Income Tax Appellate Tribunal - Mumbai
Wealth-Tax Officer vs K.H. Gharda on 24 April, 1987
Equivalent citations: [1987]22ITD457(MUM)
ORDER
I.S. Nigam, Accountant Member
1. Against the consolidated order of the Commissioner of Wealth-tax (Appeals) VII, Bombay, both the revenue and the assessee have come up in appeals before us. All the appeals are, therefore, for the sake of convenience, disposed of by a common order.
2. The assessee is an individual and the appeals relate to the assessment years 1980-81 to 1983-84. It was claimed that the assessee, by an oral declaration, created a trust on 21-3-1977 by appointing himself and his wife, Mrs. Aban Keki Gharda, to be the trustees and transferring to it 2,000 equity shares in M/s. Gharda Chemicals Pvt. Ltd. to be held in trust in accordance with the provisions specified orally. According to the assessee, this was followed by the meeting of the two trustees, i.e., the assessee and his wife, held on 23-3-1977 under the chairmanship of Mrs. Aban Keki Gharda where the fact of the creation of the oral trust was placed on record and the provisions of the trust specified orally were also recorded. According to the oral directions recorded in the minutes of the first meeting of the trustees held on 23rd March, 1977, as already described, the trustees were to hold the trust fund and the future income thereof upon trust for the benefit of the assessee's wife, Mrs. Aban Keki Gharda, in the event of there being any difference of opinion at any time between the trustees or in the event of a tie between them, the matter was to be decided by the casting vote of the senior-most amongst them in age, the gift of 2,000 equity shares in M/s. Gharda Chemicals Pvt. Ltd. was revocable and the assesses reserved to himself the absolute right to transfer the shares or the assets to which they stood converted back to him for his absolute use and benefit at any time after one year, i.e., 21-3-1978, etc. It was also placed on record that on 21-3-1977 along with the oral declaration of trust by the assessee, the assessee also handed over 2,000 equity shares in M/s. Gharda Chemicals Pvt. Ltd. to the trustee in the presence of M/s. J.P. Somaiya and P.A. Panikkar. On these 2,000 equity shares in M/s. Gharda Chemicals Pvt. Ltd., 2,000 bonus shares were also received. It was claimed before the Wealth-tax Officer that while the provisions of Section 4(l)(a) of the Wealth Tax Act, 1967 may apply to 2,000 shares transferred by the assessee to the trust for the benefit of his wife, they will not apply to bonus shares on these shares or to the dividend declared on these shares or on the bonus shares, that is in other words, the provisions of Section 4(l)(a) will apply only to the value of the assets transferred directly or indirectly but not to the accretion to those assets. The Wealth-tax Officer, however, found that the 2,000 shares in Gharda Chemicals Pvt. Ltd. said to have been transferred to an oral revocable trust remained in the assessee's name, the bonus shares were also in the assessee's name and the dividends on these shares were also in the assessee's name. He further held that even according to the terms of the so called revocable trust, there was nothing to indicate that there was any transfer of any shares by the assessee to the trust. On this basis he held that the value of the entire 2,000 shares of Gharda Chemicals Pvt. Ltd. claimed to have been gifted to the wife through an oral revocable trust and the further 2,000 bonus shares issued on these shares will be included in the assessee's net wealth. Here it will be necessary to point out that while the assessee worked out the value of these shares under rule ID of the Wealth-tax Rules, 1957 and the Wealth-tax Officer also valued these shares under rule ID of the Wealth tax Rules, 1957, according to the assessee, the advance payment of tax excluded from the assets ought not to have been deducted from the tax payable with reference to the book profits in accordance with the law applicable thereto for the purpose of finding out whether the amount representing the provision for taxation was in excess and, if so, to what extent in working out the value of the shares under rule ID of the Wealth-tax Rules, 1957. This was, however, not accepted by the Wealth-tax Officer in working out the value of these shares under rule ID of the Wealth-tax Rules, 1957.
3. The Wealth-tax Officer also found that out of the dividend received on these shares, which was received in the name of the assessee, Rs. 1,20,000 was deposited in the books of the company, M/s. Gharda Chemicals Pvt. Ltd., in the name of the assessee's wife and continued to be in the name of the assessee's wife on the valuation dates relevant to the assessment years 1981-82 to 1983-84. This amount of Rs. 1,20,000 was also, therefore, included in the assessee's net wealth for the assessment years 1981-82 to 1983-84.
