ORDER
B. M. KOTHARI, A.M. :
All these appeals are directed against the orders under s. 263 passed by the learned CIT in the cases of 17 beneficiaries mentioned in Sch. II of the trust deed of S. K. Patel Family Trust (hereinafter referred to as the main trust for the sake of brevity) for asst. yrs. 1980-81 to 1982-83. These 17 beneficiaries are oral specific deferred family trusts (hereinafter referred to as the “deferred trusts” for short).
2. The main trust was created by one Shri Kanjibhai K. Patel by settling Rs. 1,000 on 28th March, 1979. The beneficiaries of the main trust were listed in Sch. I and Sch. II of the trust deed of the main trust. As per Sch. I, there are 17 individual beneficiaries with specific share ratio and Sch. II gives the list of 17 oral specific deferred family trust each having individual beneficiary. The distribution of the income of main trust is to be made as directed in the trust deed i.e. 49% of the income of the 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 February, 1980 and the running business of the erstwhile firm was taken over by the Main trust.
4. The main trust submitted return 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 the case of main trust. He, however, observed that income receivable for and on behalf of beneficiaries is to be taxed in the hands of the 17 individual beneficiaries mentioned in Sch. I and trustees of the 17 oral specific deferred trusts mentioned in Sch. II in their representative capacity under s. 161 of the IT Act, 1961. Accordingly, the AO originally assessed the trustees of these 17 oral specific deferred family trust as representative assessee under s. 160(1) r/w s. 161 of IT Act, 1961 for asst. yrs. 1980-81 to 1982-83 at normal rate of tax and not at the maximum marginal rate of tax. For asst. yrs. 1981-82 and 1982-83, the ITO also accepted the statement in writing signed by only one of the two trustees required to be submitted as per Expln. 1 to s. 160(1) as sufficient compliance of the relevant new provisions introduced w.e.f. 1st April, 1981 so as to obviate the levy of maximum marginal rate of tax under s. 164A on the income of oral trust. The ITO thus did not invoke the provisions of s. 164 or 164A and did not charge tax at maximum marginal rate.
5. The CIT exercised his revisional powers under s. 263 in the case of the Main trust holding that the AO has erred in law and acted to the prejudice to the Revenue in directing that 51% of the income of the main trust is to be taxed in the hands of trustees on behalf of the beneficiaries of Sch. II of the trust deed of the Main trust. This part of the assessment order was, therefore, cancelled and he was directed to levy tax on the aforesaid income at maximum marginal rate in the hands of the main trust.
6. The CIT also exercised his revisional powers under s. 263 in the cases of all these 17 Oral Deferred Specific Family Trust (beneficiaries listed in Sch. II of the trust deed of Main trust) for asst. yr. 1980-81 to asst. yr. 1982-83. The orders under s. 263 were passed on or about 19th March, 1985. In view of the elaborate reasons recorded in the order under s. 263 , the CIT came to the conclusion that the original assessment orders for all the relevant years under consideration were erroneous and prejudicial to the interest of Revenue mainly on the following grounds :
(a) That it is clear from the cl. III(b)(ii) of the trust deed of S. K. Patel Family Trust (main trust) as well as from the resolution passed by the trustees of these oral deferred trusts on or about 25th March, 1979 that the beneficiaries 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 beneficiaries. Therefore, in the year under review, there are no known beneficiary in respect of the income of the assessee trusts. Hence income of the assessee trust is not received in the year under consideration on behalf or for the benefit of any person. He, therefore, directed the AO to charge tax at maximum marginal rate under s. 164(1). It was, however, observed that such findings are given without prejudice to the action directed vide order under s. 263 in the case of the main trust by way of protective measure.
(b) In asst. yr. 1981-82, and 1982-83, the learned CIT apart from giving directions to invoke provisions of s. 164(1) and to charge tax at maximum marginal rates also gave a further finding that the statement in writing submitted under Expln. 1 to s. 160(1) signed only by one of the trustees is not valid and provisions of s. 164A will also be applicable resulting in levy of tax at maximum marginal rate of tax.
(c) The learned CIT has given elaborate reasons and has also relied upon certain judgments referred to in the order under s. 263.
7. The appeals filed by the main trust, viz., S. K. Patel Family Trust against order under s. 263 for asst. yrs. 1980-81 to 1983-84 being ITA Nos. 1135 to 1138/A/1985 has been decided by the ‘C’ Bench of the Tribunal vide order dt. November, 1994. The Tribunal held that facts are identical to that of Bharat Trust. Relying on the decision dt. 16th November, 1994 in the case of Bharat Trust (1995) 51 TTJ (Ahd) 305], the Tribunal held that income receivable for and on behalf of the beneficiary trust cannot be subjected to tax at maximum marginal rate as one unit in the hands of the main trust under s. 164(1). The order of the CIT under s. 263 in the case of the main trust was vacated and that of the Assessing Officer were restored for all the years under consideration.
8. In the present appeals, the trustees of 17 deferred trusts have challenged the orders under s. 263 passed by the CIT for all the three years under consideration. The grounds raised in the three appeals can be briefly summarised as under :
I. Jurisdiction : The invoking of provisions under s. 263 is without jurisdiction, invalid and passing of such an order in the protective manner is unwarranted and contrary to law.
II Merits : The learned CIT has erred in holding that beneficiaries having contingent interest, they cannot be 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 applicable in these cases and maximum marginal rate of tax is chargeable. He has also erred in holding that the statement in writing signed by the trustee (one of the trustees only) was not sufficient compliance of Expln. 1 to s. 160(1).
(ii) The CIT having not decided applicability of s. 164A or 164(1) the ultimate finding stand vitiated.
Additional ground : All the appellants have also raised an additional ground in all these appeals vide letter dt. 28th April, 1995 reading as under :
“In law in the facts of the appellant’s case, in view of the decision of Hon’ble Tribunal, in the case of S. K. Patel Family Trust (main trust) ITA No. 1135 to 1138/A/85, asst. yrs. 1980-81 to 1983-84, income of the said main trust is to be assessed in the case of the appellant and, hence, income-tax paid by the said main trust on such income should be adjusted in the case of the appellant as and when paid.”
9. The learned counsel Mr. K. C. Patel, appearing on behalf of all these appellants, submitted that there are divergent views of the Tribunal in the case of IAC vs. Bharat Trust (supra) and in the case of Neo Trust vs. IAC (1993) 47 TTJ (Ahd) 83 : (1992) 41 ITD 412 (Ahd). He contended that the view taken by the Tribunal in the case of the main trust namely S. K. Patel Family Trust is based on the decision of the Tribunal in the case of Bharat Trust (supra). The principles laid down in that case should be followed, which squarely supports the main grounds raised in these appeals that the trusts should be treated as specific trusts liable to tax at normal rates and not at the maximum marginal rate of tax.
9.1 The learned counsel invited our attention towards types pages 8 and 9 of the resolution dt. 25th March, 1979 of Smt. Shantaben Karsanbhai Patel oral specific deferred family trust indicating that the income of the trust should not be given to Smt. Shantaben Karsanbhai but income should be accumulated in a specific corpus in the name of Shantaben Karsanbhai Patel Specific Corpus and the beneficiary has contingent interest in the income of the year and on completion of the duration of the trust of the corpus is to be given to the beneficiary and if the beneficiary is then not alive, the trust fund/property should be divided equally amongst the legal heir or heirs of the beneficiary. He laid emphasis on the term “contingent” and “equally” used in the said resolution to highlight that 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, submitted that the question which should be put every year is whether as on the relevant date at the end of each previous year, the specific beneficiary is alive ? If the answer is yes, it should be held that the sole beneficiary had 100% interest in the income of the trust in the relevant year. However, such income is to be accumulated for the benefit of such sold beneficiary and cannot be paid to the said beneficiary until completion of the duration of the period of trust. At this stage, the judgment Nirmala Bala Sarkar vs. CIT reported in (1969) 74 ITR 268 (Cal) was brought to the notice of the learned lawyer and he submitted that the said judgment has also been referred in the judgment of Hon’ble Gujarat High Court in the case of Gosar Family Trust (supra).
9.4 The learned Lawyer then proceeded to the next point relating to validity of statement in writing submitted on behalf of appellant oral deferred trusts in accordance with Expln. 1 to s.160(1) for asst. yr. 1981-82 and 1982-83. It was contended that the statement in writing signed by the trustee (signed by only one of the trustees and not by all of them) was a valid declaration. The AO was perfectly justified in accepting the same as in conformity with the requirement of the said section. The CIT had no power to distrub or cancel such acceptance by the AO. Even if such a declaration is considered to be defective, the learned counsel submitted that such a defect could be rectified or cured, if any opportunity would have been allowed to the appellants. He also placed reliance on the following judgments :
(i) M. L. Srinivasa Setty & Sons vs. State of Karnataka (1991) 99 CTR (Kar) 77 : (1992) 193 ITR 548 (Kar)
(ii) CIT vs. United Commercial Traders 1978 CTR (All) 216 : (1978) 112 ITR 953 (All)
(iii) CIT vs. R. Dwarkadas & Co. (1971) 80 ITR 283 (Bom) at pg. 289.
