Taxability of Offshore
Discretionary Trust under Income Tax Act, 1961
A discretionary trust is one where the
specific shares of the beneficiaries are not known. That is, the trustee has
the discretion to decide, from time to time, who among the beneficiaries is to
benefit from the trust, and to what extent.
The taxability of offshore Discretionary trust
can be analysed with the help of an example:
Ex: An Offshore trust has been setup in a
foreign country by NR settlor. The Beneficiaries of the Trust are Residents as
well as Non-Residents. Trust earns Income from Interest, Dividend, Capital
Gains.
For the trustee of the trust:
Scenario
1: Non-Resident
Scenario
2: Resident
Now Following Questions will Arise:
Q1: Whether trust Income will be taxable in
India under Scenario 1 or 2?
Q2: Taxability of resident Beneficiaries
a:
When Trust Income NOT-Distributed.
b:
When Trust Income Distributed.
a:
When Trust Income NOT-Distributed.
b:
When Trust Income Distributed.
Taxability of offshore
discretionary trust follows following relevant provisions of income tax act, 1961:
Scope of total income.
5. (1) Subject to the provisions of
this Act, the total income of any previous year of a person who is a resident includes all income from
whatever source derived which—
(a) is received or is deemed to be received in India
in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise
to him in India during such year ; or
(c) accrues or arises to him outside India during
such year :
Provided that, in
the case of a person not ordinarily resident in India within the meaning of
sub-section (6)*
of section 6, the income which accrues or
arises to him outside India shall not be so included unless it is derived from
a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income
of any previous year of a person who is a non-resident
includes all income from whatever source derived which—
(a) is
received or is deemed to be received in India in such year by or on behalf
of such person ; or
(b) accrues or
arises or is deemed to accrue or arise to him in India during such year.
Explanation
1.—Income accruing or arising outside India shall not be deemed to be received
in India within the meaning of this section by reason only of the fact that it
is taken into account in a balance sheet prepared in India.
Explanation
2.—For the removal of doubts, it is hereby declared that income which has been
included in the total income of a person on the basis that it has accrued or
arisen or is deemed to have accrued or arisen to him shall not again be so
included on the basis that it is received or deemed to be received by him in
India.
Representative assessee.
160. (1) For
the purposes of this Act, "representative assessee" means—
(i) in respect of the income of a non-resident specified in sub-section
(1) of section 9,
the agent of the non-resident, including a person who is treated as an agent
under section 163;
(iv) in
respect of income which a trustee appointed under a trust declared by a
duly executed instrument in writing whether testamentary or otherwise
[including any wakf deed which is valid under the Mussalman Wakf Validating
Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the
benefit of any person, such trustee or
trustees;
(2) Every representative assessee shall be deemed to be an
assessee for the purposes of this Act.
Liability of representative assessee.
161.
(1) Every representative assessee,
as regards the income in respect of which he is a representative assessee,
shall be subject to the same duties, responsibilities and liabilities as if the
income were income received by or accruing to or in favour of him beneficially,
and shall be liable to assessment in
his own name in respect of that income; but any such assessment shall be deemed
to be made upon him in his representative capacity only, and the tax shall, subject to the other
provisions contained in this Chapter, be levied upon and recovered from him in
like manner and to the same extent as it would be leviable upon and recoverable
from the person represented by him.
[(1A) Notwithstanding anything contained in sub-section (1),
where any income in respect of which
the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as representative
assessee consists of, or includes,
profits and gains of business, tax shall be charged on the whole of the
income in respect of which such person is so liable at the maximum marginal rate :
Provided
that the provisions of this sub-section shall
not apply where such profits and gains are receivable under a trust declared by any person by will
exclusively for the benefit of any
relative dependent on him for support and maintenance, and such trust is the only trust so declared by him.
(2) Where any person is, in respect of any income,
assessable under this Chapter in the capacity of a representative assessee, he
shall not, in respect of that income, be assessed under any other provision of
this Act.
164.
