High Court Of Gujarat
CIT vs. Sinivali Trust
Section 164(1), proviso
Asst. Year 1984-85, 1985-86
M.S. Shah & A.M. Kapadia, JJ.
IT Ref. Nos. 32, 36 to 40, 43 to 47, 67, 74 to 83 & 88 of 1997
11th February, 2004
Manish R. Bhatt, Bharat Naik, Mrs. Mauna M. Bhatt & Tanvish U. Bhatt, for the Petitioners : None, for the Respondents
M.S. SHAH, J. :
In these references at the instance of the Revenue under s. 256(1) of the IT Act, 1961 (hereinafter referred to as “the Act”), the following questions have been referred for our opinion for asst. yrs. 1984-85 and 1985-86: “1.Whether the Tribunal is right in law and on facts in directing the AO to charge the tax at normal rate instead of maximum marginal rate?
2. Whether the Tribunal is right in law and on facts in deleting the interest charged under s. 217 of the Act?” We have heard learned counsel for the Revenue Mr. Manish R. Bhatt, in IT Ref. Nos. 67, 74 to 83 and 88 of 1997, Mr. Bharat Naik in IT Ref. Nos. 40, 43 and 44 of 1997, Mrs. Mauna Bhatt in IT Ref. Nos. 32, 36, 37, 38 & 39 of 1997 and Mr. Tanvish U. Bhatt in IT Ref. Nos. 45, 46 and 47 of 1997. Though served, none appears for the respondentassessees. The facts found and the findings given by the Tribunal as set out in the common order of the Tribunal giving rise to these references are as under : 3.1 One Mr. Ashok Kumar S. Vaswani settled Rs. 5,000 and formed Sharda Trustâ as per the trust deed on 28th Jan., 1983, with the three trustees. As per the trust deed, there were 20 beneficiaries each having 5 per cent beneficial interest in the main trust. Sharda Trust carried on business during the accounting year relevant to the asst. yr. 1984-85 and from the business so carried on Sharda Trust earned profit of Rs. 3,20,000. The income so earned was declared in the asst. yr. 1984-85 and the same was assessed in the hands of Sharda Trust under s. 143(3). As the trust was specific and the shares of beneficiaries were determinate, no tax was levied in the case of Sharda Trust. The income determined was, however, allocated amongst the beneficiaries at the rate of 5 per cent thereof, which came to Rs. 16,000 in each case. 3.2 Taking the case of RD Trust as an illustrative case, the Tribunal found that RD Trust is one of the beneficiaries of Sharda Trust. As per its trust deed, there are two beneficiaries. Miss Rita and Mrs. Devi and as per the claim of the assessee, one of these two beneficiaries are further beneficiary in any other trust and none of them have income exceeding the maximum limit not liable to tax. The assessee has thus claimed that, as per the proviso to s. 164(1), the income declared in the hands of RD Trust is liable to be taxed at normal rate. According to the Revenue, these trusts have been created as a device to reduce or avoid the tax payable and the ratio of the decision of the Honâble Supreme Court in the case of McDowell & Co. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) is applicable to the facts of the case. 3.3 The Tribunal found that the Revenue has accepted Sharda Trust (main trust) as genuine while completing its assessment. The assessment so made has not been disturbed by taking remedial action. There is rather no finding given by the AO that formation of Sharda Trust is a part of the device to avoid payment of legitimate taxes. The AO has treated it as a specific trust and the income earned by it has been allocated amongst the beneficiaries as per their share ratio specified in the trust deed. This shows that the Revenue saw no colourable device so far as the formation of Sharda Trust is concerned. 3.4 The Tribunal further found that in the case of the assessees who are beneficiaries of Sharda Trust (the beneficiary-assessees themselves happen to be trusts), none of the individual beneficiaries of the beneficiary trusts is a beneficiary in any other trust and none of the beneficiary trusts or the individual beneficiaries in such beneficiary trusts had income exceeding the maximum amount not liable to tax. The Tribunal held that the view taken by the CIT(A) that the beneficiary trusts were liable to be charged at normal rate as per the proviso to s. 164(1) of the Act was the correct view and that the substantive part of s. 164(1) did not apply to the facts of the case. The Tribunal also found that the assessment on the beneficiary trusts was made on protective basis without prejudice to the decision that may be taken in the case of the main trust. In the case of main trust, the income declared has not been taxed. The assessment on the income of the beneficiaries has not been made in substantive capacity in the hands of any other entity. The income is treated to have been taxed substantively in the case of the assessee-trust. 3.5 The Tribunal, therefore, held that there was no evidence to show that the beneficiary trusts were formed as a device to avoid tax so as to fall within the ambit of the ratio of the Supreme Court in the case of McDowell & Co. (supra). 3.6 Since the Tribunal did not find any infirmity with the decision of the CIT(A) on merits, the question of charging interest under s. 217 of the Act did not survive.
