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Assessment of Private Trust under the Income tax Act, 1961

The provisions relating to Trust have been discussed in my article on “A note on the Indian Trusts Act, 1882”. For better understanding one may read the said article before reading this. In case of trust, where A transfers property to B for benefits of C then A is settlor, B is trustee and C is beneficiary. Where C represents people at large irrespective of caste/creed/faith and the object is charitable purpose then it is charitable trust. Where C is NOT people at large and the object is private purpose then it is Private trust.

Different types of trusts
In India private trust is governed by the Indian Trusts Act, 1882, whereas there is no such Central Act for Public trust. Different types of trusts are recognized by the Income tax Act, 1961 (the Act). They are i) charitable ii) religious, iii) electoral [section 2(22AAA)], iv) securitization [Explanation below section 115TC] v) business [section 2(13A)] and vi) Private trust

Section under which return of income is required to be filed
Whereas charitable/religious/electoral trust is required to e-File return of income under section 139(4A), securitization trust is required to e-File under section 139(4C), and business trust under section 139(4E) but Private trust is required to file/e-File return of income under section 139(1).

Liability of a trustee
Parts B, C and D of Chapter XV deal with Representative assessees (RA)- General provisions, RA- Special cases and RA- Miscellaneous provisions respectively [Sections 160 to 167]. Section 160 defines RA. A trustee appointed under a trust in writing/under an oral trust, to receive income on behalf of beneficiary is a RA in respect of that income [section 160(1)(iv)/(v)].

Types of Private trusts
Private trusts are of two types as i) Private Specific Trust (PST) and ii) Private Discretionary Trusts (PDT). Where share of each member is determinate as per the trust deed, it is known as ‘PST’ and where share of each member is indeterminate/not specifically mentioned in the trust deed; it is known as ‘PDT’

Private Specific Trust
1. In case of PST (not having profits and gains of business) the share falling to each of the beneficiaries are required to be assessed in the hands of the trustee as a RA “as if” income were income received by him. Rate applicable to each beneficiary will be determined and applied to the income from the trust and for this purpose separate assessments will be made for each beneficiary [section 161(1)]. Alternatively, the AO has the option to make the assessment directly on the beneficiaries [section 166]. Once the AO exercised his option to assess for that AY, again he cannot assess the same income for that AY in the hands of other person (i.e. the beneficiary or the trustee) [Circular No. 157 dated 26/12/1974]. Therefore for that AY once this option is exercised, section 161(1) cannot be invoked.

2. In the case of PST (having profits and gains of business) tax shall be charged on the whole income at maximum marginal rate (MMR) [section 161(1A)]. But rate as applicable to individual shall apply where such profits and gains of business are receivable under a trust declared by will exclusively for benefit of any relative dependent on the settlor for support and maintenance and such trust is the only trust so declared by the settlor[Proviso to section 161(1A)].
NOTE: MMR means the rate of income-tax, including surcharge if any, applicable in relation to the highest slab of income in the case of an individual/AOP/BOI as specified in the Finance Act of the relevant year [section 2(29C)]

Private Discretionary Trust
1. In the case of PDT (not having profits and gains of business) tax shall be charged on the relevant income at “MMR” [section 164(1)]. But rate as applicable to AOP shall apply where any of the following three cases is applicable:
i) none of the beneficiaries has any other income chargeable under this Act exceeding the exemption limit in the case of an AOP or 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 by a non-testamentary instrument before 01/03/1970 and the AO is satisfied that it was created bona fide for the benefit of the relatives dependant for support and maintenance of the settlor or where the settlor is an HUF, exclusively for the benefit of the members dependant for support and maintenance [Proviso to section 164(1)].
NOTE: non-testamentary trust is not related to will, which is created and become effective during the lifetime of the settlor.

2. In the case of PDT (having profits and gains of business) tax shall be charged on the whole income at “MMR” [section 164(1)]. But slab-rate as applicable to Individuals shall apply i) if the trust has been declared by a will from which business income is derived; ii) it is exclusively declared for the benefit of any relative dependent on the settlor for support and maintenance; and iii) the trust is the only trust so declared by the settlor [Second Proviso to section 164(1)].

Oral trust
Trustee of oral trust is required to forward a written statement setting out the purpose of trust, particulars of trustee, beneficiary and trust property to the AO within three months from the date of declaration of trust. If trustee fails to do so, trust shall be deemed to be duly executed trust [Explanation 1 below section 160(1)] and consequently shall be charged at MMR [section 164A]. If trustee forwards, where it is indeterminate it shall be charged at MMR and where shares are known as per PST.

Status of Private trust
Status of Private trust is not defined in section 2(31). Analysis of judicial decisions reveal that in the case of PST, there shall be many assessments on trustee with determinate shares and they would have to be made in the status of beneficiary, as such the status of such Private trust shall be similar with that of the beneficiary. Problem arises where beneficiaries fall under different status and in such case how to indicate the status of Private trust in PAN application or at the time of e-Filing of return of income. In the case of PDT, not falling under exceptions specified in the first and the second provisos to section 164(1), what will be the status of Private trust, whether the status of trustee or that of beneficiary shall be taken? Here also the beneficiaries may be all individuals, some individuals and some non-individuals and all non-individuals. Status of Private trust requires clarity.

Related provisions
Chapter V [Sections 60 to 65] of the Act deals with “Income of other persons, included in assessee’s total income”. For the purposes of sections 60, 61, 62 and 63, - Transfer includes any settlement, trust, covenant, agreement/arrangement. A transfer shall be deemed to be revocable if it contains any provisions for re-transfer of the income/assets to the transferor or it gives the transferor a right to re-assume power over the income/assets [section 63]. Where there is no transfer of asset but from which income arises, such income shall be chargeable as the income of the transferor [section 60]. Therefore without transferring the trust property the settlor cannot transfer the trust income. Income arising from revocable transfer of assets shall be chargeable as the income of the transferor [section 61]. Where for a specified period the trust is irrevocable, the trustee shall be liable as RA. Where the trust which was irrevocable gets revoked then the property shall get back to the settlor/any other person specified in the trust deed or to the legal inheritor of the property and he shall be liable on the income from such property from the date of transfer [section 62]. Where an individual transfers without adequate consideration an asset to a person/AOP for benefit of spouse/son’s wife all such income as arises from such asset shall be included in the total income of the individual [section 64(1) (vii)/(viii)]. The income of minor child (excluding those suffering from any disability specified in section 80U) shall be included in the income of parent whose income is greater except such income as arises through any manual work/own skill [section 64(1A)]. Further any transfer of capital assets (other than share, debenture/warrant allotted by a Company to its employee under any Employees’ Stock Option Plan or scheme etc.) under a gift/will/irrevocable trust is not regarded as a transfer hence not liable to capital gains [section 47(iii)].

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