2023 (1) TMI 1485 - AT - Income Tax

Validity of final order of AO and direction of the DRP - taxability of income earned by the Appellant from its investments made in India Whether Dispute Resolution Panel (DRP) violated the principles of judicial discipline by not following the binding Jurisdictional Bombay High Judgement in the Appellant s own case with respect to its taxability of income? - HELD THAT - As evident that at the level of the assessing officer the writ petition filed by the assessee before the Hon ble Bombay High Court was at the admission stage. However before issuing the direction by the DRP u/s 144C(5) of the Act on 16.02.2022 the Hon ble Bombay High Court has already decided the writ petition filed by the vide order 2021 (10) TMI 1270 - BOMBAY HIGH COURT (supra). In this regard DRP has categorically referred at para 7.14 of their order that the addition to the taxable income has proposed by the assessing officer in his draft assessment order on the basis of AAR ruling itself has already been reversed by the Hon ble jurisdictional High Court. The DRP has also stated in their finding that question raised in the objection filed by the assessee are squarely covered by the decision of Hon ble Bombay High Court. Looking to the above facts finding and decision of the Hon ble Bombay High Court as supra we considered that the directions issued by the DRP are not justified therefore we set aside the final order passed by the assessing officer. Accordingly ground of appeal no. 1 to 4 of the assessee are allowed.

Summary

ISSUES:

Whether the Dispute Resolution Panel (DRP) violated principles of judicial discipline by not following binding jurisdictional High Court judgment regarding taxability of income of a foreign trust.Whether a foreign trust is a valid trust under the Income-tax Act, 1961 and subject to its provisions, including sections 61, 63, and 161.Whether income of a revocable trust settled by a foreign sovereign entity is exempt from tax in India under Article 24 of the India-UAE Double Taxation Avoidance Agreement (DTAA).Whether income of a determinate trust is taxable in the hands of the trustee as a representative assessee and thereby exempt under Article 24 of the India-UAE DTAA.Whether interest under section 234B of the Income-tax Act was correctly levied.Whether initiation of penalty proceedings under section 271(1)(c) was justified.Whether the assessing officer erred in granting short credit of Tax Deducted at Source (TDS).Whether the assessing officer erred in not granting refund along with interest under section 244A of the Act.

RULINGS / HOLDINGS:

On the issue of judicial discipline, the DRP's refusal to follow the binding jurisdictional Bombay High Court judgment was unjustified; the High Court had quashed the Authority for Advance Ruling (AAR) order and held that the income was not taxable in India. The final order passed by the assessing officer was set aside accordingly.The foreign trust, although settled under Jersey law, qualifies as a valid trust under the Income-tax Act, 1961, as there is "nothing in the language of the provisions of inter alia, section 61, section 63, and section 161 of the Act that restricts its applicability to only Indian trusts."The income of the revocable trust settled by the Abu Dhabi Investment Authority (ADIA) is exempt from tax in India under Article 24 of the India-UAE DTAA, because under section 61 read with section 63 of the Act, the income arising from revocable transfer is chargeable to the transferor (ADIA), and ADIA's income is exempt under the treaty.Income taxable in the hands of the trustee as representative assessee under section 161(1) of the Act is taxable "in the same and like manner as that of" the settlor/beneficiary (ADIA), and thus exempt under Article 24 of the India-UAE DTAA.The levy of interest under section 234B was consequential to the tax demand and was dismissed without further adjudication.Initiation of penalty proceedings under section 271(1)(c) was premature and therefore dismissed.The issue of short grant of TDS credit was restored to the assessing officer for fresh verification and decision.The issue of non-granting of refund along with interest under section 244A was restored to the assessing officer for fresh verification and decision.

RATIONALE:

The Court applied the Income-tax Act, 1961, specifically sections 61, 63, 160, and 161, and the India-UAE Double Taxation Avoidance Agreement (DTAA), particularly Article 24 relating to exemption of income of sovereign entities.The Court relied on the jurisdictional Bombay High Court's ruling which quashed the AAR order that had held the income taxable, emphasizing that sections 61 and 63 apply to revocable transfers without restriction to Indian trusts only, and that "a Foreign Trust can be treated as a trust under the Act."The Court rejected the AAR's reliance on the non-ratification of the Hague Trust Convention by India as irrelevant to the applicability of the Income-tax Act to foreign trusts.The Court noted that the settlor can be the sole beneficiary under Indian Trust law and the Income-tax Act, rejecting the contention that such a structure is impermissible.The Court emphasized that the trust was established for commercial and administrative reasons and not for tax avoidance, and that income arising to the trust by virtue of revocable transfer is taxable in the hands of the settlor (ADIA), who is entitled to exemption under the India-UAE DTAA.The Court held that the trustee acts as a representative assessee under section 161(1) of the Act and is taxable only in the same manner and to the same extent as the beneficiary, thereby allowing treaty benefits to flow through.The Court found the AAR's reliance on a proposed amendment in the Finance Bill 2020 improper as it was introduced post-hearing and without giving the assessee an opportunity to respond.The Court restored certain factual issues related to TDS credit and refund to the assessing officer for fresh adjudication, indicating the need for verification of relevant material.