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2001 DIGILAW 755 (GUJ)

COMMISIONER OF INCOME TAX v. SONA FAMILY TRUST

2001-10-12

D.A.MEHTA, M.U.SHAH

body2001
M. S. SHAH, J. ( 1 ) IS reference at the instance of the revenue, the following questions have been referred for the opinion of this Court in respect of assessment year 1981-82 :-" (1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the business carried on by S/shri Tilakraj, Rajkumar and Ajablal in the name of M/s Saroj Synthetics was a Trust property, and section 161 of the I. T. Act was applicable to it ? (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that deduction under section 80j of the I. T. Act was allowable to the assessee Trust ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in granting deduction of Rs. 15,000. 00 being salary paid to Shri Tilakraj Chananlal one of the trustees, thought it was in contravention of section 50 of the Indian Trust Act being payment without any express provision in the Trust deed ?" ( 2 ) WE have heard Mr Akil Kureshi, learned counsel for the revenue. Though served, none appears for the respondent-assessee. ( 3 ) ASSESSEE-SONA Family Trust filed its return through one of its trustees in his capacity as a trustee. There were two other trustees. The Income-tax Officer treated them as an association of persons and assessed the income of Rs. 12,27,975. 00 as the income of the association of persons. The Commissioner of Income-tax (Appeals) allowed the appeal of the assessee and the Tribunal confirmed the said decision relying on the decision of this Court in KT Doctor vs. CIT (Guj.), (1980) 124 ITR 501 where this Court took the view that when the trustees are authorized to start any business, the business so done must be taken to be the business of the trust and the business itself would be property held under the trust. The trustees carried on the business and, therefore, the income of the business must be held to be the income of the trust. K. T. Doctors case was carried in appeal to the Supreme Court (230 ITR 744 ). The trustees carried on the business and, therefore, the income of the business must be held to be the income of the trust. K. T. Doctors case was carried in appeal to the Supreme Court (230 ITR 744 ). The Apex Court dismissed the appeal of the revenue with the following reasons :-"we find that there is no discussion about the plea of device in the judgment of the Tribunal, though, it is true, that the appeals before the Tribunal were by the assessee. We also find that even in the judgment of the High Court, this aspect does not seem to have been argued or dealt with. In the circumstances, it is not possible for us to examine the theory of device. These appeals are dismissed accordingly. No costs. " ( 4 ) IN view of the aforesaid decision of the Apex Court, Mr Akil Kureshi, learned counsel for the revenue submits that since the Assessing Officer in the instant case did give a finding that the trust in question was a device for avoiding payment of taxes and the Assessing Officer had given cogent reasons for coming to such a finding, this Court should answer the question in favour of the revenue by holding that the business carried on by M/s Tilakraj, Rajkumar and Ajablal in the name of M/s Saroj Synthetics was not a trust property, but was a business carried on by an association of persons and, therefore, Section 161 of the Act was not applicable to it. ( 5 ) SINCE the Tribunal did not go into the merits of the aforesaid finding given by the Assessing Officer only on the ground that the matter was covered by the decision of this Court in KT Doctors case (Supra) and since none appears for the assessee though served, we deem it proper to refer to the facts which weighed with the Assessing Officer for holding that the business in question was not merely a business of the trust in question, but it was being carried on by three persons as an association of persons, and the trust was merely a device to avoid tax liabilities. 5. 1 by trust deed dated 8. 12. 1977 Smt Pavanben Chananmal, aged about 22 years, transferred Rs. 1000. 5. 1 by trust deed dated 8. 12. 1977 Smt Pavanben Chananmal, aged about 22 years, transferred Rs. 1000. 00 to her three brothers Mr Tilakraj Sahani, Mr Rajkumar and Mr Ajablal and directed them to do business, which can be started and closed at their pleasure and then give the profits from that business to the family members numbering 13 - (father of Mr Tilakraj and his two brothers and also wives and children of two brothers - Mr Tilakraj and Mr Rajkumar ). M/s Tilakraj, Rajkumar and Ajablal are the trustees of the business being carried in the name and style of M/s Saroj Synthetics. The trust deed also included the following clause :-"the Trustees shall hold and stand possessed of the said interest, right, title, benefit hereby settled in the said amount of Rs. 1,000. 