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Private Family Trust

Chapter XV-B of the Income-tax Act deals with the law applicable to the taxation of the Representative Assessee.

Section 160 (1) (iv) provides that trustee of a trust created by a duly executed Trust Deed in writing whether testamentary or otherwise receives or is entitled to receive income on behalf or for the benefit of any person is assessable as a Representative Assessee. Every representative assessee shall be deemed to be an assessee.

Section 161(1) specifies the liability of the Representative Assessee. Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in Chapter XVB be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him.

Section 161(1A) provides that where income of the Trust declared by a duly executed instrument includes profits and gains of business, tax shall be charged on the whole of the income at the maximum marginal rate. If it is intended that Trustees should not be entitled to carry on business, the words appearing in italics in the draft deed appended hereunder should be omitted.

Proviso to section 161 (1A) provides that in case of a Trust declared by the deceased through his WILL exclusively for the benefit of his relative dependent on him for support and maintenance, provisions of section 161 (1A) shall not apply if such Trust is the only trust so declared by him.

Sec 162(1) provides that the representative who has paid taxes as a representative assessee can recover the same or retain it out of the money he possesses in his representative capacity.

Section 164 levies tax at the maximum marginal rate on the income of the discretionary trust. Proviso to that section makes exceptions. Section 164A provides that the income of the Oral Trust shall be chargeable at the maximum marginal rate.

Section 166 enables the Assessing Officer to assess either the trustee or the beneficiary. The liability of the Representative Assessee is a vicarious liability and it is co-extensive with the liability of the person represented by him. Where the Representative Assessee is being assessed, tax on share of each beneficiary will have to be separately calculated as if it formed part of the income of the beneficiary’s income. Tax payable by the Trustee will be the sum total of the tax so calculated on share of each beneficiary. Representative Assessee has no status of his own. Status of the beneficiary is to be adopted.

Sec.167 provides that the assessing officer shall have same remedies against all property of any kind in possession of representative assessee as he would have against any assessee.

One may refer to following leading cases.

  1. 50 ITR 693 (Bom) Trustees of Chatrabhuj Raghavji Trust

  2. 73 ITR 626 (SC) C. R. Nagappa vs. CIT

  3. 75 ITR 120 (Mad) A. K. Gopala Pillai vs. ITO

  4. 108 ITR 555 (SC) Trustees of HEM Nizam Family (R.W.) Trust

  5. 135 ITR 768 (Bom) CIT vs. Hemant Bhagubhai Mafatlal

  6. 166 ITR 823 (Ker) CIT vs. Fertilizers & Chemicals (Travancore) Ltd.

  7. 177 ITR 275 (SC) Mrs. Arundhati Balkrishna

  8. 188 ITR 224 (Bom) Marsons Beneficiary Trust

  9. 189 ITR 631 (Bom) Chunilal Raichand Trust

  10. 201 ITR 611 (SC) Jyotendrasinhji vs. S. I. Tripathi and others.

  11. 209 ITR 101 (SC) Kamalini Khatau

  12. 211 ITR 575 (Guj) Deepak Family Trust No. 1 and Others

  13. 215 ITR 55 (SC) Gosar Family Trust

  14. 217 ITR 54 (Allahbad) CIT vs. Prem Family Private (specific) Trust

  15. 221 ITR 649 (Mad) CIT vs. Venu Swash Sanjay Trust

  16. 224 ITR 635 (SC) Meera vs. CIT

  17. 231 ITR 528 (SC) CIT vs. Ambalal Sarabhai D. Trust

  18. 231 ITR 529 (Guj) CIT vs. Anand Sarabhai

  19. 236 ITR 574 (Guj) CIT vs. Mangaldas

  20. 237 ITR 82 (Bom) AMY vs. CIT

  21. 239 ITR 738 (SC) Patel vs. CIT

  22. 244 ITR 104 (Mad) CIT vs. Ashok Match

  23. 246 ITR 269 (Allahbad) Jogender vs. ITO

  24. 247 ITR 1 (Bom) DIT vs. Shardaben

  25. 252 ITR 465 (Guj) CIT vs. US Navlekar

  26. 253 ITR 489 (Delhi) NIDC Ltd. vs. CIT

  27. 254 ITR 429 (Raj) CIT vs. Poonamchand Manmal Babal Family Trust.

  28. 254 ITR 642(Raj) Asst. CIT vs. Ajay Vijay Traders

  29. 257 ITR 160 (Mad) CIT vs. Saurin

  30. 260 ITR 143 (Mad) CIT vs. Manoranjitham

    Following lines from the judgment of the Kerala High Court in CIT vs. Fertilizers and Chemicals (Travancore) Ltd. 166 ITR 823, 827-828 will clarify the law on the subject.

