Mehta Jaising Construction v. Asst. Commissioner of Income-tax

1. This Appeal under Section 260A of the Income Tax Act, 1961 (the Act) has been filed by the Assessee. The subject matter of the Appeal pertains to the Assessment Year 2002-2003. The Appeal was admitted on the following substantial question of law: “Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the status of the Appellant Trust was that of Association of Persons and thus the lower authorities were justified in disallowing interest of Rs.12,17,190/- paid to the beneficiaries under Section 40(b) of the Income Tax Act, 1961 ?

2. The facts giving rise to filing of this Appeal, in nutshell, are that during the material time Mehta Jaising Construction was constituted as a Private Specific Trust which was settled on 24/1/2000 by Ms. Indira

3. The Assessing Officer, by an order dated 27/3/1998, inter alia by applying the test laid down by the Supreme Court judgment in CIT v. INDIRA BALKRISHNA,[1] held that the beneficiaries have come together voluntarily by pooling their monies in the trust with clear knowledge that the funds shall be utilized by the trust for the business of the project undertaken by them. The Assessing Officer further held that the trust, through the trustees, is assessable as an Association of Persons under Section 161 of the Act.

4. Being aggrieved by the aforesaid order, the assessee preferred an Appeal. The Commissioner of Income Tax (Appeal), by an order dated 15/7/1999, dismissed the Appeal preferred by the assessee. Thereupon the assessee filed an Appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal, by an order dated 3/1/2003, has dismissed the Appeal preferred by the assessee. Hence this Appeal.

5. Learned counsel for the assessee has submitted that fundamental 1(1960) 39 ITR 546 (SC) rsk 2 requirement of the concept of Association of Persons is that there has to be a common purpose of common action with the object of producing income, profits or gains. It is further submitted that mere fact that there exists a common source of income in which two or more persons are interested as members or otherwise is neither conclusive nor determinative of the status of a person. It is also submitted that a Private Specific Trust, even if doing business, cannot be treated as an Association of Persons. It is further submitted that neither the trustees nor beneficiaries have come together with a common purpose or common action with the object of producing income, profits or gains. In support of the aforesaid submissions, reliance has been placed on the decision of the Supreme Court in the case of CIT VS. Indira balkrishna (supra) and on a division bench decision of this Court in CIT v. MARSONS BENEFICIARY TRUST[2]

6. It is urged that the expression “individual” includes a group of individuals and provisions of Section 161(1A) of the Act do not have the effect of changing the status of assessee, as it pertains to the rate of taxation. It is submitted that in the facts and circumstances of the case, the provisions of Section 164(1) are applicable, as in case of a discretionary trust where the shares of beneficiaries are indeterminate or unknown. In support of the aforesaid submissions, reliance has been placed on a division bench decision of this court in L. R. PATEL FAMILY 2 (1991) 188 ITR 253 (Bombay). rsk 3 TRUST VS. ITO[3]

7. On the other hand learned counsel for the revenue submits that the findings that the trust is an Association of Persons has been recorded by the Income Tax Officer on the touchstone of law laid down by the Supreme Court in CIT VS.

INDIRA BALKRISHNA (supra). It is further submitted that the order passed by the Income Tax Officer has been upheld in Appeal by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal. It is further submitted that the findings recorded by the Authorities by no stretch of imagination can be termed as perverse. It is, therefore, contended that no case for interference, with finding of fact which is based on meticulous appreciation is called for, in this Appeal under Section 268 of the Act.

8. Heard rival submissions made on behalf of both sides and have perused the record.

9. Before proceeding further, it is necessary to take note of Section 40 (ba) of the Act which is extracted below for the facility of reference:

10. The Supreme Court in INDIRA BALKRISHNA (supra) has held that an association of persons must be one in which two or more persons jointly held common purpose or common action and as the word occurs in a section which imposes tax on income, the association must be one which produces income, profits or gains.

11. The scope of Appeal under Section 260A of the Act is well settled. This Court, in an Appeal under Section 260A, can interfere with the finding of fact only if when the same is shown to be perverse. [See: SYEDA RAHIMUNNISA VS.