2001 (10) TMI 1189 - HC - Income Tax

Summary

Issues Involved:
1. Whether the business carried on by the trustees was a trust property under Section 161 of the I.T. Act.
2. Whether the deduction under Section 80J of the I.T. Act was allowable to the assessee trust.
3. Whether the salary paid to one of the trustees was in contravention of Section 50 of the Indian Trust Act.

Issue-wise Detailed Analysis:

1. Trust Property and Applicability of Section 161:
The primary issue was whether the business conducted by the trustees in the name of M/s Saroj Synthetics was trust property and thus subject to Section 161 of the I.T. Act. The Income Tax Officer initially assessed the income as belonging to an association of persons, not a trust. The Commissioner of Income Tax (Appeals) and the Tribunal, however, ruled in favor of the assessee, relying on the precedent set by the Gujarat High Court in K.T. Doctor vs. CIT, which held that business conducted by trustees authorized to start any business should be considered trust property. The Supreme Court had dismissed the revenue's appeal in K.T. Doctor's case, emphasizing that the theory of device was not examined in prior judgments. The Tribunal did not delve into the merits of the Assessing Officer's findings, leading to the High Court remanding the matter back to the Tribunal to examine whether the trust was a device for tax avoidance.

2. Deduction under Section 80J:
The second issue was whether the assessee trust was entitled to a deduction under Section 80J of the I.T. Act. The CIT(A) and the Tribunal had allowed the deduction based on the precedent that such deductions were permitted in previous years. The revenue argued that the trust lacked an Excise Licence and that excise duties were paid through another entity, Rajkumar Synthetics. The High Court determined that this issue was interconnected with the first issue and should be re-examined by the Tribunal in light of the potential tax avoidance device.

3. Salary Payment to Trustee:
The final issue was whether the salary paid to one of the trustees, Shri Tilakraj Chananlal, was in violation of Section 50 of the Indian Trust Act, given that the payment was made without an express provision in the trust deed. The High Court concluded that this issue was contingent on the findings regarding the first issue. If the business was determined to be a device for tax avoidance, the salary payment would need to be re-evaluated.

Conclusion:
The High Court did not answer the referred questions directly but remanded the matter to the Tribunal for a detailed examination of whether the trust was a device for tax avoidance. The Tribunal was instructed to re-evaluate all issues, including the applicability of Section 161, the deduction under Section 80J, and the salary payment to the trustee, in light of the Supreme Court's observations and the detailed facts presented by the Assessing Officer. The reference was disposed of with no order as to costs.