On the strength of aforesaid facts and judgments, he submitted that provisions of s. 164A are not at all applicable in the cases of the appellants.
9.5 The learned counsel for the assessee did not seriously contest the point relating to assumption of jurisdiction under s. 263 by the CIT except stating that he would like to rely upon the decision of the Hon’ble Madras High Court in the case of Venkatakrishna Rice Co. vs. CIT (1987) 62 CTR (Mad) 152 : (1987) 163 ITR 129 (Mad).
9.6 The learned counsel for the appellants then submitted his arguments to 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 appellants deferred trusts should be treated as specific trusts and tax should be charged at normal rates instead of applying maximum rate as per directions of the CIT, and credit for taxes paid by the main trust should be allowed.
No other arguments were advanced by the learned counsel on any other aspects or in relation to general grounds etc.
10. The learned Sr. Departmental Representative relied upon the elaborate order passed by the CIT under s. 263. As regards the finding given by the CIT about treating these appellant trusts as discretionary trusts liable to tax at maximum marginal rate of tax, he placed reliance on decision of the Ahmedabad Bench in the case of Neo Trust (supra) and judgment reported in (1969) 74 ITR 268 (Cal) (supra).
10.1 The learned Departmental Representative submitted that a close scrutiny of the decision of the Tribunal in the case of Bharat Trust (supra) or in the case of main trust based on Bharat Trust (supra) reveals that it does not decide the point in issue relating to appellant beneficiaries deferred trusts and also does not in any manner support the contention of the appellant assessees in the present cases. He invited our attention to para 12(c) and 12(d) at page 30 and 31 of the order in the case of Bharat Trust and submitted that the observations made in para 12(d) at page 31 of 51 TTJ in relation to similar 8 specific deferred family trusts in substance go against the present appellants. He also invited our attention towards para 13 to 13.2 of the decision in the case of Neo Trust (supra), which according to him fully support the view taken by the CIT in the order under s. 263.
10.2 The learned Sr. Departmental Representative submitted that the CIT has passed a very detailed and well reasoned order and has also referred to various judgments in the orders under s. 263 with reference to invalidity of statement in writing signed by only one of the trustees and has rightly arrived at the conclusion that such a statement in writing is not valid. The learned Sr. Departmental Representative vehemently argued that the appellant trusts are discretionary trusts as there was no specific beneficiary in the income of the relevant years. The income of the Main trust to the extent of share allocable to each of those 17 oral specific deferred trusts of Sch. II (appellants) is chargeable to tax at maximum marginal rate in the hands of these deferred trusts respectively 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 amount of interest charged under s. 220 and other relevant provisions of law. The learned Departmental Representative also submitted that such a ground does not arise out of the orders of the CIT under s. 263. He thus submitted that such an additional ground cannot therefore be entertained and the same also cannot be accepted on merits.
10.4 The learned Sr. Departmental Representative also submitted that creation of large numbers of such deferred trusts is a colourable device adopted by these assessees and the principles laid down in the case of Mcdowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) is fully applicable in cases of chain of trusts so created with the sole object of tax avoidance.
11. We have carefully considered the submissions made by the learned representatives of the parties and have also gone through the orders of the learned Departmental authorities. We have also carefully gone through all the decisions cited by the learned representatives of the parties.
11.1 We would first like to examine the decision in the case of Bharat Trust (supra) on which strong reliance has been placed by the learned counsel for the assessees. The Hon’ble Judicial Member and Hon’ble Accountant Member constituting the said Bench have passed separate orders but concurring with each other as regard the ultimate conclusions.
(i) The brief facts of Bharat Trust are as follows :
One Shri Ranchhood Virchand Patel created this trust by settling an amount of Rs. 1000 as per trust deed executed on 31st December, 1979 with the following three trustees :
(i) Shri Karsanbhai K. Patel
(ii) Shri Khodidas V. Patel
(iii) Shri Joitaram K. Patel
for the benefit of two sets of beneficiaries enumerated in Sch. I and II to the said trust deed.
(ii) The learned Accountant Member has briefly narrated the facts relating different beneficiaries and other relevant facts in para 2 to 11 of the order passed by him, which are reproduced hereunder for the sake of convenience and ready perusal (51 TTJ at p. 319 to 321) :
“2. Sch. I and Sch. II to the trust deed have been extracted in the order of the J.M. It would be seen therefrom that beneficiaries under the trust deed fall into four categories :
(i) Beneficiaries from Srl. No. 1 to 7 named in Sch. I are individuals/HUF having specified beneficial share in the income of the trust totalling to 28.5%.
(ii) Beneficiaries from Srl. No. 8 to 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 December, 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. Family Trust
9. J. Patel & K. Patel Oral Disc. Family Trust
10. S. Patel & K. Patel Oral Disc. Family Trust
11. Jayesh Karsanbhai & Shantaben Oral Disc. Family Trust
12. Sanjay, Karsanbhai & Shantaben Oral Disc. Family Trust
There are three individual beneficiaries in each trust, Shri Karsanbhai K. Patel is a common beneficiary in all the trusts with two minors of the family in different combinations. Further, each trust has three trustees and the trustees in each trust included Shri Karsanbhai K. Patel and/or his wife Smt. Shantaben.
4. On 28th December, 1979, one Shri Pramodbhai K. Patel created six oral discretionary family trusts by settling Rs. 500 in each. Shri Karsanbhai K. Patel, his wife Smt. Shantaben and Shri Joitaram K. Patel were made common trustees in these trusts. Two of the oral discretionary family trusts out of 12 trusts created on 9th December, 1979 were made beneficiaries in each of the trusts created on 28th December, 1979. These fall in category 2 above.
5. On 28th December, 1979 two oral specific family trusts were formed by Shri Pramodbhai K. Patel be settling Rs. 500, 250 in each of them after the names of Joitram K. Patel and Mohanlal Baraiya and their three family members were made beneficiaries in each of the respective trusts. Further, each trust has three trustees from respective families. These trusts are also made beneficiaries in the assessee trust and the same fall in category 3 above.
6. Again on 28th December, 1979, Shri Pramodbhai K. Patel created 7 oral specific deferred family trusts by settling Rs. 100, Rs. 500 in each. Shri Jagdishchandra also created one more oral specific deferred family trust on 28th December, 1979 by settling Rs. 100. Thus in all 8 oral specific deferred family trusts were created on 28th December, 1979. Seven of these oral specific deferred family trusts were named after each of the individual beneficiaries of the assessee trust and they are also made individual beneficiaries in each trust. 8th trust was again named after Shantaben and its beneficiary was her minor daughter. Each such trust had three trustees from Karsanbhai, Joitaram and Kanjibhai and their family members in different combinations. These oral specific deferred family trusts are also beneficiaries of the assessee trust among others and they fall in category 4 above.
7. It is pointed out here that J. K. Patel Oral Specific Family Trust figure 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 December, 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 Janruary, 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 Chemical Works. The firm was dissolved on 31st Janruary, 1980 and the assessee trust took over the business of the firm as a sole proprietor w.e.f. 1st February, 1980. The assessee trust has thus disclosed share income for the month January and proprietary business income for the period from 1st February, 1980 to 31st December, 1980 totalling to Rs. 25,16,500. The income has been allocated among the beneficiaries as per share ratio provided in Sch. I and II of the trust deed and accordingly income of the trust has been shown as nil.
9. We have been informed that returns have been filed in the cases of beneficiaries declaring income as per their share ratio and the tax was paid at appropriate rate in the hands of beneficiaries totalling to Rs. 10.85 lakhs. It is also understood that the income allocated to two oral specific family trusts has been distributed to real beneficiaries and the tax has been paid in the hands of ultimate beneficiaries at appropriate rate of tax.
10. The Revenue has, however, assessed the individual beneficiaries at normal rate and the beneficiary trusts at the maximum marginal rate on protective basis. The assessments so made in the cases of beneficiaries are also under dispute.
11. The Revenue has not disputed genuineness and validity of the assessee trust. The AO has, however, brought out that formation of various beneficiary discretionary trusts is part of scheme of tax planning to bring the income of beneficiary trusts formed on 28th December, 1979 within the purview of proviso (i) to s. 164(1) of the IT Act. It has further been pointed out that trustees of these oral trusts have not distributed the income in their discretion to their so-called beneficiary trusts having no other source of income and as such it is claimed that they are not chargeable to the maximum marginal rate of tax as per proviso (i) to s. 164 (1). ”
(iii) The Hon’ble Judicial Member summed up the conclusions in para-30 of the order passed by him as under 51 TTJ at p. 318 :-
“30. Our conclusions from the above discussions can be summed up in the following manner :
(i) The trusts at Sr. Nos. 8 to 15 of Sch. I and all the trusts mentioned in Sch. II of the trust deed were not beneficiaries but the trustees in their representative capacities as individual persons were the beneficiaries.
