GOSAR FAMILY TRUST, JAMNAGAR ETC. vs. COMMISSIONER OF INCOME TAX

CIVIL APPEAL No. 1180/1991Supreme Court[1995] 3 S.C.R. 89428 April 1995Bench: 3 JudgesAuthor: B.P. JEEVAN REDDY, S.C. SEN, G.T. NANAVATI GOSAR FAMILY TRUST, JAMNAGAR ETC.11 pages
AI SummaryDismissed

What were the facts?

The assessee, Gosar Family Trust, Jamnagar, created a private discretionary trust with two categories of beneficiaries. The first category was entitled to the trust income, while the second category was to receive the corpus and accumulated income at the trust's termination. The trust deed allowed trustees discretion to terminate the trust after two years and invest funds in their own concerns. The Revenue, finding that the first category beneficiaries had no taxable income but the second category did, charged the trust income at the maximum marginal rate, treating the second category beneficiaries for the purpose of proviso (i) to Section 164(1) of the Income Tax Act, 1961. The Tribunal held that the rate applicable was that of an association of persons. The High Court, on reference, ruled in favour of the Revenue, holding that proviso (i) was not attracted and the income was chargeable at the maximum marginal rate.

What did the Supreme Court hold?

The Supreme Court held that the second category beneficiaries are indeed beneficiaries within the meaning of Section 164(1) and its proviso. The Court reasoned that there is no distinction between the two categories of beneficiaries concerning the trust income. Members of the first category have no right to demand income; they may or may not receive any. Similarly, the second category beneficiaries have no absolute right to the income but may receive the whole or part of it if not distributed to the first category. Thus, both categories have only an expectation of receiving income, making the second category beneficiaries as much beneficiaries as the first. The trustees have discretion not to disburse income, and it ultimately goes to the second category, making it immaterial whether it becomes part of the corpus. For Section 164(1), what is relevant is that income is receivable on behalf of beneficiaries, not necessarily received by them. Therefore, charging the trust income at the maximum marginal rate is not contrary to law, aligning with the policy to discourage discretionary trusts. The Court distinguished the case of Commissioner of Income Tax v. B.A. Sanghrajka Trust.

What were the issues?

1. Whether, in law and on facts and having regard to the provisions of sub-section (1) of section 164 of the Income-tax Act, 1961, the assessee is entitled to the concessional rate of tax? 2. Whether, in law and on facts and in view of the provisions of the trust deed, the trust cannot be subjected to maximum marginal rate of tax? Assessee's contentions: The assessee argued that the second category beneficiaries were not beneficiaries within the meaning of proviso (i) to Section 164(1) and therefore the trust income should not be charged at the maximum marginal rate. They relied on the distinction between the two categories of beneficiaries as per the trust deed. Revenue's contentions: The Revenue contended that both categories of beneficiaries were beneficiaries under the Act. They argued that since the first category beneficiaries had no taxable income and the second category did, the proviso (i) to Section 164(1) was not attracted, leading to the chargeability of income at the maximum marginal rate. The High Court had decided in favour of the Revenue.

Which sections of the Income-tax Act were involved?

Section 164(1)

AI-generated summary — verify with the full judgment below

A GOSAR FAMILY TRUST, JAMNAGAR ETC. v. i COMMISSIONER OF INCOME TAX APRIL 28, 1995 B [B.P. JEEVAN REDDY, S.C. SEN, AND G.T. NANA VAT!, JJ.] Indian Trust Act 1882-Discretionary Trust created with two categories of beneficiaries-First category entitled to trust income-Second category to ' get the corpus of the trust and all the income accumulated at the end of the c trus!-Held : Second category is beneficiary.

Income Tax Act 1961-Section 164(1) and Proviso (if-Trust created with two category beneficiaries-First category to get trust income-Second category to get corpus and income at the end of the Trust-First category D beneficiaries having no taxable income under the proviso-The second category falling under the proviso-Rates for charging tax of the trust in- come-Held: Charging of trust income at maximum marginal rate not con- trary to /aw-Policy of law to discourage discretionary trust.

Words & Phrases-''Benificiaries''-Meaning of-To be construed and E understood in its ordinary and normal sense-No distinction between the two categories of beneficiaries-So for as income of the trust concerned-Since no distinction made between beneficiaries and beneficiaries b

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