1995 (9) TMI 87 - AT - Income Tax

Summary

Issues Involved:
1. Appropriate tax rate for the assessee-trust.
2. Determination of the assessee-trust as a conduit pipe of trust.
3. Deletion of interest charged under section 217 of the IT Act, 1961.

Detailed Analysis:

1. Appropriate Tax Rate for the Assessee-Trust:

The Revenue contended that the assessee-trust should be taxed at the maximum marginal rate, arguing that it was a conduit pipe of trusts created to reduce tax liability. The AO found that the only source of income for the assessee-trust was a 50% share of profits from Sharda Trust, which itself had no independent source of income. The AO rejected the claim that the assessee-trust was a specific trust, applying the Supreme Court's decision in McDowell & Co. vs. CTO, and taxed the income at the maximum marginal rate.

On appeal, it was clarified that the beneficial share income of the assessee-trust in Sharda Trust was only 5%, not 50%, and Sharda Trust had independent income from its business. The first appellate authority found that the AO had incorrectly stated the facts and directed that the assessee-trust be taxed at the normal rate, as none of its beneficiaries had other taxable income or were beneficiaries in other trusts. The Tribunal upheld this decision, noting that the Revenue had accepted Sharda Trust as genuine and had not provided evidence that the trust arrangement was a device to avoid tax.

2. Determination of the Assessee-Trust as a Conduit Pipe of Trust:

The Revenue argued that the assessee-trust was part of a chain of trusts created to reduce tax liability, invoking the principle from McDowell & Co. The AO considered the trust deeds to be drafted by one person and aimed at reducing the tax payable by a family group. However, the first appellate authority and the Tribunal found no evidence to support this claim. The Tribunal noted that the Revenue had accepted the genuineness of Sharda Trust and had not provided material evidence to show that the trust arrangement was a colorable device to avoid tax.

3. Deletion of Interest Charged Under Section 217 of the IT Act, 1961:

The AO had charged interest under section 217, but the first appellate authority did not deal with this issue as it did not survive after the decision on the appropriate tax rate. The Tribunal agreed with this approach, finding no infirmity in the first appellate authority's order.

Conclusion:

The Tribunal dismissed the Revenue's appeals, upholding the first appellate authority's decision to tax the assessee-trust at the normal rate and finding no evidence to support the claim that the trust arrangement was a device to avoid tax. The charge of interest under section 217 was also not sustained.