Income Tax Appellate Tribunal - Ahmedabad
Femina Fashion Group vs Income-Tax Officer on 24 July, 1989
Equivalent citations: [1990]32ITD92(AHD)
ORDER
R.M. Mehta, Accountant Member
1. These two appeals are directed against the consolidated order of the Commissioner of Income-tax passed under Section 263 of the Income-tax Act, 1961. As the facts are more or less identical and as both the appeals have been heard together, we dispose them of by means of a consolidated order. At the outset it would be necessary to state certain basic facts with a view to appreciate the controversy involved.
2. I.T.A. No. 1164/ AHD./ 1986:
The return in this case was filed on 27-4-1983 declaring a total income of Rs. 82,542 but the taxable income was declared at NIL. The ITO completed the assessment vide order dt. 7-9-1983 on income of Rs. 83,042. He, however, did not raise any demand since he accorded the status of a specific trust whose income was distributed amongst the beneficiaries their shares being specified.
3. I.TA. No. 1165/ AHD./ 1986 :
The return was filed on 14-9-1983 and the assessment was completed vide order dated 26-9-1983. The order in this case was absolutely identical to that passed by the ITO in the case of Femina Fashion Group [IT Appeal No. 1164 (Ahd.) of 1986].
4. The Commissioner of Income-tax initiated proceedings under Section 263 in both these cases and issued an identical notice on 3-9-1985. In this notice there was a proposal to set aside the assessments on the ground that the ITO who had passed the assessment orders had no jurisdiction to do so. Subsequently, however another notice was issued to both the assessees on 6-11-1985 in which the proposal was to set aside/revise the assessment on the ground that they were erroneous and prejudicial to the interests of revenue. In response to the first show cause notice it was stated on behalf of the assessees that the ITO passing the assessment order was within his jurisdiction in doing so and there was no reason to invoke the provisions of Section 263. In response to the second show cause notice the following submissions were made by the appellants :
Femina Fashion Group's case (supra) "I beg to refer to your above show cause notice and reply as follows. First of all, you had issued a show cause notice dated 3-9-1985 proposing to set aside the assessment on the ground that the assessing ITO had no jurisdiction. A reply dt. 12-9-1985 was given to the said show cause notice. Now another show cause notice under reference is issued on the ground that no investigation was conducted by the assessing ITO. You had issued a show cause notice in 'Shri D. H. Advani Family Trust' also stating that the business in names of 'M/s. Femina Fashion Collection' and 'M/s. Femina Fashion Selection' were converted into this trust. Here, in this show cause notice also, you are stating the same. It is submitted that such a show cause notice is illegal as you have issued the same without ascertaining the facts and so it cannot be said that you had correctly come to the conclusion that the assessment is prejudicial to the interest of revenue. It is obvious that somehow an action is proposed to be taken.
2. The facts of the case are as under:
(i) Retail cloth, hosiery etc. business was done under the style of 'M/s. Femina Fashion Collection', which was a firm having two partners i.e. mother and a son. It was being carried on in a rented shop. Regular books of accounts were maintained.
(ii) Retail cloth, hosiery etc. business was done under the style of 'M/s. Femina Fashion Selection', which was a firm having two partners i.e. father and a daughter. It was being carried on in a separate rented shop. Regular books of accounts were maintained.
(iii) To develop the business of these two firms, a trust styled as 'Advani Foundation' was erected having all the members of the family as beneficiaries with definite shares. Majority of the beneficiaries were working in these two firms without any remuneration.
3. The assessing ITO had examined minutely the books of accounts maintained by the trust and after satisfying himself had passed the assessment order. The trust was rejected with the sole purpose of development and expansion of the business with the joint efforts of all the working members. The trust is absolutely genuine and the trust is registered and assessed by the Sales-tax authorities also. The assessment order is not at all prejudicial to the interest of revenue as alleged.
