ORDER
B.L. Chhibber, A. M.
1. The only effective ground raised in this appeal by the assessee reads under :
“The learned CIT(A) has erred in law and on facts by upholding the order of the AO refusing registration of the firm.”
2. The assessee-firm came into existence on 20th Aug., 1982, and its first accounting year ended on 30th April, 1983, relevant to the asst. yr. 1984-85. The partners of the assessee-firm were as under :
Profit & loss sharing proportion
1. ABC Trust No. 14 20%
2. ABC Trust No. 21 20%
3. Darshan Bipin Trust 15%
4. Arun Family Trust 15%
5. Shona Trust 30%
Total 100%
The return of income was filed in Survey Ward-A and the assessment was completed on 25th March, 1985, by the ITO Survey Ward A, and the registration was granted under s. 185 in an order passed under s. 143(1) of the Act. The renewal application was filed in Form No. 12 for asst. yr. 1985-86 and the assessment was completed again under s. 143(1) allowing continuation of registration under ss. 184(7) of the Act.
2.1 On 21st April, 1984, relevant to asst. yr. 1985-86 for which the accounting year ended on 30th April, 1984, the following changes took place amongst the partners :
"ABC Trust No. 14 Sold its 20% share Two S. S. Associates
with goodwill of Rs.
1,400 to
ABC Trust No. 21 Sold its 20% share Two Akash Associates
with goodwill of Rs.
1,400 to
Darshan Bipin Trust Sold its 15% share A.P. Eight & Associates
with goodwill of Rs.
1,050 to
Arun Family Trust Sold its 15% share
with goodwill of Rs.
1,050 to A.P. Three & Associates
Shona Trust Sold its 15% share
with goodwill of Rs.
2,100 to Associates 3 & Associate
The profit arising as on 30th April, 1984, was first credited to the accounts of old trust partners and on the same day respective trust partners in their own capital account debited profit amounts of the new respective AOP partners to whom they had sold their partnership shares and accordingly all the new AOPs partners were paid their respective share of profit.
The members of the above AOPs were two Investment Companies having 49% share each and two individuals having 1% share each. The shares of the members of the AOPs were specific and, therefore, maximum marginal rate was not applicable for the asst. yr. 1985-86 whereas maximum marginal rate of taxation was applicable in respect of original trusts who were partners up to asst. yr. 1985-86. Because of the amendment w.e.f. asst. yr. 1985-86 requiring taxation of business income of trusts at maximum marginal rate, all these trusts transferred their shares to the newly constituted AOPs and as a consideration each trust would be paid a sum of Rs. 1,400 or so by the AOPs. The Assessing Officer (AO) has mentioned that the AOPs received substantial income and the trust being the original partners received only nominal income from them and the game of creating the trusts and various AOPs was really mind-boggling. The capital contributed by the AOPs was again reflected by Havala entry from the trust.
A new deed of partnership was drawn on 4th May, 1984, between five AOPs who became partners for the assessment year under appeal and applied for fresh registration. The AO examined the issue whether newly constituted firm in the asst. yr. 1986-87 was genuine or not. He noted that as per new partnership deed, five AOPs had become full-fledged partners instead of enjoying their shares as purchasers of interest from the original trust partners. Since the constitution of the AOPs was not disclosed in the new partnership deed, he asked the assessee to reveal constitution of the AOPs and he found that the constitution of the AOPs was identical i.e. the members of these AOPs were two investment companies having 49% share each and two individuals having 1% share each and the AOPs were created few days before executing new partnership deed. After analysing in great detail the constitution of the AOPs and the circumstances under which the AOPs were created, the AO arrived at the following conclusion :
“From the above paragraphs itself, it would be clear that the group is creating trust and AOPs which are sham. As these avoidance methods are indulged by the group, I hold the AOPs and trusts, as subterfuges. Without going to the legality of the existence of AOPs, I hold in this case, that the firm is not constituted by genuine partners and, therefore, the registration is refused.”
In support of the above conclusion, the learned AO relied upon the judgment of the Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) and held that the trusts and AOPs were subterfuges and sham and the entire exercise was undertaken and executed for the purpose of avoidance of payment of tax in the hands of the assessee-firm which has been claimed as a registered firm comprising of the aforesaid five AOPs. He, therefore, treated the firm as URF.
