Income Tax Appellate Tribunal - Chandigarh
Income-Tax Officer vs Smt. Ved Wati Munjal on 27 March, 1991
Equivalent citations: [1991]38ITD11(CHD)
ORDER
S.K. Chander, Accountant Member
1. These appeals by the Revenue are against two orders of of the AAC first dated 12-3-1987 in the case of Smt. Ved Wad Munjal and the other dated 23-4-1987 being a consolidated order, inter alia, dealing with the case of Ved Wati Trust No. 1, both relating to assessment year 1983-84. In order to appreciate the grievances of the revenue it is essential first to bring into focus the factual backdrop of the case which is as under.
2. By a deed of trust made at Ludhiana on 9th day of February, 1982, Mrs. Ved Wati, aged 60 years and resident of Ludhiana, referred to in this deed as the settler, settled the property demised therein on a trust known as M/s Ved Wati Trust No. 1 for the trustees S/Shri Vijay Kumar, Ashish Kumar and Ashok Kumar referred to in this deed collectively as the trustees, at the first instance with an obligation to hold, receive and distribute the income from the said property for 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 income for whose benefit the trust shall hold, receive and distribute the income are :-
(i) M/s. Munjal Investments (P) Ltd., Ludhiana, and
(ii) M/s. Bhagyoday Investments (P) Ltd., Ludhiana
4. Thereafter, there is a provision that the corpus of the trust will have beneficiaries as (a) M/s. Munjal Investments (P) Ltd., Ludhiana, and (b) M/s. Bhagyoday Investments (P) Ltd., Ludhiana. It is also provided that there will be "substitute beneficiaries", if any, of the beneficiaries to the income having attained of the full age and otherwise legally capable of contracting and any of the beneficiaries to the corpus legally capable of contracting at any time by deed, disclaims, renounces, settles or transfers in favour of any person, or persons, for ever or for a certain number of years or up to the happening of some event, his/her interest in the income or corpus under the trust hereof and in such case shall cease to be included for ever, or for such number of years, or up to the happening of the said event, as the case may be.
5. M/s. Ved Wati Trust No. 1 became partner in M/s. Munjal Gases, Ludhiana, with effect from 1-4-1982, through Ashok Kumar trustee. The trust was to get 5% share in the profit and loss of the firm. The partnership deed appears at pages 107 to 112 of the paperbook.
6. The firm M/s Munjal Gases was assessed to tax for the assessment year 1983-84 under Section 143(3) by order dated 29-1-1986 on a total income of Rs. 5,58,060 (including remuneration disallowed), out of which M/s Ved Wati Trust No. 1 got 5% share of Rs. 22,718 of total income of Rs. 4,54,361 (excluding remuneration added back), pages 113 to 118 of the paperbook.
7. Smt. Ved Wati, the settler, was assessed to Gift-tax by the Gift-tax Officer, CCI, Ludhiana, on 27-2-1987, under Section 15(3) of the Gift-tax Act, determining taxable gift at Rs. 6,99,599 as appearing at pages 102 to 105 of the paperbook.
8. The Assessing Officer while making presently impugned income-tax assessment in the case of Smt. Ved Wati Munjal for the assessment year 1983-84 on 17-3-1986 under Section 143(3), included in her total income, inter alia, the following amounts as "Income relatable to the assets stated to have been transferred to Smt. Ved Wati Munjal Trust No. 1" :-
Rs.
(i) 5% share income from M/s. Munjal Gases 22,718
(ii) Dividend income (on 1567 shares of
Hero Cycles 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 received specifically on behalf of beneficiaries and the beneficiaries claim that they got the income from trust only as repayment of their loan show that it is a device of tax evasion;
(d) That income under Section 64 is to be added because the assessee sold 316 equity shares of Hero Cycles Pvt. Ltd. to M/s Daya Nand and Sons HUF for consideration of Rs. 175 per share and 2990 preference shares of face value of Rs. 75 per share to M/s. Daya Nand & Sons HUF for consideration of Rs. 30 per share and that since the respondent was a member of the HUF M/s. Daya Nand & Sons and the sale consideration was not adequate in terms of Section 64(2), the total income earned on the said shares was to be included in the hands of the respondent, the assessee.
