1992-VIL-166-ITAT-AHM

Equivalent Citation: ITD 041, 412, TTJ 047, 083,

Income Tax Appellate Tribunal AHMEDABAD

Date: 24.01.1992

NEO TRUST.

Vs

INSPECTING ASSISTANT COMMISSIONER.

BENCH

Member(s)  : R. L. SANGANI., B. M. KOTHARI.

JUDGMENT

Per Shri R.L. Sangani, Judicial Member--These two appeals by the assessee relating to assessment years 1981-82 and 1982-83 are directed against two separate orders passed by the learned CIT, Gujarat-III, Ahmedabad on 20-3-1985 in exercise of powers under section 263 of the IT Act, 1961.

ITA No. 1174/Ahd./1985 :

2. A business of manufacture of soap detergent power used for washing clothes was being carried on by a firm in the trade name of M/s. Neo Detergent since 1-4-1979 in which there were seven partners as follows :

(1) Udaykumar K. Baraiya as trustee of Udaykumar Baraiya Family Trust ;

(2) Udaykumar K. Baraiya, as an Individual ;

(3) Jethiben Khodidas Patel ;

(4) Bhikhiben R. Patel ;

(5) Virchanddas Vandas Patel ;

(6) Pramodkumar Kanjibhai Patel ; and

(7) Smt. Maniben Kantilal Patel.

The lastnamed partner viz., Smt. Maniben K. Patel retired from partnership with effect from 31-12-1979. With effect from that date the said firm was reconstituted. A deed of partnership dated 3-1-1980 was executed. Smt. Maniben retired from partnership and Shri Karsanbhai Kacharabhai Patel as trustee of the assessee-trust (Neo Trust) joined the partnership as partner. This reconstituted firm commenced business from 1-1-1980 and was dissolved with effect from 31-1-1980 by a deed of dissolution dated 7-2-1980. The business of the erstwhile firm was taken over by the assessee-trust as running business. From 1-2-1980 the said business was carried on by the assessee-trust. The accounting year of the assessee-trust for Assessment Year 1981-82 ended on 30-9-1980.

2.1 The ITO completed assessment for Assessment Year 1981-82 under section 143(3) read with section 161 of the IT Act, 1961 on 14-3-1983. In the assessment order the ITO determined (i) the income of the old firm for three months from 1-10-1979 to 31-12-1979 (Rs. 3,91,542), (ii) the income of the reconstituted firm in which the assessee-trust had joined as partner for period from 1-1-1980 to 31-1-1980 (Rs. 1,30,514) ; and (iii) the income of the assessee trust as proprietor of said business for eight months from 1-2-1980 to 30-9-1980 (Rs. 10,44,112). The income of the old firm and the reconstituted firm mentioned above was allocated amongst the concerned partners in accordance with the provisions of section 158 of the Act. As far as the income of the assessee trust as proprietor of the business was concerned, the ITO treated the assessee trust as specific trust and allocated the income amongst the beneficiaries of the assessee trust in accordance with the provisions of section 161 of the Act and raised no demand against the assessee-trust.

3. It is now necessary to state material facts relating to formation of the assessee-trust and other trusts who have been mentioned as beneficiaries of the assessee-trust.

3.1 On or about 9-12-1979 a discretionary trust was created in the name of Jayesh Hargovandas and Rakesh Karsanbhai Oral Discretionary Trust by Shri Manilal Kesurbhai Patel by settling Rs. 50 on the trustees. The beneficiaries of this discretionary trust were three minor children of the family. On 28-12-1979 another oral discretionary trust was created by Shri Pramod Kanjibhai Patel by settling Rs. 500 on the trustees. There were two beneficiaries of this oral discretionary trust created on 28-12-1979 one of which was oral discretionary trust mentioned above viz. Jayesh Hargovandas and Rakesh Karsanbhai Oral Discretionary Family Trust and the other was Sanjay Hargovandas and Rakesh Karsanbhai Oral Discretionary Family Trust. This second Oral Discretionary Family Trust had been created in the same manner as the first oral discretionary trust on or about 9-12-1979 and there were three beneficiaries in said trust who were minors named Rakesh K. Patel, Hitesh J. Patel and Jayesh H. Patel.

