1979 (1) TMI 25 - HC - Income Tax

Court quashes notices under Section 226(3), directs appeal disposal, allows revenue to set aside trust deed. (3)

The court quashed the notices issued under Section 226(3) and the certificate proceedings, except for the assessment year 1973-74. The appellate authority ... Revocable Trust Issues Involved:1. Validity of the trust deed dated 18th March, 1972.2. Legality of the notices issued under Section 226(3) of the Income-tax Act, 1961.3. Legality of the certificate proceedings.4. Applicability of Section 63 and Section 65 of the Income-tax Act, 1961.5. Applicability of Section 281 of the Income-tax Act, 1961.Detailed Analysis:1. Validity of the Trust Deed Dated 18th March, 1972:The petitioners, who are trustees under a deed of trust dated 18th March, 1972, challenged the notices issued under Section 226(3) of the Income-tax Act, 1961. The trust deed created by Narayan Prosad Chowdhury involved his shares in certain properties for the benefit of his minor children and wife. The deed was described as irrevocable, but the Income-tax Officer (ITO) deemed it a revocable trust under Section 63 of the I.T. Act, 1961, as it reserved income and benefits for the settlor, thus falling under the provision for retransfer of income or assets to the transferor.2. Legality of the Notices Issued Under Section 226(3) of the Income-tax Act, 1961:The petitioners challenged several notices issued to tenants under Section 226(3), requiring them to pay amounts due to Narayan Prosad Chowdhury or the trustees. The notices were issued to recover arrears of income-tax, super-tax, penalty, interest, and fine. The court found that these notices were issued treating the trust as revocable and included amounts not solely attributable to the trust property income, thus breaching Section 65 of the I.T. Act, 1961, except for the assessment year 1973-74.3. Legality of the Certificate Proceedings:The petitioners also challenged four certificate cases and the proceedings taken in respect thereof. The court noted that the certificate proceedings and the attachment and proclamation of sale issued in execution were contested by the petitioners. The Certificate Officer was not competent to decide the title but only possession. Therefore, insisting on pursuing an alternative remedy would be an empty formality.4. Applicability of Section 63 and Section 65 of the Income-tax Act, 1961:Section 63 deems a transfer revocable if it contains any provision for retransfer of income or assets to the transferor. The ITO found the trust created by the deed dated 18th May, 1972, to be revocable as it reserved income for the settlor. Section 65 holds the person in whose name the asset stands liable to pay the tax attributable to the income included in another person's income. The court found that the revenue's steps to realize arrears were legal if the trust was revocable, but notices for other years breached Section 65 as no demand was given to the trustees or beneficiaries.5. Applicability of Section 281 of the Income-tax Act, 1961:Section 281 renders transfers void against tax claims if made during or after proceedings without adequate consideration or permission. The court had doubts about the genuineness of the trust, suspecting it was created to defraud creditors. However, Section 281 was not attracted except for the assessment year 1973-74, as the trust was created for that year, and the proceedings could be said to be pending.Conclusion:The court quashed the notices issued under Section 226(3) and the certificate proceedings, except for the assessment year 1973-74, where the petitioners had been given notice of demand and filed an appeal. The appellate authority was directed to dispose of the appeal in accordance with law, without prejudice to the petitioners' rights to contend the trust's revocability. The revenue was allowed to take appropriate steps to set aside the trust deed if advised. The rule was made absolute to the extent indicated, with no order as to costs.