1998 (2) TMI 113 - HC - Income Tax

Discretionary Trust Character Unchangeable; 65% Tax Rate Applies

The court held that the character of a discretionary trust cannot be changed by a resolution passed by the trustees. The Tribunal's decision was ... Chief Commissioner, High Court, Income Tax, Offences And Prosecution, Retrospective Effect, Territorial Jurisdiction, Writ Petition Issues Involved:1. Whether the character of a discretionary trust can be changed by a resolution passed by the trustees.2. Whether the Appellate Tribunal was right in law in holding that the Income-tax Officer was not justified in applying the rate of 65 per cent under section 164 of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Change of Character of Discretionary Trust by Trustees' ResolutionThe court examined whether a discretionary trust's character could be altered through a resolution by the trustees. The assessee-trust, formed under a deed of settlement dated March 27, 1961, was discretionary, allowing trustees to either accumulate or distribute the net income at their discretion. A resolution passed on January 24, 1976, directed the trustees to pay the net income to one beneficiary, Bharatidevi Sarabhai, for her absolute use and benefit. The court held that the representative assessee continued to be a discretionary trust despite this resolution. The shares of the beneficiaries were indeterminate or unknown as per the trust deed, and the trustees' discretion to distribute income did not alter the trust's discretionary nature. Thus, the character of the trust remained unchanged by the resolution.Issue 2: Application of Section 164 and the 65% Tax RateThe court considered whether the Appellate Tribunal was correct in holding that the Income-tax Officer was not justified in applying a 65% tax rate under section 164. The relevant assessment year was 1979-80. The Income-tax Officer assessed the trust at a 65% rate, arguing that the trust remained discretionary and the shares of the beneficiaries were indeterminate. The Tribunal had allowed the assessee's appeal by referring to its earlier decision without providing detailed reasons. The court emphasized that when relying on earlier decisions, the Tribunal should annex the reasoned order to aid judicial review.The court noted that under section 164, if the shares of the beneficiaries are indeterminate or unknown, the income is taxed either as the total income of an association of persons or at a flat rate of 65%, whichever is more beneficial to the Revenue. The court found that the trustees' discretion to distribute income did not make the beneficiaries' shares determinate. The trust deed did not specify the shares, and the trustees' resolution to pay income to one beneficiary did not change this fact. The court also referred to the Supreme Court's decision in CIT v. Kamalini Khatau, which held that the Revenue could assess either the trust or the beneficiaries.The court concluded that the Tribunal erred in holding that the Income-tax Officer was not justified in applying the 65% rate under section 164. The provisions of section 164 were applicable as the shares of the beneficiaries were indeterminate. The court answered the substantive question in the negative, in favor of the Revenue, and against the assessee.ConclusionThe court held that the character of a discretionary trust cannot be changed by a resolution passed by the trustees. The Tribunal was incorrect in holding that the Income-tax Officer was not justified in applying the 65% tax rate under section 164. The reference was disposed of with no order as to costs.