Colourable trust device rejected where family business income was diverted through a nominal trust lacking commercial substance.

A purported trust arrangement was held to lack commercial substance where the trust was created with a nominal corpus, the sole trustee was also a beneficiary, and the deed gave wide discretion over the trust fund and beneficiaries' shares. The tribunal found that the original family business continued in substance under the same control, while the lease and re-lease arrangements had no real commercial purpose. Earlier acceptance in routine assessments did not bar scrutiny in a later year because each assessment year is separate and res judicata does not apply. The arrangement was treated as a colourable device to divert business income and avoid tax, and the revenue authorities' finding was upheld.

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Issues: Whether the assessee trust was genuine and whether the business income shown in its hands was the income of the purported trust or a colourable device to divert the family business income and reduce tax liability.

Analysis: The trust was created with a nominal corpus, the sole trustee was one of the beneficiaries, and the deed gave wide and overriding discretion to the trustee in dealing with the trust fund and the beneficiaries' shares. The earlier acceptance of the trust in routine assessments did not prevent examination of genuineness in the year under appeal, since each assessment year is separate and res judicata does not apply to income-tax proceedings. The surrounding circumstances showed that the original family business continued in substance under the same control, while the purported lease arrangements and subsequent re-leasing arrangement lacked commercial reality. The deed provisions and the facts together indicated that the beneficiaries' shares were not truly definite and that the arrangement was designed to split business income and avoid taxation.

Conclusion: The trust was not genuine, carried on no real business of its own, and was held to be a colourable device to divert the income of the family business; the finding of the revenue authorities was upheld.

Final Conclusion: The appeals failed because the alleged trust arrangement was rejected on merits as a tax-avoidance device, leaving the assessed income to be treated in accordance with the revenue authorities' view.

Ratio Decidendi: Where the surrounding facts and trust deed show that a purported trust lacks commercial substance and functions only as a device to divert business income and avoid tax, the revenue authorities may look beyond the form to the real nature of the arrangement and disregard the apparent trust structure.

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