TMI Blog1989 (9) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... ere are two Associations of Persons (AOP) as beneficiaries but whose right to share in the income of each of these trusts is subject to the complete discretion of the trustees. All these 42 AOPs are made up of various combinations of altogether 34 persons. Under clause 6 of the assessee';s trust deed if the disposition of any part of the trust fund is regarded as void and ineffective, that part is to be held in trust of the aforesaid 34 persons. The 42 AOPs, the discretionary trusts and the assessee trust were created on 8th August, 16th August and 8th September, 1983 respectively. The discretionary trusts and the assessee trust were created by settling a sum of ₹ 500 each and ₹ 10,000 respectively. Under the deed of trust the assessee trust was empowered to do business. For the asst. year 1984-85 it returned an income of ₹ 10,31,804 and for the asst. year 1985-86 it showed a loss of ₹ 63,270. The assessee has stated that the income had been distributed among the 21 discretionary trusts and were the beneficiaries and that all those 21 beneficiaries had filed their return of income and so the taxable income of the assessee was nil. Counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use the ITO had not specified who according to him were the actual beneficiaries. He submitted that the decision in McDowell Co. Ltd.';s case (supra) was primarily applicable when one wanted to know in whose hands the income was chargeable. He referred to the Madras High Court decision in the case of M.V. Valliappan v. ITO (1988) 170 ITR 238 drawing our attention particularly to the following observations at page 280 of the report: - Having regard to the new approach adopted by the English courts in the matter of considering the legitimacy of a scheme of tax planning which has been now adopted by the Supreme Court in McDowell';s case (1985) 154 ITR 148 (SC), only colourable devices adopted for evading a tax liability will have to be ignored by courts. It appears to us on a careful reading of that decision that a legitimate transaction which does not amount to a dubious device is not hit even by the new approach adopted by the English courts and by the Supreme Court. He also referred to the Supreme Court decision in the case of CWT v. Arvind Narottam (1988) 173 ITR 479 where the Supreme Court held that the decision in McDowell Co. Ltd.';s case (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned to avoid tax, it was essential (a) that the series was, at the time the intermediate transaction was entered into, pre-ordained in order to produce a given result; (b) that the intermediate transaction had no other purpose than tax mitigation; (c) that there was, at that time no, practical likelihood that the pre-planned events would not take place in the order ordained, so that the intermediate transaction was not even contemplated practically as having an independent life; and (d) that the preordained events did in fact take place. He submitted that in the present case we did not know what the ultimate result of this arrangement was and that therefore, the decision in McDowell Co. Ltd.';s case (supra) was not applicable to this case. 9. On the other hand, the learned Departmental Representative submitted that in the present case, the transaction or the arrangement was of an abnormal nature. According to him, there was no commercial justification for creating the 21 discretionary trusts or the AOPs. He pointed out that all the trusts and AOPs had been created within a period of one month, they all had the same address and that the ultimate beneficiari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decision in the case of Vega (P.) Ltd. (sic) depended upon the facts of that case which were not similar to the facts here. 10. The assessee';s counsel rejoined that first of all since in this case the income had been earned after the trust had been created there was no question of reducing the tax liability by creating the trust. He submitted that there was no income of the trust and so there was no tax liability of the trust before it was created and therefore, there was no question of reducing the tax liability of the trust. He submitted that the last condition in Cravan';s case (supra) had not been fulfilled because the income had not been distributed to the AOPs but had been retained by the discretionary trusts. 11. The principal question in this appeal is whether the Supreme Court decision in the case of McDowell Co. Ltd. (supra) is applicable and if so how far the decision of the Gujarat High Court in the case of K T. Doctor (supra) can be said to be modified or not applicable in this case. We should first of all consider the decision in the case of K.T. Doctor (supra) . In that case a certain sum was settled by the assessee';s mother upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be ignored and since the trustees were empowered to do business, the business was of the trust and not of the assessee. Thus the entire emphasis in that case was on the position of the trustees and not the trust deed as submitted by the assessee';s counsel. The present case is quite different. What is sought to be ignored is the position of the 21 discretionary trusts as the beneficiaries. When the 21 discretionary trusts are ignored it is those 21 beneficiaries of the assessee trust which are being ignored. It only so happens in this case that they are trusts. Similarly, it is the beneficiaries of these 21 trusts i.e. the AOPs which are being ignored and it only so happens that they are AOPs. In the case of K.T. Doctor the genuineness of the trust was not questioned whereas in this case the ITO has treated the discretionary trusts and the AOPs as sham. His endeavour is to find out who the real-beneficiaries are and what their rights are. For the above reasons the decision in the case of K.T. Doctor is not applicable here. 11A. That brings us to the submissions of the assessee';s counsel regarding the Explanation 1 to sec.164. According to him, we cannot l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration, completely ignores the reality of the situation. The trust was expected to earn income and in fact it did earn very high income in the assessment year 1984-85. It would he wrong to look upon the decision in McDowell';s case as confirmed to cases where income had in fact accrued the tax on which was to be saved. That decision also applies to cases where an attempt is being made to evade tax liabilities which is likely to be incurred. In the present case if the 21 discretionary trusts had not been made definite beneficiaries and the power to distribute the income and corpus of the assessee trust to the ultimate beneficiaries was at the discretion of the trustees of the assessee trust the tax liability of the assessee trust would have been much higher than the tax liabilities which should fall upon it by regarding it as a specific trust. It is that difference between these two tax liabilities which is sought to be evaded in the present case. All the conditions for applying the Ramsay principles as stated in the case of Cravan (supra) have been fulfilled. Looking to the sequence of events in this case it cannot be denied that the purpose was to reduce the tax liability. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owell Co. Ltd.';s case (supra) an attempt was made to make the assessee';s liability as that of another. Therefore, the substance of that decision is not that one assessee is sought to be replaced by another but a false appearance is given to realities. Therefore, the principle of McDowell Co. Ltd.';s case (supra) is fully applicable to this case. 15. The learned counsel in the course of his arguments has given some instances which were not devices. They were gifts of capital interest bonds or of relief bonds which did not entail any gift-tax. In doing so, the assessee is certainly avoiding certain gift-tax. But that is not a device. In our view, no one will call it a device because the assessee has chosen to buy those kinds of bonds which carry a lower rate of interest than what the assessee or his donee would otherwise have earned. The Tribunal';s decision in the case of Garware (supra) has no application in this case. In that case the assessee HUF was a beneficiary of a family trust entitled to 1/4th of the corpus after 25 years. The karta of the assessee HUF who was the sole surviving coparcener transferred the assessee';s interest in that trust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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