    "The object sought to be achieved in enacting these sections in Chapter XV of the Income-tax Act is to fasten on the person who actually carried on the business, the liability to pay the tax on the income received by him, regardless of its destination or enjoyment. It is also an object to catch the income at the earliest point of time and tax the same where it is found, instead of waiting until such time when the income reaches the person who is the owner thereof."

    It is in this backdrop we have to construe these sections. Section 160(1) defines various categories of representative assessees in respect of the income set out against each. Sub-section (2) of section 160 declares that every representative assessee shall be deemed to be an assessee for the purpose of the Act. Section 161(1) says that every representative assessee, as regards the income in respect of which he is a representative assessee, will be subject to the same duties, responsibilities and liabilities as if the income is received by or accrued to him beneficially. He shall also be liable to assessment in his own name in respect of that income. Nonetheless, any such assessment made on him shall be deemed to be made in his representative capacity only. Regarding the recovery of the tax thus levied, the section says that subject to the other provisions contained in Chapter XV, it shall be recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the principal. Sub-section (2) of section 161 was enacted, as observed by the Supreme Court in C. R. Nagappa vs. CIT [1969] 73 ITR 626, "presumably with an intention to remove the conflict of judicial opinion which arose in the interpretation of the analogous provisions of sections 40 and 41 of the Indian Income-tax Act, 1922". This sub-section makes it clear that where any person is, in respect of any income, assessable, following the procedure prescribed under Chapter XV, in the capacity of a representative assessee, he shall not, in respect of the same income, be assessed under any other provisions of the Income-tax Act. While considering the scope of section 161(1), it is fruitful if we take into account the object with which section 166 is enacted. These two sections together would constitute a code and, therefore, to understand the scope of one, it is necessary to consider the scope of the other also. Section 166 virtually overrides the provisions contained in sections 160 to 165 and confers power on the Income-tax Officer to assess either the representative assessee or the person represented by him (the principal) in respect of the income referred to in section 160 and recover the tax thus levied from the said assessee. Section 162 provides that a representative assessee who pays any tax on behalf of the person whom he represents is entitled (a) to recover from such person the tax so paid, and (b) to retain out of any moneys that may be in his possession or that might come to him in his representative capacity, an amount equal to the tax so paid by him and (c) to obtain a certificate from the Income-tax Officer specifying the amount to be retained, pending final settlement of the tax liability of the person represented in the case of any disagreement between the representative and the represented, regarding the sum to be retained."

    I give hereunder Draft of Family/Private Specific Trust.

    In case, discretionary trust is to be executed, Trustees should be given absolute discretion to apply the income/the capital of the trust for benefit of any of the beneficiaries mentioned in the deed.

    specimen

    Private FAMILY Trust

    THIS INDENTURE made at the _______ day of _________ 2005 (Two Thousand Five) between Shri. A, resident of Bombay hereinafter referred to as the "Settlor" of the one part, and (1) Shri B, (2) Shri C and (3) Shri D, hereinafter called "the Trustees" of the other part.

    WHEREAS the Settlor is absolutely seized and possessed of and otherwise well and sufficiently entitled to an amount of rupees _____________________ only which amount is hereinafter referred to as ‘the said amount’; and

    WHEREAS the Settlor is desirous of settling the said amount for the benefit of certain persons (hereinafter referred to as the beneficiaries) in the manner and subject to the provisions declared hereinafter; and

    WHEREAS for the purpose of effecting such desire the Settlor has handed over the said amount by issuing a cheque drawn in favour of the Trustees on __________ Bank to the Trustees intending that the said amount and future income thereof shall be held by the trustees upon the Trust and subject to the powers and provisions hereinafter declared of and concerning the same to which the trustees have agreed.

    NOW THIS INDENTURE WITNESSETH AS UNDER :

    1. For effectuating the settlement, the Settlor doth hereby transfer and assign unto the trustees all the said amount and his/her beneficial interest in the said amount to have and to hold the same and the income thereof upon the trust and for the purposes hereinafter declared of and concerning the same.
         

    2. For the consideration aforesaid, the trustees hereby covenant with the Settlor, that they the Trustees and the trustees for the time being shall stand possessed of the said amount and all other assets forming part of the Trust Fund and all income arising therefrom upon the trust and with and subject to the powers and provisions hereinafter declared of and concerning the same.
        

