24.  Section 164 of the I. T. Act is not Applicable If the Shares of Beneficiaries in the TRUST are Known and Determinate !

During the course of assessment proceedings, disputes do arise about the applicability of Section 164 particularly when the Income-tax Authorities are of the view that the shares of the beneficiaries in the trust are not determinate or known and Section 164 of the Income-tax Act should be applied. However, recently the Madras High Court has given a very important ruling in the case of CIT v. P. Sekar Trust (2010) 321 ITR 305 wherein it was held that where the beneficiaries were known and their shares were determinate, Section 164 of the Income-tax Act in which maximum marginal rate of tax is charged was not applicable.

After quoting Section 164 of the Act the Madras High Court was of the view that in order to attract Section 164(1) of the I.T. Act, the beneficiaries for whose benefit, such income or such part thereof was recoverable are indeterminate and unknown. This was a clear provision. After narrating the facts of the case, the Madras High Court was of the view that it was clear that the shares of the beneficiaries were equal and as and when the two stated beneficiaries got married and begot children, they would become beneficiaries. With the increase in the number, the share of each person could be reduced. Another objection of the Revenue was that there were certain contingencies like getting married and begetting children, which differentiated the Madras High Court’s case in Muthukrishnan (2003) 260 ITR 526. From the facts of this case and from the terms of the trust deed, the judges of the Madras High Court found that the intention of the author of the trust could not be said to be uncertain. The shares of the beneficiaries were stated to be equal and in case the unmarried beneficiaries got married and begot children, they would also become beneficiaries and with the increase in the number, the share of each person could be reduced. Then the High Court opined that the judgment of a Division Bench of Madras High Court in the case of CIT v. P. Bhandari (1984) 147 ITR 500 could be taken in aid. Reference was also made to various other judgments. It was held that various judgments including the judgment in the case of Allahabad Bank Ltd. v. CIT (1953) 24 ITR 519 (SC) were Of no use to the Revenue and those decisions were having no bearing to the issue involved in this case.

Having regard to the terms contained in the trust deed that the beneficiaries were known and the shares were determinate, and having regard to the provisions of the I.T. Act and having regard to the decisions in various cases cited above, the first question of law was answered in favour of the assessee and against the Revenue. As regards the second question of law, as per the statutory provision, Section 245S, the ruling of the Advance Rulings Authority was not binding on others. Hence, the second question of law did not arise for consideration from the order of Tribunal. Thus, the appeal stood dismissed.