INCOME TAX OFFICER Vs. NEO TRUST

JUDGEMENT

(1.) ON 24/4/2000 the Court admitted the appeal by formulating following substantial question of law :-

(2.) THE Assessment Year in question is 1984-1985, the relevant previous year being calendar year 1983. The Assessee trust became a partner in a partnership firm constituted on 16/1/1982, whereby the Assessee was having 60 % share and the remaining 40 % share was held equally at 20% each by two other persons, namely S. K. Patel Family Trust and Nirma Chemical Works Pvt. Ltd. With effect from 1/1/1983, by virtue of Retirement Deed dated 5/1/1983, Nirma Chemical Works Pvt. Ltd. , retired and on settlement of accounts, as mutually agreed, land with superstructure valued at Rs. 11,06,555/- was given to the retiring parter. Thereafter, on 31/3/1983 the firm was dissolved and S. K. Patel Family Trust took over the business with all assets and liabilities and the Assessee trust got back the capital contribution made by it.

(3.) THE Assessing Officer therefore took a stand that, as the incoming partners had not brought any capital, the partnership firm did not carry on any business, the partnership firm was not registered with Registrar of Firms and the distribution of assets on retirement and/or on dissolution was not in accordance with the profit sharing ratio; the entire transaction was a colourable device adopted with the object of avoiding liability to tax under section 45 of the Income Tax Act 1961 ('the Act' ). The Assessing Officer therefore invoked provisions of Section 52 (1) of the Act, and also sought to tax profits under section 41 (2) of the Act. Accordingly the assessment was framed on 30/3/1987 after rejecting the explanation tendered by the Assessee.