TMI Blog1995 (5) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... trust shall be received by individual beneficiaries mentioned in Sch. I according to their specific share ratio indicated therein, and the remaining 51% of the income of the main trust shall be received by the trustees of the oral specific deferred family trusts mentioned in Sch. II according to their share ratio indicated therein. However, the said share of income was not to be paid to the individual beneficiary of the oral specific deferred family trust but the same was to be accumulated for a period of 19 years from the date of the trust deed. 3. The main trust became partner in the firm M/s Nirma Chemical Works through its trustee Smt. Shantaben Kachrabhai Patel with 15% share. The firm was dissolved on 7th Feb., 1980 and the running business of the erstwhile firm was taken over by the Main trust. 4. The main trust submitted returns of income declaring NIL income during all the years under consideration on the ground that the said trust received income for and on behalf of beneficiaries and the same was allocated amongst the beneficiaries as per the share ratio provided in Sch. I and II of the trust deed. The Assessing Officer (AO) originally assessed the income at NIL in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iciaries of these assessees oral deferred trust have no vested right, title or interest upto the period of 19 years and it was specifically made known that income received by the assessee trusts (beneficiaries listed in Sch. II) from the Main trust would be accumulated and not paid to the beneficiaries of the assessee trusts but shall form part of its corpus. This position was also made clear by these assessee trusts by way of a note appended with the return stating the aforesaid fact. It was also mentioned in the said note annexed with the return that though the share of these beneficiaries were specific, known and ascertainable, income was assessable in the hands of the trustees under s. 160(1) r/w s. 161 and s. 166 was not applicable as income did not accrue or arise to the specific beneficiary. The CIT, therefore, held that the persons stated as beneficiary in each of the assessee deferred trust has no right to receive any income or benefit in the years under review, and therefore, such persons cannot be regarded as beneficiary in the years under review. Further the trustees of these assessee deferred trust or the said deferred trust themselves cannot be regarded as beneficiari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded as beneficiaries in the year and that the beneficiaries of the trusts had no right to receive their share and, hence, no income accrued to them, and the CIT has also erred in relying on inapplicable case law. The order under s. 263 is predetermined and prejudicial. III. Protective order: The CIT having passed adverse order under s. 263 in the case of the main trust directing inclusion of entire income in question in the hands of the said trust and taxing the same at maximum marginal rate, no adverse order could have been made in the hands of the appellant deferred trusts in relation to that very income once again. The CIT has no jurisdiction to pass protective order under s. 263. The CIT has erred in directing the Assessing Officer to charge tax at the maximum marginal rate in all these cases. IV. General: The order passed under s. 263 is bad in law and on facts and should be quashed and the CIT has erred in not considering the various submissions made by the appellants. In the appeals for asst. yrs. 1981-82 and 1982-83, the appellants apart from above grounds have raised some more grounds which are briefly as under: (i) The CIT has erred in holding that s. 164A is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the ultimate beneficiary had contingent interest in the income of the year but only the payment thereof was deferred for the period of duration of the trust for 18/19 years. In the event of death of the specified beneficiary in the intervening period, it has been clearly provided that the corpus of the trust shall be given to the legal heir or heirs in equal ratio. The trust is therefore a specific trust having definite and specified share ratio of the beneficiaries. Mr. Patel, the learned lawyer, submitted that all the relevant documents, resolutions relating to all the 17 deferred trusts are similar and identical. 9.3 The learned counsel placed heavy reliance on the following judgments to support the aforesaid contention: (i) Addl. CIT vs. M.K. Doshi (1979) 9 CTR (Guj) 123 : (1980) 122 ITR 499 (Guj) (ii) CIT vs. Gosar Family Trust (1990) 89 CTR (Guj) 266 : (1991) 189 ITR 18 (Guj) (iii) CWT vs. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust 1977 CTR (SC) 306 : (1977) 108 ITR 555 (Guj) at p. 559 (iv) CIT vs. The Trustees of Staff Gratuity Fund of Shree Ram Mills Ltd. (1987) 59 CTR (Bom) 92 : (1986) 162 ITR 471 (Bom). Mr. Patel, the learned lawyer, submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support the admissibility and acceptance of the additional ground of appeal. He submitted that in view of the decision in the case of Main trust i.e. S.K. Family Trust in ITA No. 1135 to 1138/A/85, income of the main trust to the extent of that part which is attributable to these 17 Oral Deferred Trusts mentioned in Sch. II of the main trust deed will now be assessable in the hands of the present appellant deferred trusts on substantive basis and hence income-tax paid by the said main trust on such income should be adjusted in the cases of the appellants as and when paid. He placed reliance on the following judgments: (i) Trustees of Late Sir R.J. Vakil vs. CIT (1958) 33 ITR 517 (Bom) (ii) ITO vs. Bachu Lal