The department says our family trust is really a specific trust because the settlor used to show its income in his own return. The trustees have retained the income. Can it be taxed in the beneficiary's hands?
No, not on those facts. Where the trust deed leaves distribution to the trustees' discretion and the income was in fact retained and not disbursed, the trust remains a discretionary trust and the income is not assessable in the beneficiary's hands. The failure of the settlor or his successor to appoint the persons who were to exercise the discretion does not convert a discretionary trust into a specific trust.
Decided by the Supreme Court (R.M. Lodha J and Shiva Kirti Singh J (judgment delivered by Lodha J)) on 2014-04-16, reported as Civil Appeal No. 2312 of 2007 with 16 connected civil appeals (Supreme Court of India, marked REPORTABLE). It bears on section 161, section 164, section 166, section 5 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Assessment & Scrutiny matters.
This is the Supreme Court's most recent word on the discretionary-versus-specific characterisation, and it supplies the definition of a discretionary trust that every subsequent order quotes. It also draws the line beyond which Kamalini Khatau does not reach: the Revenue's option to assess the beneficiary bites only on income distributed and received, so retained income cannot be pursued in the beneficiary's hands at all. Practically it also answers the department's favourite evidential argument — that the settlor's own earlier returns show what the trust really was. The Court accepted that for the earlier years dealt with in Jyotendrasinhji the returns were decisive, but held that for years in which the assessee did not admit receipt, did not receive, and did not return the income, the characterisation had to be decided on the deed.
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The ex-Ruler of Gondal, Shri Vikramsinhji, executed three deeds of settlement in the United States on 19 December 1963 and two in the United Kingdom on 1 January 1964. Mr Robert Hampton Robertson McGill was named the Original Trustee of the U.K. settlements, which were for the benefit of the settlor, his children and remoter issue, and their spouses. Clause 3 of the U.K. deeds directed the trustees to hold the fund on trust for such one or more of the beneficiaries as the person who for the time being was (or would have been) the Maharaja should appoint during the specified period, the power being exercisable only by the settlor, the Elder Son or the Younger Son. Clause 4, operating 'subject as aforesaid', gave the income to the settlor for life, then to the Elder Son, and so on. During his lifetime the settlor included the whole of the trust income in his own returns, and his son Jyotendrasinhji did the same for assessment year 1970-71 before later contending that the inclusion had been a mistake. The Settlement Commission held that clause 3 never came into operation because no additional trustees were appointed, that clause 4 therefore sprang into operation, and that the U.K. settlements were specific trusts. That order reached the Supreme Court in Jyotendrasinhji v. S.I. Tripathi, decided 2 April 1993, where the Court recorded the assessee's argument on clause 3 at para 37 of that report but held at para 38 that the question was academic because the settlor and the appellant had in fact been receiving the income. The present appeals concern income-tax assessment years 1984-85 to 1991-92 and wealth-tax years from 1970-71. For those years the returns and balance sheets bore the endorsement at the foot of the statement of funds, 'Net Income for the year retained'. The Tribunal held the U.K. trusts to be specific trusts; the High Court disagreed and held them discretionary, noting three distinguishing features for the years under appeal.
All 17 appeals were dismissed with no order as to costs (paras 21 to 23). The two U.K. trusts continued to be discretionary trusts for the assessment years in question, the income having been retained by the trustees and not disbursed; the mere failure of the settlor and, after his death, his son to exercise the power to appoint the discretion-exercisers did not alter the character of the trusts. The same conclusion governed the wealth-tax appeals, and the value of the assets could not be assessed on the estate of the deceased settlor.
Clause 3 of the U.K. deeds left disbursement to the trustees' discretion, and the endorsement in the returns showed that income was retained and not disbursed (paras 12 and 13). The High Court had identified three features distinguishing the years under appeal from the years covered by the Settlement Commission's order and by Jyotendrasinhji: the assessee had not admitted having received the income, had not received it, and had not shown it as taxable income in the returns for the years under appeal (para 16). The Court set out the legal nature of a discretionary trust at para 18 and, applying that with the fact of retention, held that the High Court's view could not be said to be legally flawed and that non-exercise of the power of appointment did not alter the trusts' character (para 19). The wealth-tax controversy followed the same position (para 20).
