1984 (6) TMI 61 - AT - Income Tax

Trust converted to specific trust, beneficiary to be taxed, not trust. Income tax authorities' orders set aside.

Ambalal Sarabhai D. Trust No. 5. Versus Income-Tax Officer

The Tribunal concluded that the income-tax authorities were not justified in invoking the provisions of Section 164 as they stood at the relevant time. ... Discretionary Trust Issues Involved:1. Applicability of Section 164 of the Income-tax Act, 1961.2. Determination of whether the trust is discretionary or specific.3. Impact of the trustees' resolution on the nature of the trust.4. Relevance of amendments to Section 164 by the Finance (No. 2) Act, 1980.5. Applicability of the Indian Trusts Act, 1882.Issue-wise Detailed Analysis:1. Applicability of Section 164 of the Income-tax Act, 1961:The primary issue in this appeal is the applicability of Section 164 of the Income-tax Act, 1961, as it stood at the relevant time. The assessee, a trust assessed as an Association of Persons (AOP), argued that the net surplus income should be included in the total income of the beneficiary, Smt. Bharatidevi Sarabhai, under Section 161 of the Act. The Income Tax Officer (ITO) concluded that the trust had the characteristics of a discretionary trust and assessed the income at a flat rate of 65% under Section 164. The Appellate Assistant Commissioner (AAC) upheld this decision, leading to the present appeal.2. Determination of Whether the Trust is Discretionary or Specific:The trust deed, executed on 27-3-1961, allowed trustees to either accumulate the net income or pay it to beneficiaries at their discretion. A resolution passed on 24-1-1976 by the trustees directed that the net income from 1-4-1976 to 31-3-2001 be paid to Bharatidevi Sarabhai. The assessee contended that this resolution made the trust specific, as the beneficiary and her share were determined. The Tribunal noted that the facts in the present case were identical to those in the case of Smt. Saraladevi Sarabhai (B-11) D-Trust, where it was held that the provisions of Section 164 would not be applicable.3. Impact of the Trustees' Resolution on the Nature of the Trust:The Tribunal considered the trustees' resolution dated 24-1-1976 and the subsequent communication to Bharatidevi Sarabhai. It concluded that the resolution effectively converted the discretionary trust into a specific trust, as the beneficiary and her share were determined. The Tribunal emphasized that the trustees had the power to make such changes under the trust deed, and the resolution was valid and binding.4. Relevance of Amendments to Section 164 by the Finance (No. 2) Act, 1980:The Tribunal examined the amendments to Section 164 by the Finance (No. 2) Act, 1980, which aimed to plug loopholes for tax avoidance through private trusts. The amendments, effective from 1-4-1980, provided that unless the beneficiaries and their shares were expressly stated in the trust deed and ascertainable on the date of the deed, the trust would be regarded as discretionary. The Tribunal noted that prior to the amendment, trustees could allocate income to beneficiaries at their discretion. The resolution passed by the trustees in 1976 was valid under the law as it stood then, and the subsequent amendment did not apply retrospectively.5. Applicability of the Indian Trusts Act, 1882:The revenue argued that the trustees' resolution exploited loopholes in Section 164 and was not lawful under Section 4 of the Indian Trusts Act, 1882. The Tribunal rejected this argument, stating that the validity of the trustees' actions should be examined in light of the trust deed, not the Indian Trusts Act. The Tribunal emphasized that the trust was not created in violation of the Indian Trusts Act, and the trustees had the power to distribute income as per the trust deed.Conclusion:The Tribunal concluded that the income-tax authorities were not justified in invoking the provisions of Section 164, as they stood at the relevant time. The trustees' resolution validly converted the discretionary trust into a specific trust, and the income should be taxed in the hands of the beneficiary, not the trust. The Tribunal set aside the orders of the income-tax authorities and directed the ITO to frame the assessment afresh, accepting the assessee's contention that no income is taxable in its hands. The appeal was allowed.