3.2 In similar manner the following oral dicretionary trusts were created on or about 28-12-1979. Their names are as under :

(1) Rakesh Karsanbhai Oral Discretionary Family Trust.

(2) R.K. Oral Discretionary Family Trust.

(3) Rakesh K. Patel Oral Discretionary Family Trust.

(4) Punita Rakesh Oral Discretionary Family Trust.

(5) Punita & Karsanbhai Oral Discretionary Family Trust.

(6) Piyush J. Oral Discretionary Family Trust.

(7) Piyush Joitaram Patel Oral Discretionary Family Trust.

(8) Piyush & Pushpaben Oral Discretionary Family Trust.

(9) Santaben & Karsanbhai Kacharabhai Oral Discretionary Family Trust.

(10) Karsanbhai Kacharabbai Nathubhai Oral Discretionary Family Trust.

The beneficiaries of each of these oral discretionary family trusts which were created on 28-12-1979, were two oral discretionary trusts which had been created a few days earlier and the beneficiaries of each of the subsequently mentioned Oral Discretionary Family trusts were three minors.

4. The assessee-trust (Neo Trust) was created by trust deed date 31-12-1979. Some of the beneficiaries of the assessee trust are mentioned in Schedule I of the deed while other beneficiaries are mentioned in Schedule II of the trust deed. The beneficiaries mentioned in Schedule I of the trust deed can be divided in three categories. The first category is that of individuals. The second category is that of Oral Discretionary Trusts. The third category is that of Oral Specific Trust.

4.1 As far as first category is concerned, there are seven individuals. Six of these individuals were partners in firm of Neo Detergent. The seventh individual is a minor who had been admitted to the benefit of said partnership. As far as Oral Discretionary Trusts are concerned they are Oral Trusts created on or about 28-12-1979 mentioned above. Each of these trusts, as already stated, has two beneficiaries and those two beneficiaries are by themselves Oral Discretionary Trusts and beneficiaries of the subsequently mentioned Oral Trusts are three individuals. As far as third category is concerned, it consists one Oral Specific Trust known as V.G. Zala Oral Specific Family Trust of which there are three beneficiaries.

5. As far as beneficiaries of Second Schedule are concerned, they are seven Oral Specific Deferred Trusts. Their names are after the seven individual beneficiaries mentioned in Schedule I. Each of these Specific Deferred Trusts has only one beneficiary and that beneficiary is one of the seven individuals mentioned in Schedule I.

6. In the trust-deed the share of each of the seven individuals mentioned in Schedule I, each of the 11 Oral Discretionary Trusts mentioned in Schedule I and one Oral Specific Trust mentioned in that Schedule and share of each of the Oral Specific Deferred Trusts mentioned in Second Schedule have been specified. The total share of the seven individuals mentioned in Schedule I comes to 28.5 per cent. The total share of 11 Oral Discretionary Trusts comes to 32 per cent. The share of one oral specific trust is 11 percent. The total share of seven Specific Deferred Trusts comes to 28.5 per cent. In other words the total share of individual beneficiaries comes to 28.5 per cent while the total share attributable to the Trusts comes to 71.5 per cent.

7. The learned CIT initiated proceedings under section 263 of the Act by issuing notice date 19-2-1985. The assessee filed reply date 8-3-1985. After considering the said reply and submissions made on behalf of the assessee, the learned CIT came to the conclusion that 71.5 per cent of the income of the assessee trust which would come to the share of 12 Trusts mentioned in Schedule I and seven trusts mentioned in Schedule II of the trust deed would be assessable at maximum marginal rate and that the ITO had erred in not taxing the same at said rate and in allocating the said income to those trusts. Against that order the present appeal has been filed by the assessee.