    3. The Trust hereby established shall be styled as "ABC TRUST". (the said trust)
        

    4. It is hereby agreed and declared between the parties of these presents that the trustees shall stand and be possessed of the said amount and other assets and investments, business and properties and funds which the said trust may hold from time to time and which may be added in the execution of the said trust herein designated as 'the Trust Fund') upon trust to receive the annual or other income thereof and thereout in the first place to reimburse himself or themselves or pay and discharge all the costs and expenses incurred in or about the administration of the trusts of these presents including income-tax and/or other taxes levied upon the trustees and including all outgoings and municipal or other rates assessments and duties and costs of ordinary repairs to any immovable property, if any, forming part of the Trust Fund and subject hereto :-

      1. A. UNTIL THE SPECIFIED DAY:

        The Trustees shall pay the residue of such annual or other income to the following beneficiaries in the proportion mentioned against the respective names:-

        (1) Kumari P
        (2) Shri R
        (3) Shri S
        (4) Smt. T
        (5) Smt. U

        PROVIDED that with effect from the day of the marriage or death of Kumari P. she shall cease to be entitled to receive any payment as aforesaid and her share of income shall be paid to the following beneficiaries (or their respective legal heirs) in the proportion mentioned against their respective names:
        (1) R .. ¼
        (2) S .. ¼
        (3) T .. ¼
        (4) U .. ¼

        PROVIDED further that in the event of death of Shri R, S and/or Smt. T, U the income payable to the deceased shall be paid to his / her legal heirs in accordance with the law of intestate succession applicable to Hindus. In the event of there being no heirs, the share of the deceased shall be divided equally amongst the other beneficiaries.
            

      2. ON THE SPECIFIED DAY :

        The Trustees shall close the trust and transfer all the assets forming the part of the Trust Fund to the following beneficiaries (or their respective legal heirs) in the proportion mentioned against their respective names to be held by them absolutely.

        (1) R .. ¼
        (2) S .. ¼
        (3) T .. ¼
        (4) U .. ¼

         

      3. The expression Specified Day shall in this deed mean the day of death of the last survivor of P, Q, R, S, T, U. Provided that the trustees for the time being in their absolute discretion and by unanimous decision in writing fix any day earlier than the said day to be the Specified day.
          

    5. The Trust established hereby shall be irrevocable and notwithstanding anything to the contrary contained elsewhere in these presents, no part of the Trust Fund or future income thereof shall be given, lent to or applied for the benefit of the Settlor.
         

    6. The trustees shall be free to invest all moneys which shall require investment in any manner they may think proper (without being obliged to invest the same in the investments authorised by law for the investment of the trust funds) and to dispose of sell or exchange such investments and other properties both movable and immovable as are forming part of the Trust Fund whenever they in their absolute discretion think it desirable to do so. And without prejudice to the generality of the foregoing powers, the trustees may invest any moneys requiring investments:

      1. in the purchase of any immovable property situated in India or elsewhere (and for the development thereof the trustees may borrow moneys at such interest as they may think fit for the purpose without security or on security of the Trust Fund or any property forming part of the Trust Fund) or
          

      2. in the purchase of or subscription to debentures, stocks, funds, shares and securities of any company or corporation whether incorporated in India or elsewhere; or
           

      3. in making loans upon the security of any immovable property or movable property; or
           

      4. in making loans to or deposits with any person, firm or company or corporation; or
          

      5. in starting or acquiring any business which may be carried on by the trustees as such trustees for and on behalf of the Trust hereby established either as sole proprietor thereof or in partnership with any other person or persons; or
           

      6. in the purchase of or acquisition of a flat by becoming member of a co-operative society or association of flat owners; or
          

      7. in such other investment of whatsoever nature and wheresoever situate and whether involving liability or not or upon such personal credit with or without security as the trustee shall in their absolute discretion think fit—
          

      8. To the intent that the trustees shall have the full and unrestricted power of investing and transposing the investments in all respects as if they were absolutely entitled thereto beneficially.
          

    7. The trustees are hereby expressly authorised to accept gifts of money and/or property (movable or immovable) for the benefit of this trust from the Settlor and/or other person or persons and such gifts shall be held by the trustees as accretion to or augmentation of the Trust Fund and the moneys or other property received by way of such gift and the future income thereof shall be held on the like trusts in all respects as are herein contained and are applicable to the Trust Fund and income of the Trust Fund shall be subject to the same trust powers and provisions as are contained in these presents and applicable thereto as if such money or property had formed part of the original Trust Fund.
       

    8.  

