TMI Blog2014 (10) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... transferee/representative assessee is not proper. U/s 164 as so replaced, a `representative assessee' who receives income for the benefit of more than one person whose shares in such income are indeterminate or unknown, will be chargeable to income-tax on such income at the flat rate of 65% or the rate which would be applicable if such income were the total income of an AOP, whichever course would be more beneficial to the Revenue – the object of the amendments to the provision was only that the distribution of the income should not be entirely at the discretion of the trustees and that the trust deed should regulate the shares. The power of revocation under Clause 13 of the Deed of Trust is a general power of revocation and the same would be sufficient for construing the transfer in the present case as a revocable transfer - it is not necessary that the power of revocation should be at the instance of the contributors/beneficiaries/ transferor and it can be at the instance of any person either settlor, trustee, transferee or the beneficiaries - Provisions of Sec.61 of the Act do not contemplate a power of revocation only at the instance of the transferor – relying upon A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed - Even if the Trust deed authorises addition of further contributors to the trust at different points of time, in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate - Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust deed – thus, the provisions of Sec.164(1) of the Act would not be attracted in the present case - identity by reference to the terms of the trust deed is sufficient and it is not necessary that the beneficiaries should be specifically named in the deed of trust – Decided against revenue. Assessee trust to be assessed as AOP or not – Held that:- The beneficiaries contributed their money to the Assessee and a separate agreement was entered into between the Assessee and each beneficiary - There is no inter se arrangement between one contributory/ beneficiary and the other contributory/beneficiary as each of them enter into separate contribution ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributors together with the initial corpus was to be handed over to the trustees under the provisions of the Indian Trust Act, 1882. The trust was to facilitate investment by the contributors who should be resident in India and achieve returns to such contributors. The trust deed provides that the contributors to the fund will also be its beneficiaries. 3. The trustees had power to appoint investment managers to manage the trust fund. The Settlor was to be appointed as the investment manager. The terms of the appointment of the Settlor as investment manager are set out in an investment management agreement dated 25.9.2006 between the Assessee represented by the Trustee and Settlor. 4. The Settlor as investment manager issued memorandum to prospective investors on a confidential basis for them to consider an investment in mezzanine Fund. An investor who wishes to contribute to the fund enters into a contribution agreement with the trust, the trustees acting on behalf of the trust and the Settlor acting in his capacity as investment manager. 5. The following is the list of beneficiaries who contributed to the fund for investment and the capital value of their investment as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Badve Penelope Badve 2,730,000 C S Vaidyanathan 2,730,000 Ganapathy Nallasivan 2,730,000 Praveen K Ganapathy 2,730,000 ICICI Bank 52,770,900 Total 528,255,000 6. For AY 2008-09, the Assessee filed return of income declaring total income of ₹ 1,81,68,357/- and claimed refund of ₹ 61,03,968 which is nothing but the TDS made by the Assessee on the interest given to the beneficiaries as set out in the last column of the chart given in the earlier paragraph. A revised return of income was filed on 26.6.2009 in which the total income declared was the same but the request for refund of TDS as made in the original return of income was not made in the revised return of income. 7. The reason as to why the revised return of income was filed are set out by the Assessee in a letter dated 23.11.2010 addressed to the AO. The same reads thus:- In this regard, we wish to submit that the Fund has declared an income of ₹ 1,81,68,357 in its revised retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. To the above rule laid down in Sec.161(1) of the Act, there are three exceptions. They are:- (a) Under s. 161(1A), this rule of apportionment and determination of proportionate tax attributable to the beneficiary will not apply to any income earned by the trustee as profits and gains of a business. The whole of such income shall be taxed at the maximum marginal rate . A similar proviso occurs also in s. 164(1) restricting benefits where business income is involved. (b) Under s. 164(1), if the individual shares of the persons on whose behalf and for whose benefit the income is receivable are indeterminate or unknown, such income, again, will be taxed at the maximum marginal rate . (c) In certain other circumstances, set out in the proviso to s. 164(1), the relevant income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their investments in the fund does not make the share determinate or known. The AO was therefore of the view that the provisions of Sec.164(1) of the Act would apply and the Assessee would be liable to be assessed at the maximum