1988 (5) TMI 63 - AT - Income Tax

Account Books, Assessment Year, Business Premises, In Part, Total Income, Unexplained Investments

Summary

Issues:
- Jurisdiction of CIT under section 263 of the Income-tax Act for assessment years 1981-82 and 1982-83.
- Interpretation of provisions of section 63(a)(ii) of the Act and clause 8(b) of the trust deeds.
- Whether the trusts created by the assessee were revocable under the provisions of section 63(a)(ii) of the Act.

Analysis:
The appeals before the Appellate Tribunal ITAT CALCUTTA-B involved challenges against the consolidated order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act for the assessment years 1981-82 and 1982-83. The core issue revolved around the creation of two irrevocable trusts by the assessee-company for the benefit of its employees and officers. The Commissioner found the orders passed by the Inspecting Asstt. Commissioner erroneous and prejudicial to the revenue's interests due to a perceived revocability of the trusts under section 63(a)(ii) of the Act.

The CIT issued show-cause notices under section 263, contending that clause 8(b) of the trust deeds rendered the trusts revocable as it provided the settlor with the power to vary the provisions of the trust deeds. The assessee argued that the Settlor did not reassume power over the income or assets of the trusts, thus the dividends received by the trusts should not be included in the Settlor's income. The departmental representative, relying on precedents and clause 8(b) of the trust deeds, argued for the inclusion of dividends in the Settlor's income.

The pivotal question was whether the CIT correctly set aside the assessments under section 263 by considering the application of section 63(a)(ii) in light of clause 8(b) of the trust deeds. The Tribunal analyzed the provisions of section 63(a)(ii) and clause 8(b) to determine the revocability of the trusts. Reference was made to judicial pronouncements, including the decision of the Calcutta High Court in a similar case, emphasizing the significance of the settlor reassuming power directly or indirectly over the income or assets for revocability.

The Tribunal concluded that clause 8(b) of the trust deeds did not grant the Settlor the power to reassume control over the income or assets of the trusts, as required under section 63(a)(ii) for revocability. It was highlighted that the power to vary provisions did not extend to affect the core objectives of the trusts. The Tribunal distinguished the cited precedent and held that the CIT's assumption of jurisdiction under section 263 was improper. Consequently, the Tribunal allowed the appeals, setting aside the CIT's order under section 263.

In essence, the judgment delved into the intricacies of trust revocability under tax laws, emphasizing the necessity for direct or indirect reassumption of power by the settlor over trust assets for revocability to apply. The analysis provided a nuanced interpretation of statutory provisions and legal precedents to resolve the dispute regarding the inclusion of trust dividends in the Settlor's income.