00 (rupees One thousand only) and all other moneys, shares of joint Stock Companies, donations, contributions and all property or properties moveable or immoveable which may hereafter be paid, received or transferred to them and the investment for the time being representing the same and rents, income, profits, dividends and interest hereinafter referred to as the TRUST FUND upon the Trust with and subject to the powers and provisions herein contained and concerning the same i. e. to say :-a ). . . . . . . . . . . . "to make all repairs and additions and alterations as may be deemed necessary or expedient by the Trustees in respect of any immovable property or properties, ownership flats, sheds or blocks in industrial estates belonging to the Trust Fund and pay all costs, charges and expenses thereon. "the Assessing Officer observed that the trust deed could not have given such a midas touch to Mr Tilakraj and his two brothers so that whatever gets the benefit of their association will become a trust property and that to hold so would do violence to the concept of the settlement of property under trust. 5. 2 the Assessing Officer further noted the following facts for giving a finding that the trust was merely a device to avoid payment of taxes. 5. 2 the Assessing Officer further noted the following facts for giving a finding that the trust was merely a device to avoid payment of taxes. (I) The business activities of M/s Saroj Synthetics (the name in which the alleged business of the trust is carried on) are carried out in the business premises of M/s Rajkumar Synthetics Mills Pvt. Ltd. , which is a Company of which the shareholders are family members of the same Sahani family. (II) The business of M/s Saroj Synthetics is to process cloth, but the Central Excise Licence for processing is in the name of M/s Rajkumar Synthetics Ltd. from May, 1980 and before that upto April, 1979 such licence for processing was with M/s Rajkumar Silk Mills which is a registered firm having members of the same family as partners. The excise duty is also paid by M/s Rajkumar Synthetics Mills Pvt. Ltd. and then reimbursed by the assessee. (III) M/s. Saroj Synthetics have processed very large quantity of cloth (28. 95 lacs meters of cloth), but the cloth for processing was given by the two concerns of family i. e. M/s Rajkumar Silk Mills and M/s Rajkumar Synthetic Mills Pvt. Ltd. M/s Saroj Synthetics (trust business) received the labour charges from the said two concerns as under :- (I) m/s Rajkumar Silk Mills Rs. 66,740. 00 (ii) rajkumar Synthetic mills Pvt. Ltd. Rs. 43,62,060. 00 -- total Rs. 44,28,800. 00 --THE grey cloth processed by M/s Saroj Synthetics belongs to M/s Rajkumar Synthetics Mills Pvt. Ltd. and they get back their finished goods after paying labour charges to M/s Saroj Synthetics. AFTER processing, the finished sarees/fabrics of 41. 58 lacs meters were sent back to M/s Saroj Synthetics whose sales are included in the total sales of Rs. 420. 43 lacs reflected in the accounts. (IV) The representative of the assessee could not explain why M/s Saroj Synthetics did not follow the procedure of obtaining the Central Excise Licence for processing. ALTHOUGH M/s Saroj Synthetics did not obtain any Central Excise Licence for processing activities, but the trust which was started with the corpus of Rs. 1000. 00 purports to own and possess machinery of Rs. 25. 52 lacs as disclosed in the balance-sheet. (V) M/s Saroj Synthetics took certain plant and machinery worth Rs. 4. 58 lacs on hire from Pratik Prints by paying hire charges of Rs. 3,72,000. 1000. 00 purports to own and possess machinery of Rs. 25. 52 lacs as disclosed in the balance-sheet. (V) M/s Saroj Synthetics took certain plant and machinery worth Rs. 4. 58 lacs on hire from Pratik Prints by paying hire charges of Rs. 3,72,000. 00 in the assessment year. Apart from the fact that the hire charges of Rs. 3. 72 lacs (Rs. 31,000/- per month) for machinery worth Rs. 4,58 lacs are fairly high charges, Pratik Prints is a proprietary concern of Smt. Rajbharati, wife of the brother of Mr Tilakraj Sahani. (VI) The profits of M/s Saroj Synthetics of Rs. 14. 74 lacs have been reflected in the accounts after depreciation and investment allowance reserve. After certain deductions, the net income of M/s Saroj Synthetics is Rs. 13. 21 lacs and after deducting expenses, the net income of Rs. 12. 27 lacs has been shown in the return of income of M/s Saroj Synthetics. 5. 