1984 (10) TMI 92 - AT - Income Tax

Advance Tax, Assessment Year, Interest Payable By Assessee, Previous Year, Regular Assessment

Summary

Issues:
- Registration of the firm was refused by the ITO and confirmed by the AAC.
- Validity of the constitution of trusts for minors.
- Whether the trust was constituted to defeat the provisions of section 64(1).
- Whether the minors suffered the loss of the firm indirectly.

Analysis:
The judgment by the Appellate Tribunal ITAT Cochin involved appeals by the assessee firm, Ajit Traders, for the assessment years 1978-79, 1979-80, and 1980-81. The primary issue was the refusal of registration of the firm by the ITO, which was upheld by the AAC. The grounds of appeal were centered on the AAC's error in confirming the ITO's decision regarding the registration refusal.

The firm, Ajit Traders, was constituted by a partnership deed with five partners, including three partners representing trusts for minor beneficiaries. The refusal of registration by the ITO was based on the belief that the trusts were formed to circumvent tax provisions and that the minors were indirectly made liable for the firm's losses. The AAC, on the other hand, confirmed the refusal on the grounds that the trusts had not been validly created.

The Tribunal examined the trust deeds and the sequence of events leading to the constitution of the trusts. It was contended that the gifts to minors and the subsequent formation of trusts were simultaneous transactions, implying that the trusts were not constituted with the minors' funds. However, the Tribunal disagreed, holding that the amounts were first gifted to the minors, becoming their property before the trusts were established. This sequence was crucial in determining the validity of the trusts.

In comparing the case to a precedent set by the Kerala High Court, where the transfer to a trust fund was upheld due to the involvement of majors and not direct gifts to minors, the Tribunal found the present case to be different. The Tribunal concluded that the minors first received the gifts, and then the trusts were constituted, thereby upholding the AAC's decision to refuse registration.

Ultimately, the appeals by the assessee firm were dismissed, affirming the refusal of registration based on the invalid constitution of trusts for minors and the attempt to avoid tax provisions.