Private Trust

1. What is a Private Beneficiary Trust?
A Private Beneficiary Trust is a trust which is formed for the benefit of specified individuals, and not for the benefit of public at large. 
A Private Beneficiary Trust may be –
a. A Specific Trust
b. A Discretionary Trust

2. What is a Specific Trust?
i) Beneficiary / Beneficiaries are Specific
ii) Income pertaining to such Beneficiary / Beneficiaries is determinate
iii) Property pertaining to such Beneficiary / Beneficiaries is determinate.

Example of a Specific Trust:
a) Mr. X forms a trust for his grandson ‘Master A’ for his benefit. Here the beneficiary ‘Master A’ is Known or determinate, such trust is a Specific Trust.

3. What is a Discretionary Trust?
Where the income is not receivable or received by the Representative Assessee specifically on behalf of or for the benefit of a specific beneficiary or in case of more than one beneficiary, the individual shares of the
beneficiaries are Indeterminate or Unknown.

4. What is the Status of a Private Beneficiary Trust?
Individual or AOP

5. In PAN Application, what is the status to be mentioned?
Individual or AOP

6. While filing the Income Tax Return, whether the Status has to be mentioned as Trust, AOP or Individual? &
7. When can a Private Beneficiary Trust be taxed as an Individual?
In the case of a Private Specific Trust, the income prtaining to the trust is taxed as an “Individual’.

The Supreme Court in CIT V Indira Balkrishna (1960) 39 ITR 546 (SC)While considering what constitutes an AOP, held that the word Ässociation means “to join in an action”.

In the case of a trust, neither the trustees nor the beneficiaries can be considered as having come together wth common purpose of earning income.

Individual, because
a. The beneficiaries have not set up the trust.
b.The trustees derive their authority under the Terms of the deed. They are merely in receipt of Income.
c.The mere fact that the beneficiaries or the Trustees being representative assesses, are more than one, cannot lead to the conclusion that they constitute an ‘AOP’.

CIT Vs. Shri Krishna Bandar Trust (1993) 201 ITR 989 (CAL)
The Income of the trust is assessable in the hands of its trustees or upon the beneficiaries as Ïndividual

In CIT V SODRA DEVI (1957) 32 ITR 615 (SC)
Supreme Court has held that the word ïndividual does not mean only a Human Being, but is wide enough to include a group of Persons.

Income of a trust may however be taxed as an ‘AOP’ in certain cases and also taxed at ‘Maximum Marginal Rate’ (MMR) in certain cases.

8. When can a Private Beneficiary Trust be taxed as an A O P?
Income of a Discretionary trust shall be charged to tax as if it were the total income of an association of persons, in the following circumstances:

a) Where none of the beneficiaries have any other taxable income exceeding the basic exemption limit or is a
beneficiary under any other trust.

b) Income of a trust declared by any person under will, where such trust is the only trust declared by him.

c) Income of a non-testamentary trust (i.e. other than that created under will), created before 01.03.1970, bonafide exclusively for the benefit of the relatives of the settlor or of the members of a Joint Hindu Family where the trust is created by such family in circumstances where such relatives or members were mainly dependent on the settlor for their support or maintenance.

d) Income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund, or any other fund created bonafide by a businessman / professional exclusively for the benefit of his employees.

e) Income being profits and gains of a business receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, where such trust is the only trust declared by him.

9. When can a Private Beneficiary Trust be taxed at Maximum Marginal Rate (MMR) ?
a) Incomes of a Discretionary trust shall be chargeable to tax at the ‘maximum marginal rate’.
b) Any income being profits and gains of business, arising to a private trust, unless such income is 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.

10. Filing Return of Income: Which form to be used? ITR – 2, 4, 5, 7
i) I T R - 2:  For Individual and HUF’s not having Income from a Business or Profession
ii) I T R - 4: For Individual and HUF’s having Income from a Proprietary Business or Profession
iii) I T R - 5: For Firms, AOPs and BOIs
iv) I T R - 7: For persons including companies required to furnish return under Section 139(4A) or Section 139(4B) or Section 139(4C) or Section 139(4D)
ITR 2,4,5 shall be applicable, based on the nature of the private trust.


11. Trust for Benefit of Spouse: Sec 64(1)(vii)
Income arising to a trust created for the immediate or deferred benefit of the spouse of an individual, from any asset transferred by such individual directly or indirectly, for inadequate consideration, shall be clubbed in the hands of that individual.

12. Trust for Benefit of Son’s Wife: Sec 64(1)(viii)
Income arising to a trust created for the immediate or deferred benefit of the son’s wife of an individual, from any asset transferred by such individual, directly or indirectly, for inadequate consideration, shall be clubbed in the hands of that individual.

13. Trust for Benefit of Minor Child: Sec 64(1A)
Any Income arising or accruing to a minor child, shall be clubbed in the total income of the parent whose total income is greater.

14. What is an Accumulation Trust?
An Accumulation Trust is one where the Income of the Trust is not transferred or given to the Beneficiary but is accumulated to a certain period.
In Addl. CIT V M.K.Doshi (1979) 9 CTR (GUJ) 123, the Gujurat High Court observed “That according to the clauses of the indenture, the income to be accumulated till the attainment of majority of each of the sons and the respective share of each of the sons is to be paid and handed over to him as and when he attains the majority.

The accumulated income, therefore, would be naturally, at the end of every year, capitalized and when available to the respective sharers would be more in the nature of capital and, therefore, a corpus and it, therefore, loses its characteristics of being an Income”

This decision of the Gujarat High Court has been affirmed by the Supreme Court in the case of CIT V M.R. DOSHI (1995) 211 ITR 1 (SC), holding that since the payment of income is to be made to the beneficiaries on attaining majority, no addition is to be made to the father’s income.

