K.S. Kasturirangan, Vijayawada

A discretionary trust means a trust under which the trustees have the discretion to apply the income and capital of the trust according to their will. Under this type of trust the beneficiary has no right to any part of income, it is on the discretion of the trustee to pay him or apply it somewhere else for the benefit of the beneficiary. It is a trust the income of which is not specifically receivable on behalf or for the benefit of any one person or wherein the individual shares of the beneficiaries are indeterminate or unknown. - Vide CIT v. Kamalini Khatau (1994) 209 ITR 101 (SC).

It is at the option of the assessing officer to recover tax either from the trustees or the beneficiary/ies of a discretionary trust in respect of income distributed and received by the beneficiariesduring the accounting year.-Vide CIT v. Kamalini Khatau (1994) 209 ITR 101 (SC).

The maximum marginal rate of income-tax, according to section 164(1), would be applicable in respect of the following cases:
1) where the income of trust is not receivable on behalf of or for the benefit of any one person, but is receivable for abstract objects;
ii) where the beneficiary is unknown;
iii) where the income is received or receivable on behalf of known individuals but the shares of such individuals are not known or determinate

Where trustees were given discretion to accumulate income or use it for one beneficiary to the exclusion of others, shares were held indeterminate and trust was liable to tax at the maximum marginal rate.-Vide CIT v. Lady Ratanbai Mathuradas & Ors. (1968) 67 ITR 504 (Bom.)

The maximum marginal rate of tax will not be applicable, according to proviso to section 164(1), in the following cases and income would be charged to tax as if it were total income of an association ofpersons;

i) where none of the beneficiaries has any other income chargeable to tax or is a beneficiary under any other trust (Proviso (I))
ii) where the relevant income or part of relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him. (Proviso (ii))
iii) where the relevant income or part of relevant income is receivable under a trust created before 1.3.1970, by a non-testamentary instrument and the assessing officer is satisfied, having regard to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settler, or where the settler is a Hindu Undivided Family, exclusively for the benefit of the members of such family, in circumstances where such relatives or members were mainly dependent on the settler for their support and maintenance. (Proviso (iii)).
iv) where the relevant income is receivable by the trustees on behalf of a provident fund,superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession. (Proviso (iv)).

Kindly elucidate how the cost of acquisition of agricultural lands, which were acquired by the Hindu Undivided Family of which I am the Karta in the year 1950, is to be worked out for the purposes of working out the capital gain if the land was converted into residential plots in the year 1968 and these plots were sold in the year 1996?

K. Ramanujam, Hoogly

For the purpose of determining capital gains, cost of acquisition of land would be ascertained as on 1.1.1954 and not in the year 1968, when the said land was converted into residential plots

My uncle is an NRI in the UK. He purchased a draft for Pound 5000 in the UK and sent it to me for being given to his father (my grand father) who lives in Dehra Dun. The draft was encashed in Delhi and the money was sent tohim. The tax authorities are subjecting the amount to gift tax on the grounds that the gift had been made in India. Is their view correct?

R.K. Dhawan, Agra

Yes. On the facts of the case, it cannot be said that the post office through which the drafts were sent acted as an agent of the donor. In such a case, the gift would have been completed within the UK. But there was no such request made by the donees in the present case. To make a valid gift, there must be delivery of possession in the case of a movable article. In the present case delivery of possession took place only in India where the draft was encashed and payment was made. Therefore, the gift was completed within the Indian territory, and the gift tax is leviable. Please see the decision of the Madras High Court in the case of CGT v. Mohd. Hussain (19997)95 Taxman 440 (Mad.).

I inherited a property from my late father in the year 1984. My father had mortgaged the property during his life time and it was not redeemed till he was alive.After his death, I had also to pay considerable amount by way of estate duty. I have also redeemed the mortgage amount along with interest

Now, I wish to sell this property. Kindly advise whether mortgage amount with interest and estate duty paid by me would constitute cost of acquisition for purposes of working out 'capital gain's?