8. The first ground raised on behalf of the assessee is that the learned CIT had no jurisdiction to invoke powers under section 263 of the Act because the assessment order had been passed after obtaining instructions from the IAC under section 144A of the Act. A copy of instructions under section 144A is not on record. We shall assume that the IAC had issued instructions under section 144A of the Act. However, that by itself would not be a bar to exercise jurisdiction by the CIT under section 263. The order of which revision has been made by the CIT is that of the ITO and not that of the IAC. The order of the ITO, although passed in pursuance of instructions under section 144A of the Act, is subject to revision under section 263 of the Act.This has been made clear in the Explanation inserted in section 263 by the Taxation Laws (Amendment) Act, 1984 with effect from 1-10-1984. Consequently this ground is rejected.

9. The next ground raised on behalf of the assessee is that the order of the ITO had merged in its entirety in the order of the CIT(Appeals) date 17-10-1983 and as such the learned CIT should not have exercised jurisdiction under section 263 of the Act, inspite of the fact that subject matter of appeal before the CIT (Appeals) was entirely different from the subject matter of the revisional order.This submission cannot be accepted. There was difference of opinion among the High Courts on the question whether there was complete merger of the assessment order in the order of the CIT (Appeals) or whether there was only partial merger which was confined to the subject matter adjudicated by the first appellate authority. The decision of the Gujarat High Court in the case of Karsandas Bhagwandas Patel v. G.V. Shah, ITO [1975] 98 ITR 255 is in favour of department on this point. It was observed in that decision as follows :

" Whether there is merger of the order of assessment of the ITO in the appellate order of the AAC or not and, if there is, to what extent, depends upon the subject matter of the appellate order of the assessment made by the ITO merges in the order of the AAC only insofar as it relates to items considered and decided by the AAC. That part of the order of assessment which relates to items not forming the subject matter of the appellate order is left untouched and does not merge in the order of the AAC. Even after an appeal from an order of assessment is decided by the AAC, a mistake in that part of the order of assessment which was not the subject matter of review by the AAC and was left untouched by him, can be rectified by the ITO under section 35 of the Indian Income-tax Act, 1922, because the mistake would be his own mistake which he can always correct under section 35(1). "

The abovementioned decision which was in respect of rectification by the ITO, would apply to revisional powers of the CIT. As in both the cases the question is whether there is complete merger in the order of the first appellate authority or whether there is partial merger. If there is partial merger as far as powers of rectification were concerned, it would be partial merger as far as powers under section 263 were concerned. We respectfully follow said decision and decide this point against the assessee.

9.1 Besides, we find that section 263 has been amended by the Finance Act, 1988 and Finance Act, 1989 with effect from 1-6-1988 and in the amended provision it is specifically mentioned as follows :

" For the removal of doubts, it is hereby declared that, for the purposes of this sub-section, where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal (filed on or before or after the 1st day of June, 1988), the powers of the Commissioner under this sub-section shall extend (and shall be deeded always to have extended) to such matters as had not been considered and decided in such appeal. "

9.2 The learned counsel for the assessee submitted that this provision would be applicable to those orders of the CIT which are passed after 1-6-1988 and for that submission he relied on the decision of the Bombay High Court in the case of Ritz Ltd. v. Union of India [1990] 184 ITR 599. We find that there is difference of opinion on this point. The language of abovementioned provision is categorical in nature. It is specifically mentioned therein that power of the CIT would be deemed always to have been extended to subject matters as had not been considered and decided in such appeal. Thus, by virtue of this provision the CIT had, in 1985, powers to exercise jurisdiction under section 263 regarding such matters as had not been considered and decided in appeal by the first appellate authority. This is the additional reason on the basis of which the submission of the assessee is liable to be rejected. Besides, we find from the copies produced before us that the only ground raised in appeal before the CIT(Appeals) by the assessee was that the ITO had erred in disallowing import fees of Rs. 20,000 and at the time of hearing of the appeal the assessee did not press that ground. Thus, in substance the assessee had withdrawn the appeal. In these circumstances it cannot be said that original assessment order had merged in the order of the CIT(Appeals). This is yet another additional reason for rejecting the plea of the assessee on this point. The plea regarding the jurisdiction is therefore rejected.

