Indeterminate trust income shares attract section 164(1); corpus entitlement does not make beneficiaries' income shares determinate.

A trust created from property received on partition was held valid because the settlor had full disposal rights over property that had devolved on him under section 8 of the Hindu Succession Act, 1956, and its earlier family origin did not make it ancestral in his hands. The Income-tax Officer was found to have exercised the option to assess the beneficiaries individually, since their trust income had already been included in those assessments and a rectification recital did not make them provisional in substance. For section 164(1), the beneficiaries' shares in the trust income were indeterminate because the deed fixed no income shares and later equal entitlement to corpus did not determine them.

---

---

Issues: (i) Whether the trust was invalid. (ii) Whether the Income-tax Officer had exercised the option to assess the beneficiaries individually. (iii) Whether the shares of the beneficiaries in the income of the trust were indeterminate so as to attract section 164(1) of the Act.

Issue (i): Whether the trust was invalid.

Analysis: The property settled by one of the authors of the trust was the individual property of his father received on partition and devolved on him under section 8 of the Hindu Succession Act, 1956. He had full disposing power over that property, and the mere fact that the property had earlier come from the family did not make it ancestral in his hands so as to disable him from creating the trust.

Conclusion: The trust was valid and this issue was decided against the assessee.

Issue (ii): Whether the Income-tax Officer had exercised the option to assess the beneficiaries individually.

Analysis: The beneficiaries had been assessed individually, and their trust income had been included in those assessments. A mere recital that the assessments were subject to rectification did not show that the assessments were provisional in substance or that the Income-tax Officer had not elected to tax the income in the hands of the beneficiaries. The later attempt to assess the trust did not negate that election.

Conclusion: The Income-tax Officer had exercised the option, and this issue was decided in favour of the assessee.

Issue (iii): Whether the shares of the beneficiaries in the income of the trust were indeterminate so as to attract section 164(1) of the Act.

Analysis: The trust deed did not specify the beneficiaries' shares in the income. The trustees were to preserve the income and corpus and spend only such amount as was necessary for the beneficiaries' essential requirements and overall advancement. The operative test under section 164(1) was whether the shares in the income were determinate, and equal entitlement to corpus at a later stage did not make the income shares determinate.

Conclusion: The beneficiaries' shares in the income were indeterminate and section 164(1) applied; this issue was decided against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly against the assessee, with the trust held valid, the Income-tax Officer found to have exercised the option, and section 164(1) held applicable because the beneficiaries' income shares were indeterminate.

Ratio Decidendi: For the purpose of section 164(1) of the Income-tax Act, 1961, the determinability of the beneficiaries' shares must be judged by their shares in the income of the trust, not by future entitlement to corpus, and a mere provisional or rectificatory recital does not prevent an assessment from amounting to an exercise of the option to tax the beneficiaries individually.

---