1992 (1) TMI 138 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the CIT u/s 263.
2. Merger of ITO's order with CIT(A)'s order.
3. Applicability of maximum marginal rate u/s 164(1).
4. Deduction of interest payable to trusts.

Summary:

1. Jurisdiction of the CIT u/s 263:
The assessee argued that the CIT had no jurisdiction to invoke powers u/s 263 since the assessment order was passed after obtaining instructions from the IAC u/s 144A. The tribunal rejected this argument, stating that the order of the ITO, even if passed in pursuance of instructions u/s 144A, is subject to revision u/s 263. This is supported by the Explanation inserted in section 263 by the Taxation Laws (Amendment) Act, 1984.

2. Merger of ITO's order with CIT(A)'s order:
The assessee contended that the order of the ITO had merged in its entirety with the order of the CIT(A), and thus, the CIT should not have exercised jurisdiction u/s 263. The tribunal rejected this submission, citing the Gujarat High Court decision in Karsandas Bhagwandas Patel v. G.V. Shah, ITO [1975] 98 ITR 255, which supports partial merger only to the extent of items considered and decided by the CIT(A). Furthermore, amendments to section 263 by the Finance Acts of 1988 and 1989 clarify that the CIT's powers extend to matters not considered and decided in such appeals.

3. Applicability of maximum marginal rate u/s 164(1):
- Income for 11 Oral Discretionary Trusts: The tribunal held that the income receivable by the assessee trust for these trusts was for the benefit of individuals whose shares were indeterminate. Thus, the maximum marginal rate u/s 164(1) was applicable.
- Income for V.G. Zala Oral Specific Trust: The tribunal found this to be a specific trust with determinate shares among three beneficiaries. Therefore, the income was to be allocated under section 161, and section 164(1) was not applicable.
- Income for 7 Oral Specific Deferred Trusts: The tribunal noted that the beneficiaries of these trusts had no right, title, or interest in the income for 19 years, and the income was to be accumulated as part of the corpus. Thus, the provisions of section 164(1) were applicable, and the maximum marginal rate was to be charged.

4. Deduction of interest payable to trusts:
For Assessment Year 1982-83, the CIT directed the ITO to disallow interest payable to the trusts mentioned in Schedules I and II. The tribunal set aside this direction, noting that although the ultimate beneficiaries are known but their shares are indeterminate, and there are beneficiaries in respect of parts of the income. Therefore, the CIT's reason for disallowing interest was not sustained.

Conclusion:
The appeals were partly allowed. The directions of the CIT to apply the maximum marginal rate in respect of the income for V.G. Zala Oral Specific Family Trust were set aside, while the directions for the income of the 11 Oral Discretionary Trusts and 7 Oral Specific Deferred Trusts were confirmed. The direction to disallow interest was also set aside.