10. It may be mentioned at the very outset that in the show-cause notice issued, the learned CIT had expressed the view that the assessee trust was not genuine. However, in the order under section 263 of the Act he has expressly mentioned that the assessee-trust should be regarded to have been genuinely created for lawful purposes. In view of this finding recorded by the learned CIT we have to proceed in this appeal on the basis that the assessee-trust was genuine. Hence the only point that requires decision is whether the learned CIT was right in law in holding that the maximum marginal rate was liable to be applied regarding the income which came to the shares of various trusts mentioned in Schedules I & II of the trust deed.

11. We shall first deal with that part of the income, which according to the assessee, was liable to be allocated to 11 Oral Discretionary Trusts mentioned at Sr. Nos. 8 to 18 in the First Schedule of the Trust deed in specified ratio.

11.1 We have already stated the facts regarding formation of these 11 Oral Discretionary Trusts which may be described as Oral Trusts of first line. As already stated, they were formed on or about 28-12-1979 about three days before the formation of the assessee-trust. The beneficiaries of each of these 11 Oral Discretionary Trusts of first line are two Oral Discretionary Trusts which may be described as Oral Discretionary Trusts of second line. Each of these two Oral Discretionary Trusts of second line has three beneficiaries who are individuals. Thus, there are 22 Oral Discretionary Trusts of second line and their beneficiaries are 15 individuals who have been grouped in permutations and combinations of three each. Out of these 15 individuals 11 are minors while 4 are major. This is clear from the chart given by the assessee at pages 144 to 147 of the paper book. Out of these 4 major persons two viz. Joitaram Kacharabhai and Karsanbhai Khodidas are trustees of the assessee trust.

11.2 It is clear from the facts on record that the real beneficiaries of the assessee trust are not trustees of Oral Discretionary Trusts of first line mentioned in First Schedule of the trust deed. It cannot be said that that part of the income which was receivable by the assessee trust for the benefit of these 11 Oral Discretionary Trusts of first line was receivable for the benefit of any one person. It cannot equally be said that individual shares of the persons on whose behalf or for whose benefit such income was receivable was determinate. Consequently as far as that income is concerned, which according to the assessee, was receivable by the assessee trust on behalf of said 11 Oral Discretionary Trusts of first line, the provisions of section 164(1) are clearly attracted and as such the maximum marginal rate under said provision would be applicable.

11.3 We do not agree with the submission of the learned counsel for the assessee to the effect that the trustees of each Oral Discretionary Trusts of first line were the real beneficiaries of the assessee trust and that under the law we are not entitled to inquire as to on whose behalf and for whose benefit those trustees had to receive part of the income from the assessee trust. We are of the opinion that substance of the matter is to be taken into account. We have to inquire as to who are the real beneficiaries of the assessee-trust as far as that part of the income is concerned. That inquiry will be wholly unreal and would be incomplete if we accept if se dixit that since the trustees of these 11 Oral Disc. Trusts of first line have been named as beneficiaries they should be regarded as beneficiaries.

11.4 We also do not agree with the submission of the learned counsel for the assessee to, the effect that each Oral Disc. Trust should be regarded as independent entity and on that basis the income which came to the share of each Oral Disc. Trust of the first line should be regarded to have not attracted the provisions of section 164(1) of the Act. The trustees of the said Oral Disc. Trust did not have beneficial interest in that part of the income and they could not be regarded as beneficiaries of assessee-trust. We have to see as to who in reality are the beneficiaries. When that is seen, it is clear that there are several individuals for whose benefit the said income was receivable and the shares of those individuals were not determinate.