A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit.
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Handle my notice → Ask a CA on WhatsAppNo, not on those facts. Where the trust deed leaves distribution to the trustees' discretion and the income was in fact retained and not disbursed, the trust remains a discretionary trust and the income is not assessable in the beneficiary's hands. The failure of the settlor or his successor to appoint the persons who were to exercise the discretion does not convert a discretionary trust into a specific trust. This was decided by the Supreme Court (R.M. Lodha J and Shiva Kirti Singh J (judgment delivered by Lodha J)) and bears on section 161, section 164, section 166, section 5 of the Income Tax Act 1961. It is reported as Civil Appeal No. 2312 of 2007 with 16 connected civil appeals (Supreme Court of India, marked REPORTABLE). This is the Supreme Court's most recent word on the discretionary-versus-specific characterisation, and it supplies the definition of a discretionary trust that every subsequent order quotes. It also draws the line beyond which Kamalini Khatau does not reach: the Revenue's option to assess the beneficiary bites only on income distributed and received, so retained income cannot be pursued in the beneficiary's hands at all. Practically it also answers the department's favourite evidential argument — that the settlor's own earlier returns show what the trust really was. The Court accepted that for the earlier years dealt with in Jyotendrasinhji the returns were decisive, but held that for years in which the assessee did not admit receipt, did not receive, and did not return the income, the characterisation had to be decided on the deed. If it applies to you, the first step is this: Establish, year by year, whether the income was distributed or retained. The endorsement in the trust accounts here — 'Net Income for the year retained' — is what carried the case (paras 12 and 13).
The ex-Ruler of Gondal, Shri Vikramsinhji, executed three deeds of settlement in the United States on 19 December 1963 and two in the United Kingdom on 1 January 1964. Mr Robert Hampton Robertson McGill was named the Original Trustee of the U.K. settlements, which were for the benefit of the settlor, his children and remoter issue, and their spouses. Clause 3 of the U.K. deeds directed the trustees to hold the fund on trust for such one or more of the beneficiaries as the person who for the time being was (or would have been) the Maharaja should appoint during the specified period, the power being exercisable only by the settlor, the Elder Son or the Younger Son. Clause 4, operating 'subject as aforesaid', gave the income to the settlor for life, then to the Elder Son, and so on. During his lifetime the settlor included the whole of the trust income in his own returns, and his son Jyotendrasinhji did the same for assessment year 1970-71 before later contending that the inclusion had been a mistake. The Settlement Commission held that clause 3 never came into operation because no additional trustees were appointed, that clause 4 therefore sprang into operation, and that the U.K. settlements were specific trusts. That order reached the Supreme Court in Jyotendrasinhji v. S.I. Tripathi, decided 2 April 1993, where the Court recorded the assessee's argument on clause 3 at para 37 of that report but held at para 38 that the question was academic because the settlor and the appellant had in fact been receiving the income. The present appeals concern income-tax assessment years 1984-85 to 1991-92 and wealth-tax years from 1970-71. For those years the returns and balance sheets bore the endorsement at the foot of the statement of funds, 'Net Income for the year retained'. The Tribunal held the U.K. trusts to be specific trusts; the High Court disagreed and held them discretionary, noting three distinguishing features for the years under appeal. The matter was decided on 2014-04-16 by the Supreme Court (R.M. Lodha J and Shiva Kirti Singh J (judgment delivered by Lodha J)). On those facts the Supreme Court held as follows. All 17 appeals were dismissed with no order as to costs (paras 21 to 23). The two U.K. trusts continued to be discretionary trusts for the assessment years in question, the income having been retained by the trustees and not disbursed; the mere failure of the settlor and, after his death, his son to exercise the power to appoint the discretion-exercisers did not alter the character of the trusts. The same conclusion governed the wealth-tax appeals, and the value of the assets could not be assessed on the estate of the deceased settlor.
