involved:
1. Applicability of the first proviso to section 41(1) of the Indian Income-tax Act, 1922.
2. Determination of shares of beneficiaries under the trust deed.
3. Taxation of income in the hands of the trustee versus beneficiaries.

Issue-wise Detailed Analysis:

1. Applicability of the First Proviso to Section 41(1) of the Indian Income-tax Act, 1922:
The central issue was whether the trustee could be taxed at the maximum rate under the first proviso to section 41(1) of the Indian Income-tax Act, 1922. The Income-tax Officer applied the maximum rate, concluding that the shares of individual beneficiaries were indeterminate and unknown during the relevant assessment years. This was contested by the assessee, leading to appeals and subsequent references to higher authorities.

The Tribunal upheld the Income-tax Officer's decision, stating that the shares of the beneficiaries were indeed indeterminate, thus justifying the application of the maximum rate. The court ultimately agreed with this assessment, concluding that the shares were indeterminate and unknown, thus affirming the Tribunal's decision to apply the maximum rate.

2. Determination of Shares of Beneficiaries under the Trust Deed:
The trust deed executed on December 9, 1944, by the settlor transferred land to trustees with specific instructions on its sale and the use of proceeds. The deed outlined various terms for the marriage expenses and construction of houses for the settlor's daughters. The critical terms, Nos. 10 and 11, specified that any remaining fund after meeting the daughters' marriage expenses would be equally divided among the surviving daughters, and if any daughter died unmarried or childless, her share would devolve upon the settlor's male heirs.

The court analyzed these terms and concluded that the daughters did not have a vested interest in the income during the assessment years. The interest was contingent upon the occurrence of certain events, such as the completion of marriage and construction expenses. Therefore, the shares of the daughters were not determinable during the relevant years, as any daughter alive during the assessment years could potentially die before the fund became distributable, thus losing her right to any share.

3. Taxation of Income in the Hands of the Trustee versus Beneficiaries:
The court examined whether the income from the trust should be taxed in the hands of the trustee at the maximum rate or in the hands of the beneficiaries based on their receivable shares. Dr. Debi Pal, representing the assessee, argued that the shares were determinable since the number of living daughters was known during the assessment years. However, the court found that the shares were indeterminate due to the contingent nature of the interest.

The court referred to sections 19 and 21 of the Transfer of Property Act, distinguishing between vested and contingent interests. It concluded that the daughters' interest was contingent, as it depended on their survival until the fund became distributable. Consequently, the income could not be considered receivable by the beneficiaries in defined shares during the assessment years.

Conclusion:
The court held that the shares of the beneficiaries were indeterminate and unknown during the relevant assessment years, thereby justifying the application of the maximum rate of tax under the first proviso to section 41(1) of the Indian Income-tax Act, 1922. The Commissioner of Income-tax was entitled to costs, and the question referred to the court was answered in the affirmative.

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