Home Case Index All Cases Income Tax Income Tax + HC Income Tax - 2021 (10) TMI HC This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (10) TMI 1270 - HC - Income TaxRecognition of TRUST - Taxability of the income accruing on the investments made or proposed to be made in the Indian portfolio companies by the Trust -taxability of income arising by virtue of revocable transfer of assets - Scope of AAR rulling - whether the capital contribution made / proposed to be made / transferred by ADIA to Green Maiden A 2013 Trust be treated as a revocable transfer for the purpose of Section 63 of the Act ? - Whether the entire income which may arise from the investments made by the Trust in Indian Companies (Portfolio companies) be chargeable to income-tax in the hands of ADIA as per Section 61 of the Act or be chargeable to income-tax in the hands of any other person as defined under the Act ? - as submitted trustee is entitled to receive income on behalf of the sole beneficiary, it should be considered as representative assessee of the sole beneficiary - reasoning given by AAR that the trust is registered in jersey, there is no treaty between India and Jersey and Section 61 and 63 of the Act would apply only to those trust which fall under the Indian Trust Act 1882 HELD THAT:- Nothing in Section 61 requires involvement of a trust in revocable transfer. Section 61 is plain and simple in as much as, it provides for income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. Further Section 61 is not dependent on Section 63 of the Act. A transfer can be revocable transfer on its own merits without reference to Section 63 of the Act. Clause (a) of Section 63 of the Act merely extends the provisions of Section 61 of the Act to cases which might not otherwise be covered by Section 61 by extending the meaning of word revocable. The case of AAR that if the transaction does not qualify as a trust, the provisions of Section 63 and/or Section 61 are not applicable, is erroneous. In any event, under Section 63 there is no requirement that a trust covered by it must necessarily be an Indian trust falling under the Indian Trust Act. Such restriction which is not there in the Act cannot be imported into Sections 61 and 63 of the Act. As noted earlier, where such restriction is provided for the Act says so as noted in section 10(23FB) of the Act where it specifically provides that venture capital fund means a fund operating under the trust deed registered under the provisions of Registration Act, 1908. As can be seen from the definitions, the Trust created in terms of the deed of settlement is consistent with the requirements of both, the Indian Trusts Act as well as Trust (Jersey) Law, 1984 as to what constitutes a trust. Settlor cannot be a sole beneficiary - First of all the Act does not make any such provision. Secondly, there is no provision under the Indian Trust Act also which debars the settlor from being beneficiary. In the case of Bhavna Nalinkant Nanavati [2002 (1) TMI 48 - GUJARAT HIGH COURT] the settlor of the trust was also the sole beneficiary in the Deed of Settlement.In the present instance, the settlor is not the trustee but is the sole beneficiary which is clearly permissible. AAR’s view that Sections 60 to 64 are designed to overtake and circumvent the counter design by a taxpayer to reduce its tax liability by parting its property in such a way that the income should no longer be received by him but at the same time he retains certain powers over property/income - In the case at hand, if ADIA had invested the amount directly, the income derived from such investment would exempted under Article 24 of India-UAE DTAA. ADIA has not created the trust to avoid tax and that is not AAR's case either. AAR says if ADIA had directly invested they would not have been liable to pay tax. AAR failed to understand why would someone not invest directly if the returns on such investment would be exempt from tax. AAR fails to appreciate that ADIA routed its investment on certain instruments through the trust only for commercial expediency. According to AAR the assessee’s representative could not satisfactorily answer the query as to why ADIA routed its investments in non-convertible debenture funds through Jersey route for investment in Indian market and ADIA itself being an FII registered with SEBI could have directly invested in Indian Portfolios and taken advantage of Article 24 of India-UAE treaty. But the fact is ADIA has explained in detail in its letter dated 13th November 2018 and letter dated 25th September 2019 to AAR, why it routed its investment in non convertible debentures through Jersey route for Indian market. As regards the ground that Section 160(1)(i) or 160(1)(iv) of the Act, provides that trustee can be representative assessee but in this case trustee being a resident of Jersey cannot be an agent of ADIA, in our view that is not sustainable as the Act does not provide anywhere that only trustee who is resident of India can be an agent under Section 160 of the Act. Act presupposes that a Foreign Trust is a trust for the purposes of the Act. In Vikramsinghjit of Gondal [2014 (5) TMI 286 - SUPREME COURT], the Apex Court has applied the provisions of Section 164 and 166 of the Act to tax the beneficiary of a trust settled in U.K. Even if, the trust is based out of Jersey and the trust is settled in Jersey, ADIA being the settlor and sole beneficiary of the trust and resident of UAE as per Article 24 of the India-UAE DTAA, the income which arises to it by virtue of investment in Indian Portfolio companies will be governed by the beneficial provisions of the India-UAE DTAA. As exemption under Article 24 of India-UAE DTAA would be attracted. Even if for a moment we say that for any reason the provisions of Section 61 are not applicable, then also the trustee can only be assessed in a representative capacity and, accordingly the provisions of Section 160(i)(iv) will be applicable. Therefore, even if the income is taxed in the hands of the trustee in terms of Section 161(1), it will be taxed in the “like manner and to the same extent” as the beneficiary. Once again, ADIA is the sole beneficiary of the trust, the income assessed in the hands of the trustee will take colour of that of ADIA’s income and thereby, the benefit of India-UAE DTAA must be granted. So long as the settlor has a right to reassume power over the assets settled, the same would amount to revocable transfer. In the facts of the case at hand, ADIA could reassume the power and hence the contribution to the trust was a revocable transfer thereby making the income arising to the trust taxable in the hands of ADIA which was exempt under Article 24 of India-UAE DTAA. The tax liability of a trust has to be determined by applying the provisions of the Act alongwith the provisions of India-UAE DTAA and not apply the law as applicable in Jersey. The ruling dated 18th March 2020 has to be quashed. The income that accrues to the trust would not be chargeable to tax in India either by virtue of application of Section 61 read with Section 63 or on an application of Section 161 of the Act conjointly with the provisions of Article 24 of the India-UAE DTAA. Since we have quashed the Ruling dated 18th March 2020 of the AAR, the steps taken in furtherance of the Ruling order passed therein are also quashed and set aside.
|