IT Act 2025
Section 308
IT Act 2025
Section 308
Charge of tax in case of oral trust.
308. (1) Where a trustee receives or is entitled to receive any income on behalf or for the benefit of any person under an oral trust, then, irrespective of anything contained in any other provision of this Act, tax shall be charged on such income at the maximum marginal rate.
(2) For the purposes of this section, “oral trust” shall have the meaning assigned to it in section 303(3).
Analysis
1. Purpose and Policy Rationale
(i) Oral trusts are inherently non-transparent because there is no written instrument that identifies:
i. the beneficiaries,
ii. their shares, or
iii. the purpose of the trust.
(ii) Such structures are prone to misuse for tax evasion, benami arrangements, or concealment of ownership.
(iii) To prevent abuse, the law automatically taxes the entire income at MMR, removing scope for lower slab rates or look-through taxation.
2. Key Features of Section 308:
Provision Explanation
Sub-section (1) Any income received or receivable by a trustee under an oral trust is taxed at MMR, irrespective of any other provision in the Act.
Sub-section (2) Clarifies that oral trust has the meaning given in s.303(3) – a trust not evidenced by a written instrument but created verbally or implied by conduct.
3. For Taxpayers:
A. Who is affected:
Trustees managing assets under an oral arrangement.
Settlors who create trusts verbally without documentation.
Beneficiaries of such trusts, whose income is held by trustees.
B. Consequences of having an Oral Trust:
(i) High tax liability:
i. Entire income taxed at MMR, which includes surcharge and cess.
ii. Even if beneficiaries are identifiable and low-income, no slab benefits apply.
(ii) Loss of exemptions/benefits:
a. Cannot claim benefits available to registered or determinate trusts, such as:
b. Section 11/12 exemptions for charitable trusts,
c. AOP slab rates,
c. Exemption for specific family trusts.
(iii) No distinction between determinate and discretionary: Even if beneficiaries are clear, oral nature overrides and directly triggers MMR.
(iv) Risk of disputes: Lack of written records can lead to disputes about ownership, control, and tax liability.
C. Rights of Taxpayers:
(i) To convert oral trust into written trust:
i. Prepare a registered trust deed clearly stating beneficiaries, their shares, and the trust purpose.
ii. Future income may then be taxed under Section 307 or other relevant provisions, potentially at lower rates.
(ii) To challenge MMR application:
i. If there is clear evidence that the trust was in fact written but lost, the taxpayer may argue it is not an “oral trust.”
ii. Strong proof required: certified copies, court orders, or secondary evidence.
D. Duties of Taxpayers:
(i) Full disclosure: Trustees must disclose existence of oral arrangements honestly during assessments.
(ii) Maintain supporting evidence:
i. Even for oral trusts, maintain accounts of income and expenses.
ii. Record minutes or affidavits that reflect the trust’s functioning to reduce litigation risk.
4. For Assessing Officers (AOs):
A. Primary Duties:
(i) Identify oral trusts clearly:
i. Check whether any written instrument exists.
ii. If none, classify as an oral trust under s.303(3).
iii. Record reasons for treating it as an oral trust in the assessment order.
(ii) Apply MMR mandatorily: Once identified, no discretion exists – tax must be levied at MMR.
(iii) Irrespective of other provisions:
i. Ignore slab rates, exemptions, or look-through approaches.
ii. Section 308 has an overriding effect on other sections.
B. Verification Steps:
Step
AO’s Action
1. Examine documents
Verify whether any written trust deed exists, registered or otherwise.
2. Cross-check conduct
Review evidence of oral arrangement, e.g., statements, affidavits, or settlement patterns.
3. Determine income flow
Identify all sources of income received by the trustee.
4. Apply MMR
Compute tax on the entire income received or receivable, without splitting.
5. Speaking order
Clearly state why the trust was treated as oral and why MMR was applied.
C. Powers and Rights of AOs:
i. Summon parties (s.131) to verify whether any written instrument exists.
ii. Reopen assessments under s.148 if oral trust income was concealed.
iii. Disallow claims of slab benefits or exemptions unless written evidence is produced.
5. Comparison with Section 307:
Aspect
Section 307 (Unknown shares)
Section 308 (Oral trust)
Trigger
Beneficiaries or their shares not specifically stated.
No written trust deed, trust exists only verbally.
Default tax rate
MMR, unless specific exceptions apply (e.g., old family trust, will trust).
Always MMR, no exceptions.
Relief possible?
Yes, through specific carve-outs in s.307(2).
No relief unless trust becomes written in future.
6. Illustrative Examples:
(i) Example 1 – Family oral trust: Mr. A verbally declares that his brother will manage ₹50 lakh for the benefit of A’s children, with no written document.
i. Trustee earns ₹5 lakh interest income.
ii. Result: Entire ₹5 lakh taxed at MMR, even if children are minors and have no other income.
(ii) Example 2 – Oral PF arrangement: An employer verbally sets aside funds for employee gratuity without creating a registered trust deed. Result: Entire income of that fund taxed at MMR, unlike a registered fund under s.307(2)(d).
7. Practical Recommendations:
(i) For Taxpayers
i. Never rely on oral declarations for significant trusts.
ii. Execute a proper trust deed, even if simple, to avoid harsh taxation.
iii. Keep beneficiary details updated and filed with tax authorities.
(ii) For Assessing Officers
i. Treat absence of a written instrument as automatic MMR trigger.
ii. Verify carefully in cases where taxpayers attempt to retroactively create documents.
iii. Use s.303(3) definition to defend classification in appellate forums.
8. Key Takeaways:
(i) Automatic MMR levy: Oral trusts are seen as high-risk vehicles, taxed at the highest possible rate.
(ii) Overriding provision: Section 308 overrides all other tax rules for such income.
(iii) Compliance pathway exists: Taxpayers can avoid MMR by creating a valid, written trust deed going forward.
(iv) AO’s role is strict and mechanical: Once oral trust status is established, AO has no discretion but to apply MMR.
9. Summary Table:
Stakeholder
Taxpayers (Trustees/Beneficiaries)
Rights
- Right to prove trust is not oral by showing a valid written instrument.
- Right to appeal AO’s classification.
Duties
- Disclose income truthfully.
- Maintain records and evidence of transactions.
- Execute a written deed for future compliance.
Assessing Officers
Rights
- Power to summon and investigate under s.131.
- Power to reopen past assessments if oral trust income escaped taxation.
Duties
- Verify absence of written deed carefully.
- Provide a clear, reasoned order when applying MMR.
- Apply s.308 strictly without exceptions.
10. Conclusion: Section 308 is a strong anti-abuse rule. It automatically penalizes oral trusts through maximum marginal rate taxation, incentivizing transparency and written documentation. Taxpayers must formalize their trust structures to avoid punitive taxation, while AOs must diligently enforce the provision to protect revenue and prevent misuse of oral arrangements.
Above Article can also be viewed at
https://1drv.ms/b/c/0f527a60e6f7d291/ERWZO9uz9xVEjNaecyitrPIBK4pheSOhJbiVs7lGoBh_5w?e=dJdUnd