Income Tax Appellate Tribunal - Ahmedabad
Shree Ganesh Chhababhai Family Trust vs Income-Tax Officer on 3 March, 1993
Equivalent citations: [1993]47ITD581(AHD)
ORDER
R.L. Sangani, Judicial Member
1. The assessee is a trust which came into existence by trust deed dated 5-7-1979 executed by one Smt. Surajben Chhababhai Patel by settling Rs. 11000. The beneficiaries of the assessee-trust are 45 oral discretionary trusts the names of which are mentioned in the Schedule to the trust deed. It is mentioned in the trust deed that the trustees of these 45 trusts would represent those trusts as beneficiaries of the assessee-trust. The share of 25 of these beneficiary trusts is 2% each while the share of remaining 20 beneficiary trusts is 2.5%. Subsequently these beneficiary trusts filed statements in writing signed by the trustees setting out the purpose of the trust, particulars as to the trustees, the beneficiaries and the trust property and forwarded the same to the Assessing Officer as required by Explanation 1 to Section 160 of the Act. The result was that those 45 beneficiary trusts would be deemed to be trusts declared by duly executed instrument in writing as laid down in said Explanation.
2. The beneficiaries of each of 44 trusts out of 45 trusts referred to above, were two oral discretionary trusts while the beneficiaries of 45th trust were three oral distretionary trusts. Thus there were 91 beneficiaries of the above 45 trusts. It may be mentioned here that before the ITO and CIT (Appeals) as well as in the course of arguments before us it was represented on behalf of the assessee that the beneficiaries of above 45 trusts were 90 trusts but after the arguments were closed when the assessee was asked to file a list of all the trusts, it was pointed out on behalf of the assessee that the beneficiaries of these 45 trusts were in fact 91 trusts and not 90 trusts as had been stated by the assessee before the lower authorities and also before us. It is stated before us that these 91 trusts were also oral trusts at the initial stage and subsequently statements were filed as laid down in Explanation to Section 160 of the Act with the result that they would be deemed to be trusts declared by duly executed instrument as laid down in said Explanation. The beneficiaries of these 91 trusts were 12 minor children of three persons viz., S/Shri K.C. Patel, G.C. Patel and J.C. Patel. They were mentioned in different permutation and combination of three or four each as beneficiaries in these 91 trusts.
3. The assessee-trust was proprietor of business carried on under the name of Ganesh Housing Builders. Net profit as per account book was Rs. 1,81,196. The assessee filed return on 18-7-1984 for assessment year 1982-83 for which the relevant accounting year ended on 30-6-1981 declaring total income at 'Nil'.
4. Subsequently the assessee filed revised return and in the statement accompanying the revised return the income was shown at Rs. 2,31,798. In the revised return the income was declared at 'Nil'. Following note was incorporated in Part III of the return :
The appellant is a written specific Trust in which the beneficiaries of the trust are 45 persons in their capacities as respective trustees of the respective trusts. Each of the trusts referred to have two persons as their respective beneficiaries in their capacities as respective trustees of their trusts. All these trusts are deemed to be in writing on account of the intimations in writing given by the respective trustees as per Clause (iv) of Exp. I to Section 160(1) of the IT Act, 1961 in last year. The shares of the beneficiaries of the Appellant trust are determined and specific with the identifiable beneficiaries having thus determinate shares and thus income of the trust should be allocated in the hands of 45 beneficiaries and the said income should be assessed in their hands at the ordinary rate. The Returns of the beneficiaries 45 trusts of this trust are not filed as to our knowledge the income of the relevant trusts-beneficiaries are much below taxable limit.
5. Before the ITO the assessee claimed the status of specific trust on the ground that 45 beneficiaries of the assessee-trust had definite share in the income of the assessee-trust. It was submitted that only fact which was decisive in holding that the assessee-trust was specific trust, was that the beneficiaries named in the trust deed had definite share. It was also stated that it was immaterial that the beneficiaries themselves were trusts and the beneficiaries of those trusts were also trusts. It was submitted that the income should be allocated amongst 45 beneficiaries mentioned in the trust deed and when the income was so allocated, no income would remain assessable in the case of the assessee-trust and as far as 45 beneficiary trusts were concerned no income was chargeable in their hands because income allocated to each of those trusts was below taxable limit.