11.5 Considering from all the angles, the conclusion is irresistible that as far as income which, according to the assessee trust, had been received for and on behalf of and for the benefit of 11 Oral Disc. Trusts of first line, is concerned that income had been really received for the benefit of the individuals whose shares were indeterminate and as such maximum marginal rate under section 164 was attracted. We are supported in this view of the matter by the decision of the Tribunal in the case of Atman Trust v. IAC [1989] 31 ITD 315 (Ahd.) in which the beneficiaries of the assessee trust were 21 Oral Disc. Trusts and each of those 21 Disc. Trusts whose shares were specified in the income of the assessee trust had two AOPs as beneficiaries and the share of members of AOPs was indeterminate and those 42 AOPs were made up of various combinations of altogether 34 persons. The Tribunal in that case held that the assessee-trust was a Discretionary Trust although in the trust deed the share of each Discretionary Trust which had been shown as beneficiary had been specified.

11.6 The learned counsel for the assessee has relied on the decisions which are as under :

(1) CIT v. Harikisnan Jethalal Patel [1987] 168 ITR 472 (Guj.)

(2) CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC)

(3) M. V. Valliappan v. ITO [1988] 170 ITR 238 (Mad.)

(4) CWT v. Arvind Narottam [1988] 173 ITR 479 (SC)

(5) Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120 (SC)

(6) Addl. CIT v. M.K. Doshi [1980] 122 ITR 499 (Guj.)

(7) CIT v. Gosar Family Trust [1991] 189 ITR 18 (Guj.)

We have carefully considered those decisions. None of these decisions is directly applicable to the facts of the present case. These decisions are not of any assistance to the assessee as far as the point in controversy was concerned. Each case would depend on the peculiar facts therein. We have already highlighted the peculiar facts of the present case and our decision is based on the facts as they appear on record. In one of the decisions on which emphasis has been laid it has been pointed out that the trustee can be a partner in a firm on behalf of trust. There is no dispute about the legal position of trustee being a partner in a firm on behalf of the trust. What we are concerned with in the present case is whether the share payable to the trustees of Oral Disc. Trusts who have been shown as beneficiaries in the trust deed would in the circumstances of the case be regarded as share payable to any one person or share payable to persons whose shares are determinate. After analysing the entire facts we have come to the conclusion that the income payable to the trustees of these Oral Disc. Trusts was payable for the benefit of such individuals whose shares were indeterminate and as such as far as that income was concerned the provisions of section 164(1) were attracted.

12.We shall now deal with that part of the income which accordingto the assessee had been received for and on behalf of Oral Specific Trust mentioned at Sr. No. 19 in the First Schedule. After hearing the learned DR we find that the said trust (V.G. Zala Oral Specific Family Trust) was a specific trust. It was not a discretionary trust. The beneficiaries of the trust were three individuals of which there are two minors viz. Ranjit Pratapsingh and Niruben Pratapsingh. The third beneficiary is Vikrambhai Mulsingh. Each has 1/3rd share in the income of the said trust. Thus ultimate beneficiaries as far as this trust is concerned, are these three individuals whose shares are determinate. They are the real beneficiaries and since their shares are determinate we hold that as far as income which the assessee trust has received for the benefit of V.G. Zala Oral Specific Trust mentioned at Sr. No. 19 in the First Schedule is concerned, that income was liable to be allocated under section 161 of the Act and the provisions of section 164(1) would not be attracted in respect of that income.