4. Facts of McDowell & Company Ltd. referred to in your show cause notice are absolutely different and has no relevance to the facts of this case. Hence, the observations made by the Court has no application to this trust, which is genuine and there is not an iota of evidence to show that it was created with a view to avoid or evade the tax.
5. On the facts and circumstances of the case, it is submitted that provisions of Section 263 have no application and the show cause notice issued is illegal and invalid.
D.H. Advani Family Trust [ITA No. 1165 (Ahd.) of 1986]:
I beg to refer to your above show cause notice and reply as follows. First of all, you had issued a show cause notice dt. 3-9-1985 proposing to set aside the assessment on the ground that the assessing ITO had no jurisdiction. A reply dt. 12-9-85 was given to the said show cause notice. Now another show cause notice under reference is issued on the ground that the ITO has not investigated whether the firm continued to be in existence and whether the income of the trust requires to be assessed in the hands of somebody else. It is quite evident that somehow an action is proposed to be taken, which is not legal.
2. The show cause notice is based on incorrect facts and so it is not legally valid. Correct facts are as under:
(i) Tailoring business was done by Smt. Vimla Dolatram Advani as proprietor up to 31-12-1983. It was assessed to Income-tax for the last 6 to 7 years. She sold off the 7 sewing machines to the trust for Rs. 3500, and closed the business. Firms styled as 'M/s. Femina Fashion Collection' and 'M/s. Femina Fashion Selection' has no connection with this trust, at all.
(ii) The correct date of purchase of two stamp papers for the trust is dt. 31-12-1981 as stated. Xerox copy of the trust deed is submitted here with.
(iii) Signature of the settlor is attested by two witnesses viz. Shri D.H. Advani and Smt. Nirmala D. Advani.
(iv) This trust deed is executed on 31-12-1981 and not on 15-12-1981 as stated.
(v) Books of accounts of the trust commences from 31-12-1981.
3. Facts of McDowell & Company Ltd. referred to in your show cause notice are absolutely different and has no relevance to the facts of this case. Hence, the observations made by the Court has no application to this trust, which is genuine and there is not an iota of evidence to show that it was created with a view to avoid or evade the tax.
4. From the facts stated above, it can be seen that show cause notice under reference is based on incorrect facts. The trust is genuine and there is no device to avoid or evade the tax as alleged, and there is no prejudice to revenue. Hence, your are requested to not take the proposed action.
5. The Commissioner of Income-tax on a perusal of the record had observed that the appellant trusts had been preceded by two firms, namely, M/s. Femina Fasion Collection and M/s. Femina Fashion Selection both situated at Municipal Market, Navrangpura. He also noted that a search had taken place in the case of Shri Daulatram son of Hotchand Advani, who was the main man behind the Advani Family Group and who had created the earlier firms. It was also noted that a search had taken place at the residential and business premises of the aforesaid person on 10/11-12-1981 and the appellant trusts had come into existence immediately thereafter i.e. on 15-12-81 and 5-1-1982 and these had taken over the running business of the two firms.
6. The Commissioner also noted that in the case of the Advani Foundation which had taken over the running business of Femina Fashion Group, one Shri Rajesh-kumar residing at Surat had executed the trust deed on 5-1-1982 with a sum of Rs. 500. He also found that shri Daulatram son of Hotchand Advani and Shri Harikishan son of Shri Daulatram had been appointed trustees of the said trust. The beneficiaries were also found to be members of the same family. It was also observed that the capital of the business belonging to the erstwhile partners of the firm who were members of the Advani Family continued to remain with the trust and the total assets of the firm had been handed over to the trust by the partners of the erstwhile firm after the execution of the trust deed. According to the Commissioner this was a case where a running business had been acquired with a meagre sum of Rs. 500 and whose profits were to go back to the partners of the erstwhile firm and the members of their family.
7. In the case of D.H. Advani Family Trust also it was noticed by the Commissioner that the trust had been created by one Hasibai Khushiram Vajumal with a sum of Rs. 1000. The trustees being Smt. Lajvanti Daulatram and Vidhya Daulatram. The beneficiaries once again were the members of the same family.
