1986 (2) TMI 149 - AT - Income Tax

Summary

Issues Involved:
1. Application of Section 263 of the Income-tax Act, 1961.
2. Interpretation of Explanation 1 to Section 164 of the Income-tax Act.
3. Determination of the trust as discretionary or specific.
4. Validity of the Commissioner's order.
5. Applicability of amendments to the assessment year 1980-81.
6. Impact of trustees' discretion on the nature of the trust.
7. Relevance of subsequent amendments to the trust deed.
8. Binding nature of CBDT circulars on the ITO.

Detailed Analysis:

1. Application of Section 263 of the Income-tax Act, 1961:
The Commissioner invoked Section 263 of the Income-tax Act, 1961, deeming the ITO's order as "erroneous insofar as it is prejudicial to revenue." The ITO had failed to consider the impact of Explanation 1 to Section 164, newly inserted by the Finance (No. 2) Act, 1980, effective from 1-4-1980. The Commissioner issued a notice under Section 263 and subsequently directed the ITO to treat the assessee as a discretionary trust, liable to be assessed at maximum rates.

2. Interpretation of Explanation 1 to Section 164 of the Income-tax Act:
Explanation 1 to Section 164 deems income as indeterminate unless the individual shares of beneficiaries are expressly stated in the trust deed and ascertainable as such on the date of the instrument. The Commissioner argued that the trust's provisions, allowing trustees to alter shares or accumulate income, rendered the trust liable to assessment at maximum rates. The assessee contended that the power to alter shares was prospective and had never been exercised, thus maintaining specific shares.

3. Determination of the Trust as Discretionary or Specific:
The trust deed specified nine groups of beneficiaries with defined shares. However, the deed also granted trustees the absolute discretion to alter shares or accumulate income, which the Commissioner argued made the trust discretionary. The assessee argued that the trust was specific as the trustees had never exercised this discretion and that shares were ascertainable based on the trust deed.

4. Validity of the Commissioner's Order:
The Commissioner rejected the assessee's arguments, emphasizing that the trust's provisions allowed for potential alteration of shares, making it discretionary. The Commissioner directed the ITO to assess the trust at maximum rates. The Tribunal upheld the Commissioner's order, agreeing that the trust was discretionary due to the trustees' overriding discretionary power.

5. Applicability of Amendments to the Assessment Year 1980-81:
The Tribunal agreed with the departmental representative that the Finance (No. 2) Act, 1980, effective from 1-4-1980, applied to the assessment year 1980-81. The Tribunal distinguished this case from others where amendments applied prospectively, emphasizing that substantive provisions effective from the first day of April apply to the assessment year commencing on that date.

6. Impact of Trustees' Discretion on the Nature of the Trust:
The Tribunal held that the trustees' discretion to alter shares or accumulate income rendered the trust discretionary. The existence of such a clause, even if unexercised, made the individual shares indeterminate. The Tribunal emphasized that the shares must be ascertainable from the trust deed without considering external factors or potential trustee actions.

7. Relevance of Subsequent Amendments to the Trust Deed:
The assessee argued that a subsequent amendment to the trust deed, deleting the discretion clause retrospectively, should be considered. The Tribunal rejected this argument, stating that the trust deed's terms at the time of execution were sacrosanct and could not be altered retrospectively to affect the assessment.

8. Binding Nature of CBDT Circulars on the ITO:
The Tribunal noted that the ITO had not applied his mind to the CBDT circular, which stated that trusts with discretionary powers for trustees to allocate income would be assessed as discretionary trusts. The Tribunal held that the ITO should have considered the circular or expressed respectful disagreement, which he failed to do.

Conclusion:
The appeal was dismissed, with the Tribunal upholding the Commissioner's order under Section 263. The trust was deemed discretionary due to the trustees' overriding discretionary power, and the amendments to the trust deed were not considered valid for altering the assessment. The Tribunal emphasized the importance of applying the law in force during the relevant assessment year and the necessity for the ITO to consider CBDT circulars.