Private Trust & its Taxation

Introduction

-Section 3 of The Indian Trusts Act, 1882 defines a ‘Trust’ to mean an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner. Thus, a trust is not a separate legal entity but is an obligation.

-The above definition is applicable only to the “Private Trusts” for section 1 of the Indian Trust Act, 1882 clearly provides that public or charitable trust are saved from its operation.

-In this article we will analyise the Private Trust & its Taxation .

Type of Trust

• Revocable: A trust that can be revoked (cancelled) by its settlor at any time during this life.
• Irrevocable: A trust will not come to an end until the term / purpose of the trust has been fulfilled.
• Discretionary: An arrangement where the trustee may choose, from time to time, who (if any-one) among the beneficiaries is to benefit from the trust, and to what extent; (income as well as capital) the beneficiary thus has no more than a hope that the discretion would be exercised in his favour. Hon’ble Supreme Court has in the case of CWT vs. Trustees of H. E. H. Nizam’s Family held that the Trust cannot be considered to be indeterminate. As long as one is able to know the beneficiaries on the valuation date, the Trust was held to be determinate.
• Determinate: The entitlement of the beneficiaries is fixed by the settlor at the time of settlement or by way of a formula, the trustees having little or no discretion; or
• Combination trusts: Revocable – Discretionary /Determinate or Irrevocable – Discretionary /Determinate.

Taxation of Private Trust

• Revocable trusts:

♦ Transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor or it in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or asset.

♦  In such case the trust is disregarded and the income is taxed in the hands of the settlor.

• Irrevocable Determinate Trust:

♦  As the beneficiaries are identifiable and their share are determinate, trustee can be assessed as representative assessee, and the tax shall be levied and recovered from him in the like manner and to the same extent as it would be leviable and recoverable from the person represented by him. Alternatively, assessment can be made in the hand of the beneficiaries.

♦  The assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee { CWT vs. Trustees of H. E. H. Nizam’s Family (SC)} . Thus, in case of Determinate Trust status of trustee would depend upon the status of the beneficiaries to the extent of their share.

♦ All the benefits, deductions or allowances which an individual beneficiary could have obtained are also available to the trustees assessed in representative capacity.

♦ Other than business income, the rate of tax would be same as applicable to the beneficiaries, whereas on business income Maximum Marginal Rate of tax will be applicable except, when trust declared by will exclusively for benefit of any relative dependent on him for support and maintenance and such trust is only trust so declared by him, then at rate of tax applicable to AOP.

• Irrevocable Discretionary Trust:

♦  The status of the private discretionary trust is individual. (CBDT Circular no 6/2012 dt 3^rd Aug,2012)

♦  All the benefits, deductions or allowances which an individual beneficiary could have obtained are also available to the trustees assessed in representative capacity.

♦  The rate of tax would be Maximum Marginal Rate except, when trust declared by will exclusively for benefit of any relative dependent on him for support and maintenance and such trust is only trust so declared by him, then at rate of tax applicable to AOP.

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Author: CA. Ajit Kumar, K AJIT & Co. Chartered Accountant in Practice from Patna and can be contacted at [email protected].

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