The officer has read a discretion clause in my family trust deed as making the shares indeterminate and charged everything under s.164 at the maximum marginal rate with surcharge at the top slab - how much of that can I get back?
The client is a private family trust settled by a deed dated 3 March 2016 and assessed at a circle in Coimbatore. Clause 4 names the settlor's four grandchildren as beneficiaries with shares of thirty, thirty, twenty and twenty per cent. Clause 9 permits the trustees, by a written resolution, to vary those shares in any year having regard to the need of a beneficiary. The trustees have never passed such a resolution. For FY 2023-24 the trust received rent of Rs 38,40,000 from a commercial building, interest of Rs 12,60,000, and Rs 7,20,000 from a firm for letting out a distributorship agreement the trust holds and no longer runs itself. Rs 9,00,000 was distributed during the year to the eldest beneficiary, who has shown it in her own return for AY 2024-25. The trust's return for AY 2024-25 was filed on 29 October 2024 under s.161(1), tax being computed at each beneficiary's own rate, at Rs 4,86,000. The order under s.143(3) dated 18 February 2026 holds the shares indeterminate because of clause 9, applies s.164(1) to the whole of Rs 58,20,000, charges the maximum marginal rate with surcharge at thirty-seven per cent, and invokes s.13 because a flat owned by the trust is occupied by the settlor's son at Rs 9,000 a month. Gross tax at that rate on Rs 58,20,000 is Rs 24,87,700, and the demand, after credit for the Rs 4,86,000 already paid and with interest, is Rs 22,50,000. The appeal was filed on 19 March 2026.
Read clause 9 against the minute book before anything else, and establish in writing that the power to vary was never exercised in FY 2023-24 or in any earlier year. Section 164(1) turns on whether the income is specifically receivable on behalf of one person and whether the individual shares are indeterminate or unknown, and the answer for this year is a question about this year. A power that sits unused in a deed and a discretion actually exercised are not the same thing, and the whole of the rate dispute follows from which of the two the record shows.
Section 164(1) charges the relevant income at the maximum marginal rate where income for which a representative falling under s.160(1)(iii) or (iv) 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 library's statement of the section sets out that trigger and then every proviso in sequence, and the position it describes is the one governing AY 2024-25. The Supreme Court has held, on the mirror question, that where a deed leaves distribution to the trustees' discretion and the income was in fact retained, the trust remains discretionary and the settlor's own conduct in returning the income did not convert it into a specific trust.
Section 161(1) makes the representative liable to assessment in his own name, deems the assessment to be made on him in his representative capacity only, and caps the charge: tax is levied on and recovered from him in like manner and to the same extent as it would be leviable on and recoverable from the person represented. The library's statement of the sub-section says so. A High Court has held that where the officer assesses the trustee rather than the beneficiary, the assessment must be made at the rate the beneficiary's own total income attracts - which is the same principle working in the officer's favour where a beneficiary has substantial income of his own.
Section 161(1A) opens with a non obstante clause and displaces the beneficiary-rate protection in s.161(1) entirely: where any income in respect of which a person mentioned in s.160(1)(iv) is liable as representative consists of or includes profits and gains of business, tax is charged on the whole of that income at the maximum marginal rate, and the fact that the shares are determinate is irrelevant. It was inserted with effect from 1 April 1985. A Tribunal Bench has held that where a trust stopped running its distributorship itself and let another concern run it for a monthly fee, the distributorship was a commercial asset, the letting did not take the receipt out of the business head, and s.161(1A) applied.
Maximum marginal rate is a defined expression and the definition reaches the rate of income tax, including surcharge, applicable to the highest slab of income for an individual, association or body under the Finance Act of the year. A Special Bench has held that while the rate under s.164 takes the highest slab rate applicable to an individual, surcharge is applied in a graded manner by reference to the trust's actual total income against the Finance Act thresholds, so that below the first threshold no surcharge is chargeable at all. On a total income of Rs 58,20,000 that is the difference between thirty-seven per cent surcharge and ten, and it survives even if every other ground fails.
Section 166 preserves the direct assessment of the person on whose behalf the income is receivable and the recovery of tax from him, so there is no absolute bar on assessing the beneficiary; the library's statement of the section says that expressly. The Supreme Court has held that the Revenue has an option and may assess either the trustees or the beneficiary, but only in respect of income actually distributed to and received by the beneficiary during the accounting year, and that s.164 is not a code in itself but fixes only how the tax is charged. It has separately held that s.161(2) does not take away the option; it requires only that where the representative is the one assessed, he is assessed under Chapter XV and not under any other provision.
Section 13 operates on the exemption in s.11 and s.12 - it provides that nothing contained in those sections shall operate to exclude income from the total income in the cases it lists. A private family trust claiming nothing under s.11 has no exemption for the section to withdraw, so the finding has nothing to bite on and the flat at Rs 9,000 a month is a question of the rent actually assessable, not of forfeiture. That reasoning is taken here from the opening words of s.13 itself; no entry in this collection decides the point, and every s.13 entry in it concerns an institution claiming s.11.
Section 160(1) is an exhaustive list of five classes and nobody outside it can be made a representative assessee; the trustee of a trust declared by a duly executed instrument in writing falls in the fourth. Section 161(1) then makes the assessment on him in his own name but deems it to be made on him in his representative capacity only. The practical consequence is that the assessment is on the trustees as representatives of named beneficiaries in respect of identified income, and the order should read that way. Where it does not, the point is worth taking early, because it also governs what can be recovered and from whom.
A representative assessee is entitled to recover the tax paid from the person on whose behalf it is paid, and to retain out of any money payable by him to that person a sum equal to his estimated liability. The library records that the retention right is available before any order is made against him, because it extends to any person who apprehends that he may be assessed as a representative assessee, and that the estimate can be settled by the officer where the amount is disputed. For trustees who have already distributed Rs 9,00,000 and face a demand of Rs 22,50,000, that is the difference between a personal exposure and a funded one.
The graded surcharge is the ground that most often succeeds, and it succeeds quickly. Determinacy is the hard one: where the deed names shares and the power to vary was never used, a good share of these are decided for the assessee, but where the trustees have ever exercised the discretion the maximum marginal rate usually stands for that year and for the years after it. The business income head is the quiet killer - once any part of the income is held to be business profits, s.161(1A) takes the whole of it to the top rate and the determinacy win is worth nothing. The s.13 finding in a private trust is usually dropped once the point is put, sometimes at the assessment stage itself. Expect two to three years to a first appellate order.
