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TRUST – Through The Legal Lens

By 16/05/2021May 5th, 2022No Comments
legal lens

Trust Through The Legal Lens

Trust is an arrangement whereby a person holds property as its nominal owner for good of one or more beneficiaries. We can see many trusts working for different purposes. But are they liable for the paying of tax while working? Does the creation of trust become the device of tax evasion? The answer is No, that is not the case.

The income tax appeal tribunal (ITAT) in Delhi ruled on this. The trust’s legitimacy is discussed in the decision. Second, trust is used to store treasuries and stock. Finally, under the provisions of sections 160 to 166 of the Income-tax Act of 1961, its income is taxed as a representative of the beneficiary or beneficiaries (IT act ).

The trust cannot escape the tax, according to the ruling, and the trust will have the same tax responsibilities and exemptions as the beneficiaries. Escort benefit and welfare trust vs. ITO was the lawsuit that resulted in this decision. The following are the details of the case.

A trust called the escort benefit and welfare trust was founded on February 14, 2012. A trust deed was used to establish it. The Escort benefit and welfare trust’s sole beneficiary and management was the corporation Escort. The trust’s first gift was $10,000, which was made by its three trustees.

Three companies amalgamated into Escort limited. Through this merger, it was decided that the shares of all the companies were to be transferred to Escort benefit and welfare trust, for giving the benefit to the Escort limited and its successor. 

The Escort benefit and welfare trust generated a large amount of money in the fiscal year 2016-17, with an income of over Rs 4,47,60,037. Escort Limited paid the dividend distribution tax under section 115-o of the Income Tax Act.

However, Escort’s claim of exemption under section 10(34) of the IT Act was restricted. Since the settlor and the beneficiary were the same in the case of Escort benefit and welfare trust, the assessing officer found out and claimed that the trust, in this case, is itself valid, under the Indian trust act 1882. 

Furthermore, the assessing officer discovered that, though a few trustees were chosen for this trust, they did not have any discretion, and therefore it was determined that the beneficiary, Escort Limited, was acting as a trustee to the Escort benefit and welfare trust.

The exemption was not granted to the Escort benefit and welfare trust and it was helped that the trust was only created to get an exemption from the taxpaying. And further assessor ordered Escort benefit and welfare trust to pay the tax over the dividend income that they have as the income from the other source under section 56 of the IT act.

 Thereafter, the Escort benefit and welfare trust filed an appeal with the commissioner of income tax (appeals), i.e. CIT (A). Escort benefit and welfare trust is not a genuine and properly created trust, and therefore cannot be taxed as a representative assessee, according to the commissioner of income tax (appeals). It will be held as an association of the people.

The ITAT overturned the commissioner of income tax (appeals) judgment, ruling that the Escort benefit and welfare trust is a legal trust. Since the trust legislation makes no reference to the settlor and single beneficiary being the same person. And also the exemption in taxes under section 10(34) was also granted to the Escort benefit and welfare trust. 


Tags: tax fraud, tax evasion and tax avoidance, income tax appeal tribunal, tax evasion, creation of trust, income tax appellate tribunal, tax evasion penalties, income tax evasion, legal lens, tax evasion and avoidance, income tax fraud

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