(1990) 188 ITR 224 (Bom)
Liability of a representative assessee; charge of tax where the share of beneficiaries is unknown
A trust is determinate where the beneficiaries and their shares are capable of being ascertained from the trust deed at the date it takes effect. It is not necessary that they be named, nor that the shares be quantified in money terms.
When is a trust determinate, so that income is taxed at the rates applicable to the beneficiaries, rather than indeterminate and taxed at the maximum marginal rate?
The trust deed identified the persons who were to benefit and set out the basis on which the trust fund and its income were to be divided among them. The beneficiaries were described by reference to a class and a formula rather than being individually named with rupee amounts against each. The Revenue took the view that because the deed did not name each beneficiary and specify a fixed share, the shares were indeterminate or unknown, and assessed the trust at the maximum marginal rate under the provision applicable to such trusts.
The matter came before the Bombay High Court, which examined what degree of specificity the statutory test requires before a trust will be treated as determinate.
For the assessee
The deed enabled the beneficiaries and their respective shares to be worked out with certainty. The law requires that the shares be capable of being ascertained, not that they be spelled out in figures. A requirement of individual naming and rupee quantification would defeat the ordinary working of trusts, where beneficiaries are commonly described by class and shares by proportion.
For the Revenue
The provision charging tax at the maximum marginal rate applies wherever the individual shares of the beneficiaries are indeterminate or unknown. Unless the deed identifies each beneficiary and states that beneficiary's share, the condition is satisfied and the higher rate follows.
The Court held that the statutory question is whether the beneficiaries and their shares are capable of being ascertained, not whether the trust deed happens to state them expressly. If the deed supplies the material from which the beneficiaries can be identified and their shares worked out — by describing a class with sufficient precision, or by prescribing a formula or proportion — the trust is determinate, and the fact that ascertainment requires a computation does not make the shares unknown. The Court emphasised that certainty is tested as at the date the trust deed takes effect, by reference to the deed itself, and that a trust does not become indeterminate merely because the identity of the persons falling within a described class may change over time or because the monetary value of a share depends on the size of the fund. It held that the provision charging the maximum marginal rate is directed at genuinely discretionary or unascertainable arrangements, where it cannot be said who is entitled to what, and is not to be applied to a trust whose terms permit the entitlements to be determined.
The determinate-versus-indeterminate distinction, now reflected in Sections 304 and 307 of the IT Act 2025, is the central question for every pooled vehicle constituted as a trust. Venture capital funds, alternative investment funds and securitisation trusts are routinely tested against it, since a finding that the trust is indeterminate would tax the fund at the maximum marginal rate and defeat the pass-through. Fund documentation is drafted with this test squarely in view.