marginal rate which was 30% plus surcharge, if any, and education cess, if any. The beneficiaries had however declared interest income at the applicable rates and STCG on sale of mutual fund units at 10% which is the rate as per the provisions of Sec.111A of the Act. There is no dispute with regard to the fact that the beneficiaries have declared income allocated by the Trust to them and have been assessed in respect of the share of their income. The AO also observed that the same income cannot taxed twice once in the hands of the Trust and again in the hands of the beneficiaries in view of the provisions of Sec.86 of the Act which provides that where the assessee is a member of an association of persons income-tax shall not be payable by the assessee in respect of his share in the income of the association, if the association is chargeable to tax on its total income at the maximum marginal rate or any higher rate under any of the provisions of this Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT 81 ITR 310 (SC) and CIT Vs. Managing Trustees Nagore Durgah 57 ITR 321 (SC). 14. The AO for the above reasons brought to tax the entire income in the hands of the Assessee at the Maximum Marginal Rate. 15. Before CIT(A) the Assessee challenged (i) the conclusion of the AO that the Assessee is an AOP; (ii) Income or any part of in respect of which the Assessee is liable as representative Assessee is specifically receivable on behalf or for the benefit of any one person; or the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable are indeterminate or unknown. 16. ARGUMENTS ADVANCED BY THE ASSESSEE BEFORE CIT(A) AS TO WHY IT SHOULD NOT BE REGARDED AS AOP: 16.1 Under Section 161 of the Act the liability of a representative assessee in respect of income for which he is so assessable, the status of the Assessee cannot be different from that of the beneficiaries. For the above proposition reliance was placed on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Food Corporation of India Contributory Provident Fund 318 ITR 318 (Del) wherein the question for consideration was as to whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t constitutes AOP, there has been a statutory rider added. The Finance Act, 2002 has inserted w.e.f. 1st April, 2003 an Explanation to clarify that object of deriving income is not necessary for AOP, BOI, local authority or an artificial juridical person in order that such entity may come within the definition of Person in section 2(31). If income results than they are liable to be taxed as AOP if the other conditions laid down by judicial decisions are satisfied. 16.3 In the light of the above definition of AOP, the Assessee pointed out before CIT(A) that :- (i) the Assessee is a trust constituted under an instrument of trust dated 25/9/2006. M/S.ICICI Venture Funds Management Company Limited (hereinafter referred to as Settlor ) by an indenture of Trust dated 25.9.2006 transferred a sum of ₹ 10,000/- to M/S. The Western India Trustee and Executor Company Limited (hereinafter referred as the Trustee ) as initial corpus to be applied and governed by the terms and conditions of the indenture dated 25.9.2006. The trustee was empowered to call for contributions from the contributors which will be invested by the Trustee in accordance with the objects of the trust. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust deed. Therefore it cannot be said that the beneficiaries have come together with the object of carrying on investment in mezzanine funds which is the object of the trust. The beneficiaries are mere recipients of the income earned by the trust. They cannot therefore be regarded as an AOP. (iv) With regard to the contention of the AO that the Assessee has obtained PAN in the status of an AOP (Trust) and filed its ROI by quoting the status as AOP/BOI, the Assessee pointed out that the PAN application requires that an applicant has to mandatorily state the status. Form No 49A, being the application for obtaining a PAN permits the applicant to tick only any one of tile following options: i. Individual ii. HUF iii. Company iv. Firm v. Association of Persons vi. Association of Persons (Trusts) vii. Body of individuals viii. Local authority ix. Artificial Juridical person The Assessee pointed out that from the above list, the Assessee is left with no other option but to choose the option of AOP (Trusts) to obtain the PAN. (v) With regard to the status mentioned in the ROI, the Assessee pointed out that the provisions of Rule 12 of the Income- tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on the date of creation of the trust the marriage has not taken place, merely because wife/children cannot be known until the marriage and begetting of children by the stated beneficiaries, it cannot be said that the trust deed does not prescribe the beneficiaries and s. 164 is not attracted. Reliance was also placed on the CBDT circular No.281 dated 22.9.1980 wherein the CBDT has explained the scope of Sec.164 with regard to stating the name of the beneficiaries in the trust deed. In the said circular the provisions of Expln.