Notes attached to the statement of income claimed that the trusts were discretionary and the Taxpayer had not received any income from the trusts since the trustee decided to retain the net income. However, for later assessment years (which were in dispute in this appeal) the Taxpayer had not shown the income of the trusts claiming that inclusion of such income in earlier assessment years was done under a mistake. After his death, the Settlor’s son (the “ Taxpayer”) also included such income in his personal returns of income tax for certain assessment years. The trust deeds defined the term ‘the Trustees’ to mean and include the Original Trustee or the other trustees for the time being appointed in terms of these deeds.ĭuring his lifetime, the Settlor included the whole of the income arising from these trusts in his personal returns of income tax. Beneficiaries of these two trusts were the Settlor, his children and remoter issue and any spouse of such children and remoter issue. A foreign national was designated as the ‘Original Trustee’ under the two trust deeds.
3 by executing two similar trust deeds in the U.K. Gondal’s 2 former ruler, Maharaja Vikramsinhji had created two private trusts (“ Settlor”) in the U.K. available to the beneficiary with respect to that beneficiary’s share of income. That is, the trustee would generally be able to avail all the benefits/deductions, etc. If it is the latter, the taxation in the hands of a trustee must be in the same manner and to the same extent that it would have been levied on the beneficiary. In a determinate trust, the entitlement of the beneficiaries is fixed by the settlor, the trustees having no discretion in determining the amount of distributions to be made to the beneficiaries.Īs per the Income Tax Act, 1961, the income of a discretionary trust is taxed in the hands of the trustee while the income of a determinate trust may be taxed either in the hands of the beneficiary or of the trustee in his capacity as the representative assesse.
That is, the trustee has the discretion to decide, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent. In its decision in Commissioner of Wealth Tax, Rajkot v Estate of Late HMM Vikramsinhji of Gondal, 1the Supreme Court has reiterated the primary basis for difference in taxation of discretionary trusts versus determinate (or specific) trusts in respect of an offshore trust.Ī discretionary trust is one where the specific shares of the beneficiaries are not known.
Fallout of this judgment (although not raised in this dispute) is the uncertainty it creates on the taxability of capital/corpus distributions to beneficiaries.Where trustees have clearly retained the income of the trust and brought it forward year to year without disbursing it to the beneficiaries, the trust is discretionary.Supreme Court reiterates the principle that income of a discretionary trust cannot be taxed in the hands of a beneficiary unless distributed to the beneficiary.
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