3 after considering all the aforesaid facts, the Assessing Officer held that the business carried on in the name and style of M/s Saroj Synthetics is the business of M/s Tilakraj Sahani, Rajkumar Sahani and Ajablal Sahani which is being carried on by them in their individual capacities and the three persons doing business constitute an association of persons. The profits from such business should be brought to charge as such under Section 28 of the Act. The Assessing Officer assessed the total income of the association of persons at Rs. 14,79,850. 00 and passed consequential orders. ( 6 ) IN appeal by the assessee, the CIT (A), however, held in favour of the assessee and the revenue went in appeal before the Income-tax Appellate Tribunal. Before the Tribunal, the departmental representative vehemently contended that in view of the finding given by the Assessing Officer - Inspecting Assistant Commissioner that the trust was a device for carrying on the business by three persons in their individual capacities and, therefore, as an association of persons and in view of the decision of the Supreme Court in Mcdowell and Co. Ltd. vs. CTO, (1985) 154 ITR 148, the Tribunal should allow the appeal of the revenue and confirm the findings given by the Inspecting Assistant Commissioner. Ltd. vs. CTO, (1985) 154 ITR 148, the Tribunal should allow the appeal of the revenue and confirm the findings given by the Inspecting Assistant Commissioner. The departmental representative also drew the attention to the individual accounts of the beneficiaries and pointed out from the balance sheet of Sona Family Trust that the money which should have gone to the beneficiaries had been used for business and investment purposes and that the beneficiaries could not have debit balance looking to clause 3 (b) of the trust deed whereunder the entire income of the trust after paying the expenses had to be distributed amongst the beneficiaries. It is also argued that the income was being used for the business purposes. On the other hand, the learned counsel for the assessee argued that the income from the trust was being assessed in the hands of the beneficiaries and, therefore, there was no need to disturb the order of the CIT (A ). ( 7 ) AFTER considering the rival submissions, the Tribunal gave the following reasons for not going into the question about correctness or otherwise of the finding given by the Assessing Officer that the trust was a device :-"we are now faced with a situation where we have a clear decision of the Gujarat High Court in the case of K. T. Doctor (Supra) and on the other hand we have the observations of the Highest Court of this land (reference is to the decision in Mcdowells case) which do have a bearing on the facts of this case. However there is one very important consideration which in our view, is conclusive of this matter i. e. the aforesaid amendment of section 161 made by the Finance Act, 1984. That amendment, if applicable, would have decided this issue in favour of the Revenue. However it is applicable only with effect from 1. 4. 1985. The decision of the Honble Gujarat High Court in the case of K. T. Doctor (Supra) is of January, 1980 and so it was already four years old when the amendment was made. Inspite of that the legislature has chosen to give the amendment only a prospective effect. Further, in the Budget Speech of Finance Minister for 1984-85 the following paragraph relevant to the said amendment occurs :`. . . . . . Inspite of that the legislature has chosen to give the amendment only a prospective effect. Further, in the Budget Speech of Finance Minister for 1984-85 the following paragraph relevant to the said amendment occurs :`. . . . . . I would like to refer to a tendency noticed to create private trusts which carry on business. To curb such practice, I propose to provide that where such trusts have profits and gains of business, the entire income of the trust will be charged to tax at the maximum marginal rate,. . . . (Ref. (1984) 146 ITR Statues pg. 68)THUS the Finance Minister who introduced the amendment clearly chose not to make the amendment retrospective. Therefore we cannot accept the argument of the learned D. R. That would be contrary to the clear will and choice exercised by the law makers. Regarding the argument of the learned DR based on the accounts of the beneficiaries, we have only to say that this is a part of assessees activity of doing business and the Trust deed permits it. Finally, we are unable to discover any objective test or criterion in the Supreme Court decision in the case of Mcdowell and Co. (supra) to push aside the form of the trust. In the absence of clear guidelines