Understanding Taxation of Private Discretionary Trusts Created by Will: Insights from ITAT Ahmedabad Ruling
Facts and Issue of the Case
In the case of Shakuntala Balvantray Trust vs. Income Tax Officer, the Income Tax Appellate Tribunal (ITAT) Ahmedabad addressed the taxation of a private discretionary trust established through a will. The trust was created by the late Smt. Shakuntala Balvantrai for the benefit of her daughter and grandchildren. During the assessment year 2021-22, the trust earned interest income, which was subsequently distributed to the beneficiaries.
The Centralized Processing Centre (CPC) processed the trust’s income tax return under Section 143(1) of the Income Tax Act, 1961, and applied the Maximum Marginal Rate (MMR) of taxation. This led to a tax demand of ₹32,638, despite the trust’s declared income being ₹1,04,610, which would have resulted in no tax liability under normal slab rates applicable to an Association of Persons (AOP). The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the application of MMR, arguing that the beneficiaries’ individual incomes were indeterminate. The trust contested this decision, asserting that it qualified for an exception under the first proviso to Section 164(1) of the Income Tax Act, which allows certain trusts to be taxed at normal slab rates instead of MMR.
Observations by the Tribunal
proviso to Section 164(1). It was noted that the trust was a private discretionary trust created solely through the will of the deceased and was the only trust declared by her. The tribunal emphasized that the first proviso to Section 164(1) stipulates that if a trust is declared by will and is the only trust so declared by the testator, the income shall be taxed as if it were the total income of an AOP, thereby applying normal slab rates instead of MMR. Furthermore, the tribunal referred to CBDT Circular No. 577 dated 04-09-1990, which clarifies that the intention was not to subject such trusts to MMR. The circular explicitly states that Section 167B does not apply to trusts declared by will where such trust is the only trust declared by the settlor, and that such trusts are to be taxed under the proviso to Section 164(1). The tribunal observed that the CIT(A) erred in treating the applicability of MMR as undisputed and failed to address the assessee’s specific grievance.
Law Applicable
Section 164(1) of the Income Tax Act, 1961, generally mandates that income received by a representative assessee on behalf of beneficiaries with indeterminate shares shall be taxed at the MMR. However, the first proviso to this section provides exceptions, including cases where the trust is declared by will and is the only trust so declared by the testator. In such cases, the income is to be taxed as if it were the total income of an AOP, thereby applying normal slab rates. CBDT Circular No. 577 further reinforces this interpretation by clarifying that Section 167B, which deals with the taxation of AOPs with unknown shares, does not override the special provision under the proviso to Section 164(1). This circular serves as an important interpretative aid, ensuring that the taxation of such trusts aligns with the legislative intent.
Conclusion by the Tribunal
The ITAT Ahmedabad concluded that the Shakuntala Balvantray Trust met the criteria outlined in the first proviso to Section 164(1) and, therefore, should not be subjected to MMR. The tribunal held that the trust’s income should be taxed at normal slab rates applicable to an AOP. Consequently, the tax demand raised by applying MMR was set aside.
These ruling underscores the importance of understanding the specific provisions and exceptions within the Income Tax Act concerning the taxation of trusts. It highlights that private discretionary trusts created solely through a will and being the only trust declared by the testator are eligible for taxation at normal slab rates, provided they meet the stipulated conditions. Taxpayers and practitioners should carefully evaluate the nature of the trust and the applicability of relevant provisions to ensure accurate tax compliance.