(ii) All the beneficiaries of Schs. I and II were known and their shares were fixed, ascertained 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 December, 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 December, 1979. Each of these two oral discretionary trusts formed on 9th December, 1979 has three individual beneficiaries. There are thus 12 individuals who have been grouped in combinations of three each. Out of these 10 individuals, 2 are major and the remaining 8 are minors. Both major beneficiaries Shri Karsanbhai and his wife Smt. Shantaben are among the individual beneficiaries of the assessee trust and Shri Karsanbhai is also one of the trustees of the assessee trust. The substance of the trust deed would show that the settlor intended benefit to pass to the said 10 ultimate individual beneficiaries through the said 6 oral discretionary trusts of 28th December, 1979 and then 12 discretionary trusts of 9th December, 1979. The income receivable for and on behalf of the said 6 oral discretionary trusts was allocated to them as per the share ratio provided in the trust deed. The said 6 oral discretionary trusts did not further distribute the income to the beneficiaries so as to reach the ultimate individual beneficiaries. Those 6 oral discretionary trusts, however, filed returns through their trustees and paid tax at the appropriate rate availing the benefit of proviso (i) to s. 164(1) instead of paying the tax at maximum marginal rate under s. 164(1). The said 12 oral discretionary trusts formed on 9th December, 1979 have no other income to benefit the ultimate 10 individual beneficiaries. It so appears that the very object of forming the said 12 oral discretionary trusts on 9th December, 1979 was to enable the said 6 oral discretionary trusts to pay tax at appropriate rate instead of maximum marginal rate by availing concession as per proviso (i) to s. 164(1) which provides that in case where none of the beneficiaries has any other income chargeable under the Act exceeding the maximum amount not chargeable to tax in the case of an AOP or is a beneficiary under any other trust, tax shall be charged on the relevant income or part of relevant income as if it were the total income of an AOP. Otherwise, the formation of said 12 oral discretionary trust had no other object or purpose to serve. The arrangement so made was thus sham or make-believe and not real and genuine for bona fide purpose. Such device was adopted only to reduce incidence of tax in the hands of said 6 oral discretionary trusts, i.e. the beneficiaries of the assessee-trust. Keeping these facts in view, the AO taxed 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 trust 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. The income receivable for and on behalf or for the benefit of beneficiaries as per the share ratio provided in Sch. II to the trust deed has been allocated to the beneficiary trusts but the beneficiary trusts have not passed on the income to the individual beneficiaries in view of the stipulation made in the trust deed. Though the trust deed in Schedule II shows the beneficiaries as specific trusts, but by way of restrictions imposed by the settlor, the beneficiary trusts by their very nature and scope are not short of discretionary trusts. Having regard to such consideration, the AO has taxed the income receivable for and on behalf of such trusts at the maximum marginal rate. Here also the assessments have been made directly on the beneficiary trusts.
13. It would be seen from the facts given that the assessee-trust has been accepted as genuine and valid trust and the income receivable for and on behalf of for the benefit of beneficiaries has been allocated to various categories of beneficiaries in the share ratio specified in the trust deed at the close of the year. The AO has assessed the income so allocated directly in the hands of beneficiaries and levied tax at appropriate rate. The assessments so made are in conformity with the provisions of s. 166 and recent decision of the Hon’ble Supreme Court in the case of CIT vs. Smt. Kamalini Khatau (1994) 119 CTR (SC) 169.
13.2 As regards the beneficiaries discussed in para 12(c) and 12(d), it is evident that these are oral trusts and fall in the category of discretionary trusts. It is for consideration whether the income receivable for and on behalf of such discretionary trusts should be assessed as one unit in the hands of the assessee-trust at maximum marginal rate under s. 164(1) of the IT Act ? It is evident from the trust deed that beneficiaries including the discretionary trusts are known and their share in the income of the assessee-trust are specific and determinate. The assessee-trust, therefore, by all standards in specific trust and simply because certain beneficiaries are discretionary trusts, that does not by itself make the assessee-trust as discretionary trust liable to tax under s. 164(1) of the IT Act. The beneficiary discretionary trusts are, however, liable to tax at the appropriate rate on the income receivable and allocated to them in the specified share ratio. However, the income so 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 trusts, including the beneficial income from this trust through the trustee be taxed and charged at maximum marginal rate under s. 164(1) of the Act. But it will be highly unjust or rather preposterous to subject this trust to suffer tax at maximum marginal rate under s. 164(1) of the Act, for the simple reason that a few trusts (beneficiaries) are discretionary trusts.”
The aforesaid facts and findings given in the case of Bharat Trust (supra) clearly reveals that the Tribunal in that case has not given any findings or decision in relation to leviability of tax at maximum marginal rate or at normal rate in the cases of the beneficiaries oral trusts of Sch. I nor in relation to beneficiaries deferred trusts enumerated in Sch. II. The said decision does not in any manner support the contention of the appellant deferred trusts as to whether they should be regarded as discretionary trusts or specific trusts and whether the tax should be charged at maximum marginal rate or at ordinary normal rate. On the other hand, some observations made by the Accountant Member in para-12(c) and 12(d) as part of his findings alongwith observations made by the AO indicates his serious concern about such tax avoidance schemes and devices adopted by the assessees.
11.2 The assessee’s counsel also relied upon the decision of Bombay ‘D’ Bench of Tribunal dt. 30th September, 1993 in the case of K. Kachradas Patel Specific Family Trust and Patel Specific Family Trust in ITA Nos. 3168 to 3170/Bom/1987 and ITA Nos. 1773 to 1775/Ahd/1987 and ITA Nos. 2751 to 2753/Bom/1987 in the case of Patel Specific Family Trust. The aforesaid decision of Bombay Tribunal has been referred and relied upon in the case of Bharat Trust in para-11 and 28 of the order passed by Hon’ble Judicial Member at pages 312 and 317 of 51 TTJ. These trusts also relate to persons and family members of Nirma Group as trustees and beneficiaries.
The facts relating to creation of these trusts have been enumerated in para 2 and in para 7 at page 5 of the above referred order dt. 30th September, 1993 passed by the Bombay Tribunal. These two trusts were created by one shri Siddarthbhai Shah. Sch. I of the trust deed of those trusts gives the list of one set of beneficiaries, persons enumerated at S. Nos. 1 to 10 are individuals, at ss. Nos. 11 to 45 are BOIs with 3-4 persons of the same few families closely related to each other and Sr. Nos. 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 Representative cited before the Bombay Tribunal only the two decisions referred to at page 20 of the said order (i) in the case of B.D. Fibre Enterprises vs. IAC (1986) 19 ITD 427 (Bom) and Atman Trust vs. IAC (1989) 31 ITD 315 (Ahd). However, an earlier decision dt. 24th January, 1992 of ITAT, Ahmedabad Bench ‘B’ in the case of Neo Trust vs. IAC (supra) of the same Nirma Group based on almost identical facts decided in favour of the Revenue was not even cited by the Departmental Representative before the Bombay Bench, which decided the aforesaid appeals on 30th September, 1993. The absence of reference of Tribunal’s decision in Neo Trust’s case while dealing with the main controversy relating to levy of maximum marginal rate of tax in relation to income attributable to various beneficiaries oral specific deferred trust in the Bombay Bench’s decision is further curious particularly in view of the fact that in para 39 at page 36 the Tribunal’s decision in Neo Trust has been relied upon by the assessee in relation to grant of deduction in respect of interest expenditure.
11.3 The facts and decision in Neo Trust’s case (supra)
The facts have been given in paras 4 to 6 of 41 ITD at pages 417 and 418, which are reproduced hereunder :
(4) The assessee trust (Neo Trust) was created by trust deed dt. 31st December, 1979. Some of the beneficiaries of the assessee trust are mentioned in Sch. I of the deed while other beneficiaries are mentioned in Sch. II of the trust deed. The beneficiaries mentioned in Sch. I of the trust deed can be divided in three categories. The first category is that of individuals. The second category is that of oral discretionary trusts. The third category is that of oral specific trust.
4.1 As far as first category is concerned, there are seven individuals. Six of these individuals were partners in firm of Neo Detergent. The seventh individual is a minor who had been admitted to the benefit of said partnership. As far as oral discretionary trusts are concerned they are oral trusts created on or about 28th December, 1979 mentioned above. Each of these trusts, as already stated, has two beneficiaries and those two beneficiaries are by themselves oral discretionary trusts and beneficiaries of the subsequently mentioned oral trusts are three individuals. As far as third category is concerned, it consists one oral specific trust known as V. G. Zala Oral Specific Family Trust of 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 the said order in 41 ITD at pages 422 to 424, which are also reproduced hereunder :
“13. We shall now deal with that part of income which, according to the assessee trust, has been received by it for and on behalf and for the benefit of seven beneficiaries mentioned in Second Schedule of the trust deed. As already stated, these seven beneficiaries are oral specific deferred trusts. The beneficiaries of these seven oral specific deferred trusts are (1) Bhikhiben, (ii) Jothiben, (iii) Virchanddas, (iv) Pramodkumar, (v) Meenaben, (vi) Minor Babulal and (vii) Udaykumar. These seven persons are seven individual beneficiaries mentioned at Sr. Nos. 1 to 7 in the First Schedule. In the First Schedule they figure as individual beneficiaries while in the Second Schedule they figure as beneficiaries of oral specific family trusts and oral specific family trusts are shown as beneficiaries of the assessee-trust.