Kapoor (1966) 60 ITR 74 (SC) (iii) CIT vs. Ramanand Sachdeva (1982) 136 ITR 440 (Del) At this stage, the judgment of the Hon'ble M.P. High Court in the case of Shantilal vs. CIT (1984) 39 CTR (MP) 317 : (1984) 145 ITR 789 (MP) was also shown to the learned counsel for his comments. He submitted that grant of credit for taxes paid in respect of that very income is a necessary consequential action. The learned counsel summed up his arguments by contending that the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on substantive basis in view of the order of the Tribunal in the case of main trust. He submitted that tax is leviable on the share income of these 17 beneficiary deferred trusts at maximum marginal rate under s. 164(1) and also under s. 164A. 10.3 The learned Departmental Representative also objected to the entertainment of additional ground of appeal raised in all these appeals. He submitted that further litigation in the Main trust as well as Bharat Trust and Neo Trust are pending. The appellant trusts and the Main trust paid tax as per their views about the assessability of income and therefore credit of taxes paid by the Main trust in the hands of the beneficiary deferred trusts cannot be allowed from the respective dates of payments. The credit by way of issue of refund voucher/adjustment voucher can be allowed only from the date when such adjustments/refund voucher will be issued in accordance with the provisions of law. He submitted that facts of the various cases relied upon by the learned counsel for the assessee are clearly distinguishable. The acceptance of such a claim made on behalf of the appellants will result in unwarranted relief by way of reduction in the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 13 listed in Sch. I are oral discretionary family trusts having beneficiary share in the income of the trust totalling to 20%. (iii) Beneficiaries at Srl. Nos. 14 and 15 of Sch. I are oral specific family trusts having beneficial share in the income of the trust totalling to 13%. (iv) Beneficiaries from Srl. Nos. 1 to 9 mentioned in Sch. II to the trust deed are oral specific deferred family trusts having beneficial share in the income of the trust totalling to 38.5%. It is also considered necessary and essential to bring to the fore the facts relating to formation of beneficiary oral discretionary and oral specific deferred trusts. 3. On 9th Dec., 1979, one Shri Maniklal K. Patel created the following 12 oral discretionary trusts by settling Rs. 50 in each: 1. Jayesh Patel Karsanbhai Patel Oral Disc. Family Trust. 2. Sanjay Patel Karsanbhai Patel Oral Disc. Family Trust. 3. Jayesh H. Patel Karsanbhai K. Patel Disc. Family Trust. 4. Sanjay H. Patel Karsanbhai Patel Oral Disc. Family Trust. 5. Jayesh Karsanbhai Oral Disc. Family Trust. 6. Sanjay Karsanbhai Oral Disc. Family Trust. 7. J.H. K.K. Oral Disc. Family Trust 8. S.H. K.K. Oral Disc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e both in Sch. I (Srl. No. 14) and Sch. II (Srl. No. 8) and its total share comes to 8% (2+6). The assessee trust as mentioned above has been formed by execution of a trust deed on 31st Dec., 1979. As regards the other oral trusts detailed above it is claimed that intimations as per Expln. 2 to s. 160(1) have been given to the AO within the specific time limit. 8. The question now arises how the assessee trust came to do business. There existed a firm in the name of Bharat Soap constituted by the following partners: 1. Shri Joitaram K. Patel 2. Shri Karsanbhai K. Patel 3. Smt. Jamunaben U. Baraiya 4. Smt. Shantaben K. Patel 5. Shri Khodidas V. Patel The firm was reconstituted on 1st Jan., 1980 when assessee-trust was taken partner and the share ratio of the partners was fixed as under: Joitaram K. Patel 22% Karsanbhai K. Patel 20% Jamunaben U. Baraiya 18% Shantaben K. Patel 20% Khodidas V. Patel 10% Bharat Trust (assessee) 10% The firm was engaged in business of manufacturing detergent powder under the Nirma trade mark in pursuance to royalty agreement with Nirma Chemica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and determinate; (iii) The income of the appellant-assessee-trust is to be computed and apportioned in terms of provisions of s. 160(1) of the IT Act, 1961 and (iv) The income of the assessee-trust cannot be subjected or brought to tax at maximum marginal rate under s. 164(1) of the Act as has been erroneously done by the AO. The decision of the AAC, therefore, in this regard has to be upheld but for the reasons given and discussed by us above. The key controversy is thus decided in favour of the assessee and against the Revenue." (iv) The Hon'ble Accountant Member has recorded his findings and conclusions in para-12 and 13 of his order, the relevant extracts therefrom are reproduced hereunder 51 TTJ at p. 322 to 324: "12. I would now examine and consider the question of applicability of provisions of s. 164(1) to the income receivable for and on behalf of various categories of beneficiaries. (c) There are six oral discretionary family trusts and these trusts were formed on 28th Dec., 1979, i.e. three days before the formation of the assessee trust. The beneficiaries of each of these six oral discretionary family trusts are two oral discretionary trusts formed on 9th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axed the income receivable and allocated to the beneficiary oral discretionary trusts at maximum marginal rate under s. 164(1) of the IT Act. (d) I would now deal with that part of income which is receivable for and on behalf and for the benefit of 8 oral specific deferred trusts listed in Sch. II of the trust deed. Beneficiaries of these trusts are Karsanbhai. Joitaram, Shantaben, Jamunaben, Khodidas, Virchanddas, Manjubuaben