ITAT explains tax aspects of private specific or discretionary trusts

This Tax Alert summarizes a recent ruling of the Bangalore Income Tax Appellate Tribunal (ITAT) in the case of India Advantage Fund – VII (Taxpayer). The ITAT dealt with the tax aspects of a private specific trust wherein contributors were the beneficiaries. The ITAT held that presence of power to terminate trust by trustee or by contributors will constitute a revocable transfer. Accordingly, income arising to the trust was held taxable in the hands of the individual beneficiary (transferor) as per Indian Tax Laws (ITL). Based on facts, the ITAT also held that the Taxpayer was neither a discretionary trust nor an Association of Persons (AOP).

ITAT ruling covers several important areas on taxation of contributory trust on which there was limited guidance available and provides useful guidance to the taxpayers in general.