13.1 The clause in the trust deed relating to these beneficiaries is very important. That clause is cl. III(b)(ii) which is as follows :
`It is hereby agreed and declared between the parties to this deed of trust that the trustees shall stand possessed of the 28.5% balance of the income which shall be divided and receivable for and on behalf of and for the benefit of the trusts mentioned as beneficiaries in the Sch. II herein attached to this trust deed, and shall be divided as per shares specified against each of the said beneficiaries mentioned herein in the said Sch. II herein attached, but it is specifically made known that the beneficiaries of the said trusts shall have no right, title or interest either vested or contingent in the said income up to the period mentioned in this clause and, therefore, it is specifically provided and made known that the said income which is receivable for and on behalf of the said trusts which are beneficiaries, is to be accumulated and not to be paid to the each of the said beneficiaries of the said trusts and shall be forming part of the corpus of and for and on behalf of each of the said trusts upto the period of 19 years from the date of this presents.’
From the above clause it is clear that the beneficiaries of these oral specific deferred trusts have no right, title or interest either vested or contingent in the income of the assessee-trust upto the period of 19 years and that the said income was liable to be accumulated 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 specific clause has been inserted in the trust deed of the assessee-trust to the effect that the beneficiaries of those oral specific deferred trusts would have not right, title or interest, either vested or contingent in said income and that the said income would be accumulated and would form part of the corpus of those trusts. The real beneficiaries in Sch. II are the beneficiaries of the oral specific deferred trusts. The trusts of oral specific deferred trusts are not the real beneficiaries. Since the real beneficiaries have not right, title or interest in respect of the said income, it cannot be said that the said income was receivable for and on behalf and for the benefit of any person in the relevant accounting year. Consequently, the tax at maximum marginal rate was liable to charged under s. 164(1) of the Act in respect of that income.
13.2 In this connection much stress was laid by the learned counsel for the assessee on the decision of the Gujarat High Court in the case of Gosar Family Trust (supra). We find that the said decision is of no assistance to the assessee-trust. In that decision the main question was whether expression “beneficiaries” in cl. I of proviso to s. 164(1) refers to only income beneficiaries or whether it refers to corpus beneficiaries also. The High Court has held that said clause refers to corpus beneficiaries also. This point is not relevant as far as oral specific deferred trusts of Sch. II are concerned. The provisions in the trust deed with which the High Court in said case was concerned were entirely different from the provisions of the trust deed with which we are concerned in this appeal. As already stated in the trust deed with which we are concerned, there is a specific clause which says that the beneficiaries of the oral specific deferred trusts have no right, title or interest either vested or contingent in the income of the assessee-trust for a period of 19 years and that the said income would form part of the corpus of the trust. Consequently that decision does not in any way support the plea of the assessee.
13.3 It was submitted on behalf of the assessee that since the beneficiaries of the assessee trust have been assessed in 1983, the learned CIT could not have modified the assessment order in respect of the assessee trust. Reliance was placed on the decision of the Bombay High Court in the case of CIT vs. Smt. 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 trust and not the beneficiaries as has been laid down by the Full Bench of the Gujarat High Court in the case of CIT vs. Smt. Kamalini Khatau 1978 CTR (Guj) 327 (FB) : (1978) 112 ITR 652 (Guj) (FB). Consequently the fact that oral discretionary trusts mentioned in Sch. I had offered the amount in question for taxation in their individual assessments would not be a legal bar for exercise of powers by the CIT under s. 263 in respect of the assessee-trust for applying the provisions of s. 164 in respect of the income relating to those oral discretionary trusts when the facts on record justified that action. Besides, we find that the CIT has initiated revision proceedings under s. 263 in the cases of those oral discretionary trusts and the CIT has modified the assessment orders by directing that the assessments should be on protective basis and that the assessment of the assessee-trust as finally made in pursuance of the directions under s. 263 should be taken into account in those assessments. Thus this is not a case of double taxation of the same income and there is no legal infirmity in the order passed by the learned CIT.”
12. A perusal of the trust deed of the two main trusts, namely, Neo Trust and Bharat Trust clearly reveals that almost identical trust deeds and similar facts existed in both these cases. In fact both these trusts were created on the same day, i.e., on 31st December, 1979 with identically worded trust deeds. The Tribunal’s ‘C’ Bench in the case of Bharat Trust (supra) in 51 TTJ 305 at page 312 in para 12 of the order of the Judicial Member, the earlier decisions of the Tribunal have been referred with following observations :
“From a careful reading of the assessment order one thing which emerges very transparently is that it has never been the case of the AO that the trust has been created by the settlor as a ruse, device or subterfuge with a view to evading payment of legitimate taxes under the provisions of the IT Act, 1961 in respect of the income earned, in the guise of a trust. Nor is it the case of the AO that the creation of the trust was sham, bogus or invalid or that the trust deed was a mere make believe document and that the appellant trust is not a real trust but there is someone really behind the veil or smoke screen and, therefore, truth should be brought to surface, the veil should be pierced and the smoke screen should be smashed. In 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 (supra) :
“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 be regarded to have been genuinely created for lawful purposes. In view of this finding recorded by the learned CIT we have to proceeded in this appeal on the basis that the assessee-trust was genuine. Hence, the only point that requires decision is whether the learned CIT was right in law in holding that the maximum marginal rate was liable to be applied regarding the income which came to the shares of various trusts mentioned in Sch. I and II of the trust deed.”
From the foregoing quoted extracts, it appears that true and correct facts were not placed before the Tribunal while distinguishing the Neo Trust’s decision (supra) in the case of Bharat Trust (supra).
12.1 Another noteworthy point in the decision of Bharat Trust is about the reliance placed on the recent judgment of Hon’ble Supreme Court in CIT vs. Kamalini Khatau (1994) 119 CTR (SC) 169 case in para 13 at page 323 of 51 TTJ of the order. In our humble opinion, a further elucidation in this regard may be imperative. The Hon’ble Supreme Court overruled the judgment of Gujarat High Court and decided the issue in favour of the Revenue. It will be relevant to reproduce the relevant extracts from the judgment of the Hon’ble Supreme Court in the case of CIT vs. Kamalini Khatau (supra) :
” Sec. 164 stated that where any income in respect of which a trustee is liable as representative assessee is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or part thereof is receivable are indeterminate or unknown, tax shall be charged as if such income were the total income of an AOP or where such income or part thereof is actually received by a beneficiary, then at the rate applicable to the total income of the beneficiary if such course benefits to Revenue. Put differently s. 164 states that tax shall be levied upon the income of a discretionary trust as if it were the total income of an AOP, except that if it or part of it is actually received by a beneficiary it or that part of it becomes chargeable to tax at the rate applicable to the total income of the beneficiary if that course is beneficial to the Revenue.”
From the foregoing discussions, it is abundantly clear that the decision in the case of Bharat Trust (supra) does not deal with the main controversy requiring our consideration in the present appeals of beneficiaries 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 beneficiaries in the Sch. II herein attached to this trust deed, and shall be divided as per share specified against each of the said beneficiaries mentioned herein in the said Sch. II herein attached, but it is specifically made known that the beneficiaries of the said trusts shall have not right, title or interest either vested or contingent in the said income upto the period mentioned in this clause and, therefore, it is specifically provided and made known that the said income which is receivable for and on behalf of the said trusts which are beneficiaries, is to be accumulated and not to be paid to the each of the said beneficiaries of the said trust and shall be forming part of the corpus of and for and on behalf of each of the said beneficiaries upto the period of 19 years from the date of this present.
It is hereby specifically provided that if any of the beneficiaries mentioned in the Sch. I hereinafter attached in this present dies and income after the death of the said beneficiary shall be given in equal share to the legal heirs of the said deceased beneficiary.”
13.2 The following extracts from the resolution dt. 25th March, 1979 of Smt. Shantaben Karsanbhai Patel Oral Specific Deferred Family Trust (one of the appellant trusts) are also noteworthy and are, therefore, reproduced hereunder :
(1) At page 1 of the said Resolution :
In the event of the death of the above mentioned beneficiary the legal heirs who are alive to be considered as beneficiary or beneficiaries for that accounting year. The grandsons and granddaughters of the present beneficiary are not to be considered as beneficiaries.
Resolution No. 1 at pages 4 and 5 of the said Resolution :
Shri Joitaram Kachrabhai Patel handed over Rs. 50 (Rupees fifty) to trustees of Smt. Shantaben Karsanbhai Patel Oral Specific Deferred Family Trust which amount was accepted by the trustees at the time of settlement and due to this it is resolved that Shri Joitaram Kachrabhai Patel paid Rs. 50 (Rupees fifty only) which was accepted by the trustees of Smt. Shantaben Karsanbhai Patel Oral Specific Deferred Family Trust and the said trust came into existence on 28th March, 1979 with said fund and the same is noted. It is further resolved on the oral declaration of settlor Shri Joitaram Kachrabhai Patel that the duration of the trust will be for 18 years or if beneficiary is minor then on attaining majority 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 trust, on such occasion the trust, if dissolved, corpus is to be given to the beneficiary and if the beneficiary is not alive, the trust fund/trust property should be divided equally amongst the legal heir or heirs of the beneficiary.”
