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TMI Blog2013 (12) TMI 1111X X X X Extracts X X X X X X X X Extracts X X X X ..... n Trust Act, 1882 vide deed of declaration of trust dated 26.08.2005, filed its return of income for the relevant year on 31.03.2008, declaring Nil income. The same, subsequent to its processing u/s.143(1), was subject to the verification procedure under the Act. The Assessing Officer (A.O.), after making certain enquiries, assessed the income u/s. 143(3) on 18.12.2009, accepting the returned income. Subsequently, it was observed by the Administrative Commissioner, the ld. CIT, in his capacity as the revisional authority under the Act, that the assessee's claim for exemption of income (interest) u/s.161 (1) of the Act, so that the same would be liable to tax in the hands of the beneficiary/s, had been accepted by the A.O. without considering the application of section 161(1A) of the Act. The assessee was engaged in an activity of advancing loans to various financial institutions from which it receives income. As such, the said income would stand to be assessed in its hands as a 'Association of Persons' (AOP) for and on behalf of the beneficiary/s in terms of section 161(1A). The assessee was accordingly, show caused by him u/s.263 vide notice dated 10.01.2012. The assessee filed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eror a right to re-assume power over, the whole or any part of any income or assets to the transferor, i.e., whether directly or indirectly. As such, again, the entire interest income is assessable only in the hands of the investor-MF. f) Section 161(1A), which draws an exception to section 161(1), providing for the income being taxed in the hands of the Trustee (or representative- assessee), is not applicable in the instant case, as the Trust, having made but a single transaction, which required no further effort or action to be put in, is not undertaking any business activity. The MFs are not permitted by Securities and Exchange Board of India (SEBI), with which they are registered, as is the MF under reference, to carry on any business except make investments. The word "business" is a word of large and indefinite import; it is something which occupies the attention and labour of a person for the purpose of profit; it is an activity carried on continuously in an organized manner with a set purpose and with a view to earn profit. Clearly, these attributes are missing in the instant case, with the Trust having not done any activity except collecting interest and distributing the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's submission that the income of the Trust belongs to the beneficiary without verifying the question of allowability of exemption of the income earned by the so-called Trust under the provisions of the Act; inquiring, rather, into the genuineness and the source of the funds placed with it. The absence or lack of enquiry would give rise to jurisdiction to the competent authority to interfere u/s.263 of the Act, referring to the purpose in the decision in the case of K.A. Ramaswamy Chettiar v. CIT [1996] 220 ITR 657 (Mad.) and Swarup Vegetable Products Industries Ltd. vs. CIT [1990] 187 ITR 412 (All.) (paras 4.1 & 4.2 of the IO). b) Continuing further, he would observe that a Trust is created when the Settlor of the property transfers it to the Trustee for its usage, making a unequivocal declaration, binding on him, of having divested himself of the ownership as well as enjoyment of the property and income therefrom. In the instant case, the Trust was created by putting in only a initial corpus of Rs.1,000/- and, subsequently, contributions were received from MF, which were utilized for purchase of loan granted by GE Capital Services India (the Lender or the Assignor). The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transaction was not different from that of loan, in which case the lender, by virtue of the loan transaction, itself gets the right to receive both the interest as well as the money lent. There was, as such, no occasion for the application of sections 61 and 63 (para 7). e) Reference was also made by the ld. CIT to the request by the HDFC Mutual Fund for intervention in the revisional proceedings, which was found by him as unacceptable, being not in terms of Explanation 3 to section 153, also citing the decision in the case of CIT vs. Biju Patnaik [1991] 187 ITR 544 (Orr.) in support. The assessee's claim that it was its interest income was at Rs.202.72 lakhs, and not Rs.247.50 lakhs, as disclosed per its return, even as informed to the A.O. in the assessment proceedings, was found by him as not in accordance with the procedure laid down by law (s.139(5)), besides being not relevant to the revisionary proceedings (para 9 & 10 of IO). f) The A.O. had, it was opined by him, erroneously allowed exemption to the assessee on the interest income earned during the year, so that his order was erroneous in- so-far as it is prejudice to the interest of the Revenue. The same was, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Trust being only a collecting or receiving agency. He would also take us through the relevant parts of the Trust Deed, DOA, as well as the Schedules thereto, to exhibit what was being stated. In this regard, he would advert to the decision in the case of CIT vs. A. Tosh & Sons Pvt. Ltd. [1987] 166 ITR 867 (Cal.), wherein a similar arrangement was found by the hon'ble court to be a case of diversion of income by overriding title. Further, it needs to be appreciated that the instant proceedings are revision proceedings and not original proceedings, so that if two views are possible, and one of them stands adopted by the A.O., the same would preclude assumption of jurisdiction u/s.263. Could the view taken by the A.O. be by any means considered as so unreasonable that it could not be regarded as a possible view? In fact, the A.O.'s view is shared by, firstly, the tax deduction officer, when he issued a certificate u/s.197 of the Act to the assessee, which enabled it to pass on the interest income to the MF without deduction of any tax at source. Secondly, when the Tribunal has granted stay to the assessee/s in respect of its appeal/s under reference. This is as it is only when a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, could further clarify this aspect, he asseverated that the ostensible open remand by the ld. CIT was but a camouflage, which the tribunal cannot undo in-as-much as he (the ld. CIT) had already expressed his opinion. 5. We have heard the parties, and perused the material on record as well as the case law cited. 