and minor Nita Karsanbhai. All the 7 major persons are also individual beneficiaries as mentioned at Srl. Nos. 1 to 7 in the first schedule. Clause III(b)(ii) of the trust deed makes it clear that the beneficiaries of the said 8 oral specific deferred family trusts shall have no right, title or interest either vested or contingent in their share income and the said income is to be accumulated to form part of the corpus of those trusts upto a period of 19 years. It is thus evident from the trust deed that the said income is not receivable by the said deferred trusts for and on behalf and for the benefit of individual beneficiaries for a period of 19 years. Clause III(d) of the trust deed also confers right on the trustees to dissolve the said trusts any time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o allocated to the beneficiary discretionary trust has already been assessed by the AO at the maximum marginal rate invoking the provisions of s. 164(1) of the IT Act. On these facts, the income receivable and allocated to beneficiary discretionary trusts cannot be assessed as one unit at maximum marginal rate under s. 164(1) in the hands of the assessee-trust. 14. Having regard to the facts and ratio of various decisions cited supra, I concur with the finding given by Brother J.M. in his order about non-applicability of provisions of s. 164(1) in the case of an assessee-trust for the income receivable for and on behalf of the beneficiaries whose shares are specified and determinate. I am also in agreement with him about deductions claimed towards advertisement and bonus expenses". (v) It may also be relevant and worthwhile to reproduce para-27 of the order passed by the Hon'ble Judicial Member appearing at page 317 of 51 TTJ: "We also cannot accept the Revenue's argument that since few oral trusts of Sch. I are discretionary trusts, the assessee- trust also becomes a discretionary trust. Well, if those trusts are discretionary trusts, then let the income derived by those tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... os. 46 to 100 are certain individuals and certain representatives of certain discretionary family trusts. The beneficiaries stated in Sch. II also give the list of those very 100 beneficiaries, where the share of profit is to be accumulated in their respective share ratios. The Bombay Bench after elaborate discussion recorded its finding in para 27 at page 26 of its order holding that these two main assessee trusts are specific trusts from all angles and, therefore, entitled to be assessed under s. 161 of the IT Act. It was further held that since the beneficiaries have already been assessed under s. 166 by exercise of the option by the Revenue, there cannot be separate assessment in the cases of main trust. The aforesaid trusts are also like the main trusts such as Neo trust, Bharat trust, etc. The Bombay Bench also did not decide the controversy as to whether the "deferred trusts" shown as beneficiary of II Sch. of the trust deed of the main trust should be regarded as discretionary trust liable to tax at maximum marginal rate of tax or it should be treated as "specific trust" liable to tax at normal rate of tax. Another interesting feature is that the Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which there are three beneficiaries. 5. As far as beneficiaries of second schedule are concerned, they are seven oral specific deferred trusts. Their names are after the seven individual beneficiaries mentioned in Sch. 1. Each of these specific deferred trusts has only one beneficiary and that beneficiary is one of the seven individuals mentioned in Sch. 1 6. In the trust deed the share of each of the seven individuals mentioned in Sch. I, each of the 11 oral discretionary trusts mentioned in Sch. I and one oral specific trust mentioned in that schedule and share of each of the oral specific deferred trusts mentioned in second schedule have been specified. The total share of the seven individuals mentioned in Sch. I comes to 28.5%. The total share of 11 oral discretionary trusts comes to 32%. The share of one oral specific trust is 11%. The total share of seven specific deferred trusts comes to 28.5%. In other words, the total share of individual beneficiaries comes to 28.5%, while the total share attributable to the trusts comes to 71.5%." The discussion relating to seven beneficiaries which are oral specific deferred trusts has been made in paras 13, 13.1, 13.2 and 13.3 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulated and was not liable to be paid to the beneficiaries and that the income was to form part of the corpus of those trusts. From this provision it is clear that the said income is not receivable by the assessee-trust for and on behalf and for the benefit of any individual. That income was liable to be given by the assessee-trust towards the corpus of those trusts. The assessment order of one of the beneficiaries in these oral specific deferred trusts is on record at page 149 of the paper book and the said assessee has not shown income receivable from the assessee-trust. It is clear that all the parties have construed this clause as stating that the said income would not accrue to those oral specific deferred trusts for 19 years. In these circumstances the provisions of s. 164(1) would be clearly attracted in respect to this income and maximum marginal rate would be liable to be paid. We may mention here that there is identical clause in the constitution of these oral specific deferred trusts. Normally assessee should not have been concerned with the question as to how the trustees of these oral specific deferred trusts would distribute the income to the