Resolution No. 8 at pages 15 and 16 of the said Resolution :
The management expenses, interest, brokerage, tax paid to Government or non-Government, gift-tax, municipal tax, property tax, income-tax, wealth-tax and all other taxes are to be deducted from the income/expenditure and thereafter, the net income may not be given to the beneficiary or the legal heirs but the trustees have to accumulate every year and the same will be deposited in trust fund account. In case, same shows loss such loss, as resolved earlier, should be set off to the subsequent years. After setting off, the net income should be deposited in trust fund.”
It was submitted by the learned counsel for the assessee that the aforesaid terms and resolutions are almost identical in the cases of all other deferred trusts enumerated in Sch. II of trust deed of main trust.
13.3 The trustees of Shantaben K. P. Patel Oral Specific Deferred Family Trust in their reply to show cause notice submitted in March, 1985 (pages 10 to 16 of the paper book) to the CIT, inter alia, submitted as under :
“It is further submitted that the fact that beneficiaries of the assessee trust had no right to actually receive and appropriate to himself or herself which the assessee trust receives as beneficiary of S. K. Patel Family Trust for a period of 19 years is not relevant or germane.”
13.4 In para 2 at page 2 of the order under s. 263 it has, inter alia, been mentioned that in a note appended to the return when it is stated that as per resolution and minutes of the meeting of the trust held on 25th March, 1979 its income is to be accumulated as corpus of the trust for a period of 19 years. It was further claimed that though the share of the beneficiaries were specific, known and ascertainable, income was assessable in the hands of the trustees under s. 160(1) r/w s. 161 of the IT Act, 1961 and s. 166 was not applicable as income did not accrue or arise to the specific beneficiary
13.5 It is, therefore, clear from the aforesaid terms, clauses, letters and other documents that the ultimate individual beneficiary of such deferred trusts had no vested right, interest or title over the income of the relevant years 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 contingency namely that the beneficiary should be alive at that point of time after 19 years, when the duration of the period of appellant deferred trusts is going to come to an end. Such terms, conditions and clauses clearly defers both the accrual of right to receive as well as the receipt of the corpus fund for a period of 19 years. The individual beneficiary or in the event of his/her premature death, his/her legal heirs also thus had no accrual right to receive the income of the assessee trust in the relevant year/s but merely had a chance to receive the corpus/share in the corpus of the trust fund on the expiry of 19 years and that too on the happening or non-happening of the contingency, i.e., their remaining alive at that point of time on the completion of the period of duration or the prescribed period of accumulation.
14. Let us now examine the relevant provisions of IT Act in relation to tax on income of discretionary trusts. Sec. 164(1) and the proviso (i) and (ii) of s. 164 are reproduced hereunder :
“164(1) : Subject to the provisions of sub-ss. (2) and (3), where any income in respect of which the persons mentioned in cls. (ii) and (iv) of sub-s. (1) of s. 160 are liable as representative assessees or any part thereof is not specifically receivable on behalf or for the benefit of any one person or where the individual shares of the persons on whose behalf or for whose benefit such income or such part of the income and such persons being hereafter in this section referred to as “relevant income”, “part of relevant income” and “beneficiaries”, respectively, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate :
Provided that in a case where –
(i) none of the beneficiaries has any other income chargeable under this Act exceeding the maximum amount not chargeable to tax in the case of an (AOP) or is a beneficiary under any other trust; or
(ii) the relevant income or part of relevant income is receivable under (a trust declared by any person by will and such trust is the only trust so declared by him)”
” Sec. 160(1) : For the purposes of this Act, “representative assessee” means – …
(iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf deed which is valid under the Mussalman Waks 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 receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed;
(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons or whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed.”
14.1 The aforesaid Expln. to s. 164 was inserted by the Finance (No. 2) Act, 1980 w.e.f. 1st April, 1980. The scope and meaning of various amendments made by the aforesaid amending Act have been explained in Circular No. 281 dt. 22nd September, 1980 [printed at (1981) 131 ITR (St) 4]. As a result of the insertion of above Explanation, trust under which a discretion is given to the trustees to decide the allocation of income every year or a right is given to the beneficiary to exercise the option to receive the income or not each year will all be regarded as discretionary trusts and assessed accordingly. The prohibition of distribution or payment of income in each year or deferment of payment of income to beneficiary for 19 years or prohibiting payment of income in each of the relevant year to the beneficiary will clearly bring such a trust within the category of “discretionary trust” liable to tax at maximum marginal rate of tax.
14.2 The appellant himself has contended in the note appended to the returns of income that its income is to be accumulated as corpus of the trust for a period of 19 years and its income was assessable in the hands of the trustees under s. 160(1) and that s. 166 is not applicable as income did not accrue or arise to the specific beneficiary. The provisions of s. 166 reads as under :
“166. Nothing in the foregoing sections in this chapter shall prevent either the direct assessment of the person on whose behalf or for whose benefit income therein referred to is receivable, or the recovery from such person of the tax payable in respect 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 had 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 beneficiary of the appellant trusts had no vested or contingent right in the relevant years under consideration over the income of the assessee trusts. Since there was no definite beneficiary or specific share in respect of income of the assessee trust every year or in each of the relevant years but the beneficiary of such deferred trusts merely had a chance to have the corpus fund after 19 years depending on the happening of the contingency of his/her survival and/or who will then be surviving legal heir/s, the appellant trusts will have to be regarded as discretionary trusts liable to tax at maximum marginal rate until the happening of contingency namely the expiry of the period of 19 years and the survival of the nominated beneficiary or his/her legal heirs on that future date after 19 years from the date of creation of the trust.
15. Such a view is fully fortified by the decision of the Tribunal in the case of Neo Trust vs. IAC (supra) in para 13, 13.1 to 13.3 of the said order which have been quoted in earlier part of this order (at page 30 to 73) with which we fully concur and agree.
16. We will now consider the various case laws cited by the learned representative of the assessee.
(i) Addl. CIT vs. M. K. Doshi (supra)
The headnote appearing at page 500 (of ITR) is reproduced hereunder :
“Held that the interest which each son got in the accumulated income could not be said to be a vested interest but was merely a contingent interest in the sense that his interest would ripen into a vested interest on the condition of attainment of majority by him. Therefore, there was neither receipt nor accrual of income so as to attract the provisions contained in cl. (v) of s. 64 of the Act and the income of the trust was not includible in the total income of the assessee under s. 64 (v).
Held also, that since the income was to be accumulated till the attainment of majority by each of the sons, and the respective share of each of the sons was to be paid and handed over to him as and when he attained majority, the accumulated income would at the end of every year be capitalised and, when available to the respective sharers, would be in the nature of capital and, therefore, his corpus. It would, therefore, lose its characteristic of being income. In this view also, s. 64(v) would not be attracted.”
The aforesaid judgment instead of supporting the case of the assessees clearly goes against them. It is clear from the aforesaid judgment that the beneficiaries of the appellant deferred trusts had not 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 (supra)
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 lines of the corresponding provisions in the South African IT Act. Under the provisions of s. 164 of the said Act, before the amendment made by the Finance Act, 1970, income of a trust in which the shares of the beneficiaries were indeterminate or unknown was chargeable to tax as a single unit treating it as the total income of an AOP. This provision afforded scope for reduction of tax liability by transferring property to trustees and vesting discretion in them to accumulate the income or apply it for the benefit of any one or more of the beneficiaries at their choice. By creating a multiplicity of such trusts each one of which derives a comparatively low income, the incidence of tax on the income from property transferred to the several trusts was maintained at a low level. In such arrangements, it was often found that one or more of the beneficiaries of the trust were persons having high personal incomes, but no part of the trust income being specifically allocable to such beneficiaries under the terms of the trust, such income could not be subjected to tax at a high personal rate which would have been applicable if their shares had been determinate. With a view to put an effective curb on the proliferation of such trusts and to reduce the scope of tax avoidance through such means, the Finance Act, 1970, replaced s. 164 of the said Act by a new section under which a representative assessee who received income for the benefit of more than one person whose shares in such income were indeterminate or unknown was chargeable to income-tax on such income at a flat rate of 65% or the rate which would be applicable if such income were the total income of an AOP, whichever course would be more beneficial to the Revenue. In order to obviate hardship in genuine cases where the circumstances were such that tax evasion could not be considered to be the main purpose of creating the trust, certain exceptions were specified where the flat rate of 65% was not to apply and the first exception was that where none of the beneficiaries of the trust had any other income chargeable to income-tax, the income of the trust was to be charged to tax at the progressive rates of tax applicable in the case of an AOP. The provisions of s. 164 as substituted came into effect on 1st April, 1971. Sub-s. (1) of s. 164 was amended by the Finance (No. 2) Act, 1980, w.e.f. April, 1980 as a measure 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 beneficiary under any other private trust. As a result, the income of discretionary trust would be chargeable to tax at the maximum marginal rate in cases where any of the beneficiaries has any other taxable income exceeding the exemption limit or if any of the beneficiaries is a beneficiary under any other private trust.”