-1 to Sec.164 of the Act regarding identification of beneficiaries has been explained to the effect that for identification of beneficiaries it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the Court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the Court or the instrument of trust or wakf deed on the date of such order, instrument or deed. 17.2 With regard to ascertainment of share of the beneficiaries, it was contended that Article 6.5 of the Trust Deed clearly specifies the manner in which the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at the maximum rate but at the rate applicable to it as if it were the total income of an AOP. On application of clause (b) above, it was submitted that Sec. 164(1) will not come into operation if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also the share to which each of them would be entitled without ambiguity. The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. The whole object and intent of s. 164, as amended in 1980, is to prevent the shares of beneficiaries being manipulated at the discretion of the trustees. If it is read as requiring the specification of the beneficiaries and their shares in the deed itself, it may lead to absurdities. When the Trust deed authorises addition of further contributors to the trust at different points of time in addition to initial contributors, it is not possible to say that the share income of the beneficiaries cannot be determined or known fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S ON BEHALF OF THE ASSESSING OFFICER BEFORE THE CIT(A) 19. The AO in the form of remand report dated 20.10.2011 mainly reiterated the stand of the revenue as contained in the order of assessment as follows:- 1. The AO drew attention to Clause 6 of the trust deed regarding distribution of Trust Fund and Income and pointed out that under Clause 6.6.3 distribution will be at the discretion of the Trustee in consultation with the investment manager. According to the AO the above provision in the trust deed would show that distribution of income is at the discretion of the trustees. 2. The trust deed does not say it is a revocable trust. 3. The beneficiaries of the trust are assessed at various places of India. It is very difficult to monitor all these beneficiaries as to whether they have filed their returns and even if filed, whether correct share of income received/receivable from the assessee are admitted. The AO of the trustee will have no control to scrutinize as to whether any expenditure or set off of loss is claimed by the beneficiaries in their returns against the share income. To avoid all these things, the right and correct person to be taxed is the trustee as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istributed exactly as per the formula determinable from the trust deed rather the shares vary depending upon the amount contributed by the beneficiaries for asset management. 8. The CIT (A) erred in holding that the assessee, trust cannot be assessed as an AOP . 9. The CIT (A) ought to have appreciated the fact that Section 2(31) of the I. T. Act gives an inclusive definition for the word Person . There is no separate status of Trust envisaged in the definition of person. All the trusts are assessed on the status of AOP. This being the case, the assessment of the assessee in the status of AOP is in order. Accordingly, whatever provisions of the Act applies to AOPs will apply to the assessee also. Hence it is not relevant whether the necessary ingredients for formation of an AOP are fulfilled by the assessee or not. The assessee who is a trust is rightly assessed in the status of AOP since there is no specific status of Trust is available in Section 2(31). 10. The CIT (A) ought to have appreciated the fact that Income tax Act envisages that the income of a person has to be assessed in the correct and appropriate status. Merely, because someone else has been assessed and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the asst. yr. 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the asst. yr. 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other. 24. With the aforesaid prelude, he made submission on the grounds raised by the Revenue before the Tribunal in the grounds of appeal. On ground No.3 raised by the Revenue in which the revenue has attacked the findings of the CIT(A) that the Assessee trust is a revocable trust and it need not be subjected tax as the tax obligation have been fully discharged by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months from the date of receipt of first contribution, in the event the minimum fund commitment is not received. 13.4 Procedure on termination: In the event of the Trust being terminated in the circumstances above mentioned, the Trustee shall as soon as practicable thereafter. 13.4.1 take all practical steps to sell all the non-cash assets of the Trust Fund in the manner the Trustee deems fit or advisable; l3.4.2 shall commence arrangements to pay all the liabilities of the Trust; 13.4.3 return to the extent of the available cash in the Trust Fund, all outstanding interests in the Trust in proportion to the percentage of the Capital Contribution held by the respective Contributors immediately prior to the date of termination of the Trust; and 13.4.4 distribute initial Settlement, accretions thereto to the Settlor or their respective nominees and assigns. 13.4.5 distribute the residual portfolio in specie. 26. It was submitted by him that the above power of revocation which is a general power of revocation is sufficient for construing the transfer in the present case as a revocable transfer. According to him it is not necessary that the power of revocation should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying out which must not involve the carrying on of any activity for profit. 