(1) [Subject to the provisions of sub-sections (2) and (3), where] any income
in respect of which the persons mentioned in clauses (iii) and (iv)
of sub-section (1) of section 160 are liable as
representative assessees or any part thereof is not specifically receivable on behalf or for the
benefit of any one person or where the individual shares of the
persons on whose behalf or for whose benefit such income or such part thereof
is receivable are
indeterminate or unknown (such income, such part of the income and such persons
being hereafter in this section referred to as "relevant income",
"part of relevant income" and "beneficiaries",
respectively), [tax shall be charged on the relevant income or part of relevant
income at the maximum marginal rate :]
Direct
assessment or recovery not barred.
166.
Nothing in the foregoing sections in this Chapter shall prevent either the
direct assessment of the person on whose behalf or for whose benefit income
therein referred to is receivable, or the recovery from such person of the tax payable in
respect of such income.
Note: In case of Discretionary trust
Section 166 is not attracted unless discretion as to the distribution is
exercised. Beneficiary can only be taxed when the income from the foreign
discretionary trust vests in him upon the trustee exercising the discretion in
his favour. Income cannot fall within section 5 for the beneficiary till the
discretion has been exercised.
[1994] 74
TAXMAN 392 (SC) SUPREME COURT OF INDIA Commissioner of Income-tax v. Smt.
Kamalini Khatau
Section 166, read with sections 5,161 and 164, of the Income-tax Act,
1961 - Trustees - Direct assessment or recovery not barred - Assessment year
1969-70 - Whether revenue has option to assess and recover tax from either
trustees or beneficiaries of a discretionary trust in respect of such income
thereof as has been distributed and received by beneficiaries in course of
accounting year - Held, yes - Whether section 166 is merely clarificatory -
Held, yes
Section 164 of the Income-tax Act, 1961 - Trust - Charge of tax where
shares of beneficiaries unknown - Whether section 164 is code in itself dealing
with all matters relating to discretionary trust - Held, no - Whether section
164 creates a charge on income of discretionary trust - Held, no - Whether section
164 makes trustees of discretionary trust liable to assessment or recovery of
tax on income of trust - Held, no
HELD
The trustee even of a discretionary trust is joy reason of the terms of
section 160, a representative-assessee. Section 161(1) sets out the liability
of a representative-assessee. Section 161(2) gives the representative-assessee
a further measure of protection by making it explicit that 'he shall not in
respect of that income be assessed under any other provisions of this Act'.
This is of significance for 'any other provisions of this Act' must plainly
mean any provision of the Act other than section 161.
Section 164 states that tax shall be levied upon the income of a
discretionary trust as if it were the total income of an AOP except that if it
or part of it is actually received by a beneficiary, it or that part of it
becomes chargeable to tax at the rate applicable to the total income of the
beneficiary if that course is beneficial to the revenue. Section 164 does not
create a charge on the income of a discretionary trust. The word 'charged' in
the context in which it is used in section 164 means only 'levied'. Section 164
does not make the trustee of a discretionary trust liable to assessment or the
recovery of tax on the income of the trust. It is section 161, therefore, which
has to be read to make the trustee even of a discretionary trust liable to
assessment and recovery of tax on income received by him as a trustee. Further,
section 161 protects the representative-assessee by stating that assessment
upon him shall be deemed to be only in his representative capacity, by
mandating that tax can be levied upon and recovered from him only in like
manner and to the same extent as it would be leviable upon and recoverable from
the person represented by him and by stating that he may not be assessed under
any provisions of the Act. Section 164 does not give any of these protections,
as clearly, they must be given to all representative-assessees. The liability
of a trustee of a discretionary trust to be assessed to tax in respect of its
income and to recovery thereof is created by section 161 and it also states
that he is not liable to such assessment under any other provisions of the Act.
Section 164 sets out only how such tax shall be charged when the income is not
distributed and when the income is distributed?
It does appear, therefore, that section 164 cannot be read as being a
code in itself applicable to and dealing with all matters relating to the
taxation of the income of a discretionary trust. Consequently, it cannot be
held that the beneficiary of a discretionary trust, even if he has received its
income in the accounting year, could not be faxed thereon because section 164
does not provide for such contingency.
