1991 (3) TMI 181 - AT - Income Tax

Carrying On Business, Discretionary Trust, Income From Property, Minor Child, Religious Trust

Summary

Issues Involved:

1. Status of the assessee-trust as a specific or discretionary trust.
2. The genuineness of the assessee-trust and its beneficiary trusts.
3. Applicability of maximum marginal rate for tax assessment.
4. Application of the principles laid down by the Supreme Court in McDowell & Co. Ltd. v. CTO.

Issue-wise Detailed Analysis:

1. Status of the Assessee-Trust:
The assessee-trust claimed the status of a specific trust, arguing that the 45 beneficiaries had definite shares in the income. The Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) (CIT(A)) rejected this claim, stating the assessee-trust should be treated as a discretionary trust because the shares of the ultimate beneficiaries were unknown. The Tribunal upheld this view, emphasizing that the 45 beneficiary trusts were discretionary trusts, and the shares of ultimate beneficiaries were indeterminate.

2. Genuineness of the Assessee-Trust:
The assessee-trust was created by a trust deed dated 5-7-1979, and the beneficiaries were 45 oral discretionary trusts. The Tribunal examined the circumstances under which these trusts were created. It was found that the trusts were created by a closed group of persons with the sole objective of tax avoidance. The Tribunal concluded that the creation of these trusts was not genuine, as it was a colorable device for tax avoidance. The Tribunal referred to the Supreme Court's decision in McDowell & Co. Ltd., which emphasized that judicial recognition should not be given to such sophisticated legal devices aimed at tax avoidance.

3. Applicability of Maximum Marginal Rate:
The ITO assessed the income of the assessee-trust at the maximum marginal rate, treating it as an Association of Persons (AOP) with indeterminate shares. The CIT(A) upheld this assessment. The Tribunal agreed, stating that since the shares of the members of the AOP were not determinate, the provisions of section 167A were applicable, and tax should be charged at the maximum marginal rate. Additionally, even if the assessee-trust was considered genuine, the 45 beneficiary trusts were discretionary, attracting the provisions of section 164(1) and the maximum marginal rate.

4. Application of McDowell & Co. Ltd. Principles:
The Tribunal applied the principles laid down by the Supreme Court in McDowell & Co. Ltd., which stated that colorable devices cannot be part of tax planning. The Tribunal noted that the creation of multiple trusts with the sole objective of dividing income to fall below the taxable limit was a clear device for tax avoidance. The Tribunal emphasized that all surrounding circumstances must be considered to determine the genuineness of the transactions and the intention behind them.

Conclusion:
The Tribunal dismissed the appeal, upholding the ITO's order to assess the income at the maximum marginal rate. It concluded that the assessee-trust was not a genuine trust and was created as part of a device for tax avoidance. The Tribunal also held that the assessee-trust could not be regarded as a specific trust due to the indeterminate shares of the ultimate beneficiaries.