6. The ITO did not accept the submissions of the assessee. He examined the entire circumstances in which these trusts came into existence. He held that series of steps have been taken by closed group of persons in creating the above artificial entities with the sole object of avoidance of payment of tax. He applied the principle laid down by the Supreme Court inihe case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. He held that the assessee-trust was not a genuine trust and that the income declared by the assessee-trust was liable to be assessed in the status of AOP at maximum marginal rate. In the alternative he held that the assessee-trust should be treated as discretionary trust in view of the fact that the shares of ultimate beneficiaries were unknown and hence maximum marginal rate was applicable. He accordingly levied at maximum marginal rate.
7. The assessee filed appeal and the CIT (Appeals) examined the entire circumstances and came to similar conclusion. He confirmed the action of the ITO in applying the maximum marginal rate. The assessee is now in further appeal before the Tribunal.
8. The learned Advocate General who appeared on behalf of the assessee submitted that we have to look to the provisions of Indian Trust Act in order to decide whether the assessee-trust was a genuine trust. He referred to various provisions of Indian Trust Act and also to various terms of the trust deed under which the assessee-trust was created and submitted that no provisions of Indian Trust Act had been violated and hence the assessee-trust should be regarded as genuine trust. It was submitted that 45 trusts which were beneficiaries of the assessee-trust and 90 trusts (this in fact should be 91) which were beneficiaries of those 45 trusts should also be regarded as genuine trusts. It was submitted that all these trusts had filed statements as required by Explanation 1 to Section 160(1) of the Act before the ITO within the prescribed time and as such those trusts should be regarded as deemed written trusts. He also submitted that we have to look to the immediate beneficiaries of the assessee-trust and should stop at that point in order to determine whether the assessee-trust was specific trust. Since the shares of 45 beneficiaries of assessee-trust were specific, the assessee-trust should be regarded as specific trust. He referred to the decision of Supreme Court in the case of CWT v. Arvind Narottam [1988) 173 ITR 479 in support of his submission that where the language of deed of settlement was admitted of no ambiguity, there was no scope for consideration of tax avoidance. He also referred to the decision of Supreme Court in the case of CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660. He admitted before us that certain decisions of the Tribunal on this point were against the assessee particularly the decisions in the cases of B.D. Fibre Enterprises v. IAC [1986] 19 ITD 427 (Bom.), Atman Trust v. IAC [1989] 31 ITD 315 (Ahd.) and Harish (HE) Trust v. ITO. However according to him, those decisions required reconsideration and should not be followed. It was submitted that in those decisions one vital aspect was overlooked and that aspect was that where trust satisfied all the conditions under the Indian Trust Act, it was a valid trust under the General Law and it should not be regarded as invalid trust under the Income-tax Act.
9. The learned D.R., on the other hand, relied on the reasons given in the assessment order and in the order of CIT (Appeals). According to him, the principle of decision of Supreme Court in the case of McDowell & Co. Ltd. (supra) had been rightly applied. According to him, the abovementioned decisions of the Tribunal which are admittedly applicable, had been rightly decided and this Bench should not deviate from the view already taken in those decisions.
10. We have considered the rival submissions. It wouid be necessary to state the facts in detail in order to appreciate the controversy. The assessee-trust has been created by the settlor Smt. Surajben Chhababhai Patel by an indenture dated 5-7-1979 by settling a sum of Rs. 11001. 45 trusts have been mentioned as beneficiaries of the assessee-trust in the trust deed. The name of each beneficiary trust begins with the word "Ganesh". Some of the names are 'Ganesh Patel Dipak Trust', 'Ganesh Hemang Trust', Ganesh Patel Bimal Trust, Ganesh Shekhar Patel Trust, Ganesh Kalpesh Patel Trust, Ganesh Alka Patel Trust etc. All these 45 trusts claimed to have come in existence from 2-7-1979, i.e. to say three days before the date on which the assessee-trust came into existence. Originally all these 45 trusts were oral trusts. The assessee has not filed copies of terms of all these 45 trusts. It is not known whether those copies had been filed before the lower authorities. However, the lower authorities accepted the submissions of the assessee that the terms of all 45 trusts were identical. Consequently the terms of one of the trusts had been examined and it has been assumed that all 45 trusts are similar. We shall also presume in this appeal that terms of all 45 trusts are similar. Before us the assessee's learned counsel has referred to beneficiary No. 31 mentioned in the trust deed viz. Ganesh M. Alka Patel Trust. This trust is taken as a typical trust and it is submitted that the terms of all other trusts are identical.