9. According to the learned counsel for the assessee, all the objections of the Assessing Officer are untenable and were properly met with by filing a reply dated 26-2-1986 appearing at. paper book pages 46 to 48. It was also submitted that nonetheless the Assessing Officer has raised an assessment on the trust by order dated 20th March, 1986 with regard to the income accruing and arising from the assets put in trust. This has been done by holding the view that it is the trustees who, on behalf of the trust, got the benefit of the income of the settled properties.
10. The Appellate Assistant Commissioner vide his order dated 23-4-1987 has held that the formation of the trust is valid and has, therefore, excluded the income accruing and arising from the demised properties from the income of the trust but has, with regard to the income assessable under Section 64, issued directions to the Assessing Officer to redetermine the market value of the shares and if there is any difference between the two, then assess the proportionate income relatable to these shares. This direction of his and the conclusions arrived at by him are challenged in appeal by the Revenue in the case of the trust but in doing so the AAC only followed the decision taken by him in the case of Smt. Ved Wati, the settler as individual.
11. It was contended by the Revenue that the AAC erred both in law and on facts in deleting the addition of Rs. 33,054 relatable to assets transferred to M/s. Ved Wati Trust No. 1 because while allowing this relief, he merely went by what the assessee pleaded before him in complete disregard of the facts on record 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 and 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 lD 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 lD for valuation of unquoted equity shares is mandatory. The order of the AAC, therefore, it was contended, be set aside and that of the assessing authority restored.
13. On the other hand, the learned counsel for the assessee submitted that the gifts made by Smt. Ved Wati Munjal have been accepted and assessed to tax by the Gift-tax Officer, that the trust has been accepted as a genuine partner in the firm of M/s. Munjal Sales Corporation, that the Supreme Court judgment in the case of McDowell & Co. Ltd. (supra) is itself under review by the Hon'ble Supreme Court as is apparent from [1987] 165 ITR 225 (Statutes), that according Shri N.A. Palkhiwala, an eminent jurist, the case of McDowell is based upon misinterpretation of the three House of Lords decisions, that the ratio of the Madras High Court and in the case of M.V. Valliappan v. ITO [1988] 170 ITR 238 shows that in tax planning, the judgment of the Supreme Court in the case of McDowell does not come into play if the transactions are bona fide, that within the framework of law tax planning is promoted as held in Union of India v. Playworld Electronics (P) Ltd. [1990] 184 ITR 308 (SC), that the authorities below have not doubted the genuineness of deed of settlement to which the ratio of the Madras High Court judgment in the case of CIT v. Dutt's Trust [1942] 10 ITR 477 applies and, therefore, the order of the Appellate Assistant Commissioner is fully justified.
14. With regard to the inclusion of income under Section 64, it was contended that the findings of the AAC that if there is any difference in the value of shares transferred, then the proportionate income relatable should be brought to tax are fully justified. He also placed reliance upon the following judgments:-
(i) H.N. Patwardhan v. CIT [1970] 76 ITR 279 (Bom.)
(ii) Smt. V. Amirtham Ammal v. CIT [1976] 102 ITR 350 (Mad.), and
(iii) D.M. Netarwala v. CIT [1979] 120 ITR 848 (Bom.).
15. The rival submissions have been carefully considered along with perusal of the orders of the authorities below and relevant documents in the paper book and consideration of authorities cited. From the narration of facts given supra, it becomes clear that in consequence of the creation of the Trust, it became partner in M/s. Munjal Gases, Ludhiana, with effect from 1-4-1982 through Shri Ashok Kumar - one of the trustees with 5% share in profit and loss of that concern in terms 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 I, 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 difference in valuation of shares of M/s. Highway Cycles Ind. Ltd. taken at Rs. 4,454 per share as against Rs. 2,900 per share shown at Rs. 1,24,320. These two additions were made after consideration and discussion to the declared value of gift at Rs. 2,45,333. In other words, the transfer of assets by Smt. Ved Wati Munjal of the demised assets to the corpus of the trust was taken as genuine and bona fide so as to constitute legally a transfer attracting provisions of the Gift-tax Act. This gift-tax assessment has also become final as appearing at pages 102 to 105 of the assessee's paperbook.