27. It was pointed out by the learned counsel that the ratio laid down in the aforesaid decision if applied to the interpretation of the provisions of Sec.61 can only mean that it is the existence of the power to revoke the transfer that has to be seen and not the person at whose instance such revocation can be done. It was his submission that the reason behind the rule, bringing to tax income in the hands of the transferor, is existence of a power by which the transferor can derive the benefit of income arising by virtue of the transfer. The source of such power need not be only in the hands of the transferor. It was thus submitted by the learned counsel for the Assessee that there was a specific power of revocation conferred under the instrument of transfer and therefore Sec.61 would apply and there is no need to resort to the provisions of Sec.63 of the Act. Consequently the income arising by virtue of the transfer has to be brought to tax only in the hands of the transferor/beneficiary and not in the hands of the trustee/transferee. 28. His next submission was that even if it is assumed for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obtained by the transferor/settler for revocation will not make the trust an irrevocable transfer. In such circumstances it must be held that the deed contains a provision giving the transferor a right to re- assume power directly or indirectly over the whole or any part of income or assets within the meaning of s. 63(1)(ii) of the Act. 31. Our attention was drawn to clause-6 of the trust deed which provides for distribution of the Trust Fund and Income. Clause 6.3 of the trust deed provides as follows: 6. Validity of Decisions Made by the Trustee ........ 6.3 Frequency of Distribution: Subject to obtaining any regulatory clearance for any distribution and subject to the Investment Manager determining in its reasonable opinion that the amounts to be distributed are not deminimis, Income, gains and any other receipts that are realized and received in cash by the Fund and which the Fund does not have a right to retain pursuant to the terms of this Indenture, the Private Placement Memorandum or the Contribution Agreements will be distributed as soon as practicable after such gains are realized. The Trustee may retain Income, gains and/or other receipts of the Fund to satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. On the above stand of the revenue as reflected in Gr.Nos.4 to 7 the learned counsel for the Assessee drew our attention to Clause 1.1.13 of the Trust deed which reads thus: 1.1.13 Contributors or Beneficiaries' means the Persons, each of whom have made or agreed to make Contributions to the Trust in accordance with the Contribution Agreement. 35. According to him the above clause in the Trust deed is enough to identify the beneficiaries. Our attention was also drawn by him to CBDT Circular No.281 dated 22.9.1980 wherein the CBDT has explained the scope of Sec.164 with regard to stating the name of the beneficiaries in the trust deed. In the said circular the provisions of Expln.-1 to Sec.164 of the Act regarding identification of beneficiaries has been explained to the effect that for identification of beneficiaries it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the Court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the Court or the instrument of trust or wakf deed on the date of such order, instrument or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble High Court found that the beneficiaries of the trust included the prospective spouses of some of the beneficiaries. The trust deed also provided that in the event of a beneficiary dying before marriage or not marrying before the trust came to an end, that part of the benefit which was to be given to the spouse would be given to the heir of the beneficiary or to the beneficiary himself or herself. The Hon'ble High Court therefore came to the conclusion that the share to be allotted to the beneficiaries was determinate under the trust deed and the beneficiaries also being known, the Tribunal has rightly held that the CIT was in error in revising the order of the AO on the ground that the shares were indeterminate and that the trust deed is void or vagueness. (3) XYZ., In Re 224 ITR 473 (AAR): The Authority for Advance Ruling (AAR) held that if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also the share to which each of them would be entitled without ambiguity, then it cannot be said that the Trust deed does not name the beneficiaries or that their shares are indeterminate. The persons as well as the shares must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve directions that it will not be mandatory for 'private discretionary trusts', if its total income exceeds ten lakh rupees, to electronically furnish the return of income for assessment year 2012-13. It was also highlighted that Form No.49A which was the prescribed form of application for allotment of Permanent Account Number (PAN) also did not contain a separate status Trust but contained a column AOP (Trust) . The revised Form No.49A later notified contains a column for status as Trust . According to him therefore the argument of the revenue that all Trusts are AOPs is not correct. 