1994 (3) TMI 45 - HC - Income Tax

Issues Involved:

1. Legitimacy of the trust or association of persons (AOP) claimed to be created under the will of late Sri Laxmi Prasad.
2. Validity of the assessment proceedings and the protective assessment made by the Deputy Commissioner of Income-tax.
3. Interpretation of the will dated November 24, 1977, and whether it directed the creation of any trust.
4. Whether the Income-tax Appellate Tribunal should be directed to refer the questions of law to the High Court.

Detailed Analysis:

1. Legitimacy of the Trust or Association of Persons (AOP):

The Revenue conducted a search under section 132(1) of the Income-tax Act, 1961, on the premises of two individuals, where unexplained assets and documents were claimed to belong to an AOP named Messrs. Laxmi Prasad and Sons. The Deputy Commissioner of Income-tax (Assessment) found that the registered will dated November 24, 1977, did not create any trust and suggested that the idea of the trust was an afterthought. The appellate authority, however, held that a trust was created under the will and assessed the income accordingly. The Tribunal upheld this view, but the High Court found that the will did not direct the creation of any trust, nor were there any mentions of trustees or the trust's objectives.

2. Validity of the Assessment Proceedings and Protective Assessment:

The assessee filed returns for the assessment year 1982-83, which were beyond the statutory time limit. The Deputy Commissioner initiated proceedings under sections 147(a)/148 and issued a notice under section 148 after obtaining approval. The assessee requested that the late return be treated as compliance with the notice. The Deputy Commissioner made a protective assessment, observing that the income claimed to be of the trust was assessed substantively in the hands of one individual. The appellate authority canceled the protective assessment and treated it as a substantive assessment of the AOP, a decision affirmed by the Tribunal. However, the High Court noted that the Deputy Commissioner had rightly made a protective assessment, as the property claimed to be of the AOP was not accepted as such.

3. Interpretation of the Will Dated November 24, 1977:

The High Court scrutinized the will and found no direction for creating any trust. The appellate authorities had misinterpreted the will, as it neither named the trust nor specified any conditions for its creation. The High Court emphasized that the document must be interpreted in light of the surrounding facts, including the lack of any claim of the trust's existence before the search. The absence of income-tax or wealth-tax returns for the trust during the relevant years further supported the conclusion that no trust was contemplated under the will.

4. Direction to the Income-tax Appellate Tribunal:

The High Court concluded that the Tribunal's findings were based on an incorrect interpretation of the will and that questions of law did arise from the Tribunal's order. Therefore, the High Court directed the Tribunal to draw up a statement of the case and refer the questions of law mentioned in its order dated May 6, 1992, to the High Court for decision.

Conclusion:

The High Court allowed the application, directing the Tribunal to refer the questions of law to the High Court. The court found that the will did not direct the creation of any trust, and the protective assessment made by the Deputy Commissioner was appropriate. The High Court emphasized the need to interpret the will in the context of the surrounding facts and the absence of any prior claim of the trust's existence.

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