beneficiaries. However, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ushaben Trust (1991) 190 ITR 485 (Bom). The facts in that decision are not given in detail. It is not clear from the facts mentioned whether the share of the beneficiaries in that case were determinate or not. Reliance has been placed in that decision on earlier decision in the case of Trustees of Putlibai R.F. Mulla Trust vs. CWT (1967) 66 ITR 653 (Bom). In that decision the shares of the beneficiaries were held to be determinate. The principle that would emerge is that if the shares of the beneficiaries are determinate and if the beneficiaries are assessed in respect of their shares, the assessee-trust cannot be assessed in respect of those very shares. In the present case such is not the position. In revision proceedings the learned CIT has held that the income of the assessee-trust which was receivable on behalf of various trusts mentioned in Sch. I and II as beneficiaries attracted the provisions of s. 164(1) of the Act. That finding has been confirmed by us in relation to 11 oral discretionary trusts mentioned in First Schedule and seven oral trusts mentioned in Second Schedule. When the provisions of s. 164(1) are attracted, the income is assessable in the hands of the tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such circumstances, the various decisions of different Benches of this Tribunal in the cases of B.D. Enterprises vs. IAC (1986) 19 ITD 427 (Bom), Atman Trust vs. IAC (1989) 31 ITD 315 (Ahd) and in the case of Neo Trust vs. IAC (1992) 41 ITD 412 (Ahd) which have been strongly relied upon by the Departmental Representative do not help the Revenue in this appeal, because in all those cited cases the Tribunal was dealing with cases where the issues were that the creation of several trusts or chain of trusts were bogus, sham and a facade; that apparent was not real; that there was someone real behind the screen and the trust deeds in those cases were make believe documents and so on and so forth and, therefore, the orders passed by the Revenue authorities in all those/such cases were upheld by different Benches of this Tribunal." It will, however, be relevant to reproduce para 10 of Tribunal's order in case of Neo Trust: "10. It may be mentioned at the very outset that in the show cause notice issued, the learned CIT had expressed the view that the assessee trust was not genuine. However, in the order under s. 263 of the Act he has expressly mentioned that the assessee trust should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iaries of the II Schedule of the main trust, i.e., the 17 oral specific deferred family trusts and that decision does not in any manner support the appellant's contentions. 13. Therefore, the main controversy namely whether the 17 appellant oral specific deferred trusts being the beneficiaries of the II Schedule of the trust deed of the main trust namely S.K. Family Trust should be regarded as discretionary trusts liable to tax at maximum marginal rate or they should be treated as specific trust liable to tax at normal rates will have to be determined in accordance with the relevant clauses of the trust deed of the main trust, terms of the resolutions passed by the appellant trusts and other connected documents in accordance with the relevant provisions of law and the decisions of Tribunal and various Courts on similar or connected points. 13.1 The relevant cl. III(b)(ii) of S.K. Family Trust reads as under: "(ii) It is hereby agreed and declared between the parties to this deed of trust that the trustees shall stand possessed of the balance 51% of the income which shall be divided and receivable for and on behalf of and for the benefit of the trusts mentioned as beneficiarie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whichever is later, i.e., the trust would and on 24th March, 1997 but due to some circumstances, the duration of the trust may be reduced with unanimous consent of the trustees. While at dissolving the trust, the trustees have to divide the trust property to the beneficiary or their heirs. Resolution No. 3 at pages 8 and 9 of the said Resolution: Now herewith it is clarified that during the accounting year if any loss is incurred, the said loss is required to be adjusted towards the income of the trust, the said loss should be set off from the income of the trust next year and after that whatever the income remains after setting of the loss, should be taken for the benefit of the beneficiary Smt. Shantaben Karsanbhai Patel by the trustees and that said sum not be given to Smt. Shantaben Karsanbhai Patel but should be owned by the trustees for the benefit of the beneficiary and the same is to be accumulated in a separate corpus in the name of Smt. Shantaben Karsanbhai Patel specific corpus and the beneficiary has contingent interest in the income of the year and on completion of duration of the trust or under any circumstances if the trustees of the trust reduce the duration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration but at the most it could be said that the concerned individual beneficiary merely had a chance to receive the corpus fund of the trust accumulated from initial corpus along with accumulated income of 18/19 years upon the expiry of the period of duration of the said trust only in the event of the said beneficiary surviving upto that period of 19 years. The said beneficiary cannot, therefore, be regarded as income beneficiary in the years relating to asst. yrs. 1980-81 to 1982-83. This is why the income of these years was accumulated and had to be transferred in a separate corpus and the said beneficiary had no right to demand, right to receive the said income of the relevant years under consideration until expiry of 19 years