17. It is quite interesting to note that Income-tax assessment of M/s Munjal Gases was made on 29-1-1986 and Gift Tax assessment on Smt. Ved Wati Munjal was also made on 27-2-1987 by the Income-tax Officer, CC 1, Ludhiana, acting as Gift-tax Officer. The impugned income-tax assessment on Smt. Ved Wati Munjal made under Section 143(3) on 17-3-1986 is also by the ITO, CC 1, Ludhiana. So it cannot be said that assessment on M/s. Munjal Gases for Income-tax and assessment of Smt. Ved Wati Munjal for Gift-tax purposes were made by different officers. These assessments were made in the same circle as the presently impugned assessment on Smt. Ved Wati Munjal was made and is now subject-matter of appeal.
18. The learned first appellate authority, therefore, rightly held "that there was complete divestment of certain assets along with liabilities to a trust. The settler did not have any right to enjoy any right of property or "income arising from the assets transferred by her. Therefore, the income from such assets did not arise to the assessee". Thus the reasons recorded by the assessing authority in the impugned assessment do not cut much ice because same transfer cannot be treated as genuine as well as a device to defraud the Revenue. In fact, if it was "artifice of tax evasion", as held by the Income-tax Officer, it would be invalid for affecting a genuine transfer attracting gift-tax and also giving bona fide standing to one of the trustees to become a genuine partner in M/s. Munjal Gases. The income from transferred assets is income of the trust which was created validly. The question, however, is as to whether the income of the trust is taxable in the hands of the trustees or because of shares of beneficiaries being determinate it is to be distributed before tax.
19. The Madras High Court and 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 the trust as an artifice in terms of the ratio decidendi of McDowell & Co. Ltd. (supra), as that applies to transactions which are not bona fide yet his conclusion that "the income accrued out of the property settled has been utilised towards the discharge of liabilities taken over by the trustees from the settler" is correct as held by him in the case of trust. So the assessment on the trust of the entire income in the hands of the trustees is upheld. But income so assessed has to be excluded from the assessment of the settler - the individual Smt. Ved Wati Munjal.
The appeal of the Revenue in the case of the trust bearing I.T.A. No. 870/87 is allowed by setting aside the impugned order of the first appellate authority and restoring in its place the order of the assessing authority.
21. But in I.T.A. No. 659/87, the first two grounds taken up by the Revenue relating to deletion of income from the hands of Smt. Ved Wati Munjal that income which is "relatable to assets transferred" to trust have to be rejected in view of the decision given in the case of the trust supra. The remaining grounds in the case of Smt. Ved Wati Munjal relate to directions issued by the learned Appellate Assistant Commissioner to the assessing authority "to find out the market value after hearing the assessee and, if there is any difference, then to assess the proportionate income relatable". According to the revenue, these directions are "confusing" and "inconclusive" and observations about method of working the value of shares are not in accordance with law.
22. It has been found above that there is gift-tax assessment by the Gift-tax Officer, CC l,Ludhiana, on Smt. Ved Wati Munjal on the value of assets transferred by her to the corpus of the trust. The Gift-tax Officer upvalued the shares of M/s. Hero Cycles Pvt. Ltd. and that of M/s Highway Cycles Industries Ltd. The figures finally determined in this assessment dated 27-2-1987 or if the value of the same shares is determined by the Tribunal in G.T.A. Nos. 7 and 8/88 dated 27-9-1990 for the assessment year under appeal be taken. The inadequate consideration will be excess value so determined and not the entire value of shares. The addition of income accruing and arising will thus relate to excess value of shares and should accordingly be considered for application of provisions of Section 64 of the Income-tax Act in the case of the settler. This in fact has been put off concession also by the learned counsel for the assessee. The grounds (3-6) relating to this issue are, therefore, allowed protanto.
23. Before closing, it appears appropriate to place on record with appreciation the able assistance to the Court rendered by the learned counsel from both the sides and in particular the finally articulated contentions of the learned Senior Departmental Representative Sh. Arun Kumar about the taxability of income in the hands of the trust.
24. All authorities cited from both sides have been perused and, if these are not discussed in detail, it is because these are distinguishable on facts and/or are not directly relevant.
25. In the result, I.T.A. No. 870/87 is allowed in full and I.T.A. No. 659/87 is allowed in part.