5.1 The first thing that strikes us is the nature of the transaction itself is not clear to either of the authorities below. In fact, the ld. CIT makes no bones about it. He states that while a Trust is an obligation assumed by Trustee upon divesting itself of his rights in the trust property in its favour by a Settlor for the benefit of a third party/s, i.e., the beneficiary/s of the Trust, in the present case, the Settlor (who is also the Trustee), does so only for Rs.1,000/-. It is this sum alone that fits into the paradigm and the common understanding of the Trust, as to the nature of which as the property of the Trust, or of income there-from as its income, there would, accordingly, be no reason for any doubt, nor do we observe any. However, the amount under reference, Rs.2500 lakhs, which is claimed to form the 'Trust Fund' comes from the beneficiary/s itself. Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debenture-holders, the beneficiaries of the Trust. No doubt, the interest and the principal would, on definite dates in future, flow to the debenture-holders, but then would it make any difference if it were to be received in the first instance by the Fund, to be passed on to the individual investors? Could the Trust be considered as undertaking business, or of in fact having earned any income, which could in case of interest, only be the person who actually owns the capital and bears the financial risk involved, i.e., the debenture-holders. This, to our mind sums up the assessee's case on merits. 5.2 Coming back to afore-stated questions, the answer is: surely, not. But then, there are some crucial and unexplained differences, so that the two situations cannot be considered at par, and stood mentioned by us only to emphasize or highlight these differences. While the assessees' case is akin or para materia with that of a debenture- trust fund, that of the Revenue is based on these differences. There is no bar in law for an investor to invest in the debentures of a private company in real estate business. It is not clear if the MF could invest directly in or grant loan to such comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no proper explanation and understanding of the transaction (also see para 5.3). 5.3 The question of examining the taxability of the income, if any, arising there-from, i.e., the transaction under reference, and which without doubt to be with reference to the relevant provisions of the Act, could only be a later, i.e., after understanding the true nature and purpose of the transaction. This is also responsible for, so that the same is by itself a proof as to the non understanding of the transaction, is the difference in the perceptions and the claims as to the status of the assessee under the Act. While the A.O. considers it to be a AOP, the assessee claims that of an individual, with the ld. CIT states of being not a valid trust, holds the asset in its own right (refer paras 2.2(i) and 2.3( c) of this order). In our view, this aspect would stand to be considered only after a clear understanding of the transaction. Further, the MF being itself, as we understand, a Trust, could it possibly be a beneficiary of a Trust (inasmuch as it is only the beneficiary which in law is the assessee, being represented by a trustee), for which its terms as well as the permissible avenues, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fund undertaking any business. A MF, the investor in the instant case, is deriving only business income from its activity of investment. That the same is exempt u/s.10(23D) of the Act is another matter. There is no gain saying that it cannot, as per SEBI guidelines, undertake business, which only implies 'any other business', i.e., other than of investments (refer para 2.2(f)). That, in fact, is its sole function, i.e., to mobilise funds and invest the same in defined sectors, employing professional resources, so as to yield higher and more appropriate, i.e., in terms of the defined investment objective/s, returns for its subscribers. If the MF, in achieving its avowed objectives, adopts a particular devise, as the waterfall mechanism in the instant case, the same has to be considered as an arrangement entered into as a part of, and in the course of, its business, and not independent of it. The same, thus, is only a business activity or part of its 'business'. Would it, however, impact its exemption, is, as afore-said another matter, which again would have to be looked at separately. 5.5 The question of application of sections 61 and 63 also does not arise. It is only where thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) has laid down four-way test for invocation of a provision. Succinctly put, these are; incorrect assumption of facts; incorrect application of law; without applying the principles of natural justice; and without application of mind. It is the last category, if not the first one as well, which arise in the instant case, and which, therefore, we are concerned with. The law in this respect is fully developed and stable, so that an order passed without application of mind is per se erroneous insofar as it is prejudicial to the interest of the Revenue, and toward which the case law is legion, rendered both before and after the said decision by the apex court (including the two decisions by the said court itself referred therein, i.e., reported at 88 ITR 323 and 67 ITR 84), so that the apex court was, thus, only articulating therein the settled law. In fact, the ld. CIT has himself cites two decisions in this regard (refer para 2.3(a)), which the ld. AR has not adverted to in his arguments. Non application of mind is a matter of fact, and inferential one, which has to be inferred on the basis of the material on record, including the order considered as passed without application of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant provisions of law. 5.7 Coming, next, to the decision in the case of Sunbeam Auto Ltd. (supra). We have already clarified that, firstly, the application or otherwise of mind, absence of which makes an order liable for action u/s.263, is a matter of fact, to a finding in respect of which is to be arrived at on the basis of the material on record. We have found as a fact that there has been no application of mind in the matter by the A.O. Though he had asked the assessee to explain about the exemption of income, he made no further enquiry in the matter, accepting as correct what was being stated; rather, focusing on the genuineness and creditworthiness of the credit from the MF, as stated by the ld. CIT. Toward this, it may be relevant to cite the decision by the Hon'ble Delhi High Court in the case of Gee Vee Enterprises vs. Addl. CIT [1975] 99 ITR 375 (Del), enlisting the duties and obligations cast on the assessing authority under the Act, failing which section 263 is attracted. The apex court in the case of Malabar Industrial Co. Ltd. (supra) has clarified that where the assessing authority has failed to apply his mind to the case in all perspective, the order passed by him ..... X X X X Extracts X X X X X X X X Extracts X X X X
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