Trust deed limits and AOP taxation: partial corpus transfers may be unauthorised, and joint recipients can be taxed as an association.
A trustee must act strictly within the trust deed: where the instrument requires the whole corpus to be dealt with in a prescribed manner, a partial distribution on restrictive terms is beyond authority and inconsistent with the Indian Trusts Act. The text also explains that, for tax purposes, the label used by the parties is not decisive; if individuals voluntarily combine to hold and enjoy property and derive income jointly, they may be treated as an association of persons. On this analysis, the income remains assessable in the hands of the trust when the corpus transfer is invalid, and the recipients may be taxed at the maximum marginal rate where the statutory conditions for AOP treatment are met.
Issues: (i) Whether the trustees could validly distribute only a part of the trust corpus to two beneficiaries on terms of joint tenancy and survivorship, and whether the resulting income was taxable in the hands of the trust or the beneficiaries; (ii) Whether the recipients, though described as a body of individuals, were liable to be assessed as an association of persons at the maximum marginal rate.
Issue (i): Whether the trustees could validly distribute only a part of the trust corpus to two beneficiaries on terms of joint tenancy and survivorship, and whether the resulting income was taxable in the hands of the trust or the beneficiaries.
Analysis: The trust deed required distribution of the entire corpus only on expiry of the stipulated period or an earlier period duly decided by the trustees, and permitted use of corpus only for specified objects such as health, education, maintenance, marriage expenses and advancement in life. The trustees did not exercise a power to advance the distribution of the whole corpus but attempted a partial distribution with restrictive conditions, thereby altering the trust scheme and creating a trust upon a trust. The power of a trustee is confined to the mandate of the settlement, and a trustee cannot do less where the deed directs the whole to be dealt with in a prescribed manner. The attempted transfer of part of the corpus to a separate body with joint ownership conditions was beyond the trustees' authority and inconsistent with the trust deed and the Indian Trusts Act.
Conclusion: The partial distribution of corpus was invalid, and the income remained assessable in the hands of the trust.
Issue (ii): Whether the recipients, though described as a body of individuals, were liable to be assessed as an association of persons at the maximum marginal rate.
Analysis: The arrangement showed conscious and voluntary joining of persons to hold and enjoy the transferred property and to derive income jointly. The statutory concept of association of persons is wider than the label used by the parties and is not confined to a company or co-operative society. Where individuals combine in a joint enterprise to produce income, the status may be that of an association of persons for tax purposes. On the facts, the recipients were engaged in a common venture with determinate collective ownership and enjoyment, bringing them within the taxing provision applicable to associations of persons with indeterminate shares.
Conclusion: The recipients were assessable as an association of persons, and tax at the maximum marginal rate was correctly applied.
Final Conclusion: The attempted partial corpus distribution was ultra vires the trust deed, and the alternative assessment in the hands of the recipients was sustainable only at the maximum marginal rate under the applicable tax provision.
Ratio Decidendi: A trustee must act strictly within the mandate of the trust deed and cannot effect a partial disposition that is not authorised where the instrument requires distribution of the whole corpus in the prescribed manner; where persons voluntarily combine to hold and enjoy property and earn income jointly, the taxing statute may treat them as an association of persons notwithstanding the label of body of individuals.