1989 (7) TMI 139 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the Income Tax Officer (ITO)
2. Legality of the show cause notices issued under Section 263
3. Validity and genuineness of the trusts
4. Applicability of the McDowell & Co. Ltd. judgment
5. Limitation period for invoking Section 263
6. Adequacy of the ITO's investigation during the assessment

Issue-wise Detailed Analysis:

1. Jurisdiction of the Income Tax Officer (ITO)
The Commissioner of Income-tax initiated proceedings under Section 263, initially proposing to set aside the assessments on the ground that the ITO had no jurisdiction. The assessees argued that the ITO was within his jurisdiction to pass the assessment orders, and thus, there was no reason to invoke Section 263.

2. Legality of the Show Cause Notices Issued Under Section 263
The Commissioner issued two show cause notices. The first notice proposed setting aside the assessments due to lack of jurisdiction, while the second notice proposed setting aside the assessments on the grounds that they were erroneous and prejudicial to the interests of revenue. The assessees contended that these notices were illegal as they were based on incorrect facts and lacked proper investigation.

3. Validity and Genuineness of the Trusts
The Commissioner observed that the trusts were created immediately after a search at the premises of the main person behind the Advani Family Group. The trusts took over the running businesses of two firms, and the capital of the businesses continued to remain with the trust. The Commissioner concluded that the trusts were sham transactions created to evade tax, as the control and management continued with the Advani Family, and the trusts were created with minimal corpus amounts.

4. Applicability of the McDowell & Co. Ltd. Judgment
The Commissioner referenced the Supreme Court's decision in McDowell & Co. Ltd., indicating that the trusts were created as a device to avoid tax. The assessees argued that the facts of McDowell & Co. Ltd. were different and not applicable to their case. However, the Commissioner maintained that the principles laid down in McDowell & Co. Ltd. were relevant to the present case.

5. Limitation Period for Invoking Section 263
The assessees raised a preliminary objection that the action under Section 263 was barred by limitation, as the orders were passed beyond the two-year period. The Tribunal, however, upheld the Commissioner's action, citing that the amendment to Section 263 extended the limitation period for pending assessments, and the Commissioner's order was within this extended period.

6. Adequacy of the ITO's Investigation During the Assessment
The Tribunal observed that the ITO showed undue haste in completing the assessments without making relevant and proper inquiries. The assessments were finalized on the same day as the hearings, indicating a lack of thorough investigation. The Tribunal concluded that the ITO failed to examine the detailed documents and relationships between the trustees, beneficiaries, and settlors, leading to the assessments being erroneous and prejudicial to the interests of revenue.

Conclusion
The Tribunal upheld the consolidated order of the Commissioner under Section 263, setting aside the assessments and directing the ITO to make proper inquiries and pass fresh orders in accordance with the law. The appeals were dismissed.