8. Taking into account the aforesaid facts in both the cases the Commissioner was of the view that the ITO had passed the assessment orders and accepted the claim of the assessees without making any inquiries regarding the relationship of the settlors of the trust and the members of the Advani Family. He was also of the view that the running business had been handed over to the two trusts and this appeared to be a "Sham transaction". It was also observed that the beneficiaries in both the cases were the members of the Advani Family and the control and management continued with Shri Daulatram Advani who was the "main person behind the whole show".
9. After considering the replies of the appellants in response to the show cause notices (reproduced earlier) the Commissioner passed an order setting aside the two assessments. The relevant reasons recorded by him in doing so are as under: -
7. I have considered the submissions of the assessee in both the cases. It is apparent from the record that the ITO making the assessment on the two trusts has not examined the settlors, trustees and beneficiaries to find out the real character of the trusts. Thus the case has not been investigated and therefore the ratio laid down in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 will be clearly applicable. Further it is patent the way in which the trusts have been created immediately after the search and the way in which the assets have been transferred by the two firms to the two trusts having only Rs. 500 and Rs. 1000 as their corpus and beneficiaries being the trustees of the Advani Family and also since the trustees are the same persons either husband or wife or father and son and thus the control and management of the business has continued to remain with the family that these are sham credits to evade tax. Further, it is observed that the second trust has been created by a lady who has affixed her thumb impression on the deed. This shows that she has created this trust without understanding the implications. It is also not understood how, Shri Rajeshkumar, settlor of the first trust and Smt. Hasibai, settlor of the second trust came to the rescue of the assessee immediately after the search was conducted. The immediate cause for creating these trusts is clearly to set at naught the facts found during the course of search. All these factors indicate that a scheme was made by the assessee family to avoid payment of taxes by creating these two trusts. The observations of the Hon'ble Supreme Court indicated in the show cause notices are therefore clearly applicable. It will be worth while to reproduce them again.
In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai J. in Wood Polymer Ltd. In re and Bengal Hotels Limited, In re [1977]47 Comp. Cas. 597 (Guj.) where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.
It was neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to void taxation. It is upto the Court to take stock and determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation as was done in Ramsay, Burma Oil and Dawson to expose the devices for what they really are and to refuse to give judicial benediction.
8. The assessee's contention that the notice is illegal because the facts have not been ascertained is not maintainable because as indicated above the circumstances of the creation of the trust can lead to no other conclusion than the fact that the same has been created with a view to evade tax. Another assertion of the assessee that the ITO had examined the accounts of the trust and then passed the orders has no bearing as far as the proceedings under Section 263 are concerned because as already discussed from the passing of the order by the ITO without going into reality of the facade created by these two settlors and tearing the veil and ascertaining who was in the control and management of the assets it can be said that the assessment made was erroneous and prejudicial to the interest of revenue. In fact the two businesses continued to be carried on by the same set of persons with full control over finances and management and ultimately the benefit has been derived by the members of the family so it can be said that there was no discontinuance of or closure of the firms as the two businesses belonged to Shri Daulatram Advani and family only. Mere registration with Sales-tax Authorities has no meaning as the Sales-tax Authorities are not concerned with the reality of an entity.
9. In view of the discussion as above I hold that the orders passed by the ITO in the two trusts cases were erroneous in so far as they were prejudicial to the interests of revenue, as no investigation was made by the ITO to find out who was the real owner or owners of the business transferred to the two trusts and carried on in their names by the trustees belonging to the Advani Family Group. The observations of the Supreme Court in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 as well as Delhi High Court in the case of Gee Vee Enterprises (supra) are applicable. Since the two cases require investigation I set aside the same and direct the ITO to make proper inquiry and after such inquiry and after giving opportunity of being heard to the assessee to draw his conclusions as to whether the income of the two trusts should if necessary be assessed and pass fresh orders in accordance with law. The two assessments are set aside. In view of the fact that I have decided the case on merits I am not going into the question of jurisdiction.
