Decided on April 19,1994



B.L. CHHIBBER, A.M. : - (1.) THIS appeal by the assessee is directed against the order of the learned CIT(A).
(2.) The first grievance of the assessee is that the CIT(A) ought to have accepted the contention and submissions of the assessee-trust that the assessment order passed by the ITO under S. 144 was invalid. Without prejudice to the above, according to the assessee trust, the learned CIT(A) ought to have upheld the assessee trust as a specific trust with no liability to tax. The assessee trust was created on 27th April, 1983 by Shri Gautam Shantilal Shah for the benefit of the members of the family of Shri Shantilal Balubhai Shah. The trustees were Shri Nayan Shantilal Shah, Smt. Varsha Nayan Shah (wife of Shri Nayan Shantilal Shah) and Shri Shantilal Balabhai Shah (father of Shri Nayan Shah). As per the trust deed, the beneficiaries are 5 AOPs and 5 beneficial trusts. Each of these AOPs were created on 15th April, 1983 through stereiotyped and identical documents and in each AOP three individuals were shown as members with specific shares. In all the five AOPs 5 members of the family of Shri Shantilal Balabhai Shah and one HUF are involved as members though they had been shown as members in different combination in different documents. As regards the 5 discretionary trusts, all these trusts were created on 20th April, 1983 by different settlors belonging to the maternal uncle side of Shri Nayan Shantilal Shah, the trustee as well as beneficiary. Each of these discretionary trusts have two investment companies as beneficiaries whose shares are not determinate. The appellant trust immediately after creation started the business of dealing in cloth on commission basis. The ITO held that the intermediary trusts and AOPs were mere conduit pipes and the ultimate beneficiaries where the individual members of the family and the investment companies who were not shown as beneficiaries in the instrument of the trust deed and their respective shares were not clearly and expressly mentioned. Creating a number beneficiaries trusts and AOPs to channalise the income of the assessee trust to the ultimate beneficiaries is a device that has been adopted by the family for the purpose of avoiding payment of legitimate tax on the income earned and, therefore, it these intermediary steps are eliminated from the composite transaction as referred to above, the shares of the ultimate beneficiaries would be unknown. The ITO relied upon the decision in the case of W.T. Ramsay Ltd. vs. IRC (1981) 1 All ER 865 and the decision of the Supreme Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC).
(3.) ON appeal, the learned CIT(A) confirmed the action of the ITO observing inter alia as under : "ON careful consideration of the facts and circumstances of the case, I am of the view that the entire scheme of creating the appellant trust, the beneficiaries, viz. 5 discretionary trusts and 5 AOPs smacks of an well planned, pre-arranged, pre-ordained collusive device adopted only for the purpose of avoiding payment of tax on the income earned by the members of the family and for no other apparent altruistic motive of benefiting certain genuine beneficiaries. As cited in the English decision in the case of W.T. Ramsay Ltd. (supra), in a pre-determined composite transaction. Intermediary steps in the transaction having no apparent object have to be eliminated and the last stage in the transaction have to be looked into in order to appreciate the substance of the transaction. In this case the AOPs and the discretionary trusts being intermediary steps have no function at all inasmuch as they do not carry on any activity or function independently except being conduits to accumulate and allocate the income of the appellant trust amongst the so called ultimate beneficiaries being the members of the family and some investment companies created again simultaneously. It is interesting to see that since maximum marginal rate was applicable in respect of business income of a trust w.e.f. asst. yr. 1985-86, no business was carried on by the appellant trust which would indicate that the only purpose was to avoid the payment of tax by being on record a collusive device or scheme as narrated above. The ultimate beneficiaries are 5 members of the family, one HUF who alone would have been specified as beneficiaries in the principal trust deed by the settlor if at all the settlement was meant to be acted upon as a genuine instrument of trust. The settlor knew at the time of creating the trust who exactly were the beneficiaries for whom he wanted to create the trust out of love and affection or for whatever consideration. This was not done. If the intermediary steps are eliminated, we now come to see the ultimate beneficiaries being the members of the family, one HUF and 12 investment companies in which the members of the family are interested. However, these entities have not been expressly mentioned in the instrument of trust and they are not indentifiable as such on the date of execution of the trust deed. Further, their individual shares as the settlor could have intended have not been expressly stated in the trust deed. Therefore, in view of the Expln. 1 to S. 164(1) which was introduced w.e.f. 1st April, 1980, the trust is to be treated as a discretionary trust in which neither the beneficiaries are specifically known nor their shares are determinate. In view of these reasons, the ITO was justified in taxing the entire income of the trust at maximum marginal rate under S. 164(1) of the Act.";

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