or until duration of the appellant trust. The right to receive the income at a future date, i.e., after expiry of 19 years period cannot be regarded as right to receive the income of the relevant year but it is merely a contingent right to receive the corpus of the trust not as income of each relevant year but as corpus (capital) fund and such chance of getting the corpus after the period of 19 years is also subject to the happening of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Validating Act, 1913 (6 of 1913)] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees; Explanation 1 A trust which is not declared by a duly executed instrument in writing [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913)], shall be deemed for the purposes of cl. (iv), to be a trust declared by a duly executed instrument in writing if a statement in writing, signed by the trustee or trustees setting out the purpose or purposes of the trust, particulars as to the trustee or trustees, the beneficiary or beneficiaries and the trust property, is forwarded to the (Assessing) Officer (i) where the trust has been declared before the 1st day of June, 1981, within a period of three months from that day; and (ii) in any other case, within three months from the date of declaration of trust." Explanation 1 to 164 reads as under "Explanation 1. For the purposes of this section (i) any income in respect of which the persons mentioned in cls. (iii) and (iv) of sub-s. (1) of s. 160 are liable as representative assessee or any part thereof shall be deemed as being not specifically rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of such income." Since the trustees of the appellant trusts have themselves admitted that s. 166 is not applicable, it cannot be validly contended on their behalf that the appellant deferred trusts received share income from main trust on behalf of or for the benefit of the specific, determinate beneficiary entitled to receive such income in each of the relevant year. If the assessee deferred trusts would have really in law received or entitled to receive income on behalf of the ultimate beneficiary in each of the relevant year, the said amount of income or the right to receive such income in favour of such beneficiaries would have really accrued in law every year, i.e., in each of the relevant year. Such accrued income would then be includible in the income of the concerned beneficiary, if such direct assessment under s. 166 on beneficiary is considered to be beneficial to the Revenue. The said income in the relevant years has admittedly not been shown by the individual beneficiary in their respective returns of income for the years under consideration and it has also been specifically admitted that s. 166 does not apply. This fact further strengthens the conclusion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em. It is clear from the aforesaid judgment that the beneficiaries of the appellant deferred trusts had no vested interest or right in the income of each of the relevant years but there was merely a contingent right and such contingent interest will ripen into a vested right on the expiry of 19 years period of duration of the trust. Moreover, when the corpus will be paid to the beneficiary after 19 years, it would lose the characteristic of being income but the beneficiary or in the event of his/her death, the respective legal heirs/sharers would receive the share as capital, and not as share in income of relevant years. It is, therefore, clear that income received by the appellant deferred trusts was not received for the benefit of any person in each of the relevant years under consideration. (ii) CIT vs. Gosar Family Trust The relevant extracts from the aforesaid judgment appearing at page 274 of 89 CTR (Guj) 266 : 189 ITR 19 (Guj) is reproduced hereunder: "The provisions contained in ss. 160 to 167 deal with the assessments of "representative assessee" formerly covered by ss. 40 to 43 of the Act of 1922. The provisions of these sections were simplified and recast on the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to plug loopholes for tax avoidance through the medium of private trusts, since it was felt that, even after the amendment in 1970, the provisions of s. 164 had not been fully effective in curbing the use of private trusts for avoiding proper tax liability and the entire income of a discretionary trust was made liable to tax at the maximum marginal rate of income-tax (including surcharges) applicable by the Finance Act of the relevant year to the highest slab of income in the case of an AOP. Under the provisions as they existed prior to the amendment made by the Finance (No. 2) Act, 1980, the average rate of 65% did not apply in a case where none of the beneficiaries of the trust had other income chargeable to income-tax. This special dispensation was misused in some cases by the creation of a large number of discretionary trusts, the beneficiaries of which did not have any other income chargeable to income-tax. With a view to ensuring that the provision is not misused in this manner, the said amendment Act provided that a discretionary trust would be liable to tax at the maximum marginal rate unless none of the beneficiaries had any other income chargeable to tax or was a benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of any one person. In other words, in order to treat the trust as a specific trust liable to tax at concessional or normal rate, the definite share of each beneficiary in the income of each and every year should be specified in the trust deed, while in the cases of discretionary trust liable to tax at maximum marginal rate under s. 164(1) actual receipt of income in the hands of the beneficiary for the relevant previous year is not necessary. This judgment also, therefore, does not in any manner support the appellant's contention. 