38. Our attention was drawn to the following decisions to highlight the characteristics of an AOP and as to how those characteristics were completely absent in the case of the Assessee:- (1) CIT Vs. Marsons Beneficiary Trust 188 ITR 224 (Bom) wherein it was held that coming together of persons is necessary for coming into existence of AOP. (2) State of Madras Vs. Subramania Iyer 61 ITR 613 (Mad) wherein it was held that to constitute an association of individuals, it is necessary to prove that as between themselves, the individuals had associated together and decided upon the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily Trust v. CIT, 149 ITR 724 (MP) wherein the Hon'ble M.P.High Court held that if ITO making assessment on beneficiaries, knew fully well that s. 164(1) applied, yet exercised his discretion to assess the beneficiaries and not the trust and the mere fact that he stated in the assessment order that the assessments were subject to rectification was of no avail. (3) Trustees Of Chaturbhuj Raghavji Trust vs. CIT, 50 ITR 693 (Bom) wherein the Hon'ble Bombay High Court held that under sub-s. (2) of s. 41, it is permissible for the IT authorities to make direct assessment on the person on whose behalf income, profits and gains from a trust are receivable. Sec. 41 having provided for two alternative methods, namely, either to tax the income in the hands of the trustees or directly in the hands of the person on whose behalf the income was receivable under the trust, and one of them having been availed of by the IT Department in directly assessing beneficiary in respect of the income, the other was no longer available to the Department. It was contended on behalf of the Revenue that the option was of the ITO who was assessing the trust to decide whether he would assess the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final, if the ITO was permitted to assess the HUF for the same assessment year, tax would be imposed on the same income twice over. It is true that the Act does not envisage taxation of the same income twice over on one passage of money in the form of one sort of income . It is equally true that s. 14(1) of the Act expressly debars the imposition of tax on any part of the income of an HUF received by its members. The fact that there is no provision in the Act dealing with a converse position does not affect the question, for the existence of such a converse position is legally impossible under the Act. So long as the HUF exists, the individual thereof cannot separately be assessed in respect of its income. Nonetheless, if, under some mistake, such income was assessed to tax in the hands of the individual members, which should not have been done, when a proper assessment made on the HUF in respect of that income, the Revenue had to make appropriate adjustments; otherwise, the assessment made in respect of that income on the HUF would be contrary to the provisions of the Act, particularly s. 14(1) of the Act. We, therefore, hold that if the assessment proceedings initiated under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s owner of the trust-property; and the instrument, if any, by which the trust is declared is called the instrument of trust . 44. We were initially doubtful, whether a person who contributes to the trust in accordance with the terms of a contribution agreement could be said to be beneficiary of the trust. It is no doubt true that the beneficiaries are identifiable in terms of the trust deed as persons who contribute under the contribution agreement. But can the beneficiaries be made to contribute to the trust? Beneficiaries are generally recipients of benefits under the deed of trust. Can the trust hold the money so contributed in trust for the contributors and can such contributors be called beneficiaries ? It appeared to us to be a venture undertaken by the Trust, author of the trust and the identified beneficiary at the time of creation of the trust who happens to be the beneficiary and the Investment Manager to whom without any option the management of the trust fund had to be entrusted. It is like any other form of business organization mobilizing funds for investments and promising returns to the contributors. Can such objective be achieved by forming a trust? 45. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O.P. Agarwalla on Trust, p. 220-2), he also expressed his willingness to modify cl. 7(a) as follows in order to obviate any kind of objection :- 7.(a) The trustee shall during the trust period, have the power at their discretion to admit as beneficiary any institutional investor which agrees to enter into a contribution agreement. and, consequent on the above, to insert a definition of the expression institutional investor in cl. 1 to the following effect : (1) `Institutional Investor' means any entity other than an individual, being a natural person including but not limited to financial institution, company or corporation, Government, State or Political sub-division or local authority, that trustees may consider a reputable investor. After a little discussion he was willing also to drop the last seven words which were considered to be somewhat vague. 9. One may pause here to consider whether there could be any valid objections to the constitution of a trust in this manner. The authors of the trust are the IC, the Indian financial service company and others contributing to the trust by the date of the trust deed. Indeed even institutional investors cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, in the definition in cl. (a) proposed to be inserted, the words being a natural person appears to be a surplusage and may be omitted without detracting from the meaning of the clause. But this has no impact on the validity of the trust deed. (emphasis supplied) 47. We agree with the aforesaid observations of the AAR and we proceed further to decide the various issues raised by the Revenue in its appeal. 