Proportional Taxation of Trust Beneficiaries : Clause 304(4) of the Income Tax Bill, 2025 Vs. Section 165 of the Income-tax Act, 1961

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....ived from the chargeable part of the trust's income. The concept of a "representative assessee" is central to both provisions, reflecting the long-standing principle that trustees or other representatives may be assessed in respect of income beneficially owned by others. This commentary provides an in-depth analysis of Clause 304(4), its legislative intent, practical implications, and a detailed comparison with the existing Section 165, highlighting the evolution, similarities, and differences in the statutory framework. 2. Objective and Purpose The primary objective of both Clause 304(4) and Section 165 is to ensure fair and proportionate taxation of beneficiaries of trusts in cases where only a part of the trust's income is liab....

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....ncome of the trust; and C = the income receivable by the beneficiary from the trust." Section 165 of the Income Tax Act, 1961: "Where part only of the income of a trust is chargeable under this Act, that proportion only of the income receivable by a beneficiary from the trust which the part so chargeable bears to the whole income of the trust shall be deemed to have been derived from that part." Section 165 is concise, stating the principle of proportionality without an explicit formula. Clause 304(4), in contrast, articulates the same principle but provides a clear mathematical formula for the computation, thereby enhancing clarity and reducing the scope for interpretational disputes. 3.2. Interpretation and Legal Principles Both pro....

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....ents (e.g., capital gains vs. interest income). The provision ensures that in such cases, the assessment of the beneficiary's income is not arbitrary and is proportionate to the chargeable component of the trust's income. 3.4. Ambiguities and Issues in Interpretation While Section 165 has served its purpose, its brevity has sometimes led to interpretational issues: * What constitutes "income of the trust" - is it gross or net of expenses? * How to deal with situations where distributions are made from capital or accumulated income? * Whether the provision applies where the trust instrument specifies the source of distributions? Clause 304(4), by providing a formula, addresses some of these ambiguities. However, it still pr....

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....nds to the chargeable part of the trust's income. This prevents over-taxation and ensures that beneficiaries are not unfairly taxed on exempt or non-chargeable income. Beneficiaries should be vigilant in reviewing the computation provided by the trustee to ensure that the correct proportion has been applied, particularly where the trust's income is derived from multiple sources. 4.3. For Tax Authorities Tax authorities benefit from the formulaic approach, which provides a straightforward method for verifying the taxable portion of distributions. The provision also minimizes litigation by reducing interpretational ambiguities. 4.4. Compliance and Procedural Impacts The introduction of an explicit formula in Clause 304(4) may nec....

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....ine with international best practices. 5.3. Potential Conflicts and Harmonization The shift from a principle-based approach (Section 165) to a formula-based approach (Clause 304(4)) may require transitional arrangements and harmonization with other provisions relating to computation of income, deductions, and exemptions. The new provision may also necessitate consequential amendments to rules and forms. There is potential for conflict if the computation of "chargeable part" or "whole income" is not harmonized with other provisions of the Act or with accounting standards. Clarificatory rules or circulars may be required to address such issues. 5.4. Comparison with International Jurisdictions Many common law jurisdictions, such as the UK....