Income Tax Settlement Commission (ITSC) Case
The case is about the determination of income and wealth tax liability on beneficiaries of various discretionary off shore Trust created by the Late Ashok Vardhan Birla Family. The ITSC is arguing that since Late Ashok Vardhan Birla and his son Yashovardhan Birla were in ultimate control of the Trust as they retained the power to appoint and remove the trustees, the income and assets of the Trust can be linked to specific beneficiaries. The Birla’s argument is that since the there are other beneficiaries and the Trust is discretionary in nature mere power to appoint and remove trustees does not make it specific and beneficiaries do not have any say in the distribution of the Trust assets.
Impact of Judgement
These Trusts were originally created as discretionary Trusts with multiple beneficiaries and power of distribution lying with the Trustees. The case primarily revolves around a key question i.e. if one is compromising the discretionary nature of Trust by providing beneficiaries power to remove and appoint new Trustees.
Can Trustees be really independent and exercise their discretion when they know that the beneficiaries have power to remove him/her? Is power to remove and appoint Trustees not an indirect control on Trustees and eventually the Trust? Supreme Court judgement in this case will have serious impact on many Trusts made by HNIs in India where the beneficiaries retain the power to appoint and remove Trustees. Reclassification of these Trusts to determinate from discretionary will not only impact the tax liability of Trusts and beneficiaries but may also compromise on the key objectives of the Trust like intergenerational transfer of wealth, asset protection, estate/inheritance tax planning etc. Many of such Trusts may have to either make amendment in the Trust deed or realign the objective and re-asses the tax implications. Some of them may even have to wind up the Trust as the Trust will no longer achieve its key objective.
In the famous case of Commissioner of Wealth Tax, Rajkot Vs Estate of late HMM Vikramsinhji-Maharaj of Gondal the supreme court upheld the Gujarat High Court judgement that “a discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit”. In this case merely because the Settlor and after his death, the Taxpayer, did not exercise their power to appoint additional trustees /discretion exercisers, the character of the Trusts is not altered, i.e., the Trusts remain discretionary Trusts. Therefore, the income of the trusts cannot be included in the total income of the Taxpayer.