2005 (3) TMI 42 - HC - Income Tax

High Court rules in favor of trust in section 164(1) case, emphasizing single beneficiary exception

Commissioner of Income-Tax Versus Poonam Trust.

The High Court held that the provisions of section 164(1), proviso (ii), were not applicable in a case involving a trust with an indeterminate share of ... 'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the provisions of proviso (ii) to sub-section (1) of section 164 are not applicable in this case?' - It is trite that where a party desires to attack the Tribunal's finding as defective or perverse, a specific question to that effect has to be raised - No such question has been raised here. Secondly, section 164(1) of the Act is attracted and such income is brought to tax at the maximum marginal rate, where the shares of different beneficiaries in the trust are indeterminate or unknown. In the instant case though it is true that four trusts were created under one will in so far as the trust created for the benefit of Poonam was concerned, she was the sole beneficiary. Under these circumstances, the question of aggregation of interest income received for the benefit of one single person for the purpose of section 164(1) of the Act did not arise. - we are in complete agreement with the view taken by the Tribunal Issues: Interpretation of section 164(1) of the Income-tax Act, 1961 regarding the applicability of proviso (ii) in a case involving a trust with an indeterminate share of beneficiaries.Analysis:The judgment delivered by the High Court of Punjab and Haryana involved a question of law referred by the Income-tax Appellate Tribunal regarding the interpretation of section 164(1) of the Income-tax Act, 1961. The case revolved around an assessee-trust created by a will for the benefit of a grand-daughter, with the adopted son of the testator appointed as a trustee. The issue arose when the Assessing Officer included the interest income earned by the trust in its total income, considering the share of the beneficiary as indeterminate under proviso (ii) of section 164(1) of the Act.The Appellate Assistant Commissioner, however, took a different view, stating that since the trust was created solely for the benefit of the grand-daughter, there was no ambiguity in the beneficiary's share, and thus, the provisions of section 164(1) were not applicable. The Tribunal upheld this decision, leading to an appeal by the Revenue challenging the same.During the proceedings, the Revenue contended that the Tribunal's decision was erroneous as the deceased testator had created multiple trusts, making the share of the beneficiary uncertain. However, the High Court disagreed with this argument, emphasizing that for a finding to be deemed defective or perverse, a specific question needed to be raised. Additionally, the Court clarified that section 164(1) is triggered only when the shares of different beneficiaries in a trust are indeterminate or unknown.In the present case, although multiple trusts were created under one will, the trust in question was established solely for the benefit of one individual, making the aggregation of interest income for the purpose of section 164(1) unnecessary. Consequently, the High Court concurred with the Tribunal's decision that the provisions of section 164(1), proviso (ii), were not applicable in this scenario, ruling in favor of the assessee-trust and against the Revenue. The reference was thus disposed of with no order as to costs.