10. The learned counsel for the assessee at the outset, took up a preliminary objection to the effect that the action Under Section 263 was barred by limitation. It was stated that in respect of Femina Fashion Group the assessment order was passed on 7-9-1983 whereas in the case of D. H. Advani Family Trust (supra) the date of the assessment order was 26-9-83. He also invited our attention to the fact that the CIT should have passed the orders Under Section 263 within two years of the aforesaid dates whereas the consolidated order of the C.I.T. was passed on 28-1-86. i.e. well after the period of two years. According to the learned counsel, the law had been amended with effect from 1-10-84 and the same was applicable to the assessments completed after that date whereas the assessments completed prior to that date were subject to the unamended law. It was accordingly submitted that the order Under Section 263 be quashed as being barred by limitation.
11. The learned D.R. on the other hand contended that the amendment was applicable to all pending assessments whether completed after 1-10-84 or prior to that date. He invited our attention to a decision of the Madras Bench of the Tribunal in the case of B. Vijayakumar v. IAC [1987] 20 ITD 254 wherein a similar situation had been considered. It was also stated that Circular No. 402 dated 1-12-1984 issued by the C.B.D.T. also made the position clear and the aforesaid circular had been considered by the Tribunal in its judgment. It was finally submitted that since the order of the C.I.T. had been passed within time there was no reason to cancel it on the ground of limitation.
12. We have examined the rival submissions and are of the view that the decision of the Tribunal supra relied upon by the D.R. supports the view point canvassed by him. The Tribunal after considering identical arguments as advanced before us observed as follows:
7. We have considered the rival contentions on the record. In our opinion the assessees' contention that the revision orders passed by the Commissioner were barred by time is not correct in view of the clear provisions of law contained in the amendment to Section 25(3) which has been clearly elucidated by the Board in the first part of Circular No. 402 dated 1-12-1984 which is reproduced below, for the sake of facility:
'As a consequence of the amendment of Section 263, by Section 47 of the Taxation Laws (Amendment) Act, 1984, the limitation for passing an order under Section 263 will, in view of general principles of interpretation of statutes, stand extended in cases where the period of limitation originally laid down in that section had not expired before October 1,1984...' (p. 1286)
8. In these cases the assessment orders were passed by the WTO on 5-11-1983 and 25-10-1983 and, therefore, the old law of limitation prior to amendment would expire on 4-11-1985 and 24-10-1985. Before these dates, the amendment had come into force with effect from 1-10-84 and thereby the time limit for revision had been extended and, therefore, the revisionary orders passed by the Commissioner -on 16-12-1985, 30-12-1985 and 7-1-1986 as the case may be, are clearly within the extended time limit provided by the amended law. Accordingly they are valid and in accordance with law.
9. In the case of Chettinad Corporation (P.) Ltd. {supra) which related to levy of penalty for filing prima facie wrong estimate of advance tax, the question of limitation of time was involved for levy of penalty in terms of Section 275 of the 1961 Act. In that case, the assessment was completed on 20-1-1971 and penalty was levied on 9-3-1973 which was beyond the period of two years envisaged by Section 275 as it was in force at the time when the default was committed, i.e. 14-3-1970, in the meantime, an amendment was made in that, a new provision was substituted by the Taxation Laws (Amendment) Act, 1970 with effect from 1-4-1971, according to which the time limit was extended, namely, two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated are completed. The Madras High Court observed that Section 275 is in the nature of procedural provision and there is no question of any vested right according to any assessee by reason of the assessment being completed on any particular date and it is well settled that there is no vested right in any procedural matter. The Madras High Court held that the amended provisions of Section 275 alone will apply so long as the period of limitation has not expired on 1-4-1971 when the amended provision was brought into force. The same view has been expressed by the Madras High Court in the earlier case of CWT v. Savithri (T.C. Nos. 165 to 167 of 1975 dated 17-12-1979) which relates to similar amendment made to Section 18 of the Act by the Finance Act, 1969. Following respectfully, the aforesaid judgment, we hold that the Commissioner was justified in invoking his revisionary jurisdiction in passing the impugned orders which are well within time as per amended law of limitation.
