1978 (9) TMI 84 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the Trust
2. Assessment of Income under Section 161
3. Addition to the Trading Account

Detailed Analysis:

1. Validity of the Trust:

The primary issue was whether the assessee was a validly constituted Trust and if the income should be assessed within the limitations prescribed in Section 161 of the Income Tax Act. The business, previously run by a partnership, was transferred to a Trust formed for the benefit of the children of the late T.A. Varghese. The partnership included three major partners and three minors. Upon one minor becoming a major, a declaration was signed, but no new partnership deed was drawn up.

An unregistered agreement on 16th Aug., 1971, indicated the desire to create a family trust. Donations were directed to the Trust by relatives, and these were adjusted via book entries rather than cash contributions. The Trust Deed executed on 17th Aug., 1971, named T.V. Abraham and T.V. Scaria as trustees and outlined the purpose of the Trust and the distribution of assets. The ITO had rejected the Trust's validity, citing violations of the Trust Act, but the AAC upheld its validity.

The Tribunal found no material evidence to support the claim that there was an initial gift to the minors followed by a secondary transfer to the Trust. The transfer was directly from the donors to the Trust, and the minors were beneficiaries of the income, not direct recipients of the donations. The business was transferred to the Trust for valid consideration, and no minor's share in the business was made the subject matter of the Trust without court approval. The Tribunal concluded that the Trust was validly constituted.

2. Assessment of Income under Section 161:

The Department argued that the assessment should be as an 'association of persons' rather than under Section 161. The Tribunal referred to the Supreme Court's decision in CWT vs. Trustees of Nizam's family, which stated that the charging section is subject to the provisions of the entire Act, including Sections 160 and 161. Therefore, if a validly created Trust has known beneficiaries with determinate shares, the ITO must apply Section 161 and restrict the liabilities of the trustees to the same extent as the beneficiaries. The Tribunal upheld the AAC's decision that the Trust should be assessed under Section 161.

3. Addition to the Trading Account:

The assessee appealed against the addition of Rs. 10,000 to the trading account for the assessment year 1973-74. The Tribunal noted that the gross profit rates for prior years were 14.4% and 14.9%, and the ITO had adopted 15% for the assessment year 1971-72. For the current year, the gross profit was 13.22%, which was explained by the assessee as due to the disposal of certain umbrella clothes at lower rates. The Tribunal found the explanation satisfactory and directed that the addition sustained by the AAC should be deleted.

Conclusion:

The Tribunal dismissed the departmental appeals, upholding the validity of the Trust and its assessment under Section 161. The assessee's appeal against the addition to the trading account was allowed, and the addition was deleted.