1991 (8) TMI 140 - AT - Income Tax

Summary

Issues Involved:
1. Genuineness of the trust
2. Status of the trust as an individual or AOP
3. Validity of assessments for previous years
4. Application of tax avoidance principles
5. Determination of beneficiaries' shares

Issue-wise Detailed Analysis:

1. Genuineness of the Trust:
The primary issue was whether the trust was genuine or a fictitious entity created for tax avoidance. The assessee claimed to be a private trust with specified shares for its beneficiaries. However, the Assessing Officer concluded that the trust was bogus and fictitious, assessing it on a protective basis as an Association of Persons (AOP). The CIT(A) concurred with the findings, setting aside the assessments with a direction to tax the income in the hands of the actual beneficiaries. The Tribunal upheld the findings, noting that the trust did not carry on any independent business and was merely a device to avoid taxes. The trust was created with a nominal sum of Rs. 1,000, and the business was purportedly taken over from Ramesh Chand Agarwal, who rendered himself unemployed and reduced his income, indicating an ulterior motive.

2. Status of the Trust as an Individual or AOP:
The trust filed its return of income describing its status as an individual. However, the Assessing Officer assessed it as an AOP on a protective basis, citing that the trust was not genuine. The Tribunal upheld this assessment, noting that the trust's activities and the circumstances surrounding its creation indicated that it was not a bona fide entity. The trust deed provided extensive discretionary powers to the trustee, Smt. Prem Lata Agarwal, making her the de facto owner of the trust's assets and income, which contradicted the claim of a specific trust with determinate shares.

3. Validity of Assessments for Previous Years:
The assessee argued that the trust had been accepted as genuine for the assessment years 1978-79 to 1981-82, and the Revenue could not take a different stand for the assessment year 1982-83. However, the Tribunal noted that the earlier assessments were made in a routine manner without investigating the genuineness of the trust. It is settled law that principles of res judicata and estoppel do not apply to income-tax proceedings, and each assessment year is independent. The Tribunal found no legal bar to re-examining the trust's genuineness for the assessment year under consideration.

4. Application of Tax Avoidance Principles:
The Tribunal referred to the judgments of the Hon'ble Supreme Court in CIT vs. Meenakshi Mills Ltd. and McDowell & Co. Ltd. vs. CTO, which allow lifting the corporate veil to expose tax avoidance schemes. The Tribunal found that the trust was a colourable device to avoid tax, as evidenced by the significant increase in income shown by the trust after taking over the business from Ramesh Chand Agarwal, who himself reported a reduced income. The trust ceased to carry on business from 1st April 1984, coinciding with the amendment in the IT Act taxing trusts at the maximum marginal rate, further indicating tax avoidance.

5. Determination of Beneficiaries' Shares:
The trust deed provided that the shares of the beneficiaries were 25% each. However, the Tribunal found that the extensive discretionary powers given to the trustee made the shares indeterminate. The trustee had absolute discretion in utilizing the trust funds, and the beneficiaries had no enforceable right to the income or assets. The provisions allowed for changes in the shares based on various contingencies, making the shares of the beneficiaries in a state of flux. Consequently, the Tribunal concluded that the trust could not be considered a specific trust with determinate shares.

Conclusion:
The Tribunal upheld the findings of the lower authorities, concluding that the assessee was not a genuine trust and carried on no business. It was deemed a colourable device to return the income earned by Ramesh Chand Agarwal through the purported trust and avoid tax by dividing the income among the beneficiaries. The appeals were dismissed, affirming the protective assessment as an AOP and the direction to tax the income in the hands of the actual beneficiaries.