1987 (10) TMI 76 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the Respondent as a Legally Constituted Association of Persons (AOP).
2. Protective Assessment by the Income-tax Officer (ITO).
3. Alleged Sham Arrangement and Tax Evasion.

Detailed Analysis:

1. Validity of the Respondent as a Legally Constituted Association of Persons (AOP)
The primary issue revolves around whether the respondent was a validly and legally constituted AOP. The ITO contended that the respondent was not a valid AOP but rather a sham arrangement aimed at diverting income from a main AOP or trust through a series of paper AOPs. The Appellate Assistant Commissioner (AAC) held that since the respondent admitted to being an AOP and there was no evidence to treat them otherwise, they should be recognized as an AOP. The Tribunal, however, found that the respondent did not carry out any business or activity to produce income, profits, or gains, and therefore, could not be recognized as an AOP under the Income-tax Act, 1961.

2. Protective Assessment by the Income-tax Officer (ITO)
The ITO issued a protective assessment under Section 143(3) of the Income-tax Act, 1961, suspecting the genuineness of the respondent's constitution as an AOP. The ITO issued multiple notices and summonses to gather information about the respondent's activities and its connections with other entities. Despite these efforts, the ITO concluded that the respondent was not a genuine entity and was merely a tool for tax evasion. The AAC, however, overruled the ITO's objections and directed that the respondent be treated as an AOP. The Tribunal ultimately found that the ITO was justified in his protective assessment, given the lack of genuine business activity by the respondent.

3. Alleged Sham Arrangement and Tax Evasion
The ITO and the Tribunal both found that the respondent was part of a larger scheme involving multiple AOPs and trusts, all connected to the Bholidas Patel Family. The Tribunal noted that the respondent, along with other entities, was formed by permutations and combinations of family members to construct a housing society. The Tribunal found that these entities did not carry out any real business activities and were created solely to divert income and evade taxes. The Tribunal concluded that the respondent was a non-genuine entity, formed as a device to evade taxes, and upheld the ITO's protective assessment.

Conclusion
The Tribunal set aside the AAC's order and restored the ITO's protective assessment. The Tribunal found that the respondent was not a validly and legally constituted AOP and was part of a larger scheme to evade taxes. The appeal was allowed, and the protective assessment by the ITO was upheld.