Supreme Court · 1994
(1994) 209 ITR 101 (SC)
Decided under Sections 161 & 164 of the 1961 Act; now Sections 304 & 307 of the 2025 Act.
Liability of a representative assessee; charge of tax where the share of beneficiaries is unknown
The Revenue may assess either. Where income of a discretionary trust has in fact been distributed to a beneficiary, it may be assessed in that beneficiary's hands, and the provision charging the trustee does not confer immunity on the recipient.
Where a discretionary trust distributes income to a beneficiary, may the Revenue assess that beneficiary, or must it assess the trustee alone?
Income arising to a discretionary trust was distributed by the trustees to a beneficiary in exercise of their discretion. The Revenue assessed the beneficiary on the amount received. The beneficiary contended that the statutory scheme for discretionary trusts places the charge on the trustee, to be levied at the maximum marginal rate, and that once the statute has designated the trustee as the person chargeable, the same income cannot be assessed in the hands of the recipient.
The question reached the Supreme Court, which decided it by majority, with a dissenting opinion taking the view that the charge on the trustee was exclusive.
For the assessee
The provision dealing with trusts whose beneficiaries' shares are unknown makes the tax leviable on the trustee, and prescribes the rate. That is a complete code for discretionary trusts. Permitting assessment of the beneficiary as well leaves the taxpayer exposed to assessment at two ends on the same income and is not what the scheme contemplates.
For the Revenue
The representative assessment provisions are machinery for collecting tax from the person in whose hands income lies; they do not displace the ordinary charge on the person who actually receives and enjoys the income. Where a beneficiary has in fact received a distribution, that receipt is income in the beneficiary's hands and is chargeable.
The majority held that the provisions dealing with representative assessment are machinery provisions and do not exhaust the Revenue's power to assess the person who actually receives the income. Where the trustees of a discretionary trust have exercised their discretion and distributed income to a beneficiary, that beneficiary has received income which is chargeable in the ordinary way, and the existence of a provision permitting the trustee to be assessed does not confer immunity on the recipient. The Court reasoned that the representative machinery exists for the Revenue's benefit, to enable collection where income is held by one person for another, and that it would be an odd result if machinery designed to assist collection operated to exclude assessment of the person who has actually enjoyed the income. The majority accordingly held that the Revenue has an option in such a case. It was careful to record that the same income cannot be taxed twice: assessment of one forecloses recovery from the other, and the option is as to whom the Revenue proceeds against, not a licence to collect the tax twice over.
Relevant to Sections 304 and 307 of the IT Act 2025 and to every discretionary pooling structure. Read against Ch. Atchaiah, which holds that the Assessing Officer must tax the right person and has no general option: the two are reconciled on the footing that the representative provisions create a specific statutory alternative for trusts, which the general rule does not override. Where a fund's documentation confers genuine discretion on the manager, this line of authority governs who bears the charge.
Keywords: discretionary trust, option to assess, trustee or beneficiary, machinery provision, distribution, 164, double taxation
Note: This is a summary prepared for study and reference. The citation is given so the full text of the judgment can be consulted, and it should be, before the case is relied on. Corresponding Income Tax Act 2025 sections are drawn from the section mapping used across this site; where a provision has been recast rather than renumbered, the note above explains how far the principle still applies. This page is not a substitute for professional advice.