At page 29 of the 189 ITR (Guj), it was further held that :
“Actual receipt of income in the hands of the beneficiary for the previous year is not necessary for the applicability of s. 164. ”
It was accordingly held as mentioned in the headnote at page 19 of 189 ITR (Guj) as under :
“Held, that the income of the trust was received by the trustees for both the sets of beneficiaries depending on their decision to distribute or defer the distribution and to choose the beneficiary. The possibility of the beneficiaries of either group or any of them within the group getting the trust income in their hands solely depended on the discretion of the trustees. Therefore, the individual shares of the beneficiaries were indeterminate or unknown and the provisions of s. 164(1) were attached to the type of arrangement made under the trust. The accumulations of income which were being held for the ultimate advantage of the second set of beneficiaries were accumulations that were being made for the benefit of those persons and, therefore, there is no warrant to exclude beneficiaries of the second group from the ambit of s. 164(1). Hence, the assessee was not entitled to the concessional rate of tax and should be subjected to the maximum marginal rate of tax for the relevant assessment year.”
It is, therefore, clear that the cases of trusts providing for deferred distribution of income without having a specific, known and ascertained share in the income of the relevant each of the previous year, receivable on behalf of the corpus beneficiaries will be treated as discretionary trusts liable to tax at maximum marginal rate. This is further clarified by the Expln. 1 to s. 164 inserted by the Finance (No. 2) Act, 1980 clearly providing that unless the person on whose behalf or for whose benefit such income or part thereof is receivable during the previous year is expressly stated in the instrument of trust, any such income receivable by the representative assessee (the trustees) shall be deemed as being not specifically receivable on behalf or for the benefit 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 (supra)
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 amendments were made in the relevant provisions upto the year 1980 which have far reaching effect in relation to curbing of devices to prevent avoidance of tax liability through creation of large number of discretionary trusts.
16 (iv). CIT vs. The Trustees of Staff Gratuity Fund of Shree Ram Mills Ltd. (supra)
The aforesaid judgment relate to trustees of staff gratuity fund and pertain to asst. yrs. 1963-64, 1965-66 and 1971-72. This has not relevance to the point in issue before us. Furthermore, the provisions of s. 164 has undergone various vital changes as has been elaborately discussed hereinbefore as well as in the extracts of some judgments quoted in earlier part of this order. This also does not in any manner help the assessee.
17. We will now like to discuss the findings given by the Courts in following other judgments :
17.1 Nirmala Bala Sarkar vs. CIT (supra) – at p. 275 and 276 of (1969) 74 ITR, it has been held as under :
“Hence, so far as the income in question is concerned, we cannot say that a beneficiary having a contingent interest of the property has any defined share before the contingency arises. She has then a chance to have a share in the balance of the fund but that share is indeterminate and unknown until the contingency arises. There is no case that the contingency arose during any of the assessment years in question and, as it did not, shares of the daughters in the income were not determinate. If the shares had been determinate and the money was not received by the daughters during the year in question, we would still have held that money was “receivable” by the trustee on behalf of the daughters in defined shares. But no share can possibly be determined until the contingency happens and, therefore, the shares must be considered to be indeterminate and, hence, the question must be answered in the affirmative.”
The aforesaid judgment has been referred to in the judgment of Hon’ble Gujarat High Court in the case of Gosar Family Trust (supra) without expressing any doubt or dissent as to the correctness of the aforesaid view taken by the Hon’ble Calcutta High Court.
17.2 CIT vs. Manilal Dhanji (1962) 44 ITR 876 (SC) :
At page 880 of 44 ITR the fact in issue has been summarised as under :
“It is clear from these clauses that during the minority of Chandrika, the income from the trust funds was to be accumulated and added to the trust funds and after she attained majority on 1st February, 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 closer scrutiny, however, it seems to us that cl. (b) must be read in the context of scheme of s. 16 and the two cls. (a) and (b) of sub-s. (3) thereof must be read together. So read, the only reasonable interpretation appears to be the one which the High Court accepted, namely, that the scheme of the section requires that an assessee can only be taxed on the income from a trust fund for the benefit of his minor child, provided that in the year of account the minor child derives some benefit under the trust deed either he receives the income, or the income accrues to him, or he has a beneficial interest in the income in the relevant year of account. But if no income accrues, or no benefit is derived and there is no income at all (so far as the minor child is concerned), then it is not consistent with the scheme of s. 16 that the income or benefit which is non-existent so far as the minor child is concerned, will be included in the income of his father.”
18. After giving a very thoughtful consideration to the entire facts, circumstances, relevant clauses of the trust deed of main trust, terms and clauses of the resolutions passed by the appellant deferred trusts, order of the CIT under s. 263 and other documents in the light of the relevant provisions of law and the principles of law deduced from the various decisions of the Tribunal’s Benches, judgments of Hon’ble Courts, we are of the considered opinion that the learned CIT was right in holding that the share of benefit/income received by all these 17 oral deferred specific family trusts enumerated as beneficiaries in Sch. II of the trust deed of main trust namely S. K. Family Trust, is chargeable to tax at maximum marginal rate as per s. 164(1) for all the years under consideration.
19. We would also like to discuss the submission made on behalf of the Department during the course of hearing about colourable device and applicability of principles laid down in the case of McDowell (supra). Before we deal with this aspect, it is pertinent to observe that the learned CIT in his orders under s. 263 has not invoked the principles laid down by the Supreme Court in the case of McDowell (supra) in the present cases, and also that the genuineness of the main trust has been accepted by the Tribunal.
However, a discussion on the aforesaid aspects is considered necessary, as it is the duty of the Tribunal and every Court to do so when 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. The various trusts were created with an initial corpus ranging from Rs. 50 to Rs. 1000. With such meagre capital some of the main trusts have produced income of several lakhs every year. Capital required for running such business have been arranged by those trustees. The real enjoyment of income whether in praesenti or on deferred basis as well as the corpus vest with the numbers of those members of the few families. The control and management remained vested in the trustees most of them being the members of the same family. There may be interlacing of funds. The creation of large number of various kinds of trusts has resulted in creation of hundreds of artificial/taxable entities, fragmention of income and wealth amongst such taxable entities. As a result of such series of transactions made by creation of chain of large number of trusts, a substantial reduction in the aggregate amount of tax liability under IT Act and WT Act has been achieved. Apart from substantial reduction in IT and WT liabilities in each year, the group has also got the benefit of deduction under s. 80L and various other provisions of IT Act in such multiple and large number of taxable entities.
19.2 In order to know the broad extent of tax mitigation/avoidance/reduction, the learned counsel was requested to furnish the details about tax liability if the beneficiary oral discretionary trusts and/or oral specific deferred trusts are to be charged to tax at maximum marginal rate as done by the CIT, under s. 263 or at normal and concessional rate of tax as declared by the assessee in the cases of 2/3 main trusts. We must admire the fairness on the part of these assessees and their learned lawyer and briefing Chartered Accountant Shri H. C. Shah who submitted the required details promptly with clarity and completeness. The summary of such compilation is given hereunder :
Name of trust
Asst. yr.
Tax liability at maximum marginal rate on income of disputed beneficiary trusts
Tax liability at normal rate on income of disputed beneficiary trusts
1
2
3
4
Rs.
Rs.
Bharat Trust
81-82
17,33,214
5,59,689
Int. under s. 217 A
6,06,620
23,39,834
5,59,689
Bharat Trust
82-83
30,66,663
11,67,967
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. tax 22,02,230
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 share benefit/income received by the beneficiary trusts from main trust.
(b) Interest under s. 220 may be reduced, if credit is allowed in respect of taxes paid by either the main trust or beneficiary trusts on income of the main trust allocated between beneficiary trusts.
(c) Further interest under s. 220 will be chargeable on the outstanding tax liability for the further period.
The aforesaid figures of saving in tax liability relate to only 3 main trusts for 2 years only. The tax liability in various other similar main trusts carrying on business on income derived in several years will further substantially reduce the tax liability of the group of persons of Nirma Family every year. Apart from this, deduction allowed in every case under s. 80L and other sections will result in further saving of tax liability. Moreover, there will be substantial saving in the amount of wealth-tax liability.
19.3 In the light of the aforesaid illustrative figures of saving in tax liabilities of only a few of the several trusts created by the persons of the said group, the Revenue authorities ought to have examined the question that if such multiple and large number of different types of trusts are allowed to be created in law, would it not amount to resorting to colourable devices solely or predominantly for the purpose of avoidance of taxes, would it not defeat the provisions of taxation laws, is it not fradulent, should it not be regarded as immoral and opposed to public policy and contrary to s. 4 of the Indian Trusts Act. The Revenue authorities ought to have made serious efforts to see the game of hidden purposes of tax avoidance.
