1991 (3) TMI 191 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the formation of Ved Wati Trust No. 1.
2. Inclusion of income from assets transferred to the trust in the settlor's income.
3. Application of Section 64 of the Income-tax Act regarding income from shares transferred to HUF.

Issue-wise Detailed Analysis:

1. Validity of the Formation of Ved Wati Trust No. 1:

The Revenue challenged the formation of Ved Wati Trust No. 1, alleging it was an artifice for tax evasion, referencing the Supreme Court judgment in McDowell & Co. Ltd. The Assessing Officer (AO) argued that the trust was created to avoid tax on income, which would otherwise be taxable if the settlor directly earned it. However, the Appellate Assistant Commissioner (AAC) upheld the trust's validity, noting the trust's recognition by the Gift-tax Officer and its bona fide status as a partner in M/s. Munjal Gases. The Tribunal agreed with the AAC, stating that the trust was created validly and genuinely, thus rejecting the Revenue's contention of it being a tax evasion device.

2. Inclusion of Income from Assets Transferred to the Trust in the Settlor's Income:

The AO included the income from assets transferred to the trust in the settlor's total income, arguing that the trust's formation was a tax evasion device. The AAC excluded this income from the settlor's assessment, recognizing the trust's validity. The Tribunal upheld the AAC's decision, emphasizing that the income from the trust should be assessed in the hands of the trustees, not the settlor. The Tribunal noted that the same transfer could not be treated as both genuine for gift-tax purposes and a device to defraud the Revenue for income-tax purposes.

3. Application of Section 64 of the Income-tax Act Regarding Income from Shares Transferred to HUF:

The AO also brought to tax under Section 64 the dividend income from shares transferred to HUF, arguing that the sale consideration was inadequate, and thus the income should be included in the settlor's income. The AAC directed the AO to redetermine the market value of the shares and assess the proportionate income if there was a difference. The Tribunal upheld this direction, agreeing that the income accruing from the excess value of shares should be considered for application of Section 64 in the settlor's case.

Conclusion:

The Tribunal allowed the Revenue's appeal regarding the trust (I.T.A. No. 870/87), restoring the AO's order, and allowed the Revenue's appeal in part regarding the settlor (I.T.A. No. 659/87), affirming the AAC's directions on redetermining the share value and assessing proportionate income. The Tribunal recognized the trust's validity and directed that income from the trust should be assessed in the trustees' hands, not the settlor's. The Tribunal also upheld the AAC's approach to applying Section 64 for income from shares transferred to HUF.