1987 (3) TMI 149 - AT - Income Tax

Issues Involved:

1. Status of the assessee as an Association of Persons (AOP) or Body of Individuals (BOI).
2. Genuineness of the trust.
3. Application of Section 161 of the Income Tax Act.
4. Assessment procedure and the requirement for initiating separate proceedings.
5. Applicability of the Supreme Court decision in McDowell & Co. Ltd. vs. CTO.
6. Direct assessment of beneficiaries.

Issue-wise Detailed Analysis:

1. Status of the Assessee (AOP vs. BOI):

The assessee, a private family trust, claimed the status of an Association of Persons (AOP) in its return for the assessment year 1981-82. The Income Tax Officer (ITO) rejected this claim and classified the trust as a Body of Individuals (BOI), relying on the Supreme Court decision in N.V. Shanmugham and Co. vs. CIT (1971) 81 ITR 310 (SC). The Appellate Assistant Commissioner (AAC) later ruled that the ITO could not change the status without initiating separate proceedings, citing various judicial precedents. However, for the assessment year 1982-83, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's classification as BOI, leading to further appeals.

2. Genuineness of the Trust:

The CIT(A) questioned the genuineness of the trust, suggesting it was a sham created to avoid tax. The CIT(A) argued that the business activities of the trust were closely linked to the individual businesses of the trustees, and all beneficiaries were family members, with no outsiders involved. The assessee's counsel countered these claims by demonstrating that the trust's business units were distinct and operated independently from the trustees' personal businesses. The Tribunal found the CIT(A)'s suspicion unfounded, noting that the trust and its business units were genuine and separate from the trustees' individual businesses.

3. Application of Section 161 of the Income Tax Act:

Section 161 of the Income Tax Act stipulates that trustees should be assessed in the same manner and to the same extent as the beneficiaries. The AAC directed the ITO to apportion the trust's income among the beneficiaries and assess them accordingly. The Tribunal upheld this view, citing various judicial decisions, including the Supreme Court's ruling in CWT vs. Trustees of H.E.H. Nizam's Family Trust (1977) 108 ITR 555 (SC), which established that trustees should be assessed in the same status as the beneficiaries.

4. Assessment Procedure and Requirement for Separate Proceedings:

The AAC ruled that the ITO could not change the status of the assessee from AOP to BOI without initiating separate proceedings. This decision was based on precedents from multiple High Courts, including CWT vs. J.K. Srivastava & Sons (1983) 142 ITR 183 (All) and CIT vs. Associated Cement & Steel Agencies (1984) 147 ITR 776 (Bom). The Tribunal supported this view, emphasizing that any change in status requires separate proceedings and a fresh return.

5. Applicability of Supreme Court Decision in McDowell & Co. Ltd. vs. CTO:

The CIT(A) invoked the Supreme Court decision in McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 158 (SC) to argue that the trust was a tax-avoidance scheme. However, the Tribunal found this inapplicable, noting that the trust was genuine and created within the legal framework. The Tribunal also referenced the Finance Act, 1984, which introduced new provisions effective from April 1, 1985, to address such issues, indicating that the McDowell decision did not apply to the assessment years in question.

6. Direct Assessment of Beneficiaries:

The Tribunal cited the Income Tax Appellate Tribunal, Pune Bench's decision in Trustees of Anilkumar Trust vs. ITO (1987) 27 TTJ (Pune) 69, which established that beneficiaries should be assessed directly if their shares are determinate and known. The Tribunal concluded that the trust's income should be apportioned among the beneficiaries and assessed in their hands, as specified in the trust deed.

Conclusion:

The Tribunal upheld the AAC's order for the assessment year 1981-82, directing the ITO to apportion the trust's income among the beneficiaries and assess them accordingly. For the assessment year 1982-83, the Tribunal allowed the assessee's appeal, rejecting the CIT(A)'s classification of the trust as a BOI and reaffirming the AAC's decision. The remaining grounds of appeal for the assessment year 1982-83 were dismissed as not pressed.

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