16(ii). CWT vs. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust The relevant headnote appearing at page 557 of (1977) 108 ITR (SC) is reproduced hereunder: "If, on the relevant valuation date, it is not possible to say with certainty and definiteness as to who would be the beneficiaries and whether their shares would be determinate and specific, if the event on the happening of which the distribution is to take place occurred on that date the case will be governed by sub-s. (4) of s. 21." The aforesaid finding also goes against the assessee. Furthermore, the matter relates to old years much prior to asst. yr. 1980-81. Several amendmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained majority on 1st Feb., 1959, she was to get only the income from the enlarged trust funds. Now, in the relevant year of account Chandrika was still a minor and under the terms of the trust deed she had no right to the trust income nor any beneficial interest therein; she could neither receive nor enjoy the income. She did not derive any benefit whatsoever from the trust funds during her minority and even after she attained majority, she did not have any right to the trust income which arose during her minority and her only right was to enjoy the income arising from the enlarged trust funds, i.e., the original trust funds and the accumulations of trust income during her minority. Therefore, the sum of Rs. 410 was not the income of Chandrika, but was the income of the trustees and the income was impressed with a trust, namely, that it should be added to the trust corpus. The question is, does s. 16(3)(b) apply to such a case?" After a close scrutiny of the relevant provisions and facts, the Hon'ble Supreme Court gave the following findings at p. 882 of 44 ITR: "At the first sight the argument appears to be attractive and supported by the words used in the clause. On a close ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it comes across such complex and sophisticated devices of tax avoidance is adopted by the taxpayers. 19.1 It is clear from the narration of facts hereinbefore that the members of the one or few more of the families closely related to each other of Nirma Group have carried on the business of manufacturers and dealers of soap detergent powder used for washing of clothes, etc., owned by several so called main trusts. Each of these several main trusts have large number of beneficiaries enumerated in Sch. I and II of the trust deed of the respective main trusts. Hundreds of oral or written discretionary trusts, oral or written specific deferred trusts have also been created, which by different permutations and combinations have been made trustees and/or beneficiaries. The ultimate beneficiaries of such hundreds of trusts, main trust and beneficiary trusts are few individuals (may be not more than 20/25 persons) belonging to those very families. The business carried on by different taxable entities, so created, is almost same. The technical know-how for manufacture of soap detergent powder originates from the common source. The trustees of various trusts may be mostly common persons. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Int. under s. 217 . 10,73,332 - . . 41,39,995 11,67,967 Neo Trust 81-82 4,47,529 Adv. tax 2,11,000 Less: Credit . 17,123 S.A.T. 59,073 . . 4,30,406 2,70,073 Int. under s. 220(2) . 7,26,901 . . . 11,57,307 . Neo Trust 82-83 26,64,368 Adv. tax22,02,230 . . . S.A. tax 4,06,586 Int. under s. 220(2) . 43,82,773 . . . 70,47,141 26,06,816 S.K. Family Trust 81-82 15,20,112 Adv. tax 6,29,000 Int. under s. 217 . 3,49,623 S.A. tax 4,67,500 . . 18,69,735 10,96,500 . 82-83 37,96,609 Adv. tax 24,72,140 Int. under s. 217 . 4,17,626 S.A. tax 8,99,470 . . 42,14,235 33,71,610 The aforesaid figures are liable to be modified due to various factors, e.g. (a) The tax paid on declared income by the assessee includes tax on other income other than sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he manner mentioned above was put in practice on the 3rd day of June, 1980. It was on this auspicious day that the group of the five families is stated to have floated as many as 174 AOPs as mentioned in Annexure B. The common features of all these AOPs are that they were created/constituted on the same day, may be at the same time and place, by similarly worded documents, containing same or similar terms and conditions. Another common feature was that each of the AOP had the members of one particular family as its members and such members were related to each other as mentioned in cl. No. 26 of the agreement deeds and consisted of females and minors as well." At page 583 para 21 "All this shows that it was a drama of one day, one time and possibly one place being played by the members of the families in a most systematic and planned way with the oblique motive of avoiding taxes. A large number of AOPs and partnership firms were formed only to serve as a tool of a colourable scheme drawn out to play fraud on law, and to defraud the Revenue by evading the payment of due taxes. This conclusion is amply fortified by the subsequent working of these partnership firms so constituted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial in the land of its birth in W.T. Ramsay Ltd. vs. IRC (1981) 1 All ER 865, IRC vs. Burmah Oil Co. Ltd. (1982) STC 30 (sic). In India too Desai, J. of Gujarat High Court recorded a sign of departure from that principle in Wood Polymer Ltd., In re/Bengal Hotels (P) Ltd., In re (1977) 47 Comp. Cas. 597 by refusing to accord sanction to the amalgamation of companies as that would lead