Trust income taxation turns on enforceable beneficiary rights; contingent corpus entitlement is insufficient under section 164(1).
A beneficiary for trust-tax purposes must have an enforceable right or interest in the income for the relevant year; a mere contingent entitlement to corpus on future distribution is not enough. On the trust deed, the settlor's daughter-in-law had no present right to trust income, so she was not a beneficiary of that income, while the grand-daughters were the only income beneficiaries. The trust therefore fell within clause (i) of the proviso to section 164(1) of the Income-tax Act, 1961, and the trust income could not be assessed as the total income of an association of persons.
Issues: (i) Whether the settlor's daughter-in-law was a beneficiary under the trust for the relevant previous year; (ii) whether the case fell within clause (i) of the proviso to section 164(1) of the Income-tax Act, 1961; (iii) whether the trust income was chargeable as the total income of an association of persons.
Issue (i): Whether the settlor's daughter-in-law was a beneficiary under the trust for the relevant previous year.
Analysis: The trust deed gave the daughter-in-law no present right to the income of the trust. Her entitlement was confined to such portion of the corpus, if any, as the trustees might choose to distribute on completion of the trust term. On the terms of the deed, she had no enforceable beneficial interest in the income for the relevant year.
Conclusion: The daughter-in-law was not a beneficiary of the income under the trust; only the grand-daughters were beneficiaries.
Issue (ii): Whether the case fell within clause (i) of the proviso to section 164(1) of the Income-tax Act, 1961.
Analysis: Since the daughter-in-law had no right or interest in the income of the trust for the year in question, the trust satisfied the exception contemplated by the proviso to section 164(1), on the same reasoning adopted in the earlier trust decision relied upon by the Court.
Conclusion: The case fell within clause (i) of the proviso to section 164(1), in favour of the assessee.
Issue (iii): Whether the trust income was chargeable as the total income of an association of persons.
Analysis: In view of the finding that the daughter-in-law was not a beneficiary of the income and the trust continued to fall within the protective proviso to section 164(1), the income could not be assessed as that of an association of persons.
Conclusion: The trust income was not chargeable as the total income of an association of persons, in favour of the assessee.
Final Conclusion: The reference was answered wholly in favour of the assessee, holding that the daughter-in-law was not a beneficiary of the income and that the trust income was not assessable under section 164(1) as income of an association of persons.
Ratio Decidendi: A beneficiary for the purpose of taxing a trust's income must have an enforceable right or interest in the income for the relevant year; a mere contingent right to share in corpus on future distribution does not make a person a beneficiary of the income.