Section
166 is clearly clartficatory. It does not empower any assess- ment or recovery
by itself. It only makes it clear that sections 160 to 165 do not bar the
direct assessment of the person on whose behalf or for whose benefit the income
is receivable or the recovery from such person of the tax payable thereof,
provided that is permissible under any other provisions of the Act. Even so,
since the word used in section 166 is 'receivable' it cannot apply to a
discretionary trust for it cannot be said that the income thereon is
'receivable 'for one or more beneficiaries, it being left to the discretion of
the trustees whether or not the income should be distributed to one or more of
the beneficiaries or not at all. But that is not to say that the beneficiary of
a discretionary trust, because he does not fall within the ambit of section
166, may not be assessed upon income received by him and tax recovered from him
thereon if that is permissible under any other provisions of the Act.
Section 5 defines the total income of any person to include income
received by him or received on his behalf or which accrues or arises to him. A
person may be directly assessed in respect of such income. The income of a
discretionary trust which is within the accounting year distributed to and
received by the beneficiary would, therefore, be subject to assessment in his
hands and tax thereon would be recoverable from him. Such income would squarely
fall within the broad sweep of total income under section 5 and the beneficiary
would be liable to assessment and recovery of tax thereof under section 4.
In the absence of an express provision it is difficult to hold that the
beneficiaries of a discretionary trust are not liable to be assessed in respect
of their interest in the trust properties even when such interest is identified
in the accounting year and that the trustees who represented them alone are so
liable so that tax can be recovered only from them.
Thus, the
revenue has the option to assess and recover tax from either the trustees or
the beneficiaries of a discretionary trust in respect of such income thereof as
has been distributed and received by the beneficiaries in the course of the
accounting year.
IT: Discretionary trust is one which
gives a beneficiary no right to any part of income of trust property, but vests
in trustees a discretionary power to pay him, or apply for his benefit, such
part of income as they think fit
[2014] 45 taxmann.com 552 (SC) SUPREME COURT OF
INDIA Commissioner of Wealth Tax, Rajkot v. Estate of HMM Vikramsinhji of
Gondal
Section 5 of the Income-tax Act, 1961 - Income - Accrual of
(Discretionary trust) - Assessment years 1970-71 to 1976-77 and 1978-79 to
1989-90 - Whether discretionary trust is one which gives a beneficiary no right
to any part of income of trust property, but vests in trustees a discretionary
power to pay him, or apply for his benefit, such part of income as they think
fit - Held, yes - Whether, therefore, where in case of discretionary trust,
income was retained by trustee themselves and not disbursed to beneficiaries
including assessee, it could not be brought to tax in hands of assessee - Held,
yes [Para 18] [In favour of assessee]
Analysis:
After considering above
explained provisions, for the purpose of taxation in India of the
beneficiaries, or the trustees as representative of beneficiaries, the
following needs to be ascertained:
Whether the income of the offshore Discretionary Trust falls within the
scope of total income u/s 5 of Income Tax Act, in the hands of the
beneficiaries- whether Resident Or Non-Resident?
If the income is not within the scope of section 5, can the trustee be
taxed as representative assessee whether resident or Non-Resident?
Trustee
|
|
Non-Resident
|
Resident
|
Trustee as representative assessee is assessable as
if income were received by him beneficially.
|
|
However, the tax can only be levied on him in the
manner and to the extent leviable upon person(s) represented by him. But Where
some beneficiaries are Non-resident and the others are residents, and No discretion has been exercised by
the trustee, how would the tax be levied
on trustee in the like manner
and to the extent leviable on the beneficiaries?
|
|
Trust
is not Liable to Tax In India.
|
Trustee as representative assessee is Liable to Tax but no mechanism
to compute the tax.
|
Beneficiaries
|
||
Income
Distribution
|
Non-Resident
|
Resident
|
Yes
|
Not Taxable Whether
Trustee NR or Resident
|
Taxable Whether Trustee
NR or Resident
|
NO
|
Not Taxable when trustee
is Non Resident
|
Not Taxable whether Trustee
NR or resident
|
If Trustee is Resident
Section 5(2)(a) comes to play and will be taxable in India, But
Here one has to look
closely the provisions of the respective DTAA (Treaty) with the concerned
country. Which for above income normally tax on citus basis. (Generally Not Taxable)
|
||
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