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TMI Blog1991 (3) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of the creditors for repayment of amount due to them amounting in total to Rs. 4,50,000 as specified in Schedule II thereto. Subsequently till the date of determination but after the obligation of the trustees to hold, receive and pay the income of the trust for the benefit of the creditors for their repayment is fulfilled, the trustees shall hold, receive and distribute the income of the trust for the benefit of the beneficiaries described in the deed subject to the terms, conditions, powers, provisions and covenants, restrictions, directions and mandates specified in the deed. 3. There are definitions of beneficiaries, income, trust fund or corpus, trust duration, trustee etc. provided in Chapter II of the trust deed. The primary beneficiaries to income till the satisfaction of the obligation of the trustees to hold, receive and pay the income of the trust for the benefit of the creditors for their repayment of the amount owed to them are :---- (i) M/s. Ashok Kumar (HUF) 33-1/3% (ii) Mrs. Bhobhana Munjal 33-1/3% (iii) Master Naveen (minor) s/o Shri Vijay Kumar 16-2/3% (iv) Master Gaurav (minor) s/o Vijay Kumar 16-2/3% The secondary beneficiaries to incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd.) 9,794 (iii) Interest income (Brij Mohan Lal Om Parkash and SBI) 542 -------------- 33,054 -------------- In addition to the above, the Assessing Officer also brought to tax under section 64 of the Act, the following amounts : ---- (i) Dividend income on 316 equity shares Rs.of Hero Cycles Ltd. 3,950 (ii) Dividend on 2990 preference shares of Hero Cycles Pvt. Ltd. @ Rs. 3 per share 8,970 ------------ 12,920 In taking the above decisions, the Assessing Officer primarily recorded the following reasons :--- (a) That the formation of a trust and settling properties on the trust for the benefit of the creditors was an artifice of tax evasion in terms of the S.C. Judgment in the case of McDowell Co. Ltd. [1985] 154 ITR 148 ; (b) That, if the assessee was directly to earn income from these assets and then apply the same for settlement of accounts with the creditors, it would have paid the tax on the income first and repayment of loan will be a mere application of income ; (c) That the assessee's claim that she is not to pay tax on the income of the assets transferred and the trust contention that it is not to pay tax on the said income as it has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd and elaborate discussion in the order of the Assessing Officer. The learned D.R. argued that it is a case of invalid and illegal trust formed as a device for tax evasion to which the ratio of the Supreme Court judgment in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 is clearly applicable. The learned D.R. therefore, argued that the order of the AAC be reversed and that of the Assessing Officer be restored in its place. 12. It was further argued by the learned D.R. that the AAC erred further in vacating the action of the Assessing Officer in assessing income under section 64 in respect of the shares transferred to Daya Nand Sons HUF at Rs. 12,920 and in doing so, he has completely disregarded the correct factual position of the case brought out in the assessment order. It was also emphasised by the learned D.R. that the directions issued by the AAC to the Assessing Officer that value of shares be redetermined keeping into account the fact that the application of rule 1D is not essential, are not justified. In issuing these directions, the AAC did not appreciate the settled position of law, it was contended, that the application of rule 1D for valuation of unquot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of instrument of partnership evidencing it as made on 1st day of April, 1982 mentioning clearly that " Ashok Kumar son of late Sh. Daya Ram Munjal aged 31 years (a trustee), for and on behalf of M/s. Ved Wati Trust No. 1, Ludhiana " as a party to this deed of 11th part. This firm has, it appears, been held as bonafidely constituted and assessed under-section 143(3) of the Act on total income of Rs. 4,54,361 (before adding remuneration to partners amounting to Rs. 80,100) and 5% share of Smt. Ved Wati Munjal Trust No. 1 through its trustee Ashok Kumar has been determined at Rs. 22,718. This assessment was made on 29-1-1986 and has become final as per pages 113 to 118 of the paper book. 16. The creation of the trust also got recognition from the Gift-tax Officer, Central Circle 1, Ludhiana as he assessed Smt. Ved Wati Munjal to gift-tax under section 15(3) of the Gift-tax Act vide order dated 27-2-1987 for the assessment year 1982-83 appearing at pages 102 to 105 of the paperbook. The Gift-tax Officer determined the taxable gift at Rs. 6,99,599 which included addition on account of shares of M/s Hero Cycles Pvt. Ltd. amounting to Rs. 3,34,946 and addition on account of differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Madras High Court judgment cited by the assessee and adverted to in the assessment order by the Assessing Officer does not come in aid of the assessee as that is distinguishable on facts. In that case, there was a direction of the Court for distribution of income of the trust to the creditors and the trustees did not receive income with full dominion over it. In the case of this trust, its creation by the assessee is a matter of volition. No one directed that the trust be created for repayment of loans in the manner described in the trust deed. On the other hand, the provisions of the deed show that the trustees are to hold, receive and control the income of the trust before its application for repayment of loans earlier taken by the settler. The first beneficiaries thus are not really beneficiaries in the sense of cestui que trust ordinarily understood in law because they are merely being reimbursed of the sums they had earlier parted with as loans to the settlor albeit through this instrument of trust. This cannot, therefore, be reason for not assessing the income of the trust in the hands of the trustees. 20. Thus whereas the Assessing Authority was in error in treating ..... X X X X Extracts X X X X X X X X Extracts X X X X
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