2014 (5) TMI 286 - SC - Wealth-tax

Supreme Court rules on tax treatment of discretionary trusts

Commissioner of Wealth Tax, Rajkot Versus Estate of Late HMM Vikramsinhji of Gondal

The Supreme Court dismissed all 17 civil appeals, including those under the Income Tax and Wealth Tax Acts. The Court held that the U.K. trusts were ... Computation of taxable income and taxable wealth of discretionary trust - estate of the deceased Settlor - legal position about the discretionary trust - assessment years 1964-65 to 1970-71 and assessment years 1970-71 to 1982-83 - Held that:- A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. Having regard to the above legal position about the discretionary trust which is also applied by by this Court in the earlier judgment [1993 (4) TMI 1 - SUPREME Court] and the fact that the income has been retained and not disbursed to the beneficiaries, the view taken by the High Court cannot be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts does not get altered. In view of the facts noted above, in our opinion, the two U.K. trusts continued to be 'discretionary trust' for the subject assessment years. The above position with regard to the discretionary trust is equally applicable to the controversy in appeals under the Wealth Tax Act. The High Court has taken a correct view that the value of the assets cannot be assessed on the estate of the deceased Settlor. - Decided against the revenue. Issues Involved:1. Nature of the U.K. Trusts (Discretionary or Specific)2. Inclusion of Trust Income in the Returns3. Assessment under the Income Tax Act, 19614. Assessment under the Wealth Tax Act, 1957Detailed Analysis:1. Nature of the U.K. Trusts (Discretionary or Specific):The primary issue was whether the U.K. trusts created by the ex-Ruler of Gondal were discretionary or specific. Clauses 3 and 4 of the trust deeds were central to this determination. Clause 3 provided the trustees with discretionary power to distribute the income among the beneficiaries, while Clause 4 stipulated that the income should be paid to the settlor during his lifetime and thereafter to his elder son. The High Court concluded that the trusts were discretionary, as the trustees retained the income and did not disburse it to the beneficiaries. This interpretation was consistent with the legal principle that a discretionary trust vests no right to income in the beneficiaries but grants trustees the power to distribute income at their discretion.2. Inclusion of Trust Income in the Returns:The settlor and his son had historically included the income from the U.K. trusts in their tax returns. However, for the assessment years under consideration, the son did not admit to receiving the income, nor did he include it in his returns. The High Court noted this as a distinguishing feature, further supporting the view that the trusts were discretionary and the income was retained by the trustees.3. Assessment under the Income Tax Act, 1961:The appeals under the Income Tax Act pertained to assessment years 1984-85 to 1991-92. The Tribunal had previously held that the U.K. trusts were specific due to the failure to appoint discretion exercisers as per Clause 3. However, the High Court disagreed, emphasizing that the trusts were discretionary because the income was retained and not disbursed. The Supreme Court upheld the High Court's view, stating that the character of the trusts as discretionary did not change merely because the discretion exercisers were not appointed.4. Assessment under the Wealth Tax Act, 1957:The appeals under the Wealth Tax Act involved the valuation of assets in the trusts. The High Court ruled that the value of the assets could not be assessed on the estate of the deceased settlor, as the trusts were discretionary. The Supreme Court affirmed this view, applying the same reasoning used in the Income Tax appeals.Conclusion:The Supreme Court dismissed all 17 civil appeals, including those under the Income Tax and Wealth Tax Acts, as well as the appeal arising from 'protective assessment.' The Court held that the U.K. trusts were discretionary and not specific, and the income retained by the trustees was not includible in the taxable income of the settlor or his son for the relevant assessment years. The judgments of the High Court were upheld, and no costs were awarded.