15. While filing the Income Tax Return, whether the Basic Exemption Limit is Available?
Yes. available

16. In case Basic Exemption is Available, whether it is dependent on the beneficiaries being Male or Female?
Yes, dependent on the beneficiaries being Male or Female.

17. Whether Sec. 80C deduction is available for a Private Beneficiary Trust?
Yes, available.

18. Whether the benefit of Tax in case of LTCG and STCG is available in case of Beneficiary Trust?
Yes, available

ILLUSTRATION 1: (AY 2010-11)
Mr. A forms a trust for the benefit of Ms. P and Ms. Q the would-be wives of his sons. He Settles his residential house to the trust. The House is let out on rent at Rs. 47,500 p.m. Ms. P and Ms. Q are beneficiaries under another discretionary trust. House Tax Paid -Rs. 20,000/- Compute the tax liability of income of the trust.
i) If the Trust is Specific, with equal share of beneficiaries?
ii) If the trust is Discretionary?

Computation of Trust’s Income
Case (i): Specific Trust

Gross ALV of House                          Rs.5,70,000/-
Less: House Tax Paid                          (Rs. 20,000/-)
Net ALV                                            Rs.5,50,000/-
Less: 30% deductions for repairs etc. (Rs.1,65,000/)
Net Income from Property                  Rs. 3,85,000

In the hands of Ms. P & Ms. Q individually
Income from property under trust in the hands of each beneficiary  Rs.192,500/-
Total income of each beneficiary                                                    Rs.1,92,500/-
Tax payable of each beneficiary
Income tax                                                        Rs.250/-
Add: Education cess                                              Rs.5/-
Add: Secondary & Higher Education cess              Rs.3/-
Total Tax payable                                              Rs.258/-

Total Tax liability on Income of Trust(Rs. 258*2)= Rs. 516/- (in TOTAL)

Case (ii): Discretionary Trust
Though the beneficiaries P and Q have no other taxable income but since they are beneficiaries under another
trust, the case is not covered u/s 164(1) and the Income of the trust shall be taxed at Maximum Marginal
Rate (MMR).
Computation of Tax Liability
Net Income of the Trust                                              Rs. 3,85,000
Tax Payable at Maximum Marginal Rate at 30.9%       Rs. 1,18,965


ILLUSTRATION 2:
Mr. X forms a trust for the benefit of Y and Z his major resident children both dependent on him for support and maintenance. The trust was created by will and Mr. X has settled his proprietary business upon the trust. The net business income of the trust for A Y 2010-11 is Rs. 2,90,000.
Compute the Tax Liability of Income of the trust.

i) The trust is Specific, Y and Z sharing equally, and having other taxable income of Rs.30,000 and Rs.26,000 respectively.

ii) The trust is discretionary.

iii) No trust is created and Y and Z inherit X’s business and carry on under a partnership firm and the maximum permissible salary u/s. 40(b) is shared equally between them.

Case (i) Specific Trust:

Assessment of Y
Income derived from Trust     Rs. 1,45,000/-
Other Incomes                       Rs.    30,000/-
Taxable Income                     Rs. 1,75,000/-

Tax                                                              Rs. 1500/-
Add: Education cess                                     Rs.    30/-
Add: Secondary & Higher Education cess     Rs.    15/-
Total Tax liability                                           Rs. 1545/-

Assessment of Z
Income derived from Trust     Rs. 1,45,000/-
Other Incomes                       Rs.   26,000/-
Taxable Income                     Rs. 1,71,000/-

Tax                                                             Rs.     1,100/-
Add: Education cess                                    Rs.          22/-
Add: Secondary & Higher Education cess    Rs.          11/-
Total Tax liability                                          Rs.      1133/-

Case (ii) Discretionary Trust:

Income derived from the trust        Rs. 2,90,000/-
Tax Liability (At normal rates)  (a) Rs.    13,390/-
(Since the case is covered u/s 164(1))

Assessment of Y
Taxable Income   Rs. 30,000/-
Tax Liability (b)              NIL

Assessment of Z
Taxable Income Rs. 26,000/-
Tax Liability (c)            NIL

Case (iii) Partnership firm

Assessemnt of YZ Firm
Income from Business                                                   Rs. 2,90,000/-
Less: Partner's Salary - maximum permissible
u/Sec. 40(b)                                                                 (Rs. 2,61,000)
Taxable Income                                                                 Rs. 29000/-

Tax Liability @ 30%                                    Rs. 8700/-
Add: Education cess                                     Rs.  174/-
Add: Secondary & Higher Education cess     Rs.   87/-
Total Tax liability                                          Rs. 8961/-

Assessment of Y
Share Income is exempt U/Sec. 10(2A)
Salary from firm            Rs. 1,30,500/-
Other Income                Rs.   30,000/-
Taxable Income             Rs.1,60,500/-

Tax                                                          Rs. 50/-
Add: Education cess                                 Re. 1/-
Add: Secondary & Higher Education cess Re. 1/-
Total Tax liability                                     Rs. 52/-

Assessment of Z
Share Income is exempt U/Sec. 10(2A)

Salary from firm    Rs. 1,30,500/-
Other Income          Rs. 26,000/-
Taxable Income    Rs.1,56,500/-
Total Tax liability             NIL

Ref.: CPE meeting by CA Sunil Sethia of M/s. GLS & Associates 
at SIRC premises, Chennai on 30-Dec-09