1989 (9) TMI 397 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee trust is a specific discretionary trust.
2. Applicability of the Supreme Court decision in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 /22 Taxman 11.
3. Interpretation and application of section 164 and Explanation 1 thereto.
4. Consideration of the trust deeds and the concept of lifting the veil in the context of trusts.

Summary:

1. Whether the assessee trust is a specific discretionary trust:
The primary issue was whether the assessee trust, which had 21 discretionary trusts as beneficiaries, should be considered a specific discretionary trust. The Income-tax Officer (ITO) regarded the assessee trust as a discretionary trust, stating that the income was to reach the ultimate beneficiaries (members of the AOPs) whose shares were not determined. The Commissioner confirmed the ITO's order.

2. Applicability of the Supreme Court decision in McDowell & Co. Ltd. v. CTO:
The assessee's counsel argued that the decision in McDowell & Co. Ltd. was not applicable as the tax at the maximum marginal rate had been paid by the 21 discretionary trusts. The counsel also cited the Supreme Court decision in CWT v. Arvind Narottam, where it was held that McDowell's case could not advance the revenue's case due to the plain language of the deeds of settlement. However, the Tribunal found that the decision in McDowell & Co. Ltd. was applicable, as the arrangement was a device to reduce tax liability by creating intermediary trusts and AOPs.

3. Interpretation and application of section 164 and Explanation 1 thereto:
The assessee's counsel argued that section 164 was a charging section and that the trust deed was exhaustive and conclusive regarding the nature of the trust. However, the Tribunal held that the ITO was entitled to ascertain who the ultimate beneficiaries were and consider other evidence, not just the trust deed. The Tribunal concluded that the trust deed alone was not conclusive in determining whether the trust was specific or discretionary.

4. Consideration of the trust deeds and the concept of lifting the veil in the context of trusts:
The assessee's counsel relied on the Gujarat High Court decision in K.T. Doctor v. CIT, arguing that the trust deeds could not be ignored. However, the Tribunal found that the decision in K.T. Doctor was not applicable, as the issue in that case was different. The Tribunal emphasized that the ITO's endeavor was to find out who the real beneficiaries were and what their rights were, and that the intermediate trusts and AOPs were merely conduit pipes for passing income to the ultimate beneficiaries.

Conclusion:
The Tribunal upheld the order of the Commissioner, confirming that the assessee trust was a discretionary trust and dismissing the appeals. The Tribunal applied the principles from McDowell & Co. Ltd., finding that the arrangement was a device to reduce tax liability, and concluded that the ITO was correct in considering the ultimate beneficiaries and the reality of the situation.