to avoidance of tax. The departure was completed by the Supreme Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), where it was observed that 'We think that the time has come for us to depart from the Westminster principle as emphatically as the British Courts have done' and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Ker) that the traditional rules governing the construction of taxing statutes and their application to the affairs of taxpayers may still be applicable but not to the cases involving tax avoidance or tax deferment schemes. This trend of judicial approach on the subject on hand seems to be in line with the very purpose of law as declared by Supreme Court in S.P. Gupta vs. President of India AIR 1982 SC 149 and which is that law is intended to serve a social purpose and it cannot be interpreted without taking into account the social, economic and political setting in which it is intended to operate. In view of this trend of judicial approach on vital problem of the State affecting the interest of the community at large the very approach of the learned AAC to the factual as well as legal aspect of the case stands vitiated and we disapprove of the same emphatically." The aforesaid decision has become final and SLP has also been dismissed by the Supreme Court. 19.4 (ii) Atman Trust vs. IAC The relevant paras 13 and 14 are reproduced hereunder: "13. In our view, the decision in the case of McDowell Co. Ltd. is clearly applicable in this case. The learned counsel's argument tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airly be said that there was no practical likelihood that it would not earn income and tax on it would be saved by interposing the 21 discretionary trusts between the assessee and the ultimate beneficiaries, i.e., those persons who made up the 42 AOPs. The last condition that the pre-ordained events did in fact take place has also been fulfilled, i.e., the 21 discretionary trusts are made to appear as if they are the actual beneficiaries and the income of the assessee trust has been distributed among them. 14. The assessee has sought to reduce its tax liability by creating intermediary bodies, i.e., the 21 discretionary trusts and the AOPs. In creating these bodies the assessee has not incurred any expenditure, given up any advantage or suffered any loss. This is the true picture of a device. It is the attempt to gain something for nothing which is the characteristic of a device. The intermediate bodies, i.e., the 21 discretionary trusts and the AOPs have no purpose other than reduction of tax liabilities of the assessee. The principle in McDowell's case is not confined to those cases where it has to be ascertained whose tax liability it is. It covers all cases where false appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en if the income happened to run into lacs tax on such income could be saved by creating an appropriate number of trusts on paper in such a way that the total income divided by number of such trusts would be a figure which was below taxable limit. When such a device is adopted, it could not be said that the trust which was created for carrying on business was a genuine trust. Creation of such trusts does not require any stamp paper nor do they require registration. 22. The submission of the learned Advocate General to the effect that when once it was found that the trust was created in accordance with the provisions of the Indian Trusts Act, that trust should be regarded as genuine trust and fact that number of trusts created almost simultaneously was large, would be irrelevant, cannot be accepted. All the surrounding circumstances are required to be taken into account. All tax planning would not be illegitimate. Tax planning would be regarded as legitimate when it is within the framework of the general principles of law. Colourable device cannot be regarded as part of tax planning. The point for consideration is not whether if the provisions of Indian Trusts Act are construed li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phrases like 'tax avoidance' and 'evasion'. Tax avoidance schemes were nicknamed as 'magic performance by lawyer turned magicians' by Lord Denning in Griffiths Harrison (Watford) Ltd. (1963) AC 1, Morgan vs. IRC (1963) Ch 438 and Public Trustees vs. IRC (1965) Ch 286. Lord Harman liked to describe a tax avoidance scheme as one 'which smells as a little of lamp'. Chinnappa Reddy, J., chose to define it as 'the art of dodging tax without breaking the law' in McDowell Co. Ltd. Since such schemes were evidenced and supported by certain documents and transactions, at one time the Courts were not expected to go behind such documents or transactions. When adherence to such principle caused difficulties in knowing true purport or purpose of such documents or transactions it was thought proper to say that the principle of 'not going behind the documents or transactions' be not overstated or overextended. The principle evolved was that while obliging the Court to accept documents or transactions found to be genuine as such it does not compel the Court to look at a document or transaction in blinkers isolated from any context to which it properly belongs. It was considered to be task of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the trusts had been created with the objects contemplated by ss. 4/6 of the Indian Trusts Act, 1882. The principal trust which was created with Rs. 1,000 as trust fund earned Rs. 1,66,000 through its proprietary business but the same did not go to the ultimate beneficiaries, which were human beings but was retained by beneficiary trust of the first line to be deposited in a 'reserve fund'. There was another interesting aspect of these trusts. All