13. We shall now deal with that part of income which, according to the assessee trust, had been received by it for and on behalf and for the benefit of seven beneficiaries mentioned in Second Schedule of the trust deed. As already stated, these seven beneficiaries are Oral Specific Deferred Trusts. The beneficiaries of these seven Oral Specific Deferred Trusts are (i) Bhikhiben, (ii) Jethiben, (iii) Virchanddas, (iv) Pramodkumar, (v) Meenaben, (vi) Minor Babulal ; and (vii) Udaykumar. These seven persons are seven individual beneficiaries mentioned at Sr. Nos. 1 to 7 in the First Schedule. In the First Schedule they figure as individual beneficiaries while in the Second Schedule they figure as beneficiaries of Oral Specific Family Trusts and Oral Specific Family Trusts are shown as beneficiaries of the assessee-trust.

13.1 The clause in the trust deed relating to these beneficiaries is very important. That clause is clause III(b)(ii) which is as follows :--

" It is hereby agreed and declared between the parties to this Deed of Trust and the Trustees shall stand possessed of the 28.5 per cent balance of the income which shall be divided and receivable for and on behalf of and for the benefit of the Trusts mentioned as beneficiaries in the Schedule II herein attached to this Trust Deed, and shall be divided as per shares specified against each of the said beneficiaries mentioned herein in the said Schedule II herein attached, but it is specifically made known that the beneficiaries of the said Trusts shall have no right, title or interest either vested or contingent in the said income up to the period mentioned in this clause and therefore, it is specifically provided and made known that the said income which is receivable for and on behalf of the said Trusts which are beneficiaries, is to be accumulated and not to be paid to the each of the said beneficiaries of the said Trusts shall be forming part of the corpus of and for and on behalf of each of the said Trusts up to the period of 19 years from the date of this presents. "

From the above clause it is clear that the beneficiaries of these Oral Specific Deferred Trusts have no right, title or interest either vested or contingent in the income of the assessee-trust up to the period of 19 years and that the said income was liable to be accumulated and was not liable to be paid to the beneficiaries and that the income was to form part of the corpus of those trusts. From this provision it is clear that the said income is not receivable by the assessee-trust for and on behalf and for the benefit of any individual. That income was liable to be given by the assessee-trust towards the corpus of those trusts. The assessment order of one of the beneficiaries in these Oral Specific Deferred Trusts is on record at page 149 of the paper book and the said assessee has not shown income receivable from the assessee trust. It is clear that all the parties have construed this clause as stating that the said income would not accrue to those Oral Specific Deferred Trusts for 19 years. In these circumstances the provisions of section 164(1) would be clearly attracted in respect of this income and maximum marginal rate would be liable to be paid. We may mention here that there is identical clause in the constitution of these Oral Specific Deferred Trusts. Normally assessee should not have been concerned with the question as to how the trustees of these Oral Specific Deferred Trusts would distribute the income to the beneficiaries. However as specific clause has been inserted in the trust deed of the assessee-trust to the effect that the beneficiaries of those Oral Specific Deferred Trusts would have no right, title or interest, either vested or contingent in said income and that the said income would be accumulated and would form part of the corpus of those trusts. The real beneficiaries in Schedule II are the beneficiaries of the Oral Specific Deferred Trusts. The Trustees of Oral Specific Deferred Trusts are not the real beneficiaries. Since the real beneficiaries have no right, title or interest in respect of the said income, it cannot be said that the said income was receivable for and on behalf and for the benefit of any person in the relevant accounting year. Consequently, the tax at maximum marginal rate was liable to be charged under section 164(1) of the Act in respect of that income.

13.2 In this connection much stress was laid by the learned counsel for the assessee on the decision of the Gujarat High Court in the case of Gosar Family Trust. We find that the said decision is of no assistance to the assessee trust. In that decision the main question was whether expression "beneficiaries" in clause I of proviso to section 164(1) refers to only income beneficiaries or whether it refers to corpus beneficiaries also. The High Court has held that said clause refers to corpus beneficiaries also. This point is not relevant as far as Oral Specific Deferred Trusts of Schedule II are concerned. The provisions in the trust deed with which the High Court in said case was concerned were entirely different from the provisions of the trust deed with which we are concerned in this appeal. As already stated in the trust deed with which we are concerned, there is a specific clause which says that the beneficiaries of the Oral Specific Deferred Trusts have no right, title or interest either vested or contingent in the income of the assessee-trust for a period of 19 years and that the said income would form part of the corpus of the trust. Consequently that decision does not in any way support the plea of the assessee.