19.4 The question relating to colourable tax devices adopted by taxpayers in different sophisticated ways have been considered by various Ahmedabad Benches of the Tribunal from time to time. It will be pertinent to reproduce the gist of some of such decisions :
19.4(i) ITO vs. Samir Builders (1987) 23 ITD 570 (Ahd)
The Tribunal has made following observations :
“It is gathered from the conducts of and the acts done by the members of the five families mentioned above that in order to put their idea into practice they thought of floating a good number of AOPs to be constituted by permutation and combination of the members of all these five families.”
At page 581 in para 17
“The idea conceived and thought of being acted upon in the 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 by this group of five families.”
At pages 585 to 588 paras 27, 28 and 29
“27. The above discussion brings us to hold that the principal object and the true intent behind the formation of a large number of AOPs and good number of partnership firms of this group of five families was to evade the payment of taxes. The formation of the AOPs and the constitution of firms, of which the respondent firm is simply one, was done under a well planned though ill advised, scheme designed to defeat the law and defraud the Revenue. The AOPs were to serve no purpose other than sending their manager members to some partnership firms to bring unearned profits to be divided in such a way that the tax collector shall have to return disappointed from their doors. The large number of firms were simply to serve the purpose of distributing the profits of the cumulative and combined adventure at certain levels in a definite line of succession so as to reduce the tax liability on earned profits to the minimum. It was all a tax avoidance scheme consisting of a series of well planned and pre-arranged steps. The respondent firm, as also others, was an integral part and a tool of this colourable scheme. It was all a device in the direction of avoiding tax. That being the true nature of the series of transactions, carried out by the members of the five families, dissection of their scheme and then considering the validity and genuineness of each individual transaction with the help of the isolated principles, pointed out by the learned AAC in para 20 of his order, is not at all possible and even desirable. We hold that the respondent firm was not genuinely and validly constituted and, therefore, no genuine firm with the constitution specified in the partnership deed. dt. 3rd June, 1980 existed in the years under consideration.
28. In his approach to the question involved in this case the learned AAC seems to have been influenced by the doctrine propounded by Lord Tomlin in IRC vs. Duke of Westminster (1936) AC 1 ‘that every man is entitled if he can to order his affairs so as that the tax attracting under the appropriate Acts is less than it otherwise would be’ and followed in India in CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC), CIT vs. B. M. Kharwar (1969) 72 ITR 603 (SC) and in some other cases. The doctrine expounded by Lord Tomlin was long back given a deserving and befitting burial 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 Sheatcroft in 18 Modern law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on the one side and the tax gatherer and his perhaps not so skillful advisers on the other side. Then again there is the ‘sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it’. Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guidelines, good citizens from those of the ‘artful dodgers’. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, ‘Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilisation’. But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.’
29. Need we add that in presence of the above position of law today, the doctrine propounded in Westminister’s case does not fit in the context of our socio-economic philosophy. That is why the Gujarat High Court stresses in CIT vs. Smt. Minal Rameschandra (1987) 61 CTR (Guj) 80 : (1987) 30 Taxman 282 (Guj) that in the context of developing economy of fast changing socio-economic conditions of people even the words occurring in a Statute are required to be interpreted differently. And the Kerala High Court declares in Neroth Oil Mills Co. Ltd. vs. CIT (1987) 62 CTR (Ker) 33 : (1987) 33 Taxman 249 (Ker) that the traditional rules governing the construction of taxing statues 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 (supra)
The relevant paras 13 and 14 are reproduced hereunder :
“13. In our view, the decision in the case of McDowell & Co. Ltd. (supra) is clearly applicable in this case. The learned counsel’s argument that McDowell’s case would not be applied because there was no income of the trust before its incorporation, 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 asst. yr. 1984-85. It would be wrong to look upon the decision in McDowell’s case as confined 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 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 the trusts and the AOPs came into existence within a period of one month and the 42 AOPs were made up by making various combinations of 34 inter-related persons. It is a part of the trust deed itself that if the assessee trust should fail by any reason it is these very 34 people who were to benefit. The entire arrangement had no other purpose (counsel could not point out any) except to reduce the tax liability. Therefore, the first two conditions in the case of Cravan (supra) have been fulfilled. The learned counsel argued that the shares of these 34 beneficiaries were specific and so the trust was a specific trust but the specific benefit of 34 persons would go to them only if the assessee trust failed. We have to consider a situation where the assessee trust is valid and does not fail. It must be remembered that what we are concerned in the present case is not with the validity of the assessee trust but with the question whether it is a specific or a discretionary trust. The third condition in Cravan (supra) has also been fulfilled. The trust in fact did earn a very high income in the very first year and so it could fairly 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 appearance is sought to be given to cover up realities. In McDowell & Co. Ltd.’s case (supra) an attempt was made to make the assessee’s liability as that of another. Therefore, the principle of McDowell & Co. Ltd.’s case (supra) is fully applicable to this case.”
19.4 (iii) ITO vs. H. C. Shah (1992) 43 ITD 680 (Ahd) –
The following observations are noteworthy :
“The above facts show that there is an agreement between the real persons who some times appear as donors, sometimes as trustees and some times as members of the said group claimed to be BOIs and some times as trustees of the five beneficiary trusts to divide the income from the construction business in such a manner as to pay less income-tax than is really due.”
“In the context of the IT Act a common purpose of a group having a common purpose to save income-tax would, therefore, be included in the meaning of an AOP. The decisions which have been cited before us do not show that (if the common intention of a group was to save tax it would not have been regarded by the Courts as an AOP.”
“The real factual picture is that a number of real human persons have come together in one place and merely put their stamps and signatures on a number of documents with the sole purpose of tax evasion. Finally, these facts when looked at realistically without being burdened by legal forms of constitution of the said separate groups by separate donations show that persons have come together for a common purpose and have made a mockery of the law treating it as a mere toy with utter cynicism and contempt for it.”
19.4 (iv) Shri Ganesh Chhababhai Family Trust vs. ITO (1993) 47 ITD 581 (Ahd)
Paras 21 to 23 of the said decision are reproduced hereunder :
“21. The facts narrated above in detail clearly indicate that the persons carrying on business in question had created entities on paper with the help of some persons close to them with the sole object of avoiding payment of tax. For example, in the year under consideration the income was more than Rs. 1 lac but sine in the trust deed of the assessee 45 discretionary trusts had been named as beneficiaries, an attempt was made to divide the income amongst 45 beneficiary trusts so that the income which would come to the share of each of 45 discretionary trusts would be below taxable limit. By such paper work, any number of trusts could have been created for dividing the income and even 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 literally any of the provisions could be regarded to have been violated by creation of the large number of trusts. The question is whether, when all the transactions are such that judicial process could accord its approval to them. Legislature cannot be expected to take care of every device and scheme of avoidance of taxation and, hence, it is for the Tribunals and Courts engaged in the administration of justice to determine the nature of the sophisticated legal devices and refuse to give judicial recognition to them. This is laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra) and the principle laid down therein squarely applied to the facts of the present case.
23. The learned Advocate General had drawn attention to decision in the case of Arvind Narottam (supra) in which it has been observed that where the language of the deed of settlement is plain and admits of no ambiguity, there is no scope for consideration of tax avoidance. That principle would not be applicable in cases where all surrounding circumstances taken together indicated the existence of device resulting in series of steps for tax avoidance. The question whether transaction in a particular case amounted to a device for avoidance of tax so as to come within the principle laid down in the case of McDowell & Co. Ltd. (supra), would depend on the entire circumstances of that case. Our attention was also drawn to the observations of Justice Mukharji in the above decision to the effect that unless waste and ostentation in Government spending were avoided no amount of normal sermons would change people’s attitude to tax avoidance. These observations did not indicate that when the facts on record establish a device to avoid tax, those facts should be ignored altogether.”
19.4 (v) Harish (HE) Trust vs. ITO (1989) 78 CTR (Trib)(Ahd) 5
Paras 37, 39 and 43 of the said decision are reproduced hereunder :
“37. It can hardly be disputed that a citizen has a right to create two or more than two trusts for the benefit of others. It is also right that where the language of the document was plain there should be no scope for reading an attempt to evade taxes on the part of the creator or other person. But at the same time it is also true that the use of this mode of disposition of property in the arrangement of one’s affairs with a view to avoid or minimise tax liability has given rise to very interesting 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. (supra). 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 Court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. In Workmen of Associated Rubber Industries Ltd. vs. Associated Rubber Industries (1985) 48 CTR (SC) 336 : (1986) 157 ITR 77 (SC), it was observed that it is the duty of the Court in every case where ingenuity is expended to avoid taxing and welfare legislations to get behind the smoke screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of a transaction. Almost to the same effect observations were made in the case of CIT vs. B. M. Kharwar (1969) 72 ITR 603 (SC). Though it was further observed in that case that ‘but the legal effect on a transaction cannot be displaced by probing into the substance of the transaction’. In the case of S. P. Gupta vs. Union of India & Ors. AIR 1982 SC 14 it was again stressed that as law is intended to serve a social purpose and it cannot be interpreted without taking into account social, economic and political setting in which it is intended to operate”. It was in this background that in the case of McDowell & Co. Ltd. (supra) it was laid down that ‘in our view the proper way of construing a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literarily or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.”