      1. The power of appointing new trustees shall vest with the trustees for the time being;

      2. all acts in carrying out these presents if done and carried out by a majority of the trustees for the time being shall be as valid and effectual as if such acts had been done by all the trustees;

      3. should any difference of opinion at any time exist between the trustees for the time being in relation to the commission or omission of any act or otherwise, however, in the execution of the trusts of this Deed, the opinion of the majority of such trustees shall prevail provided that in the event of tie between them the Managing Trustee shall have a casting vote in addition to his or her own;

      4. A trustee may resign office as trustee by giving notice in writing to his or her co-trustees;

      5. Without prejudice to the generality of their powers, the trustees shall have power:

        1. to employ clerks and other employees, agents, brokers, bankers, lawyers, accountants and others at such remuneration as they think fit;

        2. to delegate any powers to one or more of their body;

        3. to appoint any one from amongst them as a Managing Trustee with such powers as may be delegated by them;

        4. to delegate any power as they can lawfully delegate to any person and to execute such power of attorney as they may think fit for the purpose;

        5. to withdraw, any power or revoke any appointment of any employee or attorneys;

        6. to let any portion of any immovable property forming part of the trust fund at such rent and for such period and on such terms and conditions as they may think fit and to accept, surrender of any lease;

        7. to maintain banking accounts in the name of the trust or in the name of any business which the trustees may start or in the name of such one or more of the trustees as they may think fit and to make the account operable by such one or more of them as they may think fit;

        8. to determine who shall be the first named as regards investments in shares, stocks, debentures, and other securities and other investments;

        9. to appoint proxy or proxies for voting at any meeting of creditors, contributors, shareholders and others;

        10. to allow any investments to stand in the name of any bank;

        11. to borrow money on personal security or on the security of assets forming part of the Trust Fund.

      6. Any trustee (other than the Settlor) who being a trustee company or a professional or any firm in which he or she be a partner is engaged or employed in any professional capacity to act for this trust or do any work for this trust may be remunerated out of the Trust Fund or income thereof by the trustees for such professional or other work and such person shall be entitled to charge this trust for any professional services rendered or other work done.
         

    9. If the trustees hereby constituted or any one of them or any trustee or trustees appointed as provided in this Deed shall die or leave India for more than three consecutive years or desire to be discharged or refuse or become unfit or incapable to act then and in every such case it shall be lawful for the continuing trustee or trustees for the time being (and for this purpose every refusing or retiring trustee shall if willing to act in the execution of this power be considered a continuing trustee) or for the acting executors or executor, administrator or administrators of the last surviving or the continuing trustees to appoint a new trustee or new trustees in the place of the trustees so dying or leaving India or desiring to be discharged or refusing or becoming unfit or incapable to act as aforesaid. And upon every such appointment, the Trust Fund shall (if and so far as the nature of the property and other circumstances shall require or admit) be transferred so that the same may be vested in the Trustees or trustee for the time being and every trustee so appointed may before or after such transfer of the trust fund act or assist in execution of the trust and powers of these presents as fully and effectually as if they had been hereby constituted trustees.
        

    10. The receipt of the trustees for the purchase moneys of any property hereby authorised to be sold or for any other moneys paid or for any shares, stocks, funds or securities transferred to them shall effectually discharge the person or persons paying or transferring the same therefrom and from being bound to see the application of being answerable for the loss or misapplication thereof.
        

    11.  

      1. No trustee purporting to act in the execution of the trusts and powers of these presents shall be liable for any loss unless it is attributable to his or her own dishonesty or to the wilful commission or omission by him or her of any or all which commission or omission is known to him or her to constitute a breach of trust.
          

      2. A trustee or trustees of these presents in good faith paying over any moneys under the trust of these presents to his / her or their co-trustees or doing any act facilitating the receipt therefore for the purpose of the trusts of these presents shall not be answerable for the loss or misapplication or non-application thereof.
          

    12. It shall be lawful for the trustees for the time being of these presents to reimburse themselves or himself or herself and pay and discharge out of the trust properties of all cost, charges and expenses incurred in carrying out these presents or in or about the execution of the trusts or powers of these presents.
        

    13. The trustee or trustees may deposit all securities or the investments for the time being representing the assets of the trust with any bank for safe custody and for collection of the interest dividends on the said securities or investments and may open current accounts in their or his or her or its name with the same or any other bank.
        

    14. Any sum or distribution of any capital sum or capital assets and any shares or security received on distribution of any capital sum or capital assets whether by way of bonus or otherwise in respect of any share or security forming part of the assets of the Trust Fund shall be treated as an accretion to the Trust Fund and added to the same and shall not be deemed to be the income.

      Subject thereto the trustees’ decision as to whether any sum, assets or share or security received of any share forming part of the Trust Fund should be treated as capital or income shall be final.

      IN WITNESS OF WHEREOF the parties hereto have hereunto set and subscribed their respective hands and seals the day and the year first hereinabove mentioned.

      SIGNED, SEALED AND DELIVERED BY

      the within named Settlor

      Mr. _____________________

      In the presence of :

      1. ___________________

      2. ___________________

      SIGNED, SEALED AND DELIVERED BY

      the within named Trustees

      1. ___________________

      2. ___________________

      3. ___________________

      4. ___________________

      In the presence of

      1. ___________________

      2. ___________________
 

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