3. On appeal, the learned CIT(A) confirmed the action of the AO observing as under :
“On careful consideration of the facts and circumstances of the case, I am of the view that this is a case where paper entities were created in the chamber of a tax consultant and these entities are bogus and sham having no business purpose whatsoever. They stand between the real owner of the business and the State exchequer in the matter of payment of taxes on the income earned. One would merely look at the peculiar names given to the trusts and the AOPs as also to the investment companies to come to the irresistible conclusion that the tax consultant ran out of decent names as popularly in vogue in the commercial world. The trusts and AOPs are numbered ones and the investment companies have been named as “Abundance Investments Limited”, “Affection Investments Limited”, “Alligator Investments Limited”, “Acropolis Investments Limited”, etc. Therefore, the ratio of the decision of the Supreme Court in McDowell’s case (supra) would be clearly applicable to the facts of the case. Since I hold that the alleged partners of the appellant which claims as a firm were bogus as also the trusts originally created in the asst. yr. 1984-85, it is immaterial whether some of the alleged AOP partners were assessed to tax under s. 143(1) here and there. The appellant has created so many trusts, AOPs and other entities as members of the said AOPs that it is impossible for any single human being to trace the source of these creations and the real purpose behind such creation. But when the entire thing came to the light, the AO has to take a pragmatic view in order to find out the genuineness of the claim for the status of RF. Therefore, the action of the AO to refuse to grant registration is upheld.”
4. Shri S. N. Divatia, the learned counsel for the assessee, submitted that there was no justification for the impugned action of the AO and the CIT(A) for refusing the benefit of registration to the assessee-firm. He submitted that originally the firm was constituted of five trusts (as per details given in the preceding paras). These trust were constituted by regular trust deeds placed at page 33 to 85 of the paper book. Later on the trustees of the trusts transferred their right, title and interest in the firm to the five AOPs (referred to supra) vide deed of assignment dt. 23rd April, 1984, placed at page 23 to 27 of the paper book. He took us through this deed of assignment and submitted that the authorities below have not doubted genuineness of this deed of assignment. The learned counsel further submitted that the AOPs had entered into partnership in their respective representative capacity and they could do so in view of the judgment of the Supreme Court in the case of CIT vs. Bagyalakshmi & Co. (1965) 55 ITR 660 (SC). The learned counsel for the assessee further submitted that the authorities below were not justified in applying the ratio laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra) to the facts of the present case. The learned counsel relied upon the recent judgment of the Gujarat High Court in the case of Banyan & Berry vs. CIT wherein it has been held that every legitimate and genuine act on the part of the taxpayer resulting in reduction of tax liability cannot be treated as device for avoidance of tax. Heavily relying upon the aforesaid judgment of the jurisdictional High Court, the learned counsel for the assessee submitted that the whole arrangement entered into between the trustees of the trust who originally constituted the firm and the five AOPs was genuine one and should not have been treated by the Revenue for avoidance of tax on the part of the assessee.
5. Shri K. V. Trivedi, the learned Departmental Representative, strongly supported the orders of the authorities below. He submitted that deliberate creation of the trust and AOPs and transfer of the business by the trusts to the AOPs at a nominal consideration merely through book entry was a colourable device and such a device has been disapproved by the Tribunal in the following decisions :
(1) ITO vs. Samir Builders (1987) 23 ITD 570 (Ahd)
(2) Atman Trust vs. IAC (1989) 31 ITD 315 (Ahd)
(3) Neo Trust vs. IAC (1993) 47 TTJ (Ahd) 83 : (1992) 41 ITD 412 (Ahd)
(4) ITO vs. H. C. Shah (1993) 45 TTJ (Ahd) 690 : (1992) 43 ITD 680 (Ahd)
6. We have considered the rival submissions and perusal the facts on record. We have gone through the deed of assignment and the partnership Act to which our attention was drawn by the learned counsel for the assessee. The question before us is whether the firm constituted of five AOPs is a genuine one or not. As stated above, the firm was originally constituted of five trusts and the registration was allowed to the firm up to asst. yr. 1985-86. Then suddenly the trustees of the trusts without any valid reason assigned their right, title and interest in the assessee-firm to the five AOPs. That was done on 21st April, 1984, i.e., eight days before the close of the accounting year (accounting year ended on 30th April, 1984) relevant to the asst. yr. 1985-86 for a nominal consideration ranging between Rs. 1,050 to Rs. 2,100. It is further noted that five AOPs were created a few days/months before the assignment/transfer took place. M/s Two SS Associates was formed under deed of assignment executed on 19th April, 1984. M/s Two Akash Associates was formed under a deed executed on 19th April, 1984; M/s A. P. Eight & Associates was formed under deed executed on 3rd Jan., 1984; M/s A. P Eight & Associates was formed under deed dt. 3rd Jan., 1984, and M/s Associates 3 & Associates was formed under deed dt. 5th Jan., 1984, i.e., two AOPs were created on 19th April, 1984, i.e., only ten days before assignment of the right, title and interest while two AOPs were created on 3rd Jan., 1984, and one on 5th Jan., 1984, under similar terms and conditions enumerated in their respective deeds of execution. Each AOP had identical constitution, i.e., the members of these AOPs were two investment companies having 49% share each and two individuals having 1% share each. The capital contributed by the AOPs was reflected by Havala entry from the trusts; in other words the AOPs became partners and the trusts became depositors. It is also interesting to note that no formal dissolution deed was executed for the dissolution of the original firm constituted of five trusts. However, deed of partnership was executed on 4th May, 1984, and the preamble of the deed read as under :
