1990 (5) TMI 51 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessment order passed by the ITO was erroneous and prejudicial to the interest of Revenue.
2. Whether the appellant trust should be treated as a discretionary trust.
3. Whether the creation of the appellant trust was a scheme to divert income and evade tax.
4. Whether the CIT had jurisdiction under section 263 to set aside the assessment and direct the ITO to reframe it.

Issue-wise Detailed Analysis:

1. Whether the assessment order passed by the ITO was erroneous and prejudicial to the interest of Revenue:
The CIT found that the assessment order passed by the ITO under section 143(3) was erroneous and prejudicial to the interest of Revenue because the ITO failed to examine the nature and character of the appellant trust. The CIT noted that the ITO did not investigate whether the income was assessable in the hands of the trust, its beneficiaries, the settlor, or the trustee. The CIT observed that the ITO did not inquire into the source of investment or how the property came to be owned by the trust when its capital was only Rs. 1,000. The CIT concluded that the ITO's failure to make these inquiries rendered the assessment order erroneous and prejudicial to the interest of Revenue.

2. Whether the appellant trust should be treated as a discretionary trust:
The CIT opined that the trust should be treated as a discretionary trust because the beneficiaries were indeterminate. The CIT referred to clause II of the trust deed, which indicated that the beneficiaries could change over time due to births, deaths, and marriages. The CIT concluded that the trust was not a specific trust but a discretionary one, and therefore, the maximum marginal rate should have been applied to it. The CIT's view was supported by the Explanation introduced to section 164 by the Finance (No. 2) Act, 1980.

3. Whether the creation of the appellant trust was a scheme to divert income and evade tax:
The CIT believed that the creation of the appellant trust was part of a scheme to divert income and evade tax. The CIT cited the Supreme Court decision in McDowell & Co. Ltd. v. CTO, which held that tax avoidance through the creation of trusts could be considered a fraud on the Revenue. The CIT pointed out that the trust was created with a capital of Rs. 1,000, yet it managed to earn substantial income from property. The CIT noted that the balance sheet showed significant assets, which raised questions about the genuineness of the trust. The CIT concluded that the trust was a device to evade tax and defraud the Revenue.

4. Whether the CIT had jurisdiction under section 263 to set aside the assessment and direct the ITO to reframe it:
The CIT exercised his powers under section 263, which allows a Commissioner to revise an assessment if it is erroneous and prejudicial to the interest of Revenue. The CIT provided the appellant trust an opportunity to be heard and made necessary inquiries before passing the order. The CIT chose to cancel the assessment and direct the ITO to make a fresh assessment, rather than making the assessment himself. The Tribunal's jurisdiction in this appeal was limited to determining whether the CIT was justified in setting aside the assessment and directing the ITO to re-do it. The Tribunal found that the CIT had sufficient grounds to exercise his jurisdiction under section 263 and upheld the CIT's order.

Conclusion:
The Tribunal concluded that the CIT had sufficient grounds to exercise his jurisdiction under section 263 and set aside the assessment. The Tribunal found that the ITO failed to make necessary inquiries into the nature and character of the trust, and the CIT was justified in directing further inquiries and investigations. The Tribunal dismissed the appeal, upholding the CIT's order to reframe the assessment after conducting proper inquiries and investigations.