This part of M2K’s Succession Planning Series (#29) focuses on how various landmark legal rulings have shaped the understanding of taxation on private trusts in India. Unlike theoretical explanations, these real-world judgments highlight how courts have interpreted discretionary and specific trusts, especially when there are shifts in beneficiaries, failure to exercise trustee powers, or complex layering of sub-trusts. These cases clarify how income is taxed and when the nature of the trust remains fixed or gets recharacterised.
CIT, Rajkot vs. Estate of Late HMM Vikramsinhji of Gondal (Civil Appeal No. 2312 of 2007)
Issue:
Whether the characterization of a private discretionary trust changes if trustees don’t exercise their powers as per the trust deed.
Facts:
The taxpayer in this case was the eldest son of the settlor, Vikramsinhji. The settlor had executed five trusts — three in the USA and two in the UK — for the benefit of the taxpayer and his family members. A trustee named Mr. McGill was appointed for the UK trusts.
Initially, the taxpayer and settlor declared all trust income in India. But later, the taxpayer stopped reporting any income from the trusts. The Assessing Officer taxed him on the income like in earlier years, and this was upheld by the Appellate Tribunal.
However, the Settlement Commission took a different view. It considered the UK trusts to be specific based on clauses in the trust deed that mentioned the trustee’s powers.
The matter then went to the Supreme Court.
Judgement:
Even if trustees don’t actively exercise their powers, and even if no additional trustee is appointed despite such clauses in the deed, the nature of the trust remains discretionary.
Why? Because:
- The income remained with the trust and wasn’t distributed.
- Beneficiaries only had a hope, not a right, that discretion would be exercised in their favour.
- The character of the trust doesn’t change just because a trustee fails to act or a legal heir doesn’t appoint a replacement.
So, as long as the trust deed grants discretionary powers, the trust continues to be treated as discretionary, and income is only taxed when it is actually distributed, not on accrual.
Kashiba Family Trust Vs. Income-Tax-Officer [ITAD Ahmedabad] [1986] 15 ITD 383
Issue:
Does the transfer of a beneficiary’s share in a specific trust make it indeterminate?
Facts:
The trust had 21 named beneficiaries with fixed shares. From AY 1978-79 to 1981-82, it was treated as a specific trust under Section 161.
On 19 October 1981, five beneficiaries transferred their interests to five different Hindu Undivided Families (HUFs). For AY 1982-83, the ITO accepted this and continued assessing it as a specific trust.
However, the Commissioner of Income Tax (CIT) stepped in under Section 263. He argued that the new beneficiaries weren’t clearly identifiable in the trust deed and so, under the Explanation to Section 164, the trust should now be treated as discretionary.
Judgement:
The tribunal ruled that:
- A beneficiary has the right to assign their interest in a trust.
- Since the original shares were clearly defined, assigning those rights does not make them indeterminate.
- The mere change of beneficiaries does not change the nature of the trust.
It also referenced CBDT Circular No. 281, which clarified that the Explanation to Section 164 applies only to discretionary trusts — not to specific trusts. So, the Kashiba Trust remained a specific trust.
This case reaffirmed that unless the trust deed lacks clarity on who the beneficiaries are and what their shares are, the trust cannot be considered discretionary solely because of reassignment.
Sanjiv Family Trust vs. Income-tax Office [ITAT Ahmedabad] [1993] 46 ITD 577
Issue:
How should sub-trusts be assessed when beneficiaries of a master trust assign their beneficial interest to those sub-trusts?
Facts:
A private trust was created with four individuals as equal beneficiaries. In AY 1983-84, it was treated as a specific trust.
But on 13 March 1984, each of the four assigned half of their interest to separate family sub-trusts. These sub-trusts (second-level trusts) had Bodies of Individuals (BOIs) as beneficiaries, who were added on 9 March 1984.
The key issue? These BOIs didn’t have specific shares assigned in the deed, and the distribution was at the discretion of the trustees. The Assessing Officer argued that after this assignment, the income had become indeterminate, so the main trust should now be taxed as discretionary at the Maximum Marginal Rate (MMR).
Structure Recap:
- Master Trust had 4 equal individual beneficiaries.
- Each transferred 50% of their interest to sub-trusts.
- Sub-trusts had BOIs as beneficiaries with no fixed shares.
- Deed allowed discretionary distribution.
The core debate was whether:
- The assigned income to sub-trusts should now be taxed at MMR as discretionary trust income.
- And whether this results in multi-level taxation — on the master trust, sub-trusts, and BOIs.
Judgement:
The tribunal ruled:
- The portion of income assigned to sub-trusts becomes discretionary and is taxed at MMR in the hands of the main trust.
- The unassigned portion continues to be distributed to the four original beneficiaries and is taxed as a specific trust.
- The second-level trusts (with BOIs as beneficiaries) are also discretionary and subject to MMR.
- But due to the principle of avoiding double taxation, the same income will not be taxed again in the hands of the sub-trust or BOIs if it’s already been taxed once.
This judgment clearly distinguished between:
- Assigned vs. unassigned income
- Specific vs. discretionary trust treatment
- And reinforced the importance of documentation and clarity in trust structuring
Final thoughts:
This edition of M2K’s Succession Planning series helps bring real-world clarity to the otherwise technical subject of trust taxation. The case laws discussed show how courts interpret trust deeds, discretionary clauses, assignments, and beneficiary rights — and how these interpretations impact taxation.
Whether you’re setting up a trust, receiving distributions, or managing compliance for a client, understanding these rulings can help avoid litigation, structure trusts effectively, and make the most of the Income Tax Act’s provisions.