“Whereas a partnership was formed vide/Deed of Partnership dt. 26th Aug., 1982, to carry on the business in partnership and
Whereas the then partners were so in their representative capacity of trustees of various trusts and
Whereas the said trustees being partners in their representative capacity for the reasons known to them have conveyed, transferred and assigned their right, title and interest in the firm to the partners of First to Fifth Part hereto and
Whereas the parties hereto desired to have themselves recognised as partners in their respective representative capacity and
Whereas the parties hereto desired to approve and record the terms and conditions under which the said business of partnership is to be continued and”
A perusal of the partnership deed reveals that nowhere the names and addresses of the members of the AOPs were mentioned. Under the circumstances it is held that there was neither any dissolution of the original firm constituted of five trusts nor valid constitution of the new firm constituted of five AOPs and the whole arrangement was made by deliberate creation of trusts and AOPs and transfer of business by the trustees to the AOPs at a nominal consideration merely through book entries to by pass the amendment brought on the statute w.e.f. asst. yr. 1985-86 requiring taxation of business income of trusts at maximum marginal rate. A similar case came up before the Tribunal Ahmedabad Bench ‘C’ in the case of Samir Builders (supra) where a number of AOPs were created and the Tribunal held that this showed 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. The Tribunal further held that 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 taxes. In our view the ratio laid down by our learned colleagues in the aforesaid decision applies squarely to the facts of the case before us.
7. Coming to the case of Banyan & Berry vs. CIT (supra) heavily relied upon by the learned counsel for the assessee, it was a partnership firm and deed of partnership was executed on 16th Nov., 1982, with 16 partners. The business of the firm was of contractors, engineers. and builders. A private limited company under the name and style of Banyan and Berry Construction (P) Ltd. was incorporated on 16th April, 1983. A transfer deed was executed between the firm M/s Banyan & Berry (the assessee-firm) and M/s Banyan & Berry Construction (P) Ltd. (the company) by virtue of which it was agreed that subject to provisions contained in the agreements, the firm would transfer to the company w.e.f. 1st July, 1984, all the assets and liabilities of the firm together with the goodwill thereof with an intention that the firm’s business may be taken over as a running concern by the company w.e.f. 1st July, 1984. There was specific provision in the agreement to the effect that the benefit of additional claims relating to construction of dam at Mazam Irrigation Scheme would not stand transferred to the company. Therefore, the firm was dissolved by a dissolution deed dt. 16th Aug., 1984. Clause 7 of the dissolution deed read as follows :
“(7) The parties hereto are not undertaking any further business activity in the said firm and have no outstanding business save and except to the extent of pursuing aforementioned claims against the Government of Gujarat in respect of the contract of construction of earthen dam for Mazam Irrigation Scheme in the Sabarkantha District.”
The Revenue treated the dissolution deed as a mere device to avoid tax by treating the realisation of actionable claim as the business to be carried on by the firm by placing reliance on the decision of Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (supra). After going through the terms and conditions of the dissolution deed, the Hon’ble High Court of Gujarat held that it was “lawful, valid and bona fide dissolution” and that every legitimate and genuine act on the part of the taxpayer resulting in reduction of tax liability cannot be treated as device for avoidance of tax.
It was further held that McDowell & Co. Ltd. vs. CTO has not affected the freedom of citizen to plan his business affairs within the framework of law unless they may properly be called a subterfuge. Obviously the facts of the case before us are distinguishable. As held supra there was neither valid deed of dissolution nor bona fide deed of partnership. The trusts as well as AOPs were mere subterfuges and the entire exercise was undertaken and executed for the purpose of avoidance of payment of taxes in the hands of the assessee which has been claimed as a registered firm comprising of the aforesaid five AOPs each having two members of investment companies and two individuals.
8. It may also be stated that the Hon’ble Gujarat High Court has explained the rations laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra) and not overruled it inasmuch as the case of McDowell & Co. Ltd. still applies to actions which are outside the framework of law and tantamount to subterfuges. Accordingly the ratio laid down by the Gujarat High Court in the case of Banyan & Berry (supra) is not applicable to the facts of the case before us. In our view the whole arrangement was entered into between the different members of the families by creation of deliberate trusts and AOPs with an ulterior motive to defraud the Revenue and such mala fide practice has to be disapproved and discouraged.
9. In the light of above discussion, we concur with the finding of the authorities below and dismiss the ground raised by the assessee.
10. In the result, the appeal is dismissed.