4. When the matter went up in appeal, the Commissioner of Wealth-tax (Appeals) held that the value of 2,000 bonus shares received on the 2,000 equity shares of Gharda Chemicals Pvt. Ltd. transferred by the assessee to an oral revocable trust for the benefit of the assessee's wife, could not be included, in the assessee's net wealth for all the four assessment years under appeal before us.
5. He further held while dealing with the appeals for the assessment years 1981-82 to 1983-84 that the fixed deposit of Rs. 1,20,000 in the company, M/s. Gharda Chemicals Pvt, Ltd. out of dividends on shares transferred by the assessee to the oral revocable trust as well as on the bonus shares also could not be inoluded in the net wealth of the assessee. The Commissioner of Wealth-tax (Appeals), however, made an observation in paragraph 8 of his order that for the assessment years 1981-82 and 1982-83 these amounts had already been included in the net wealth as returned and, therefore, there was no justification for adding the same once again while working out the net wealth in the assessment order, that is, in other words, making a double addition of this amount. He, however, while making this observation also held that the inclusion of this amount in the assessee's net wealth was not justified.
6. He, however, agreed with the Wealth-tax Officer that while valuing the unquoted equity shares of M/s. Gharda Chemicals Pvt. Ltd. under rule ID of the Wealth-tax Rules, 1957, advance payment of tax excluded from the assets should be deducted from the tax payable with reference to the book profits in accordance with the law applicable thereto for the purpose of finding out whether the amount representing the provision for taxation was in excess and, if so, to what extent in working out the value of the shares under this rule.
7. Against the consolidated order of the Commissioner of Wealth-tax (Appeals), both the revenue and the assessee have come up in appeals before us. The grievance of the revenue is against the exclusion of the value of 2,000 bonus shares (received on 2,000 equity shares) of Gharda Chemicals Pvt. Ltd. from the assessee's net wealth for all the four assessment years under consideration before us. Another grievance of the revenue relating to the assessment years 1981-82 to 1983-84 only is against the exclusion from the assessee's net wealth of Rs. 1,20,000 on account of fixed deposit with M/s. Gharda Chemicals Pvt. Ltd. out of dividends on shares from that company. On the other hand, the grievance of the assessee common to all the four assessment years under consideration before us is that in valuing the unquoted equity shares of M/s. Gharda Chemicals Pvt. Ltd. under rule ID of the Wealth-tax Rules, 1957, the advance payment of tax should not have been deducted from the tax payable with reference to the book profits in accordance with the law applicable thereto for the purpose of ascertaining whether the amount representing the provision for, taxation was in excess and, if so, to what extent. The alternative contention raised was that these shares should have been valued under the yield capitalisation method as was done by the CWT (Appeals) for the assessment year 1978-79.
8. The learned departmental representative, Shri Raju, cited before us the rulings of the Hon'ble Supreme Court in the cases of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 and Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 in support of the contention that it is the duty of the Court not to give judicial benediction to colourable devices and it is the duty of the Court to go behind the smoke screen and discover the true state of affairs. Reference was then made by him to another ruling of the Hon'ble Supreme Court in the case of CI'T v. Durga Prasad More [1971] 82 ITR 540 wherein their Lordships laid down that where a party relied on self-serving recitals in documents, it was for that party to establish the truth of those recitals and the tax authorities were entitled to look into the surrounding circumstances to find out the reality of such recitals. Viewed in this context, according to Shri Raju, the 2,000 equity shares in Gharda Chemicals Pvt. Ltd. even though claimed to have been transferred to an oral revocable trust on 21-3-1977 remained in the name of the assessee, the bonus shares declared on these equity shares were also in the name of the assessee and the dividends on the shares both the original equity shares and bonus shares were also in the assessee's name. According to Shri Raju, if there was a real transfer of the original 2,000 equity shares in M/s. Gharda Chemicals Pvt. Ltd. by the assessee to an oral revocable trust, this could have been done by transfer of the shares either to the trust or in the name of the assessee's wife for whose benefit the trust was claimed to have been created. He further submitted that a bank account could have been opened in the name of the trust where the dividends declared on the original equity shares transferred and on the bonus shares could have been deposited. In support of the contention that an account could have been opened in the name of the trust, the account opening Form issued by the Syndicate Bank in the case of a trust was filed before us. In this connection, our attention was invited to the last paragraph of the minutes of the first meeting of the trustees of Aban Trust held at Bombay on 23-3-1977, which reads as follows :
It was also decided to place on record the fact that the oral declaration of trust was made by Dr. Keki Hormusji Gharda on 21st day of March, 1977 in the presence of Shri J.P. Somaiya and Shri P.A. Panikkar and 2,000 equity shares in M/s. Gharda Chemicals Private Limited were also handed over to the trustees in their presence.
