1996 (5) TMI 99 - AT - Income Tax

Issues Involved:
1. Refusal of registration of the firm by the Assessing Officer (AO).
2. Validity and genuineness of the newly constituted firm comprising five Association of Persons (AOPs).
3. Application of the Supreme Court's decision in McDowell & Co. Ltd. vs. CTO.
4. Applicability of the Gujarat High Court's decision in Banyan & Berry vs. CIT.

Detailed Analysis:

Issue 1: Refusal of Registration of the Firm by the Assessing Officer (AO)
The primary issue raised by the assessee is the refusal of registration of the firm by the AO. The AO refused the registration on the grounds that the firm was not constituted by genuine partners. The AO concluded that the trusts and AOPs involved were subterfuges and sham entities created solely for the purpose of tax avoidance. This conclusion was supported by the Supreme Court's decision in McDowell & Co. Ltd. vs. CTO, which held that such arrangements are not genuine and are created to avoid tax liabilities.

Issue 2: Validity and Genuineness of the Newly Constituted Firm Comprising Five AOPs
The assessee-firm was originally constituted of five trusts, which later transferred their shares to five newly created AOPs. The AO scrutinized the new partnership deed and found that the AOPs were created just days before the execution of the new partnership deed, with identical constitutions comprising two investment companies and two individuals. The AO held that the entire arrangement was a deliberate creation of trusts and AOPs to bypass the amendment requiring taxation of business income of trusts at the maximum marginal rate. The CIT(A) upheld the AO's decision, stating that these entities were bogus and sham, created without any business purpose, and served only to avoid taxes.

Issue 3: Application of the Supreme Court's Decision in McDowell & Co. Ltd. vs. CTO
The AO and CIT(A) relied heavily on the Supreme Court's decision in McDowell & Co. Ltd. vs. CTO, which disapproved of colorable devices and subterfuges created to avoid tax liabilities. The AO concluded that the trusts and AOPs were created as a part of a tax avoidance strategy and were not genuine entities. This decision was further supported by the Tribunal's previous rulings in similar cases, where deliberate creation of trusts and AOPs for tax avoidance was disapproved.

Issue 4: Applicability of the Gujarat High Court's Decision in Banyan & Berry vs. CIT
The assessee argued that the arrangement was genuine and relied on the Gujarat High Court's decision in Banyan & Berry vs. CIT, which held that legitimate and genuine acts resulting in tax reduction cannot be treated as tax avoidance devices. However, the Tribunal found the facts of the present case distinguishable from Banyan & Berry. The Tribunal noted that there was no valid dissolution of the original firm and no bona fide deed of partnership for the new firm. The trusts and AOPs were deemed subterfuges created solely for tax avoidance, thus making the Gujarat High Court's decision inapplicable.

Conclusion:
The Tribunal concurred with the findings of the AO and CIT(A), dismissing the appeal. The Tribunal held that the firm was not constituted by genuine partners, and the entire arrangement was a deliberate creation of trusts and AOPs to avoid tax liabilities. The Tribunal reaffirmed the applicability of the Supreme Court's decision in McDowell & Co. Ltd. vs. CTO and found the Gujarat High Court's decision in Banyan & Berry vs. CIT not applicable to the facts of the case. The appeal was dismissed, and the refusal of registration of the firm was upheld.

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