11. The beneficiaries of Ganesh M. Alka Patel Trust are (i) A. Savitaben Patel Trust and (ii) Lalitaben Patel Trust. Each of the remaining 44 trusts have similar two such trusts as beneficiaries. One of them has three beneficiaries. The assessee has filed list in which the names of all 91 beneficiary trusts of the above 45 trusts have been mentioned.
12. The assessee has also filed before us copy of minutes of Ganesh M. Alka Patel Trust referred to above which is one of the 45 beneficiaries of the assessee-trust. These minutes are cyclostyled in which blanks are filled by fresh typing of names. We have been requested to presume that for all other beneficiary trusts there are identical minutes of meeting.
13. The minutes of this trust indicate that it was orally created on 2-7-1979. Thereafter on the same day i.e., on 2-7-1979 at 12 Noon a meeting of the trustees of this trust took place in which the settlor (Shri Indravadan Shantilal Shah) was present. It is further mentioned that Shri Indravadan S. Shah had settled Rs. 201 to create the oral trust under the name of Ganesh M. Alka Patel Trust. The terms of the oral trust were put in writing in the minutes of the meeting of the trustees of this trust. It is mentioned in these minutes that the beneficiaries of Ganesh M. Alka Patel Trust are A. Savitaben Patel Trust and Lalitaben Patel Trust -both of which were being represented by their trustees. It is not mentioned in the minutes of this meeting that the shares of these beneficiaries were definite. The shares of beneficiaries are not specified. Consequently it would be assumed that the shares were indeterminate.
14. Subsequently on 30-4-1981 statement in writing as required under Explanation 1 to Section 160(1) of the Act was forwarded to the ITO in respect of this trust. Copy of this statement is at page 12 of the paper book. In this statement the names of trusts and names of beneficiaries are mentioned. However, it is not mentioned that the shares of the beneficiaries of this trust were definite or determinate. In fact, it is not mentioned as to what was the share of each of the two beneficiaries.
15. The assessee has then filed copy of minutes of meeting which is said to have taken place on 29-5-1978 of A. Savitaben Patel Trust which was one of the two beneficiaries of Ganesh M. Alka Patel Trust referred to above. In this meeting the settlor of the said trust was present. In the minutes it is mentioned that four minors were beneficiaries of said A. Savitaben Patel Trust. Those four minors were children of S/Shri K.C. Patel, G.C. Patel and J.C. Patel. It is not mentioned that shares of these minors would be definite. In fact, one of the resolutions in the meeting indicates that the shares of these beneficiaries were not determinate and as such this trust was a discretionary trust. It is stated that other 90 trusts were of similar nature and in their cases also similar minutes have been recorded.
16. For the first time after the arguments had been completed, the assessee in the covering letter accompanying the documents has mentioned that on 1-7-1980 a meeting of the trustees of A. Savitaben Patel Trust had taken place in which the settlor was present and that it was decided in this meeting that the resolution in the earlier meeting which had indicated that the shares of beneficiaries were indeterminate, would stand cancelled and instead it would be deemed that each of the four beneficiaries who were minor children of S/Shri K.C. Patel, G.C. Patel and J.C. Patel would have 25 per cent share each. It is to be noted that the fact that in a subsequent meeting such decision had been taken, has not been stated anywhere before the lower authorities and was not stated before us in the course of arguments.
17. On 7-7-1981 the trustees of A. Savitaben Patel Trust submitted to the ITO statement in writing as required by Explanation 1 to Section 160(1) of the Act in which the names of the trustees and names of the beneficiaries of the same trust had been given. In this statement it is not mentioned as to what was the share of each of the beneficiaries.