According to Shri Raju, it was significant that the 2,000 equity shares in M/s. Gharda Chemicals Pvt. Ltd. were also handed over to the trustees in the presence of Shri J.P. Somaiya and Shri P.A. Panikkar in order to point out that according to the minutes there were only two trustees, i.e., the assessee and his wife and if the assessee handed over the shares to the trustees, it is not clear to whom the shares were actually handed over if they were at all handed over. Even otherwise, according to Shri Raju, the handing over of the share scrips in the name of the assessee does not mean anything unless the shares were transferred to the trust or to the wife for whose benefit the trust was claimed to have been created. He also referred to Clause 4 of the minutes where it was recorded that in the event of a tie, the senior-most in age shall have a casting vote in order to mention that where the trustees consisted only of the assessee and his wife and the assessee was senior in age, this in effect meant that the assessee will be in absolute control and the whole thing was a facade or smoke screen. Similar, according to Shri Raju, was Clause 8, which showed that any time after 21-3-1973, i.e., one year after the so called creation of the oral revocable trust the assessee could direct for transfer back to him of these shares or the assets into which they stood converted for his own absolute use and benefit at any time, which the trustees shall be bound to do. It was submitted by him that in the first place the so called trust was by an oral declaration and even according to the minutes of the meeting of the trustees held on 23-3-1977 there were only two trustees, i.e., the assessee and his wife of whom the assessee being senior in age was to have a casting vote. The cumulative effect of all these facts and circumstances, according to Shri Raju, was that there was in effect no transfer of the shares, the whole thing was a smoke screen and it is the duty of the Tribunal to find out the real facts and not give judicial benediction to a colourable device by the assessee. On this basis, Shri Raju submitted that the inclusion of the value of the 2,000 bonus shares of Gharda Chemicals Pvt. Ltd. in the assessee's net wealth for all the four assessment years under appeal before us was justified and was wrongly excluded by the CWT (Appeals). It was further claimed that for the assessment years 1981-82 to 1983-84 the inclusion of the deposit of Rs. 1,20,000 in Gharda Chemicals Pvt. Ltd. in the assessee's net wealth by the Wealth-tax Officer was justified and the CWT (Appeals) wrongly directed that this should not be included in the assessee's net wealth.
9. On the other hand, the assessee's learned counsel, Shri Doshi, submitted to us that for the assessment year 1979-80 the CWT (Appeals) had excluded the value of 2,000 bonus shares of M/s. Gharda Chemicals Pvt. Ltd. from the assessee's net wealth and against this order of the CWT (Appeals) there was no appeal by the revenue. Proceeding further he submitted that the issue also came up before the Appellate Tribunal in the income-tax appeals for the assessment years, 1979-80 and 1980-81 (ITA Nos. 5673/Bom/1982 and 5605/Bom/1983) where the assessee's claim that Section 64(l)(iv) should not be applied to the income from dividend on bonus shares, was accepted by the Appellate Tribunal. Shri Doshi submitted to us that no application for reference against this order of the Appellate Tribunal was filed by the revenue. Coming to the merits, Shri Doshi submitted that while the provisions of Section 4(l)(a) would undoubtedly apply to the 2,000 equity shares of Gharda Chemicals Pvt. Ltd. transferred by the assesses to the oral revocable trust for the benefit of his wife on 21-3-1977, this provision will have no application to bonus shares received on these equity shares or the dividends declared on these shares or on the bonus shares in view of the rulings of the Hon'ble High Court of Bombay in the cases of Popatlal Bhikamchand v. CIT [1959] 36 ITR 577 and C1T v. M.P. Birla [1983] 142 ITR 377. Shri Doshi submitted that the shares could not be registered in the name of a trust in view of the provisions of Section 153 of the Companies Act. Our attention was invited to the minutes of the first meeting of the trustees of the Aban Trust held on 23-3-1977. It was pointed out that the fact of the trust being acted upon was established by the dividend income from the shares being deposited in a fixed deposit in the name of the assessee's wife, who was the sole beneficiary of the trust. Our attention was invited to an order of the Appellate Tribunal in the case of First WTO v. S.B. Garware, IIUF [1986] 15 ITD 711 (Bom.), wherein it was held that the mere fact of reduction in the tax liability does not affect the genuineness or the legality of the transfer.