4. The learned counsel for the Revenue has submitted that the case was covered by the substantive part of s. 164(1) of the Act and, therefore, maximum marginal rate was applicable. The learned counsel also submitted that the entire thing was a colourable device so as to avoid tax liability and, therefore, both the CIT(A) and the Tribunal erred in setting aside the protective assessment made by the AO against the beneficiary trust.
5. At the outset, we would like to make it clear that though the Revenue had proposed three questions for reference to this Court under s. 256(1) of the Act, the Tribunal referred only question Nos. 1 and 3 which are set out hereinabove. Question No. 2 which was proposed by the Revenue, but was not referred by the Tribunal, was as under: “2. Whether the Tribunal is right in law and on facts in not appreciating that the assesseeâs case is of a conduit pipe of trust wherein the ultimate beneficiaries are other than beneficiary mentioned in the settlement deed?” The Tribunal declined to refer to the said question on the ground that the finding by which the Tribunal rejected the Revenueâs contention that the trusts were formed as a colourable device was based on proper appreciation of facts and material on record. It appears that the Revenue did not take any steps to have the said proposed question No. 2 referred to this Court under s. 256(2) of the Act. In this view of the matter, we have not permitted the learned counsel for the Revenue to raise any contention based on the plea that the arrangement was a colourable device to avoid tax liability. Apart from the above aspect, we have also noted the finding given by the Tribunal that the AO found formation of the main trust i.e., Sharda Trust as a genuine one and since the assessment of Sharda Trust has not been disturbed in any manner and since the income of the Sharda Trust was allocated amongst the 20 beneficiaries with determinate share at 5 per cent each i.e., at Rs. 16,000 each for asst. yr. 1984-85 and since each of the beneficiary trusts allocated its income to its beneficiaries with determinate shares and each of those beneficiaries was not beneficiary in any other trust and the income of such individual beneficiary did not exceed the exemption limit, the proviso to s. 164(1) was applicable and not the substantive part of s. 164(1). The substantive part of s. 164(1) would apply where the individual shares of the beneficiaries are indeterminate or not known and the proviso is not attracted. In the facts of the instant case, the findings given by the Tribunal are that the shares of the beneficiaries of Sharda Trust were determinate at 5 per cent for each beneficiary and that the individual beneficiaries of those beneficiary trusts were covered by proviso (i) to s. 164(1) inasmuch as none of the beneficiaries had other income chargeable under the IT Act exceeding the maximum amount not chargeable to tax and none of the individual beneficiaries is a beneficiary under any other trust. In view of the aforesaid clear findings given by the Tribunal we are of the view that the Tribunal was right in directing the AO to charge the tax at normal rate instead of maximum marginal rate. We accordingly answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Revenue.
Coming to the next question about interest under s. 217 of the Act, since the same is a consequential question and since the Tribunal held in favour of the assessee and we have also answered question No. 1 in the affirmative, the question of interest under s. 217 does not survive and, therefore, the Tribunal rightly directed deletion of interest under s. 217 of the Act. We accordingly answer question No. 2 referred by the Tribunal in the affirmative i.e., in favour of the assessee and against the Revenue. All these references accordingly stand disposed of.
[Citation : 267 ITR 165]