9911796707
TMI Blog1993 (7) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... see the assessment was reopened and another assessment order was passed under s. 143(3). In this assessment order passed on 28th Oct., 1988 the Assessing Officer held that the trust is a discretionary trust and the income derived by it is nothing but income from profits and gains of business or profession. On this basis the ITO computed the total income as under: . Rs. Income from Business : . (a) Share of loss from M/s Rubber Extrusion Moulding Co. (taken subject to rectification) Nil (b) Income derived from licencing of office premises as per statement 1,44,000 (c), Income from interest 10,625 C/F 1,54,625 . Rs. Income from other sources : . Bank interest 67 (No deduction under s. 80L is allowable since the section does not apply to the assessee) . Total taxable income 1,54,692 Rounded off to 1,54,690 3. In the asst. yr. 1986-87 also the assessment was at first completed under s. 143(1) taxing the income under s. 161(1A) and subsequently the assessee filed an application for a fresh assessment. The second ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er) and Master Sameer S. Shetty (his son) who are none else than trustees and beneficiaries of the assessee trust. The company had in its possession two office premises No. 401 and 402 at Mahalaxmi Chambers, Bhulabhai Desai Road, Bombay 400026 as a licencee of a tenant by the name M/s Ashok Commercial Enterprises who in turn was the tenant of 2 owners of the office premises i.e. Shri Uttamchand Meghraj (for office premises No. 401) and Shri Bhopatrai Jirathdas (for office premises No. 402). As per the articles of agreement made on 5th May, 1975 between the vendor, the tenant, Licencees and purchasers, M/s. Fouress Engg. (India) Pvt. Ltd., licencee and Smt. Smita S. Shetty, Miss Sucharita S. Shetty and Master Sameer S. Shetty the office premises 401 was sold to the purchasers for Rs. 97,500 on instalment basis. By another articles of agreement of the same date (5th May, 1975) between Bhopatrai Tirathdas and others same persons mentioned above (No. 2) termed as tenant, licencee and the purchasers, the office premises No. 402 was sold to the purchasers mentioned therein for Rs. 1,36,500 on instalment basis. The sale to have been completed on the expiry of 72 months from 1st May, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of execution, the trustees (two of three being parents of the beneficiaries) have been given so wide power to wind up the trust at their sweet will, and this make the trust a discretionary trust to be taxed under s. 164 of the IT Act. Further the assessment order stated that the trust deed was executed on 7th May, 1981 whereas the tenancy agreement was made on 1st May, 1981 and the trustees could not have acquired the right of tenancy when no trust deed was executed. The assessment order also stated that the involvement of Smt. and Shri Sadanand Shetty, the trustees of the trust for the purchase of officer premises on behalf of their minor children, letting it out to the trust and as trustees of the trust subletting on leave and licence basis to the private company (in which more than 90% of the shares are held by members of single family) proves that it is nothing but business or adventure in the nature of trade and, therefore, there is no alternative but to treat the income from compensation and interest income as income from business. The assessment order also rejected the claim of the assessee that income should be assessed in the hands of the beneficiaries on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on 1st May, 1981 in respect of premises No. 401 402 the joint owner of which are the children of Shri Smt. Sadanand S. Shetty on a monthly rent of Rs. 3,000 and thereafter the trustees of the trust sub-letted the two premises again to M/s Fouress Engg. (India) Pvt. Ltd. on leave and licence basis initially at a monthly compensation of Rs. 1,500 p.m. which was subsequently increased to Rs. 18,000 p.m. w.e.f. 1st April, 1985, does not appear to have any commercial purposes except to reduce the incidence of taxation in the hands of various members of the family of Shri and Smt. Sadanand Shetty who are trustees as well as the persons holding more than 90% of the equity shares of M/s Fouress Engg. (I) Pvt. Ltd. and the tax avoidance scheme serves no commercial purposes except that of tax avoidance and is caught in the mischief of the ratio of Supreme Court decision in the case of McDowell Co. Ltd. Thus the CIT(A) upheld the assessment orders and held that the income of the appellant trust has to be assessed in accordance with the provisions of s. 161(1A) at the maximum marginal rate as the appellant trust is deriving income (though negative in asst. yr. 1985-86) from busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady assessed in respect of their shares in the income of the appellant trust. (ii) Assessing Officer and CIT(A) failed to appreciate that the beneficiaries had already been assessed in respect of income from the trust and once the beneficiaries have been assessed in respect of such income, the appellant trust should not have been assessed in respect of the same income. 