the trusts were having a life of 18 years each from the date of their execution. The discretionary trusts created on the 17th Oct., 1981 were beneficiaries of such other discretionary trusts which were created on 19th Oct., 1981. Then again the discretionary trusts of the first line were beneficiaries of the principal trust which was created on 20th Oct., 1981. It may be seen that, if the trusts were determined on the dates contemplated by the relevant clauses in the respective trust deeds unless the dates of determination were accelerated, the beneficiary trust of the principal trust would not have been there in existence when the date of determination fixed in the case of principal trust arrived. Similarly the beneficiaries of the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating a number of discretionary trusts by will. The Finance (No. 2) Act, 1980 amended the relevant provision so as to restrict the benefit of concessional tax treatment only to cases where a person has made only one discretionary trust. But is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is for the authorities who administer and interpret the law to examine, determine and adjudicate upon the nature of varying new and sophisticated legal devices to avoid tax and to expose such devices by bringing positive material and evidence on records so that the Tribunal and the higher Courts can validly refuse to give judicial benediction. 19.5 In view of the aforesaid decisions and discussions and keeping in view all the relevant facts and circumstances relating to the creation of these 17 oral specific deferred trusts, making them beneficiaries in the aforestated circumstances, and looking to the entire sequence of events, it cannot be denied that the predominant purpose behind the entire scheme and series of transactions was to reduce the tax liability. But we also cannot overlook and ignore the fact that g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the Tribunal in the case of main trust namely S.K. Family Trust vide order dt. November, 1994 has held that as the 51% share in the income has been allocated between these 17 deferred trusts being beneficiaries enumerated in Sch. II of the trust deed in their respective share ratio, that income cannot be subjected to tax at maximum marginal rate in the hands of the main trust. The substantive assessment made in the case of main trust i.e. S.K. Family Trust in respect of 51% share of benefit receivable on behalf of 17 deferred trust at maximum marginal rate has been cancelled and, therefore, the inclusion of share of the benefit/income from the main trusts in the hands of all these 17 appellant deferred trusts on protective basis is directed to be included as income liable to tax at maximum marginal rate on substantive basis in the hands of the appellant deferred trusts respectively for all the years under consideration. 21. Now we will consider the grounds relating to assumption of jurisdiction by the CIT, under s. 263. The learned counsel simply relied upon the judgment of Madras High Court reported in (1987) 62 CTR (Mad) 152 : (1987) 163 ITR 129 (Mad) and did not address any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 263 for asst. yr. 1980-81 and separate combined and identical order for asst. yrs. 1981-82 and 1982-83. The levy of maximum rate of tax under s. 164 has been confirmed for asst. yrs. 1981-82 and 1982-83 on the basis of elaborate reasonings given in the separate order for asst. yr. 1980-81. The order for asst. yrs. 1981-82 and 1982-83 of the CIT contains detailed discussion as to the facts and legal position regarding the aforesaid ground. At the outset, we will like to observe that in view of our finding in relation to the main ground holding that the income of all the appellant deferred trusts are liable to tax at maximum marginal rate for all the years under consideration, the aforesaid ground relating to s. 164A and validity of statement in writing under Expln. 1 to s. 160 is merely of an academic value. The Finance Act, 1981 inserted a new cl. (v) in sub-s. (1) of s. 160 to provide that a trustee appointed under an oral trust would be a "representative assessee" in respect of income derived which he receives on behalf of any person. This provision was also inserted with a view to counteracting attempts at tax avoidance through the creation of oral trusts. The said Amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in the case of S.K. Patel Family Trust income of the main trust is to be assessed in the case of the appellant deferred trusts and hence income-tax paid by the said main trust on such income should be adjusted in the cases of the appellant trusts as and when paid. In our view, such a ground is of a consequential nature. The request so made by the assessee appears to be reasonable and justified and is also fortified by the various judgments relied upon by the learned counsel for the assessee. We, therefore, direct the Assessing Officer to grant credit of taxes paid by the main trust on proportionate basis in the cases of the appellant beneficiary deferred trusts by treating those payments as having been made on the dates as and when paid or from the date of adjustment/refund vouchers which were treated as payments towards demands created against the main trust by passing orders pursuant to order under s. 263. In case the appeal effect order has already been passed pursuant to order of the Tribunal in the case of the main trust and interest under any provision of law has been allowed to the main trust on the amount refundable to main trust, such interest allowed to the main tru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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