INCOME TAX ACT, 1961

Liability in special cases- Discretionary trust-Beneficiary not identifiable

Assessee-trust was created by K, who had gifted equity shares of a company, for the benefit of beneficiaries, i.e., the first son of R by a duly executed trust deed. At the time of creation of the trust, R was himself a minor and had no son. It was further provided in the trust deed that in the event of the first son of R expiring before attaining majority or in the event of R not begetting a son, the sole beneficiary of the trust was to be one out of various persons specified in the trust deed depending on the occurrence of alternative and contingent events. AO was of the view that since the sole beneficiary of the trust was neither in existence nor was identifiable at the time of creation of the trust, the trust did not fulfil the requirements of section 6 of the Indian Trusts Act, therefore, was not a validly created trust. AO on the basis of earlier assessment years assessed the income of the trust on protective basis. However, at the time of making assessment AO charged the assessee-trust at the normal rates as against the higher rates applicable as per the provisions of section 164, since the assessee was a private trust and the shares were indeterminate. Subsequently, on detecting the above mistake, AO passed an order under section 154, thereby charging the tax at 66 per cent, in accordance with the provisions of section 164. For the second relevant assessment year, the assessee-trust filed a return of income and the assessment was completed under section 143(3), the assessee trust on a protective basis. Dy. CIT (A) cancelled the order passed under section 154 on the ground that in the wealth-tax cases of Smt. C and R, CIT(A) of Wealth-tax (A) and the Tribunal held that the trust was a validly created one and the shares of the beneficiaries were known and determined and in these circumstances AO was not justified in taking recourse to the provisions of section 164 for applying the higher rates of tax as per the provisions of section 164. Tribunal upheld the Dy. CIT (A) aorder for both the assessment years. Held:Merely because the revenue had not accepted the decision of the Tribunal and the reference made was pending, it cannot be said that there was any mistake apparent on the record, therefore, order under section 154 was not warranted. Therefore, Tribunal had not committed any illegality in upholding the order passed by Dy. CIT (A).

Income Tax Act, 1961 Sections 164

Decision: In favour of Assessee.
A.Y. 1982-83/1986-87