Discretionary trust income and indeterminate beneficiary shares trigger the section 41 proviso and maximum-rate taxation.

Under the trust deed, once the first life beneficiaries released their interests, the trustees had absolute discretion to accumulate income or apply it for the maintenance, education and benefit of one or more children to the exclusion of the others. The decisive question was the character of the beneficiaries' shares in the income at that stage, not later corpus distribution or the trustees' book entries. Because no child had a fixed or ascertainable share during the relevant assessment year, the shares were indeterminate and unknown. The first proviso to section 41 of the Indian Income-tax Act, 1922 therefore applied, and the trust income was chargeable at the maximum rate.

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Issues: Whether, on the trust deed and deed of release, the shares of the four children were indeterminate and unknown for the purposes of the first proviso to section 41 of the Indian Income-tax Act, 1922.

Analysis: After the release by the first life beneficiaries, the trust entered the stage in which the trustees had absolute discretion under the operative clause to accumulate the income or apply it for the maintenance, education and benefit of one or more of the children to the exclusion of the others. The relevant enquiry was the position under the trust deed itself as governing receivability of the income, not the manner in which the trustees chose to make book entries or notionally divide the income. The discretionary character of the trustees' power meant that no child had a fixed or ascertainable share in the income during that period. The fact that the children may have had a vested interest, or that the corpus might later be distributed on stated proportions, did not determine the character of the income shares for the assessment year in question. The provisions concerning the corpus and the later stage of distribution were therefore irrelevant to the assessment of the trust income at the intermediate stage.

Conclusion: The shares of the four children were indeterminate and unknown, so the first proviso to section 41 applied and the trust income was liable to tax at the maximum rate.

Final Conclusion: The reference was answered in favour of the Revenue, and the trustees' assessment was governed by the proviso to section 41 rather than by the normal rule of assessment on determinate shares.

Ratio Decidendi: For section 41, the decisive test is the character of the beneficiaries' shares under the trust deed governing the receivable income at the relevant stage, and a vested interest or later ascertainable corpus shares do not prevent the income shares from being indeterminate and unknown where the trustees have unfettered discretion over application of the income.

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