10. Shri V.H. Patil, the learned counsel for the appellant, stated that Sadanand Family Benefit Trust was assessed as a specific trust by the ITO upto the asst. yr. 1984-85. In support of his statement he filed copies of the acknowledgement of returns filed by Master Shreeram H. Shetty for the asst. yr. 1984-85 and the copy of notice of demand in which Master Shreeram H. Shetty was described as an Individual with GIR No. District 708-S 931. Of course the assessment was completed under s. 143(1) on 20th March, 1987. In the same manner Master Rithivik R. Hegde was assessed for the asst. yr. 1984-85 on 30th March, 1989 under s. 143(1) and a demand of Rs. 1,085 was raised in his assessment in GIR No. 7-4762 R(3). In the asst. yr. 1983-84 Master Shreeram H. Shetty was assessed on the basis of a return on 29th June, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,44,000 10,625 1,44,120 (NOTES: Trust is family private trust, having specific shares of its beneficiaries and hence income will be taxed in the hands of beneficiaries.) After reiterating these facts the learned counsel for the assessee disputed the order of the CIT(A), and the assessment He took us through the trust deed dt. 7th May, 1981 enclosed in the assessee's paper book No. 1 at page 9 to 22 and drew our attention to the fact that the beneficiaries are as under: (1) Mrs. Smita H. Shetty till the birth of her first child (2) Mrs. Sucharita R. Hegde, till the birth of her first child (3) Master Sameer S. Shetty, till his marriage (4) The children of the said Mrs. Smita H. Shetty (5) The children of the said Mrs. Sucharita R. Hegde (6) The wife of the said Sameer S. Shetty till the birth of her first child (7) The children of the said Sameer S. Shetty Our attention was invited to cl. 3(b) of the trust deed according to which the trust shall divide the income of the trust into 3 equal parts and shall apply and appropriate these 3 parts as under: (i) One of such part, the trustee shall apply for the benefit of Smt. Smita II. Shet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in CWT vs. Trustees of H.E.H Nizami's Family Trust 1977 CTR (SC) 306 : (1977) 108 ITR 555 (SC). In that case the Supreme Court held referring to s. 21 of the WT Act that the consequences of s. 21(1) is that trust is assessable "in the like manner and to the same extent" as the beneficiary are three fold. In the first place there would have to be as many assessment s on the trustee as there are beneficiaries with determinate and known shares, though for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly the assessment of the trustee would have to be made in the same statuts as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. And lastly, the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly. Further he has placed reliance on Trustees of Putalibai R.F. Mulla vs. CIT (1967) 66 ITR 653 (Bom), CIT vs. Trustees of Mrs. Hamasben Tribhuwandas Trust (1968) 69 ITR 527 (Bom), R.H. Pandit vs. CIT (1972) 83 ITR 136 (Bom) and CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and (iv) are liable as representative assessee or any part thereof shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the Court or the instrument of trust as the case may be, and is identifiable as such on the date of such order, instrument or deed. According to the learned counsel the persons who are beneficiaries must be determined on the first day of the trust. When the trust is for future person if it is stated on the first day of the trust that the trust is for the benefit of the daughter or son of so and so that is sufficient and the change of beneficiaries eventually does not affect the nature of the trust. The learned counsel also referred to the assessment order in which it was stated that the beneficiaries are changing and the trustees have power to dissolve and countered the statement in the assessment order by pointing out that the trustees only control the trust and that will not make the trust discretionary because the beneficiaries or the share of the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Ramakrishna Hegde, Master Sameer Sadanand Shetty (minor represented by his mother natural guardian Mrs. Soumyalata S. Shetty) called the landlords and the trustees of Sadanand Family Benefit Trust Mr. Sadanand Shetty, Mrs. Soumyalatha S. Shetty and Mr. M.B. Kamath called the tenants entered into an agreement. As per that agreement the landlord who is the owner in respect of office premises No. 401 and 402 of the building known as Mahalaxmi Chambers, hired the said premises from 8th May, 1981 on a monthly rent of Rs. 3,000.The agreement provided that the tenant will not, without the consent in writing of the landlord use or permit to be used the tenanted premises for any purpose other than for trade or business. Subsequently the Sadanand Family Benefit Trust let out the property on 16th May, 1981 to Fouress Engg. (India) Pvt. Ltd. from 16th May, 1981 for a period of 3 years with proviso for renewal for a further period of 3 years. The licence fee was fixed at Rs. 15,000 per month which was to be paid on or before 5th of every month. A sum of Rs. 45,000 was to be deposited with the licensor by the licencee by way of advance of licence fees for 3 months. No interest was payable on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing the trust as a discretionary trust for the first time in the asst. yr. 1985-86 and in holding that letting out of the property constitute a business and the income therefrom was business income. Placing reliance on H.A. Shah Co. vs. CIT (1956) 30 ITR 618 (Bom) the counsel argued that on the same facts the Assessing Officer cannot arrive at a different conclusion in different assessment years though as a general rule the principle of res judicta is not applicable to decisions of IT authorities. 