13. In view of the aforesaid position, the preliminary objection raised by the assessees' counsel stands rejected.
14. On the merits of the case, it was sought to be argued by the assessee's counsel that the Commissioner had invoked the provisions of Section 263 mainly with a view to direct the ITO to apply the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11. According to him such a course of action could not be adopted with a view to giving a second innings to the department. In this connection reliance was placed on the decision of the Gujarat High Court in the case of CIT v. Harikishan Jethalal Patel [1987] 168 ITR 472/33 Taxman 217. It was further stated that the ITO in both these cases had made a detailed examination which included the books of accounts as also the statements furnished along with the return. It was his further argument that as the assessee had furnished all the relevant information to the ITO at the assessment stage and no further queries had been raised, it could be presumed that he was fully satisfied after applying his mind to the facts of the case and did not require any further information or details. According to the learned counsel and assessment order which had been framed on the basis, of a proper investigation and inquiry into the relevant facts, could not be considered as erroneous or prejudicial to the interests of revenue. In this connection the learned counsel invited our attention to his paper book, wherein were appended the details which had been furnished to the ITO along with the return of income and which he is purported to have looked into at the time of assessment proceedings. It was further submitted that in case there had been a failure on the part of the ITO to do something at the assessment stage the same could not be set right by invoking the provisions of Section 263. Another argument which was raised during the course of the hearing was that the duty of an assessee rested at disclosing the primary facts and did not extend beyond such a disclosure. According to the learned counsel once the basic and primary facts had been given to the ITO it was not for the assessee to tell him as to what investigation should be carried out or what inference should be drawn from those facts. On the merits of the case the learned counsel stated that the two trusts had been validly created and they in turn had taken over by proper and legal means the earlier businesses being carried on. According to him the trust deeds had also been properly executed and there was nothing on record to show that the fruits of the business had been enjoyed by somebody other than the beneficiaries. It was also the Counsel's argument that even if it was presumed to be a case of "tax planning" the same was permissible within the four corners of law. According to the learned counsel the decision in the case of McDowell & Co. Ltd. (supra) did not apply and in any case this could not form part of the notice Under Section 263 issued by the C.I.T. since these provisions were not meant for applying the decisions of Higher Courts. He finally made an impassioned plea for the confirmation of the assessment orders and setting aside of the consolidated order of the C.I.T. Under Section 263. In support of his arguments he placed reliance on the following authorities :
(i) Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC)
(ii) CIT v. Ahmedabad Mfg. & Calico Printing Co. Ltd. [1981] 128 ITR 671/7 Taxman 353 (Guj.)
(iii) K.T. Doctor v. CIT [1980] 124 ITR 501 (Guj.)
(iv) CIT v. V.S. Kumaraswamy Reddiar Trust [1982]138 ITR 808/8 Taxman 192 (Ker.)
(v) Arvind Jewellers v. ITO [IT Appeal No. 66 (Ahd.) of 1985 dated 19-6-1986].
(vi) And in the case of Budhilal Hiralal Rana [IT Appeal Nos. 67 and 68 (Ahd.) of 1985 dated 28-2-1986].
15. The learned DR on the other hand strongly supported the consolidated order of the C.I.T. It was stated that the ITO had completed the assessments without making any enquiry whatsoever. According to him the appellant trusts had been created after the date of the search and by this mode the income as also the wealth had been divided amongst the various members of the same family. It was argued that the jurisdiction Under Section 263 had been rightly invoked since the ITO had not exercised reasonable and proper care in completing the assessments. It was also submitted that the two separate notices issued by the C.I.T. in each of these cases supplemented each other and not only had an adequate opportunity been given to the assessee to reply to these notices but in fact replies were filed. According to the learned DR the reference to the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) in the order of the CIT was made only with a view to highlight the fact that the ITO had not made proper inquiries although the facts of the case indicated that such inquiries should have been made. It was the further argument that a decision of the Supreme Court would always relate back and the law pronounced would be the law as it always was. It was also stated that the various decisions of the Tribunal and the High Courts relied upon by the assessees' counsel were distinguishable on facts since those were cases where proper inquiries had been conducted by the I.T.O and it was on that score that the action Under Section 263 was quashed. In support of his arguments the learned D.R. placed reliance on the following decisions.