18. As far as 45 beneficiary trusts of assessee-trust are concerned, all of them have come into existence on 2-7-1979. Originally they were oral discretionary trusts. Subsequently they are to be regarded as deemed written trusts because of the fact that statements have been submitted to the ITO as required by Explanation 1 to Section 160(1) of the Act. However, they continued to be discretionary trusts because in those statements also it is not mentioned that the share of each beneficiary was specific. Thus 45 beneficiary trusts of assessee-trust are discretionary trusts. All these 45 beneficiary discretionary trusts have been created by 5 persons by settling very small amounts like Rs. 201. They have been created on the same day Le., on 2-7-1979. The assessee-trust was created on 5-7-1979 and these 45 beneficiary trusts have been created on 2-7-1979. As already stated, the beneficiaries of each of the 45 trusts are oral discretionary trusts which have subsequently been converted into deemed written trusts. The beneficiaries of those trusts are minor children of three brothers viz., Shri KC. Patel, Shri G.C. Patel and Shri J.C. Patel in different permutations and combinations. Out of those 91 trusts 88 trusts have been created between February 1978 and August 1978.
19. As far as 45 beneficiary trusts of assessee-trust are concerned, 22 of them have been created by one Shri Champaklal S. Shah while 23 have been created by one Shri I.S. Shah. The statements of these two persons as also the statements of the settlor of the assessee-trust have been recorded by the ITO. These two persons have given identical answers. Both of them have admitted in their statements that they had made gifts to those trusts for the benefit of children of S/Shri K.C. Patel, G.C. Patel and J.C. Patel. They were asked as to who had advised them to create those trusts and their reply was that nobody had advised them. They were asked that they had created large number of trusts by settling Rs. 200 each (22 in one case and 23 in other case) for the benefit of children of S/Shri K.C. Patel, G.C. Patel and J.C. Patel and that what was the reason for creating so many different trusts and why single trust showing all the children of K.C. Patel, G.C. Patel and J.C. Patel as beneficiaries, had not been created. Shri Champaklal S. Shah had stated that he could not say why he created 22 instead of one single trust while Shri I.S. Shah stated "I felt that way". They were also asked whether they agreed that the creation of 22 trusts in one case and 23 in another case had been with a view to avoid proper payment of income-tax by the concerned persons and their reply was identical i.e., "I cannot say". Both of them admitted that real beneficiaries were not two trustees of each trust created by them but children of S/Shri K.C. Patel, G.C. Patel and J.C. Patel. Neither of these two persons were assessed to income-tax. Both of them were serving in a concern of Ganesh Housing Builders. They were asked whether they had created any trust for the benefit of their own children or their family members and their replies were in the negative. Both of them have also stated that they did not remember the names of all the trusts that they had created.
20. The settlor of the assessee-trust viz., Smt. Surajben C. Patel who was illiterate lady aged 65 years was also examined. She was mother of S/Shri K.C. Patel, G.C. Patel and J.C. Patel referred to above. These three persons are the trustees of assessee-trust. She could not state the names of 45 beneficiaries of the assessee-trust created by her. She clearly stated that she had created the assessee-trust for the benefit of 12 grand children, i.e., to say children of S/Shri K.C. Patel, G.C. Patel and J.C. Patel. She expressly admitted that she named 45 trusts as beneficiaries instead of her grand 12 children on the advice given to her by her Advocate. According to her, the ultimate beneficiaries were her grand children.
21. The facts narrated above in detail clearly indicate that the persons carrying on business in question had created entities on paper with the help of some persons close to them with the sole object of avoiding payment of tax. For example, in the year under consideration the income was more than Rs. 1 lac but since in the trust deed of the assessee 45 discretionary trusts had been named as beneficiaries, an attempt was made to divide the income amongst 45 beneficiary trusts so that the income which would come to the share of each of 45 discretionary trusts would be below taxable limit. By such paper work, any number of trusts could have been created for dividing the income and even if the income happened to run into lacs, tax on such income could be saved by creating an appropriate number of trusts on paper in such a way that the total income divided by number of such trusts would be a figure which was below taxable limit. When such a device is adopted, it could not be said that the trust which was created for carrying on business was a genuine trust. Creation of such trusts does not require any stamp paper nor do they require registration.
