TMI Blog1986 (7) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... Each of these trusts was represented in the 'master trust' through a trustee. It was further provided in the deed that each of the 100 beneficiary trusts would be entitled to 1 per cent of the net income. 3. The IAC (Assessment) on the basis of the above facts, proceeded to finalise the assessment order for both the years on the same date, i.e., 31-3-1983. He did so on the basis that the shares of the beneficiaries were determinate. The assessed income for the assessment year 1981-82 was Rs. 5,79,942 and for the assessment year 1982-83 it was Rs. 5,07,818. However, no tax liability was attracted in the case of the appellant as the entire income was allocated further amongst the 100 beneficiaries. 4. This matter would have rested there but for the fact that the learned Commissioner issued a notice under section 263 on 12-2-1985 as according to him there had been a misapplication of the provisions of section 164 of the Act. This according to the notice had resulted in an assessment which was not only erroneous but prejudicial to the interests of the revenue. In response to this notice the assessee did not choose to attend personally but sent a written reply dated 20-2-1985 mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the proceedings under section 263. He contended that the trust deeds of the 'subsidiary trusts' are not a part of the records of the present case. 10. According to him once the Commissioner had accepted the fact that the 'master trust' contained the names of the beneficiaries and their respective shares were defined, the matter ended. The Commissioner could not go further and had to confine himself to the deed of the 'master trust'. He was legally bound not to take other events into account. 11. It is also urged that the profit had been duly credited to the account of each beneficiary although no payments had been actually made. He drew our attention to the balance sheet of the appellant on page 385 of the paper book. 12. To a query from the Bench as to whether trustees can be beneficiaries (as in the subsidiary trusts) the learned counsel took us through the provisions of sections 3 and 9 of the Indian Trusts Act, 1882, and also referred to (i) Scott on Trusts, 1967, Third edn., (ii) Halsbury's Laws of England, Fourth edn., and (iii) Jowitt's Dictionary of English Law. (Extracts from these three are placed on the files). It was contended that there was no legal bar on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e face of it. He in fact went a step further by saying that there could be no commercial justification for doing so. He also contended that these 'subsidiary trusts' further had two AOPs each as beneficiaries. He also submitted that all the persons constituting the 'master trust', 'subsidiary trusts' and the AOPs were related to each other. According to him the appellant had by such a subterfuge succeeded in not paying any tax it all on business income of lakhs of rupees. According to him it was the substance and not the form of any transaction that had to be looked at. 17. The departmental representative also argued that the term 'beneficiary' is to be understood as in the Income-tax Act and not as defined in the Indian Trusts Act. According to him beneficiary was a person who received the income and was not somebody who was a mere figurehead. He also submitted and in fact drew our attention to pages 161 and 163 of the paper book filed by the appellant that the 'master trust' and 'subsidiary trusts' were created on the same date, i.e., 23-5-1980 and was part of an associated operation. According to him there was a new line of thinking in the Courts in England and India and stres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral in nature and dealt with the investment of funds. According to him these clauses were to be read in a reasonable and sensible manner and were for purposes of internal administration. According to him what had to be seen was whether the shares were determinate and not income. That according to the learned counsel is the scheme of the Act. He also urged that the decisions cited by the revenue were not applicable to the facts of his case. He placed further reliance on the following judgments---CIT v. Balwantrai Jethalal Vaidya [1958] 34 ITR 187 (Bom.) and CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555 (SC). 23. We have heard these appeals at great length and have also perused the voluminous paper book running into 480 pages filed before us. We have also gone through the plethora of judgments cited before us by the parties but do not propose to discuss each one in detail. We will discuss at appropriate places the judgments which are necessary for passing the order. We would, however, like to make it clear that judgments not specifically mentioned have also been considered. 