K.S. Misra, Advocate, Mumbai

The judgment of the Supreme Court in R.M. Arunanchalam v. CIT (1997) 227 ITR 222 (SC) has settled the controversy regarding estate duty payment. Briefly, the principles enunciated in this decision regarding estate duty and on mortgage are summarized as under:-
i) estate duty is a charge and not a mortgage.
ii) if the title is improved as a result of making certain payment, the amount so paid would be considered as a 'cost of acquisition' or 'cost of improvement' of an asset as the case may be.
iii) the payment of estate duty cannot be taken into consideration while making computation of capital gains, in case the title to theproperty received on succession or by will is complete even without the payment of the duty.
iv) whereas a payment results in the clearing of a mortgage, the interest of the mortgagee in the property must be considered to have been acquired by the payer and can be considered as a 'cost of acquisition's under the Act.
v) where a mortgage is created by the owner after he has acquired a property, the cost of discharging the mortgage would not be considered as a `cost of acquisition' or cost of improvement's.
Many a time, searches are conducted by the I-T department on frivolous grounds. Are there any guidelines in this regard?

P.L. Kanungo, Calcutta:

The tax department had, some time back, published ground rules for the conduct of searches. These can be referred to by the queriest

However, the Gujarat High Court enunciated some ideal grounds for conducting a search in the case of Prabhubhai Vastabhai Patel v. R.P. Meena (1997) 226 ITR 781 (Guj.). These are as under:
a) the authority mustbe in possession of the information and must form an opinion that there is reason to believe that the article or property has not been or would not be disclosed for the purposes of the Act.
b) the information must be something more than mere rumour or gossip or a hunch.
c) the information must exist before the opinion is formed.
d) the Authorised person must actively apply his mind to the information in his possession and shall form opinion whether there is reason to believe or not. The opinion must be formed on the basis of the material available at that time.
e) the opinion must be based on the material which is available and it should not be formed on the basis of extraneous or irrelevant material.
f) the information or opinion should have rational connection and bearing to the reasons for such opinion. The formation of opinion should be based on active application of mind and be bona fide and not be accentuated by mala fide, bias or based on extraneous or irrelevant material. The beliefmust be bona fide and congently supported. The courts have further held that the existence or otherwise of the condition precedent is open to judicial scrutiny.
g) the courts would examine whether the authorised person had material before it on which, he could form the opinion whether there is rational connection between the information possessed and the opinion formed. However, the court would not sit in appeal over the opinion formed by the authorised person if the authorised person had information in his possession and the opinion formed is on the basis of such material. The court would not examine whether the material possessed was sufficient to form an opinion.
h) the court cannot go into the question of aptness of sufficiency of the grounds upon which the subjective satisfaction is based.
i) if the belief is bona fide and is cogently supported, the court will not interfere with or sit in appeal over it.
Occasionally court refer to the rule of reading down' a statute. What does itimply?

Y.S. Ravindran, law student, Delhi

In order to save a statute or a part thereof from being struck down, it can be suitably read down. But such reading down is not permissible where it is negatived by the express language of the statute. Reading down is not permissible in such a manner as would fly in the face of the express terms of the statutory provisions.-Vide Gautam C.B. v. Union of India (1993) 199 ITR 530 (SC)

Kindly explain the concept of beneficial interpretation' in tax assessments?

The principle of beneficial interpretation or interpretation in favour of the assessee has application only in a case where, on a proper interpretation, the court is in doubt about the true scope and ambit of the provision or finds that two equally reasonable interpretations - one in favour of the assessee and the other in favour of the revenue are possible.

It is only in such cases that the question of accepting one of the two reasonably possible interpretations would arise.

The principlehas no application in a case where the words of a statute are plain, precise and unambiguous.-Vide Daryani, M.H. v. CIT (1993) 202 ITR 731 (Bom.)

Where principle of beneficial interpretation is sought to be applied, it has to be assured that the doubt as to true meaning is real and not merely conjectural or fanciful.Where the court does not think that the words or expressions are open to diverse interpretations, it is not entitled to say that there is ambiguity merely because somebody could suggest another meaning. Vide CIT v. Boots Co.(I) Ltd. (1995) 214 ITR 175 (Bom.).