13.3 It was submitted on behalf of the assessee that since the beneficiaries of the assessee trust have been assessed in 1983, the learned CIT could not have modified the assessment order in respect of the assessee trust. Reliance was placed on the decision of the Bombay High Court in the case of CIT v. Smt. Ushaben Trust [1991] 190 ITR 485. The facts in that decision are not given in detail. It is not clear from the facts mentioned whether the shares of the beneficiaries in that case were determinate or not. Reliance has been placed in that decision on earlier decision in the case of Trustees of Putlibai R.F. Mulla Trust v. CWT [1967] 66 ITR 653 (Bom.). In that decision the shares of the beneficiaries were held to be determinate. The principle that would emerge is that if the shares of the beneficiaries are determinate and if the beneficiaries are assessed in respect of their shares, the assessee-trust cannot be assessed in respect of those very shares. In the present case such is not the position. In revision proceedings the learned CIT has held that the income of the assessee-trust which was receivable on behalf of various trusts mentioned in Schedules I & II as beneficiaries attracted the provisions of section 164(1) of the Act. That finding has been confirmed by us in relation to 11 Oral Disc. Trusts mentioned in First Schedule and Seven Oral Trusts mentioned in Second Schedule. When the provisions of section 164(1) are attracted, the income is assessable in the hands of the trust and not the beneficiaries as has been laid down by the Full Bench of the Gujarat High Court in the case of CIT v. Smt. Kamalini Khatau [1978] 112 ITR 652. Consequently the fact that Oral Disc. Trusts mentioned in Schedule I had offered the amount in question for taxation in their individual assessments would not be a legal bar for exercise of powers by the CIT under section 263 in respect of the assessee-trust for applying the provisions of section 164 in respect of the income relating to those Oral Disc. Trusts when the facts on record justified that action. Besides, we find that the CIT has initiated revision proceedings under section 263 in the cases of those Oral Disc. Trusts and the CIT has modified the assessment orders by directing that the assessments should be on protective basis and that the assessment of the assessee-trust as finally made in pursuance of the directions under section 263 should be taken into account in those assessments.Thus this is not a case of double taxation of the same income and there is no legal infirmity in the order passed by the learned CIT.

13.4 Before parting, we may mention that reliance had been placed in the course of arguments on behalf of the department on decision of the Supreme Court in the case of McDowell& Co. Ltd. v. CTO [1985] 154 ITR 148. The submission on behalf of the assessee in this regard was that the assessee was entitled to arrange its affairs in such manner as to attract minimum incidence of tax and that since there was no illegality in the formation of the trusts the principle laid down in said decision of the Supreme Court would not apply. It was also submitted on behalf of the assessee that the said decision of the Supreme Court has been referred to a larger Bench and there is a debate as to where the line should be drawn between tax avoidance by lawful means and tax evasion by resorting to unlawful scheme. We have not considered it necessary to deal at length this controversy. We have taken a view that substance of the transactions should be taken into account and when the substance of the transactions is taken into account what we find is that the trustees of the trusts mentioned in Schedules I and II are not the real beneficiaries but the ultimate beneficiaries of those trusts are the real beneficiaries. According to us there could not be any real debate relating to the approach which we have adopted regarding the facts of the case. One of the submissions that was made was that it was not open to the Courts to apply the theory regarding "piercing of Veil" to the trusts and that the said theory was applicable only in respect of companies and corporations. We find that this submission is of no avail. We have not applied the theory of "piercing of veil" to the trusts as applicable to companies and corporations. What we have inquired into is as to who are the real beneficiaries of the assessee trust. In order to decide the point in controversy we were entitled to make inquiry and record a finding thereon.