we decline to travel in that unchartered sea and go against the direct decision of the Honble Gujarat High Court in the case of K. T. Doctor (supra ). Such a step is fraught with great danger of opening the door to arbitrariness. We therefore hold that section 161 is applicable to this case. "the Tribunal thus declined to go into the correctness or otherwise of the finding given by the Inspecting Assistant Commissioner only on the ground that inspite of the decision of this Court in K. T. Doctor, 124 ITR 501, the legislature did not give retrospective effect to the 1984 amendment to Section 161. K. T. Doctors case pertained to assessment years 1972-73 and 1973-74. K. T. Doctors case pertained to assessment years 1972-73 and 1973-74. ( 8 ) MR Akil Kureshi is, therefore, on strong ground in submitting that in appeal against the decision of this Court in K. T. Dcotors case (Supra), the Supreme Court has not approved of the view on the basis of which the Tribunal proceeded, as if the tax authorities and the Tribunal cannot go into the question whether the trust was merely a device to avoid payment of taxes. At the cost of repetition, we would quote the reasons which weighed with the Supreme Court (230 ITR 744) while dismissing the revenues appeal against the decision of this Court in KT Doctors case (Supra) :-"we find that there is no discussion about the plea of device in the judgment of the Tribunal, though, it is true, that the appeals before the Tribunal were by the assessee. We also find that even in the judgment of the High Court, this aspect does not seem to have been argued or dealt with. In the circumstances, it is not possible for us to examine the theory of device. These appeals are dismissed accordingly. No costs. "it is clear that the Supreme Court is of the view that even for the period prior to the amendment of Section 161 i. e. for the period prior to 1. 4. 1994 it was open to the tax authorities and the Tribunal to examine the plea of device of a trust to start/run the business with a view to avoiding payment of taxes. 4. 1994 it was open to the tax authorities and the Tribunal to examine the plea of device of a trust to start/run the business with a view to avoiding payment of taxes. ( 9 ) IN view of this principle emerging from the decision of the Supreme Court in CIT vs. KT Doctor (1998) 230 ITR 744 which was applicable even for the assessment years 1972-73 and 1973-74, we are of the view that since the Tribunal did not at all go into the correctness or otherwise of the finding given by the Inspecting Assistant Commissioner that the three members had adopted the device of a trust for carrying on business and avoiding payment of taxes and since the examination of this question involves detailed examination of facts, we are of the view that this Court need not answer question No. 1 at this stage and that the matter deserves to be remanded to the Tribunal for examining the question whether M/s Tilakraj, Rajkumar and Ajablal Sahani had adopted the device of a trust for carrying on the business in the name and style of M/s Saroj Synthetics with a view to avoiding payment of taxes. ( 10 ) THE learned counsel for the revenue is not in a position to state anything about the assessment years prior to 1981-82, but submits that in any view of the matter, the decision in any previous assessment year cannot constitute res judicata, more particularly when the plea of device is not shown to have been considered earlier. 10a. AS regards the decision of the Bombay High Court in HA Shah and Co. , (1956) 30 ITR 618, on the rule of non-applicability of the doctrine of res judicata, the said decision does, of course, lay down the exceptions or limitations to the above general rule as under :- (I) "an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. A Tribunal like the Appellate Tribunal, should be extremely slow to depart from a finding given by an earlier Tribunal. " (II) "the effect of revising a decision in a subsequent year should not lead to injustice and the Court must always be anxious to avoid injustice to the assessee. A Tribunal like the Appellate Tribunal, should be extremely slow to depart from a finding given by an earlier Tribunal. " (II) "the effect of revising a decision in a subsequent year should not lead to injustice and the Court must always be anxious to avoid injustice to the assessee. . . . . . . . . the Court may prevent an Income-tax authority from doing something which would be unjust and inequitable. "we would have certainly considered whether the Assessing Officer had done anything which would be unjust and inequitable to the assessee, if the Tribunal had already examined this question even for an earlier year, after taking into consideration all material evidence. A perusal of the Tribunals order dated 9. 