“39. Judged in the light of the principles laid down in the above mentioned cases the position in the present cases comes to this that the same settlor had created as many as 31 trusts at one and the same place within a span of 3 or 4 days by investing about Rs. 40,000 only. The creation of these trusts by the said settlor was clearly evident from the material placed before the ITO which he did not like to enquire. What would have been the purpose of settlor in creating so many trusts. If really he intended to confer benefit of the trusts upon certain ‘other persons’ such, `other persons’ and the benefit going to them ought to have been enquired into, if at all 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 October, 1981 were beneficiaries of such other discretionary trusts which were created on 19th October, 1981. Then again the discretionary trusts of the first line were beneficiaries of the principal trust which was created on 20th October, 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 second line of trust would not be in existence when the date of determination in the case of first line of beneficiary trusts would arrive. All such facts clearly indicated that it was certainly a case of chain trusts where a series of steps had been followed through by virtue of an arrangement. It was certainly a scheme, consisting of a series of documents and transactions, involving tax avoidance or tax deferment. The rule of ‘language plain, hence, no scope for considering avoidance of tax’, could not be made applicable to such a scheme containing composite transactions devised with a view to tax avoidance or tax deferment. The learned CIT has rightly turned it down as a device adopted for tax evasion.”
43. On the strength of the discussion made herein above and on our own appreciation of the facts and material placed before us we have no hesitation in recording a finding that the present case is certainly a case of chain of trusts created for oblique motive of avoiding of payment of legitimate taxes. Having arrived at that conclusion it was most appropriate on the part of the learned CIT to have asked his ITO to search our the person, if need be, who was the actual recipient of the income earned in these cases and assessee the income in his hands. That was a direction which the learned CIT could have legitimately given to the ITO, in the facts and circumstances of the case and the position of law applicable thereto, which we have discussed in sufficient detail.”
Reference application in the aforesaid matter was also rejected.
We fully appreciate that the task of detecting such devices and proving the same to be a grave act of colourable device involves a great, devoted and dedicated effort and such a task has been made further difficult by the fact that the assessments of different trusts, etc., are made at different places like Bombay, Ahmedabad and may be at various other places. But if there is a firm determination, nothing is impossible.
The legislative amendments made from time to time have tried to check and prevent such loopholes and devices. It may be recalled that a provision was originally made in s. 164 with a view to relieving hardship in a case where a person genuinely created discretionary trust by will for the benefit of his near relatives. Experience, however, showed that this provision had been misused to a large extent by persons creating 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 genuineness of the main trusts as well as its 17 beneficiaries deferred trusts of IInd Schedule has not been doubted by the CIT in the order passed under s. 263. The Tribunal in its order in the case of main trust [S. K. Patel Family Trust (supra)] relying upon decision in Bharat Trust (supra) has held that the income receivable by the main trusts on behalf of beneficiary trusts cannot be subjected to tax at maximum rate as one unit in the hands of the main trust. The Tribunal cannot enhance the liability.
19.6 The learned CIT in all the impugned orders under s. 263 in the cases of these 17 beneficiary deferred trusts has held that all these trusts should be regarded as discretionary trust and their income including the share income from the main trust should be charged to tax at maximum marginal rate. The real factual picture is that all these 17 deferred trusts have been created with a view to save tax by creating number of paper documents, resolutions and by showing some of the real human beings belonging to the family members of Nirma Group, sometimes as trustees, sometimes as beneficiaries with a view to divide the income in the hands of several taxable entities to reduce tax liability. The clause relating to deferment of payment of income for a period of 19 years to its beneficiaries will enable the main trust/beneficiary trusts to retain and continue to enjoy such accumulated profit for business activities and obviate inclusion of share of income in the hands of ultimate individual beneficiaries. All these facts when looked at realistically clearly shows the share of benefit/income received by these deferred trusts shown as received on behalf of only one individual who will be entitled to only deferred share in the corpus after 19 years, cannot be regarded as real income beneficiary of each year. But the real income beneficiary for each year are the various numbers of the said families, who are ultimately entitled to enjoy the said business income in one form or the other. On this round also, the view taken by the CIT that all these 17 oral specific deferred family trusts should be treated as discretionary trust liable to tax at maximum marginal rate deserves to be upheld. We accordingly confirm such findings given by the CIT in relation to this point, in view of aforesaid reasoning and decision of Tribunal, Ahmedabad cited supra in para 19.1 to 19.4 also.
20. Since the Tribunal in the case of main trust namely S. K. Family Trust (supra) 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 further arguments on this point. The said decision is clearly distinguishable on facts. In that case, it was held that as the order of assessment of the ITO was in accordance with law, it could not be held to be erroneous and prejudicial to the interest of Revenue merely because it was an unfavourable order. The facts of the present appeals clearly reveal that original assessments were made without even considering the vital aspects such as the true nature of trusts, the effect of deferment of distribution of income for 19 years, leviability of tax at maximum marginal rate of tax or concessional rate and applicability of ss. 164A, 164 etc.
The original assessments in the cases of all these deferred trusts (the appellants) were therefore patently erroneous and prejudicial to the interest of Revenue. Such a view is fortified by the judgments reported in Smt. Tata Devi Aggarwal vs. CIT 1973 CTR (SC) 107 : (1973) 88 ITR 323 (SC), Ram Pyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) and Addl. CIT vs. Mukur Corporation (1978) 111 ITR 312 (Guj).
A direction as to protective assessment on the beneficiary of a trust under such peculiar, complex and complicated cases of chain of trust by the CIT in the orders under s. 263 was absolutely necessary and perfectly valid. Such a view is fully fortified by the judgment of the Hon’ble Gujarat High Court in the case of Keshavlal Punjaram vs. CIT (1983) 141 ITR 466 (Guj).
The facts and grounds relating to jurisdiction in the present appeals are almost similar as in the case of Neo Trust vs. IAC (supra). The question relating to assumption of jurisdiction under s. 263 by the CIT has been discussed in para 9, 9.1 and 9.2 of the said decision by the Tribunal. Respectfully following the said decision on identical facts in the case of Neo Trust (supra) and in view of above referred discussions and the reasons given by the CIT in orders under s. 263 we hold that the learned CIT has validly assumed jurisdiction under s. 263 of the IT Act, 1961.
22. Now we will consider the ground relating to asst. yrs. 1981-82 and 1982-83 with regard to applicability or otherwise of s. 164A and/or the ground relating to validity or otherwise of the statement in writing signed by only one of the trustees submitted on behalf of the oral deferred trusts as required under Expln. 1 to s. 160(1) of IT Act, 1961.
The learned CIT has passed identical orders under 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 Amending Act also inserted a new Explanation for the purposes of s. 160(1)(iv). It provides that a trust which is not declared by a duly executed instrument in writing, will be deemed to be a trust declared by a duly executed instrument in writing, if a statement in writing “signed by the trustee or trustees” and setting out the purpose or purposes of the trust, particulars of the trustee or trustees, the beneficiary or beneficiaries and the trust property is prepared and forwarded to the ITO within the specified time limit. It is not in dispute that the trustee of each of the appellant oral deferred trusts submitted the statement in writing as required by Expln. 1 to s. 160(1) but as such statement was signed by only one of the trustees and not by all the trustees, it cannot be treated as compliance of the relevant provision according to the CIT. He therefore held that tax is chargeable at maximum marginal rate in view of s. 164A also.
The expression used in Expln. 1 to s. 160(1) requires such a statement in writing to be “signed by the trustee or trustees”. We would not like to express any opinion on the point whether such a document should necessarily be signed by all the trustees, as even if such a document signed by only one of the trustees is treated to be defective, it is only a curable defect. The learned CIT, therefore, ought to have directed the ITO to allow the assessees an opportunity to cure and remove such a defect by submitting a revised statement in writing duly signed by all the trustees. Since, we have upheld the levy of tax at maximum marginal rate under s. 164(1) in all these cases, we do not consider it necessary to direct the Assessing Officer at present to do this exercise by providing an opportunity to the appellants of curing on removing such a defect at this stage. However, in the event of reversal of our finding about leviability of maximum rate of tax under s. 164(1) at any time by the Hon’ble High Court, the ITO should then grant an opportunity to the appellant to submit a revised statement in writing duly signed by all the trustees to enable the assessees to meet the requirements of Expln. 1 to s. 160(1) so as to obviate the applicability of s. 164A.
23. We will now consider the additional ground raised by the appellants in all these appeals.
It has been contended on behalf of the assessees that in view of decision of the Tribunal in the case of S. K. Patel Family Trust (supra) 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 trust will have to be withdrawn. This is necessary as treating these payments made by main trust as payments made by appellant deferred trusts from the dates of actual payments will result in reduction in the amount of interest chargeable under s. 220 or under other provisions of IT Act. The Assessing Officer should, therefore, ensure that neither the Revenue nor the appellants should get any unwarranted and unjustified gain by way of levy of or allowing of interest. Interest under any of the provisions of IT Act is compensation for withholding the payments. Hence interest should be charged/allowed in such a manner that it should be just and equitable and should be in accordance with the provisions of law.
24. In the result, the appeals are disposed of as indicated above.