24. The first objection of the learned counsel for the appellant wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable.' Fortunately for the revenue and unfortunately for the assessee, the above is no longer good law. The House of Lords in W.R. Ramsay Ltd. v. IRC [1982] AC 300, [1981] 1 All ER 865, [1981] STC 174 held that 'where the courts are asked to determine the legal effect of a transaction carried out in steps as part of a pre-arranged scheme, the Courts are entitled to compare the position after the last step with that before the first and levy tax on that basis; the Courts are not limited to examining each steps separately. Still later, the House of Lords in Furniss (Inspector of Taxes) v. Dawson Related Appeals [1984] 1 All ER 530, have held that in a pre-planned tax saving scheme no distinction is drawn for fiscal purposes because none exists in reality between (i) a series of steps which are followed through by virtue of an arrangement which falls short of a binding contract, and (ii) a like series of steps which are followed through because the participants are contractually bound to take each step seriatum." He also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been earned by a group of people, it cannot be said that this assessee should be shown any mercy or should be treated kindly simply because his ingenuity has taken care of the existing provisions of the statute by creating wheels within wheels or constructing a flight of steps in order to achieve the ultimate purpose and that the tax law should look at only the first flight of steps and not at all the flights and their destination." 27. Another point raised by the learned counsel is that the profit has been duly credited to the account of each beneficiary. (Balance sheet on page 385 of the paper book.) We, however, find that this fact does not help the assessee as it is not clear whether any amounts have been paid to the alleged 'beneficiaries'. It appears that the entire amount continues to lie with Baldevbhai Dosabhai Sons (Bombay) of which the proprietor is the 'master trust' (appellant). 28. We would also refer at this point to the statement made at the bar by the learned counsel to the effect that (1) none of the trustees in the 'master trust' are beneficiaries in the subsidiary trusts, (2) none of the beneficiaries are related to the settlor of the 'master tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements the income from the assessee-trusts does not get added anywhere to their income and escapes assessment altogether. It would be obvious to anyone that the whole exercise had been carried out with the set purposes of evading the payment of legitimate tax dues on the income of the assessee or the ultimate beneficiaries." 29. According to the Commissioner the real beneficiaries are less than 20 members of the Patel family who are beneficiaries in more than one trust. 30. We also observe from the chart filed by the appellant (from pages 251 to 327 of the paper book) that the same set of persons are the members of the various AOPs (beneficiaries in the subsidiary trusts) in one combination or the other. It may be seen that the names of the following trustees in the 'master trust' appear in most of the AOPs as members as well as the trustees in the subsidiary trusts : 1. Shri Baldevbhai Dosabhai Patel 2. Shri Bhailalbhai Baldevbhai Patel 3. Shri Pravinchandra Baldevbhai Patel 31. In view of these clear facts we are in agreement with the Commissioner on the point that the ultimate beneficiaries are a closely knit group of persons of the same family. 32. The learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the points of tax avoidance by his Lordship Justice Chinnappa Reddy. In the judgment his Lordship has traced the history of the English law on the subject and observed : "I have referred to the English cases at some length, only to show that in the very country of its birth, the principle of Westminster has been given a decent burial, and in that very country, where the phrase 'tax avoidance' had originated, the judicial attitude towards tax avoidance has changed and the smile, cynical or even affectionate though it might have been at one time, has now frozen into a deep frown. The Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it on fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it." 35. His Lordship also referred to the earlier judgments of the Supreme Court in the cases of CIT v. A. Raman Co. [1968] 67 ITR 11 and CIT v. B.M. Kharwar [1969] 72 ITR 603 and disapproved the observations on 'tax avoidance'. 36. His Lordship also observed as follows : "... The evil consequences of tax avoidance are manifold. First, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction." 37. We would now proceed to examine the present appeals in the light of the Supreme Court judgment supra. 38. The appellant, namely, the 'master trust', was created with numerous beneficiaries whose shares were determinate. The beneficiaries were kept so large (100 in number) that the divisible income did not attract any tax in their hands by resorting to the proviso to section 164(1). 39. The beneficiaries in the 'master trust' who were entitled to 1 per cent of the net income each in turn were themselves trusts which were discretionary as shares were not specified. The third step in the entire scheme were the AOPs who were beneficiaries in the 'subsidiary trusts', such AOPs consisting of individuals and HUFs whose shares once again were indeterminate. 40. The persons who were the trustees in the 'master trust' and the 'subsidiary trusts' as well as the beneficiaries being the members of the AOP were commo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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