Within the category of private trusts come trusts for the benefit of particular individuals, whether or not immediately ascertainable, or for the benefit of some aggregate of individuals ascertained by reference to some personal relationship, and trusts for the benefit of particular animals and for the maintenance of tombs not forming part of a church, but not trusts for the benefit of the public or a section of the public. Private trusts are enforceable by the beneficiaries.
1. Definite Trust :
In the case of a Definite trust (i.e., where the shares of the beneficiaries are determinate or known), the income falling to the share of each beneficiary is liable to tax in the hands of the trust under section 161, as representative assessee, at the rate applicable to each beneficiary. However, under section 166 there is no bar to such share of income from the trust being assessed in the hands of the respective beneficiaries.
Section 161(1A) provides that, a definite trust will be liable to be taxed at the maximum marginal rate, of the income of such trust consists of, or includes, profits and gains of business.
However, the maximum marginal rate will not apply in a case where the profits and gains of business are receivable under a trust declared by any person by ‘will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.
2. Discretionary Trust :
A trust is regarded as discretionary trust if the income or any part thereof is not specifically receivable on behalf of, or for the benefit of, any one person or where the individual shares of the beneficiaries are indeterminate or unknown.
Important Principle Of Law On Taxation Of Discretionary & Specific Trust
A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the Income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future. The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. Having regard to the above legal position about the discretionary trust which is also applied by by this Court in the earlier judgment and the fact that the income has been retained and not disbursed to the beneficiaries, the view taken by the High Court cannot be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts does not get altered. The two U.K, trusts continued to be discretionary trust’ for the subject assessment years. The High Court has taken a correct view that the value of the assets cannot be assessed on the estate of the deceased Settlor.
3. [Section 161] : Where shares of the beneficiaries are determinate
In such cases the share falling to each beneficiary is liable to be assessed in the hands of trustee(s) as a “representative assessee” at the rate applicable to each beneficiary. However, the Income-tax Department has the option to make an assessment either in the hands of the trustee(s) as a representative assessee or directly in the hands of the beneficiary entitled to the income under section 166.
4. Private Trusts Having Business Income.
Where income of the trust consists of, or includes profits and gains of business, income-tax shall be charged in the hands of trustee(s) on the whole of the income at the maximum marginal rate of tax. However, it has been specifically provided that this provision will not apply in a case where the profits and gains of business are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependant on him for support and maintenance, and such trust is the only trust so declared by him.