Clause 3 of the U.K. deeds left disbursement to the trustees' discretion, and the endorsement in the returns showed that income was retained and not disbursed (paras 12 and 13). The High Court had identified three features distinguishing the years under appeal from the years covered by the Settlement Commission's order and by Jyotendrasinhji: the assessee had not admitted having received the income, had not received it, and had not shown it as taxable income in the returns for the years under appeal (para 16). The Court set out the legal nature of a discretionary trust at para 18 and, applying that with the fact of retention, held that the High Court's view could not be said to be legally flawed and that non-exercise of the power of appointment did not alter the trusts' character (para 19). The wealth-tax controversy followed the same position (para 20). In the words reproduced by the source cited on this page: "A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit." The decision followed or applied CIT v. Kamalini Khatau — accepted by the Revenue as governing the U.S. trusts (para 4); Jyotendrasinhji v. S.I. Tripathi — earlier years distinguished; the characterisation question had been left undecided there (paras 10, 11 and 16).
It was decided by the Supreme Court on 2014-04-16 and is reported as Civil Appeal No. 2312 of 2007 with 16 connected civil appeals (Supreme Court of India, marked REPORTABLE). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 161, section 164, section 166, section 5, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All 17 appeals were dismissed with no order as to costs (paras 21 to 23). The two U.K. trusts continued to be discretionary trusts for the assessment years in question, the income having been retained by the trustees and not disbursed; the mere failure of the settlor and, after his death, his son to exercise the power to appoint the discretion-exercisers did not alter the character of the trusts. The same conclusion governed the wealth-tax appeals, and the value of the assets could not be assessed on the estate of the deceased settlor. It arises in Charitable Trusts & Exemption and Assessment & Scrutiny matters, on section 161, section 164, section 166, section 5 of the Income Tax Act 1961, and was decided by R.M. Lodha J and Shiva Kirti Singh J (judgment delivered by Lodha J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Read the discretionary clause and the default clause together and ask which one actually operated in the year. Do not concede that a failure to appoint additional trustees or discretion-exercisers activates the default clause. If the department relies on the settlor's or a predecessor's own returns for earlier years, distinguish them on the three features the High Court identified and this Court accepted at para 16: no admission of receipt, no receipt, and no return of the income as taxable in the years under appeal. Where the Settlement Commission or an earlier Supreme Court order dealt with earlier years, check whether the point was actually decided — here the Court in Jyotendrasinhji had expressly declined to decide the characterisation question as academic (paras 10 and 11).
Validity check could not be completed. Validity check could not be completed. No search for later decisions applying, distinguishing or doubting this judgment was carried out for this entry, and none should be assumed. What is known is only what the judgment itself records: it dismissed the Revenue's appeals and left Kamalini Khatau and Jyotendrasinhji standing. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The body of the judgment carries only 'R.M. LODHA, J.' as the author line, but the signature block at the foot of the judgment is signed by R.M. Lodha J and Shiva Kirti Singh J, dated New Delhi, April 16, 2014; the Bench is those two Judges. The group comprises 17 civil appeals, 8 under the Income-tax Act 1961 (assessment years 1984-85 to 1991-92) and 9 under the Wealth-tax Act 1957; the entry is written from the income-tax side, and the wealth-tax appeals were disposed of on the same footing at para 20. The Revenue conceded the U.S.-trust point at para 4, so nothing was decided about those trusts. Paragraph 19 contains a transcription doubling — 'which is also applied by by this Court'. Paragraph 18, from which the key quote is taken, carries footnote 3 to Snell's Principles of Equity, 28th edition, page 138. The Court states the proposition in its own words without quotation marks but sources it to that text. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All 17 appeals were dismissed with no order as to costs (paras 21 to 23). The two U.K. trusts continued to be discretionary trusts for the assessment years in question, the income having been retained by the trustees and not disbursed; the mere failure of the settlor and, after his death, his son to exercise the power to appoint the discretion-exercisers did not alter the character of the trusts. The same conclusion governed the wealth-tax appeals, and the value of the assets could not be assessed on the estate of the deceased settlor.
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