(i) Standard Radiators v. CIT [1987] 165 ITR 178 (Guj.)
(ii) Addl. CIT v. Mukiir Corporation [1978] 111 ITR 312 (Guj.) It was finally submitted that the consolidated order of the Commissioner be confirmed.
16. In reply, the learned counsel for the assessees stated that the relevant details pertaining to the relationship of trustees, beneficiaries and the settlor had been given to the I.T.O. in both these cases. He also referred to the decision of the Bangalore Bench of the Tribunal in the case of West Coast Construction Co. v. ITO [1983] 3 ITD 116 for the submission that the powers Under Section 263 could not be invoked to consider the decision of a High Court.
17. We have examined the rival submissions and have also perused the consolidated order of the CIT as also the assesssment orders passed by the I.T.O. The paper book furnished by the assessees' counsel as also the authorities cited at the bar by the parties have been duly taken into account in disposing of these appeals.
18. It is apparent that the ITO in both these cases has shown undue haste in completing the assessments. In respect of Femina Fashion Group the return was filed on 27-4-1983 and the first hearing took place on 7-9-83 by means of a notice issued on 30-8-83 and served on the assessee on 1-9-83. On 7-9-83 itself the hearing was concluded and the assessment finalised since the date of the assessment order is also 7-9-83. In respect of D. H. Advani Family Trust the position is more interesting since the return was filed on 14-9-83 and the notice for hearing was issued three days later viz. 17-9-83 fixing the date of hearing as 26-9-83. Here also the proceedings were finalised on the same date viz. 26-9-83 since the assessment order bears this date. We also had an occasion to examine the order sheets of both the cases and it transpired that what is written therein by the ITO is in fact the assessment order which was also typed out on the same date as the date of the order sheets.
19. The aforesaid unchallenged factual position leads to only one conclusion and that is the unusual hurry displayed by the ITO in completing the assessments at the cost of making relevant and proper inquiries. According to us it is nigh impossible for an assessing officer to examine the detailed and lengthy documents which have been made a part of the assessee's paper book and which are supposed to have been furnished to the ITO during the course of the assessment proceedings. It had been the argument of the assessees counsel that a number of details had been furnished alongwith the return. Even if this be so there is no evidence on record to show that these were looked into by the ITO since nothing is recorded in the order sheet and even the assessment orders are very sparsely worded. According to us the ITO should have been a little more careful in completing the two assessments then in the way that he did, since, he completely overlooked the fact that these two trusts were created immediately after the raid and were the successors of the earlier two businesses. He also overlooked the fact that the trustees and the beneficiaries in both these cases were the same set of persons. There is also nothing to show that the ITO raised any queries during the course of the assessment proceedings or that he required the assessee to furnish any further information.
20. In view of the discussions in the preceding paras, we would observe that the various decisions relied upon by the assessees' counsel would not help him in any way since the facts of those cases are fully distinguishable. The propositions laid down in those judgments are well known, with which we cannot have any quarrel but these would not be applicable in the present two cases wherein we have already pointed out the abnormal circumstances under which the assessments were completed by the I.T.O. We are also of the view that the assessments were not set aside by the C.I.T. only with a view to enable the I.T.O. to apply the decision in the case of McDowell & Co. Ltd. (supra) but that was an additional factor which weighed with him in observing that a similar situation may exist in the present cases as well:
21. In the final analysis we opine that the consolidated order of the Commissioner Under Section 263 does not call for any interference on our part.
The same is upheld.
22. The appeals are dismissed.