10. On the same parity of reasoning Shri Doshi submitted that the fixed deposit of Rs. 1,20,000 in the company, Gharda Chemicals Pvt. Ltd., out of dividends on equity shares in the company transferred to the trust and bonus shares received on those shares could not be included in the assessee's net wealth.
11. Coming to the assessee's appeals, Shri Doshi submitted that the issue of whether the advance payment of tax, which was excluded from the assets, should be deducted from the tax payable with reference to the book profits in accordance with the law applicable thereto for the purpose of determining whether the amount representing the provision for taxation was in excess and, if so, to what extent while valuing the shares under rule ID of the Wealth-tax Rules, 1957, also cropped up in the assessee's wealth-tax appeal for the assessment year 1979-80 before the Appellate Tribunal (WTA No. 586/ Bom/1985) and the facts relevant to the issue as well as his arguments were the same as were before the Appellate Tribunal in the appeal for the assessment year 1979-80. He, however, referred to the alternative contention that the shares should be valued under the yield capitalisation method and cited before us the rulings of the Hon'ble Supreme Court in the cases of CWT v. Mahadeo Jalan [1972] 86 ITR 62.1 and CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38 and the ruling of the Hon'ble High Court of Bombay in the case of Smt. Kusumben D. Mahadevia v. CWT [1980] 124 ITR 799.
12. The learned departmental representative, Shri Raju, in reply submitted that the order of the Appellate Tribunal in the income-tax appeals for the assessment years 1979-80 and 1980-81 was dated 30-8-1984 and, therefore, could not have taken into consideration the rulings of the Hon'ble Supreme Court in the cases of McDowell and Co. Ltd. v. Commercial Tax Officer delivered on 17-4-1985 and Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. and Another delivered on 19-8-1985. He, therefore, contended before us that the order of the Appellate Tribunal dated 30-8-1984 requires reconsideration.
13. Coming to the assessee's appeals, Shri Raju also placed reliance on the order of the Appellate Tribunal in the assessee's Wealth-tax appeal for the assessment year 1979-80 where the decision of the Appellate Tribunal was in favour of the department. It was, however, submitted by him that before the Wealth-tax Officer the assessee himself had worked out the value of unquoted equity shares of Gharda Chemicals Pvt. Ltd. under rule ID of the Wealth-tax Rules, 1957 and the Wealth-tax Officer had also applied the same rule while valuing these shares and before the Wealth-tax Officer the assessee neither made a claim nor furnished any material in support of the claim that these shares should be valued under the yield capitalisation method. In these circumstances, according to Shri Raju, the alternative claim of the valuation of shares under the yield capitalisation method should not be entertained at this stage in view of the ruling of the Hon'ble Supreme Court in the case of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1.