16. In so far as the asst. yr. 1985-86 is concerned one peculiar issue pertaining to this assessment year is that the trust is a partner of M/s Rubber Extrusion Moulding Co., and has no income but share of loss only. According to the learned counsel for the assessee when there was no income and only loss the question of applying s. 161(1A) does not arise because the profits and gains of business are the words used in s. 161(1A) and that expression does not include losses and there is no mention of losses in the provision. While the word "Income" may include loss the word "profits and gains" specifically used will not include loss. Relying on CIT vs. J.H. Gotla the learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s corpus of the trust, creation of a tenancy agreement dt. 8th May, 1981 between the beneficiaries and the trustees and stated that the beneficiaries who are the owners transferred the property to the trust for holding it for the benefit of the beneficiaries. Shri Keshav Prasad emphasised that when somebody gives his own property to others to hold it in trust for the benefit of the owner it is only a colourable device. The fact that the trust gave the same property on hire to the same tenants who were tenants earlier is stated to reflect the colourable nature of the transaction. The learned Sr. Authorised Representative vehemently argued that the entire transactions constitute a full circle in which the same persons and the same property is dealt in the manner so as to reduce the incidence of tax and as the transfers are colourable device one must go behind the transactions and arrive at a proper conclusion without taking the smoke screen of the transactions at their face value. 20. In respect of additional ground of appeals Shri Keshav Prasad argued that the case before the ITO was whether s. 161(1A) was applicable in respect of the assessment and not whether trust or beneficia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name or in any other name it is not incumbent on the trustees to share the income with the beneficiaries, and when the income need not be shared with the beneficiaries s. 164(1) is applicable to this case. The decision of the Bombay High Court relied upon by the authorised representative is stated to be not applicable to the facts of the case as the conditions referred to therein have not been fulfilled. 22. In his reply Shri V.H. Patil, the Advocate for the appellant stated that giving the property on leave and licence does not constitute business and ownership of the property is not relevant as leave and licence was there in 1975 itself. About the additional grounds he reiterated that they are bare questions of law and are questions related to the subject matter of appeal. 23. After hearing the exhaustive arguments from both the sides, we wish to place on record our appreciations for the valuable assistance rendered by the counsel. 24. In so far as the additional grounds of appeal are concerned the Full Bench of the Bombay High Court in Ahmedabad Electricity Co. Ltd. vs. CIT referred to s. 254(1) according to which the Tribunal may, after giving both the parties to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided that the provisions of this sub-section shall not apply where such profits and gains are receivable under a trust declared by any person by will exclusively for the benefit of any relative dependent on him for support and maintenance, and such trust is the only trust so declared by him." 26. In Mohammed Omer Family Trust vs. ITO (Hyd)(SB) the Tribunal Special Bench dealt with the effect of insertion of s. 161(1A) in an exhaustive manner. It was held in the said decision that the contention of the Revenue that the status of the trust should be taken as an AOP because of the new provision in sub-s. (1A) is devoid of any merit because sub-s. (1A) does not state anywhere that the status should be taken as "AOP" and it only states, when read with Explanation, that the tax imposable shall be the maximum marginal rate applicable to AOP and the object of sub-s. (1A) is only to impose higher rate of tax in the circumstances mentioned therein and not to create an AOP. The non-obstante clause was held not to wipe out the settled legal position that it is only the share of the beneficiary that is liable to be taxed in the hands of the trustee as representative assessee. Therefore, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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