10. 1984 (Annexure "r" at pp. 227-231 of the paperbook) in Income-tax Appeal No. 709/ahd/1983 for the A. Y. 1979-80 indicates that the question was not decided. Ground No. 1 and the relevant discussion are set out hereinbelow without any observations, much less any comments :-"1. THE learned Commissioner of Income-tax (Appeals) erred in not allowing the claim of relief under section 80j of the Income-tax Act, 1961. "at the time of hearing, both the parties agreed that on ground No. 1 in respect of relief u/s. 80j the same is required to be sent back to the Income-tax Officer after setting aside the decision of the CIT (A) for a decision afresh after the final outcome of the writ petitions etc. pending in respect of retrospective amendment etc. before the Supreme Court. We, therefore, set aside the order of the CIT (A) on this aspect and restore this ground to the file of the Income-tax Officer to decide afresh as above. "mr Kureshi, learned counsel for the revenue did state that he was not aware about the orders passed pursuant to the aforesaid order of remand or any further litigation. We, therefore, set aside the order of the CIT (A) on this aspect and restore this ground to the file of the Income-tax Officer to decide afresh as above. "mr Kureshi, learned counsel for the revenue did state that he was not aware about the orders passed pursuant to the aforesaid order of remand or any further litigation. ( 11 ) WE agree with the learned counsel for the revenue that in the peculiar facts and circumstances of the case, when the Assessing Officer has given such elaborate reasons for holding that the trust in question was a device, even while we express no opinion on merits, we are of the view that since the Tribunal had not examined the matter in details to ascertain whether there was any colourable device or a sham for avoiding payment of taxes, the revenue has certainly made out a case for remanding the matter to the Tribunal for examining the controversy afresh after considering the decision of the Supreme Court in CIT vs. K. T. Doctor, 210 ITR 744. ( 12 ) AS far as question No. 2 is concerned, the CIT (A) as well as the Tribunal had held in favour of the assessee on the ground that in the previous years deduction under Section 80j was allowed and, therefore, in view of the decision of this Court in Saurashtra Cement and Chemical Co. Ltd. , 123 ITR 669, the question cannot be reopened. The learned counsel for the revenue submitted that the departmental representative had contended before the Tribunal that there was no Excise Licence in the name of the assessee trust and that the excise duty was being paid through Rajkumar Synthetics. ( 13 ) IN view of the aforesaid submission and the fact that this question is also interconnected with the controversy which is the subject matter of question No. 1, we are of the view that question No. 2 also need not be answered at this stage and that the Tribunal will examine the said contention after examining the contention about the plea of device which had appealed to the Assessing Officer - Inspecting Assistant Commissioner while passing the assessment order. ( 14 ) IN view of the aforesaid discussion regarding question No. 1, it is obvious that question No. 3 is also not required to be answered at this stage as the same will be required to be examined only after a finding is given on the question whether the three members had adopted a device as aforesaid. ( 15 ) WE are, therefore, of the view that the questions referred to us need not be answered and the matter deserves to be remanded to the Tribunal for examining the controversies before it afresh in light of the observations made in this judgment. ( 16 ) BEFORE parting with the matter, it may be recorded, in fairness to Mr Kureshi, learned counsel for the revenue, that the learned counsel had right from the outset submitted that the theory of device which had appealed to the Assessing Officer had not been examined by the Tribunal and, therefore, the matter was required to be remanded to the Tribunal which is the final fact finding authority. The concessions attributed by my learned Brother to Mr Kureshi were more in the nature of acknowledgements that the learned counsel had not looked for the answers to the queries being posed to him, because queries pertaining to questions of fact and mixed questions of law and fact may better be first considered and decided by the final fact finding authority viz. the Tribunal. ( 17 ) THE reference accordingly stands disposed of with no order as to costs. .