Query on Private trust

Hi Anoop,

This is quite a settled issue. I had answered a similar query about a year back. You may go through Message No 22767. The income of the trust set up for the benefit of the minor can never be taxed in the hands of the parent. The trust is an assessee in its own right. Setting up a trust for the benefit of the minor is the recommended way to bypass the provisions of Section 64(1A).

We have the judgement of CIT Vs M R Doshi [1995] 211 ITR 1 (SC) to confirm the above view.

And the fact that the grandfather has floated the trust wouldn’t make a difference—the income of the trust will be always taxable in the trust’s hands, and never in the trustee’s hands. In any case, even if the grandfather directly transfers a source of income to his grandchild, there can be no clubbing. Section 64(1A) doesn’t apply to transactions between grandparents and grandchildren.

Thanks,

CA Sanjeev Bedi--- On Fri, 1/30/09, Anoop Bhatia wrote:
From: Anoop Bhatia Subject: Query on Private TrustTo: "Sanjeev Bedi" Date: Friday, January 30, 2009, 11:32 AMRespected Sanjeev ji
I wanted to know the treatment of taxation of income of a trust which is
created by a father for benfit of minor son. Does the income in such cases
revert to the hand of parent or it will remain seperately taxable in the
hands of private trust only. The question assumes significane in the wake
of usage of private as a tax planning tool, becuase if a parent directly
trasfers some source of income to the minor the income will revert for
taxation in the hands of parent only (assuming that such parent has higher
income to the other). So here in place of transferring the source to minor,
if it is transferred to a private trust would still clubbing provisions of
section 64(1A) prevail.
In above case if the trust is created by Grand Father for the benefit of
minor Grand Son, the clubbing will be done in the hands of Father (i.e.
Parent) or it will remain taxable in the hands of trust only.
Now my query is, if income in both the cases mentioned above becomes
taxable in the hands of parent and not in the hands of trust then what is
the sense of creation such trust. Your valuable opinion on both the matters
is solicited.
I have raised this query in group forum but could not get a to-the-point
reply, hence seperately writing to you. May be while answering this query
you may mark a copy to gruop for the benefit of all.
Warm regards
Anoop Bhatia
Jaipur