9911796707
TMI Blog1993 (7) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. Thereafter, on the request of the assessee 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 assessment order was passed under s. 143(3) on 28th Oct., 1988 computing the total income as under: . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i 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, 1975. By a trust vide trust deed executed on 7th May, 1981 Ravi P. Shetty settled a trust appointing Shri Sadanand S. Shetty, Smt. Soumyalatha S. Shetty and Shri M.B. Kamath as trustees for the benefit of the children and g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 that tax has to be levied on the spot where the income has originated and the assessee cannot be allowed to adopt dubious methods to defraud the scheme by applying various types of tax planning for shirking of its responsibility u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises 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 business. 7. In the order dt. 18th May, 1990 in respect of the asst. yr. 1986-87 reference was made to the appellate order for the asst. yr. 1985-86 and on the basis of the reasons given in that appellate order, the CIT(A) upheld the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1983. In the statement accompanying the return he declared his share in Sadanand Family Benefit trust income and was assessed on that. The trust income was declared under the head other sources. The same type of assessment was done in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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. Shetty till the birth of her first child, on and from the date of the birth of the first child the said part of the net income shall be applied solely for the benefit of such child till the birth of the second child, and on and from the birth of the second child the said part of the net income shall apply for the benefit of children of Smt. Smita H. Shetty in equal shares, provided that, if the child or children of the said Smita die, before the vesting day, and if no child is living for time being for that period, during which no child is living the said part of income shall apply for the benefit of Smt. Smita H. Shetty and fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment 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. Trustees of Staff Gratuity Fund of Shree Ram Mills Ltd. (1987) 59 CTR (Bom) 92 : (1986) 162 ITR 471 (Bom) and stated that the beneficiaries can change from year to year but they must be specific when the income accrues on the valuation date. In the decision of the Bombay High Court in CIT vs. Trustees of Staff Gratuity Fund of Shree Ram Mills Ltd., the Bombay High Court dealt with the case relating to a fund created for payment of gratuity to the cause of employees of Shree Ram Mills Ltd. covered by the Industrial Court of Bombay also to such others whom the mill considered by reason of long and faithful service to deserve a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 beneficiaries are not changed. Referring to the "Vesting Day" the counsel for the appellant pointed out that the CIT(A) did not deal with this issue. 13. Further arguing the learned counsel for the appellant stated that letting out property does not constitute business though the beneficiaries purchased the property and let out to the Trust where they are beneficiaries and the trustees let out the property to a company in which Shri and Smt. Sadanand A Shetty are main owners. According to the Bombay Municipal Corporation Act, the first letting out is considered for levying property tax and as it determine the property tax, the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it 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 the deposit of Rs. 45,000 but it was refundable to the licensor on termination of the agreement after adjusting any licence fee due from the licensor to the licensee. The learned counsel for the assessee stated that this was an isolated transaction in respect of the immovable property and such an isolated transaction does not constitute business transaction. CIT vs. National Storage (P) Ltd. (1963) 48 ITR 577 (Bom) is relied on for this claim. In that decision the Bombay High Court after an exhaustive discussions of the earlier case law relating to this issue laid down at (1963) 48 ITR 577, 593 certain propositions it was held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 counsel for the assessee pointed out that if a strict and literal construction of the statute leads to an absurd result, a result not intended to be subserved by the object of the legislation ascertained from the scheme of the legislation, then, if another construction is possible apart from the strict literal construction, then that construction should be preferred to the strict literal construction. 17. Thereafter, the learned counsel for the assessee referred to the additional grounds of appeal filed during the hearing of the appeal and placing reliance on Full Bench in Ahmedabad Electricity Co. Ltd. vs. CIT (1992) 106 CTR (Bom)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gued 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 beneficiaries should be assessed. Therefore, the CIT(A) was also not concerned whether s. 164 was applicable. Consequently the issue before the Tribunal was whether the amount is taxable under s. 161(1A) or not and no other issue can arise before the Tribunal, and therefore, the additional grounds of appeal cannot be entertained. 21. In so far as the merits of the appeal are concerned the learned Departmental Representative stated that when the shares are determinate the assessment should be done under s. 161(1A). Referring to the trust deed he pointed out that the trust deed was made originally for a period of 18 years but before that vesti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself. 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 appeal an opportunity of being heard, pass such orders thereon, as it thinks fit and held that the word "thereon" gives wide powers to the Tribunal because what is to be decided by the Tribunal is the income which is to be assessed to tax and for that purpose the Tribunal may take into consideration all matters relating to the subject-matter of the appeal. The Bombay High Court (FB) also held that there is nothing in s. 254 of the IT Act, 1961 which would indicate that the appellate authorities are confined to consider only the objections raised before them or allowed to be raised before them either by the assessee or by the Department as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, assessment have to be made only in the status of an individual and cannot be made in the status of AOP even while making the assessment under s. 161(1A). In conformity with the said decision we hold that the trust can be assessed only as a representative assessee in respect of the income attributable separately to each of the beneficiaries. In other words it is the beneficiaries, income which is to be taxed separately in respect of each beneficiary and the trust is only a representative assessee. 27. In so far as the income of Rs. 1,44,000 is concerned the issue was considered in the earlier assessments and the amount was assessed as income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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