Trust for benefit of Minor

Hi Pravin and Anoop,

The trust is an Individual for the purposes of assessment under theIncome tax law. It is an established law now that "individual" asdefined in the tax law isn't restricted to human beings alone. Atrustee is a representative assessee of the trust in terms ofSection 160 of the Act. The trust being an artificial entity, therehas to be a definite person upon whom the liability to discharge thetax obligations of the trust can be affixed. What status does arepresentative assessee have? Since the trust has a number oftrustees, the revenue often argues in favour of treating them asAOP. But the courts have had a different take on this each time thismatter came up before them.In CIT v. Deepak Family Trust (No. 1) [1995] 211 ITR 575/[1994] 72Taxman 406 (Guj), the Gujarat HC said:[It is now well-settled that the word `individual' does notnecessarily and invariably always refer to a single natural person.A group of individuals may as well come in for treatment as anindividual under the tax laws if the context so requires. Theword `association' means `to join in any purpose' or `to join inaction'. Therefore, `association of persons' as used in section 2(31)(v) of the Income-tax Act, 1961, means an association in which twoor more persons join in a common purpose or common action. Theassociation must be one, the object of which is to produce income,profits or gains. In the case of a discretionary trust, neither thetrustees nor the beneficiaries can be considered as having cometogether with the common purpose of earning income. Thebeneficiaries have not set up the trust. The trustees derive theirauthority under the terms of the trust deed. They are merely inreceipt of income. The mere fact that the beneficiaries or thetrustees, being representative assessees, are more than one, cannotlead to the conclusion that they constitute an association ofpersons. The trustees of a discretionary trust have to be assessedin the status of `individual' and consequently, deduction undersection 80L of the Act, is allowable to them."]We have had cases where the courts have ruled that trusts, beingindividuals, are eligible to claim exemption from capital gains bymaking investments u/s 54, etc.And I don't think the fastening of liability to make TDS u/s 194C ona trust by means of a separate entry under clause (h) in sub-section1 (if trusts are individuals, wouldn't they be covered by clause (k)anyway?) takes away from our argument that trusts ARE individuals.It is just that a trust is a special kind of individual. All thesame, a trust would be entitled to be taxed on slab basis just likean individual assessee.And Anoop, please note that the M R Doshi judgement would hold goodonly so long as the amount of income keeps getting accumulated tillthe minor kid turns 18. In the event the trustees distribute theincome even whilst the child is still a minor, the trust would bejust a smoke screen and a façade. We can outsmart the revenue bycreating a trust as a Special Purpose Vehicle to hold the incometill the minor beneficiary becomes major. If the trustees aren'tgoing to wait till the beneficiary turns major and startdistributing the income right away, they'd simply be hoodwinking thelaw and making a mockery of Section 64(1A).Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=ZIbpXjQBulN4NjUCUo98eLgUMeA8dcJ_whUVrvVy9KcT9sLWTNS5Zu46keBxdMEYG_euFk8eFqM8ZfML3Gr-G2nrHVz0sHvBgQ, pravin saraswat wrote:>>>> Dear Sir,>> Please further supplement your reply with the tax rates applicableto> such trust and if it is going to be taxed in the highest slab, then> the quantum of tax benefit to be derived in the both situations> ie. Clubbed Income Vis-a-vis Private Trust Income.>> With high regards>> PRAVIN SARASWAT>> 9829063908>> To: banoop@...: ICAI_CIRC_MEERUT_CA@...: sanjeevbedi2001@...: Tue,3 Feb 2009 08:49:06 -0800Subject: {amresh's-CA's} Re: Query onPrivate Trust>>>>>>>>> Hi Anoop,>> This is quite a settled issue. I had answered a similar queryabout a year back. You may go through Message No 22767. The incomeof the trust set up for the benefit of the minor can never be taxedin the hands of the parent. The trust is an assessee in its ownright. Setting up a trust for the benefit of the minor is therecommended way to bypass the provisions of Section 64(1A).>> We have the judgement of CIT Vs M R Doshi [1995] 211 ITR 1 (SC) toconfirm the above view.>> And the fact that the grandfather has floated the trust wouldn'tmake a difference—the income of the trust will be always taxable inthe trust's hands, and never in the trustee's hands. In any case,even if the grandfather directly transfers a source of income to hisgrandchild, there can be no clubbing. Section 64(1A) doesn't applyto transactions between grandparents and grandchildren.>> Thanks,>> CA Sanjeev Bedi--- On Fri, 1/30/09, Anoop Bhatia wrote:> From: Anoop Bhatia Subject: Query on PrivateTrustTo: "Sanjeev Bedi" Date: Friday, January30, 2009, 11:32 AMRespected Sanjeev ji>> I wanted to know the treatment of taxation of income of a trustwhich is> created by a father for benfit of minor son. Does the income insuch cases> revert to the hand of parent or it will remain seperately taxablein the> hands of private trust only. The question assumes significane inthe wake> of usage of private as a tax planning tool, becuase if a parentdirectly> trasfers some source of income to the minor the income will revertfor> taxation in the hands of parent only (assuming that such parenthas higher> income to the other). So here in place of transferring the sourceto minor,> if it is transferred to a private trust would still clubbingprovisions of> section 64(1A) prevail.>> In above case if the trust is created by Grand Father for thebenefit 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 abovebecomes> taxable in the hands of parent and not in the hands of trust thenwhat is> the sense of creation such trust. Your valuable opinion on boththe 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 answeringthis query> you may mark a copy to gruop for the benefit of all.>> Warm regards>> Anoop Bhatia> Jaipur>>>>>>>>