14. For reasons given above we set aside the directions of the CIT to apply maximum marginal rate in the hands of the assessee in respect of the income which is receivable by the assessee-trust for and on behalf and for the benefit of V.G. Zala Oral Specific Family Trust.That part of the income which has been received for the benefit of V.G. Zala Oral Specific Family Trust shall be allocated to said trust and would be assessable in the hands of the said trust. It has been brought to our notice that as far as that trust is concerned, there is dispute between the said trust and the department on the question whether the income which came to its share would be liable to be taxed at maximum marginal rate or at ordinary rate and that dispute has arisen because of the fact that the statement in writing as contemplated by Explanation 1 to section 160 (which has been inserted w.e.f. 1-4-1981 by the Finance Act, 1981) filed by the said trust before the ITO has been signed by one of the three trustees and not by all the three trustees and the stand of the department was that it should have been signed by all the three trustees. We are not concerned with that controversy in the present appeal. That controversy would have to be decided in the proceedings which are duly taken under the law in the case of the said trust. We confirm the direction of the CIT for charging maximum marginal rate in respect of the income receivable by the assessee-trust for and on behalf and for the benefit of 11 Oral Discretionary Family Trusts mentioned in First Schedule and 7 Oral Specific Deferred Trusts mentioned in the Second Schedule.

ITA No. 1175/Ahd/1985 for Assessment Year 1982-83 :

15. The material facts for Assessment Year 1982-83 are identical with facts for Assessment Year 1981-82. It was admitted before us that the decision for assessment year 1981-82 on material facts would govern the decision for Assessment Year 1982-83 also. For reasons given in the order for Assessment Year 1981-82 above we hereby set aside the directions of the CIT to apply maximum marginal rate in the hands of the assessee in respect of the income which is receivable by the assessee-trust for and on behalf and for the benefit of V.G. Zala Oral Specific Trust. That part of the income which has been received for the benefit of V.G. Zala Oral Specific Trust shall be allocated to the said trust and would be assessable in the hands of the said trust. We confirm the direction of the CIT for charging maximum marginal rate in respect of the income receivable by the assessee trust for and on behalf and for the benefit of 11 Oral Discretionary Family Trusts mentioned in First Schedule and 7 Oral Specific Deferred Trusts mentioned in the Second Schedule.

16. The additional point in the appeal for Assessment Year 1982-83 relates to interest of Rs. 1,87,408 payable to the trusts mentioned in Schedule I and Schedule II. The interest has been allowed as deduction in the original assessment order. The learned CIT has directed the ITO to disallow the said interest. He has observed as follows :

" When there is no beneficiaries in relation to this income it cannot also be said that they had chosen to leave their corresponding moneys with the assessee's business to earn interest thereon. Consequence to the above finding will be that it is the assessee's own money ploughed back into the business. The assessee is therefore not entitled to deduction of interest on such moneys. "

17. Our finding in respect of the income receivable for the benefit of Oral Discretionary Trusts mentioned in First Schedule is that the ultimate beneficiaries are known but their shares are indeterminate. As regards the Oral Specific Trust at Sr. No. 19, our finding is that the income is received for the benefit of the beneficiaries of the said trust. As regards the income receivable for the benefit of the trusts mentioned in Schedule II is concerned, our finding is that the real beneficiaries had no right, title or interest either vested or contingent to the income in question in the years under consideration in view of specific provisions in the trust deed. However, it is not our finding that there are no beneficiaries in respect of any part of the income. Consequently, the reason given by the CIT for disallowing interest cannot be sustained. We accordingly set aside the direction of the CIT to the ITO for disallowing interest.

18. The appeals are partly allowed

 

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