Law:

Section:

Section 161, read with Section 166, of the Income-tax Act, 1961-Trust-Direct assessment on beneficiary-Under a trust deed, trust funds were to be held in trust for benefit of assessee during his lifetime and for his heirs, etc., absolutely-ITO made assessment of trust as an AOP treating assessee as sole beneficiary and also simultaneously made a protective assessment on assessee in respect of his one-fourth share in trust income returned by him-Whether assessee could be regarded as sole beneficiary during his lifetime-Held, on facts, yes-Whether protective assessment made on assessee would constitute exercise of option by ITO under section 166 of taxing beneficiary directly-Held, on facts, no Facts P executed an indenture of settlement which stipulated that the trust funds would be held for the benefit of H and its income would be paid to him for his lifetime. In a modification, the provision for payment of income to H was deleted and the accumulation of income during lifetime of settlor was provided. It was further provided that after the death of the settlor the net income was to be paid to H for and during his lifetime. In yet another modification, the settlor directed that the trust funds should be held in trust for H for the life and for his heirs, executors, administrators and assigns absolutely. The Tribunal held, that on a true interpretation of modified trust deed, it was clear that the settlor had directed that the trust funds should be held for the benefit of H during his lifetime and, therefore, he was the "sole beneficiary" and that only on his death, the interest of his heirs, etc., would arise. The assessment of the trust and of H were made on the same day. H included in his return one-fourth share on the ground that he was not the sole beneficiary, but one of the beneficiaries along with his wife, son and daughter. The ITO assessed the trust as an AOP on the footing that H was the sole beneficiary. He also assessed H on his declared one-fourth share (as if he was not the sole beneficiary) as a protective measure. The Tribunal upheld the lTO's decision observing that the protective assessment did not tantamount to exercise of option by the ITO…

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