14. We have carefully considered the rival submissions. There is the authority of the Hon'ble Supreme Court in the cases of McDowell and Co. Ltd. (supra) and Workmen of Associated Rubber Industry Ltd. (supra) that it is the duty of the authorities not to be satisfied with the form alone and it is their duty to get behind the smoke screen and discover the true state of affairs and where there is a colourable device, it should not receive judicial benediction. Viewed in this context, it is found in the present case that the trust is said to have been created by an oral declaration on 21-3-1977 to which 2,000 equity shares in M/s. Gharda Chemicals Pvt. Ltd. were handed over. According to the minutes of the first meeting of the trustees who happened to be none other than the assessee and his wife held on 23-3-1977, the trust was revocable and at any time after 21-3-1978 the assessee had the right to get the shares or the assets into which they stood converted/transferred back to him, even during that one year in the event of any difference of opinion at any time and there being a tie between the trustees who, it is necessary here to point out, were the assessee and his wife, the senior in age was to have a casting vote in addition to his own and this meant that the assessee who was senior in age would always have an absolute control over the so-called trust. It is further necessary to note that the 2,000 equity shares, which were said to have been transferred by the assessee to the trust for the benefit of his wife continued to remain in the assessee's name, the bonus shares on these shares were also received in the assessee's name and the dividends on these shares as well as the bonus shares were received in the assessee's name, that is, in other words, the shares said to have been transferred, the bonus shares received on those shares as well as the dividends both on the original shares and On the bonus shares at all times continued to belong to the assessee. Even the minutes of the first meeting of the trustees on 23-3-1977 placing on record the fact of setting up of the trust by oral declaration and the provisions again orally declared for the administration of the trust show that there was no intention of the assessee to part with the control over the shares said to have been transferred, on the bonus shares issued on the original shares or the dividends declared on the original shares or on the bonus shares. Considering all this and looking to the totality of the facts and circumstances, we have no hesitation in holding that the so-called oral declaration of the trust on 21-3-1977, the so-called minutes of the first meeting of the trustees of the trust on 23-3-1977 were a mere camouflage or smoke screen and the true state of affairs was that the shares continued to be under the control of the assessee and it was never the intention of the assessee to transfer the shares to the trust for the benefit of his wife. Once the transfer of the 2,000 equity shares of Gharda Chemicals Pvt. Ltd. to the trust is held to represent not the true state of affairs and the shares are held to continue to belong to the assessee, it automatically follows that the bonus shares on these shares as well as the dividend income of these shares belonged to the assessee. In these circumstances, if Rs. 1,20,000 out of these dividends was utilised to make a fixed deposit in the name of the assessee's wife with the company, Gharda Chemicals Pvt. Ltd., this amount also will attract the provisions of Section 4(l)(a) or else, alternatively, will be held to belong to the assessee in the name of his wife. We have, therefore, no hesitation in coming to the conclusion that the inclusion of the value of 2,000 bonus shares of Gharda Chemicals Pvt. Ltd. in the assessee's net wealth for all the four assessment years under consideration before us was justified and was wrongly excluded by the CVVT (Appeals).
15. We further hold that for the assessment years 1981-82 to 1983-84 the inclusion of the fixed deposit of Rs. 1,20,000 in the assessee's net wealth was justified and the CWT (Appeals) wrongly directed that this amount should be excluded from the assessee's net wealth. We, however, direct the Wealth-tax Officer to verify whether for the assessment years 1981-82 and 1982-83 there has been a double addition of this amount while making the assessment once when this amount was included in the assessee's working and another time when this amount was added while making the assessment and, if that is so, to make the necessary rectification.
16. Following, with respect, the order of the Appellate Tribunal in the wealth-tax appeal for the assessment year 1979-80, we uphold the order of the CWT (Appeals) that advance payment of tax should be deducted from the tax payable with reference to the book profits in accordance with the law applicable thereto for the purpose of determining whether and, if so, to what extent the amount representing the provision for taxation was in excess and was consequently not to be treated as a liability while valuing the shares of Gharda Chemicals Pvt. Ltd. under Rule 1D of the Wealth-tax Rules, 1957. It is necessary here to point out that in spite of a specific query by the Bench, the assessee's learned counsel, Shri Doshi, has not been able to show to us that before the Wealth-tax Officer in the course of the assessment proceedings the assessee either made a claim or furnished material in support of the claim of the valuation of these shares under the yield capitalisation method. The alternative contention of the valuation of these shares under the yield capitalisation method cannot, therefore, in these circumstances, be entertained at this stage in view of the ruling of the Hon'ble Supreme Court in the case of Gurjargravures (P.) Ltd. (supra).
17. The appeals filed by the revenue succeed and are hereby allowed, while the assessee's appeals fail and are hereby dismissed.