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Case lawCBDT Circulars & Instructions › Statutory position — s.164: the maximum marginal rate where beneficiaries' shares are indeterminate, and every proviso that takes a trust out of it, in sequence
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Statutory position — s.164: the maximum marginal rate where beneficiaries' shares are indeterminate, and every proviso that takes a trust out of it, in sequence

Our discretionary trust has been charged at the maximum marginal rate under section 164 because the beneficiaries' shares are not fixed. What exactly takes a trust out of that rate, and does it help that the trust was created by my father's will?

Our discretionary trust has been charged at the maximum marginal rate under section 164 because the beneficiaries' shares are not fixed. What exactly takes a trust out of that rate, and does it help that the trust was created by my father's will?

Section 164(1) charges the relevant income at the maximum marginal rate where income for which a section 160(1)(iii) or (iv) representative is liable is not specifically receivable on behalf of any one person, or where the individual shares of the persons for whose benefit it is receivable are indeterminate or unknown. The FIRST PROVISO takes a case out of that rate — not into exemption, but into tax 'as if it were the total income of an association of persons' — in four situations, and only four: (i) none of the beneficiaries has any other income chargeable under the Act exceeding the maximum amount not chargeable to tax in the case of an association of persons, and none is a beneficiary under any other trust; (ii) the relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him; (iii) the relevant income is receivable under a trust created before 1 March 1970 by a non-testamentary instrument which the Assessing Officer is satisfied was created bona fide exclusively for the benefit of the settlor's relatives, or, where the settlor is a Hindu undivided family, of the members of that family, in circumstances where they were mainly dependent on the settlor for support and maintenance; or (iv) the relevant income is receivable by trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in that business or profession. The SECOND PROVISO then cuts all four down where there is business income: where the income of a section 160(1)(iv) trustee consists of, or includes, profits and gains of business, the first proviso applies only if those profits and gains are receivable under a trust declared by a person by will exclusively for the benefit of a relative dependent on him for support and maintenance, and that trust is the only trust so declared by him.

Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 1989-04-01, reported as Income-tax Act, 1961, s.164, as printed word for word identically on departmental pages stamped Year 2023 and Year 2025. It bears on section 164, section 164(1), section 164(2), section 164(3), section 160(1)(iii), section 160(1)(iv), section 161(1A), section 11, section 12, section 13(1)(c), section 13(1)(d), section 2(24)(iia), section 11(4A), section 2(29C) of the Income Tax Act 1961, in Charitable Trusts & Exemption, Assessment & Scrutiny, How Tax Law Is Read and Capital Gains Exemptions matters.

Still good law. Sub-section (1) with both provisos is corroborated on two independently fetched year-stamped departmental pages, Year 2023 and Year 2025, which print it word for word identically. Sub-sections (2) and (3) and Explanation 1 are likewise printed word for word identically on both the Year 2023 and the Year 2025 pages; no part of this entry rests on a single page. No page stamped Year 2026 was located for this section, no Finance Act text was read, no amendment footnote list is printed on either page, and no judicial treatment was checked. Any authority stating that section 164(1) offers a choice between association-of-persons rates and a flat sixty-five per cent is superseded by amendment: neither the Year 2023 nor the Year 2025 page contains any such alternative, and the charge is the maximum marginal rate.

Why it matters

Three corrections to the way this section is usually described. First, the escape in the first proviso is not an exemption and it is not the beneficiary's own rate — it is tax computed as if the relevant income were the total income of an association of persons, which is slab treatment and nothing more. Second, limb (i) is about the BENEFICIARIES and not about the settlor: what has to be shown is that none of the beneficiaries has other income above the maximum amount not chargeable to tax for an association of persons AND that none of them is a beneficiary under any other trust. A settlor with no taxable income does not help; a beneficiary who is also a beneficiary of a second family trust destroys the limb outright. Third, the second proviso is what actually decides most private-trust cases, because it makes limbs (i), (iii) and (iv) unavailable wherever the trust has business profits and leaves only the sole will trust for a dependent relative — the same escape route as in section 161(1A). Beyond sub-section (1), the section carries two more machineries that are constantly confused with it. Sub-section (2) deals with income from property held under trust wholly for charitable or religious purposes, and taxes so much of it as is not exempt under section 11 or 12 as if it were the income of an association of persons — but its proviso charges the maximum marginal rate on the relevant income or the part of it that loses exemption by virtue of section 13(1)(c) or 13(1)(d). That proviso is where a charitable trust that has benefited a specified person, or has invested outside section 11(5), gets hit. Sub-section (3) deals with a trust held in part only for charitable or religious purposes and splits the tax into a charitable part taxed as an association of persons and a non-charitable, indeterminate part taxed at the maximum marginal rate, with its own three provisos mirroring the structure of sub-section (1). Finally, Explanation 1 is where most 'indeterminate' findings are made: shares are deemed indeterminate unless they are expressly stated in the order of the court, the instrument of trust or the wakf deed and are ascertainable as such ON THE DATE of that order, instrument or deed — a share that becomes ascertainable only later is an indeterminate share.

Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.

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Related

Other authorities on the same sections.