22. The submission of the learned Advocate General to the effect that when once it was found that the trust was created in accordance with the provisions of the Indian Trust Act, that trust should be regarded as genuine trust and fact that number of trusts created almost simultaneously was large, would be irrelevant, cannot be accepted. All the surrounding circumstances are required to be taken into account. All tax planning would not be illegitimate. Tax planning would be regarded as legitimate when it is within the framework of the General Principles of law. Colourable device cannot be regarded as part of tax planning. The point for consideration is not whether if the provisions of Indian Trust Act are construed literally any of the provisions could be regarded to have been violated by creation of the large number of trusts. The question is whether, when all the transactions are considered together, they constituted series of steps leading to a device the whole object of which is to avoid tax and whether the transactions are such that judicial process could accord its approval to them. Legislature cannot be expected to take care of every device and scheme of avoidance of taxation and hence it is for the Tribunals and Courts engaged in the administration of justice to determine the nature of the sophisticated legal devices and refuse to give judicial recognition to them. This is laid down by the Supreme Court in the case of McDowell & Co. Ltd. (supra) and the principle laid down therein squarely applies to the facts of the present case.
23. The learned Advocate General had drawn attention to decision in the case of Arvind Narottam (suprd) in which it has been observed that where the language of the deed of settlement is plain and admits of no ambiguity, there is no scope for consideration of tax avoidance. That principle would not be applicable in cases where all surrounding circumstances taken together indicated the existence of device resulting in series of steps for tax avoidance. The question whether transaction in a particular case amounted to a device for avoidance of tax so as to come within the principle laid down in the case of McDowell & Co. Ltd. (supra), would depend on the entire circumstances of that case. Our attention was also drawn to the observations of Justice Mukharji in the above decision to the effect that unless waste and ostentation in Government spending were avoided no amount of moral sermons would change people's attitude to tax avoidance. These observations did not indicate that when the facts on record establish a device to avoid tax, those facts should be ignored altogether.
24. Another decision to which our attention was drawn on behalf of the assessee was Bagyalakshmi & Co.'s case (supra). We have carefully perused that decision and nothing contained therein would be of any assistance to the assessee in view of the facts discussed above.
25. As already stated earlier, it was admitted before us on behalf of the assessee that the decisions of the Tribunal in the cases of B.D. Fibre Enterprises (supra), Atman Trust (supra) and Harish (HE) Trust (supra) were against the assessee. In those cases series of trusts had been created in similar manner and the Tribunal held that charging of maximum marginal rate was justified. We do not accept the submissions on behalf of the assessee to the effect that those decisions require re-consideration and should not be followed.
26. As already stated, large number of entities have been created on paper with the sole object of avoidance tax. In the circumstances the income is liable to be assessed in the status of AOP. Since the shares of the members of AOP were not determinate the provisions of Section 167A would be applicable and the tax would be charged at maximum marginal rate.
27. In the alternative, even if the assessee-trust which is created by a deed in writing is regarded as genuine trust, since 45 beneficiary trusts of the assessee-trust are discretionary trusts, the shares of ultimate and real beneficiaries are unknown or indeterminate and hence the provisions of Section 164(1) would be attracted and tax at maximum marginal rate would be chargeable.
28. We do not agree with the submissions of the learned counsel for the assessee to the effect that we should consider only 45 trusts named in the trust deed as the real beneficiaries and should treat the assessee-trust as specific trust. As already stated, 45 beneficiaries are discretionary trusts and shares of ultimate beneficiaries are unknown and hence the assessee-trust cannot be regarded as specific trust and must be regarded as discretionary trust. This has been held in the case of NEO Trust v. IAC [1992] 41 ITD 412 (Ahd.) and we do not accept the submission on behalf of the assessee to the effect that the said decision should not be followed by us. We uphold the order of the ITO charging the income at maximum marginal rate.
29. The appeal is dismissed.