Trust income under discretionary deed remains taxable in the trust when trustees may apply or pay income at their discretion.

Where a trust deed gives trustees discretion to apply income wholly or partly for a beneficiary's maintenance, education and advancement, and to pay any part of that income to the beneficiary, the income is not specifically receivable on the beneficiary's behalf. On that construction, the beneficiary has no enforceable right to the whole income, and actual annual payments do not change the legal character of the receipts. The first proviso to section 41(1) of the Indian Income-tax Act, 1922, therefore applies, so the trust is assessable on the entire income and the sums actually received by the beneficiary are not separately taxable in his hands.

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Issues: Whether the income of the trust was assessable in the hands of the trust or in the hands of the beneficiary, and whether the sums actually received by the beneficiary from the trust were separately assessable in his hands.

Analysis: The trust deed empowered the trustees to apply the net income for the beneficiary's support, maintenance, education and advancement in such manner as would enable him to live as far as possible with the same comforts as during the settlor's lifetime. The deed also expressly permitted the trustees, in their discretion, to pay the whole or any part of the income to the beneficiary instead of applying it for his benefit, and insulated bona fide exercise of that discretion from challenge. On a fair construction, the trustees were not under any binding obligation to apply the whole income for the beneficiary or to hand over the whole income to him. The income was therefore not specifically receivable on behalf of the beneficiary, and the fact that a fixed amount was in fact paid each year did not alter the legal position.

Conclusion: The first proviso to section 41(1) of the Indian Income-tax Act, 1922, applied, so the entire income of the trust was taxable in the hands of the trust and no part of it, including the amounts actually received, was taxable in the hands of the beneficiary.

Final Conclusion: The reference was answered in favour of the revenue on both questions, leaving the trust liable to assessment on the whole income for all the assessment years in question.

Ratio Decidendi: Where a trust deed confers discretion on trustees to apply income wholly or partly for a beneficiary's benefit, the income is not specifically receivable on behalf of the beneficiary and is assessable in the hands of the trust under the first proviso to section 41(1).

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