48. Private Trusts could be Fixed or Discretionary Trusts. A fixed trust is a trust in which the beneficiaries have a current fixed entitlement to such income as remains after proper exercise of the trustee's powers. On the other hand, a discretionary trust is one in which the beneficiaries have no such current fixed entitlement, but only a hope (spes) that the trustees in carrying out their duty to consider how much income might be paid to such beneficiaries will in their discretion pay that income to a particular beneficiary or beneficiaries. The beneficiaries have no interest in possession under the trust. There are various reasons why a settlor prefers to establish a discretionary trust rather than a fixed trust. Some of the important one's being - to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erives a comparatively low income, the incidence of tax on the income from property transferred to the several trusts is maintained at a low level. In such arrangements, it is often found that one or more of the beneficiaries of the trust are persons having high personal incomes, but no part of the trust income being specifically allocable to such beneficiaries under the terms of the trust, such income cannot be subject to tax at a high personal rate which would have been applicable if their shares had been determinate. 50. In order to put an effective curb on the proliferation of such trusts, and to reduce the scope of tax avoidance through such means, the Finance Act, 1970, has replaced s. 164 of the IT Act by a new section. Under s. 164 as so replaced, a `representative assessee' who receives income for the benefit of more than one person whose shares in such income are indeterminate or unknown, will be chargeable to income-tax on such income at the flat rate of 65% or the rate which would be applicable if such income were the total income of an AOP, whichever course would be more beneficial to the Revenue. 51. When the Explanation was added in 1980, the CBDT issued th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of assessment did not consider the above argument nor has he given any reasons why the same are rejected. The submission made by the Assessee before CIT(A) on this aspect have been accepted by the CIT(A) but he has not discussed or given any reasons as to how the submissions are being accepted. The basic scheme of section 61 r/w section 62 and section 63 is as follows : where under a settlement any income arises to the settlor, it has to be assessed in the hands of settlor, whether the settlement is revocable or irrevocable. If under a settlement any income arises to any other person apart from the settlor such income can still be assessed in the hands of the settlor provided the settlement is revocable. Even if a settlement on the face of it is stated to be irrevocable, if the same provides for direct or indirect retransfer of income or assets of the settlement to the settlor or gives the settlor a right to resume power directly or indirectly over such income or asset, the settlement should be deemed to be revocable. 54. In Chapter X of the private placement memorandum issued by the investment manager inviting contribution from investors, the tax considerations in making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be at the sole discretion of the Trustees in consultation with the investment manager. 56. In the light of the aforesaid clauses in the contribution agreement, can it be said that transfer of funds by the beneficiary to the trust/fund is a revocable transfer? 57. The answer to the above question cannot be given by merely reading the clauses in the contribution agreement alone. The contention of the learned counsel for the Assessee before us was that the Contribution agreement has to be read along with the Trust Deed as well as the Investment Management agreement and offer document for private placement issued by the Investment Manager. Article-13 of the Trust Deed provides for termination of the Trust. Though such a power is not with the beneficiary/transferor, it is not the requirement of Sec.61 that the power of revocation must be at the instance of the beneficiary/transferor. The power of revocation under Clause13 of the Deed of Trust is a general power of revocation and the same would be sufficient for construing the transfer in the present case as a revocable transfer. As rightly contended by the learned counsel for the Assessee it is not necessary that the power of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons given above we hold that Sec.61 read with Sec.63 of the Act which mandates that income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as income of the transferor will apply to the facts and circumstances of the present case and therefore the assessment in the hands of the transferee/representative assessee was not proper. 60. The issues raised by the Revenue in Grounds 4 to 7 of the grounds of appeal is with regard to applicability of provisions of Sec.164(1) of the Act. In view of the conclusion on Ground No.3 the adjudication of other grounds may not be necessary. Since the order of the AO is based on the applicability of the provisions of Sec.164(1) of the Act, we deem it appropriate to adjudicate on the issues raised in ground No.4 to 7 as well. The provisions of Sec.164(1) of the Act and Expln.-1 to Sec.164 are relevant in this regard. Sec.164(1) lays down that where any income or any part thereof in respect of which the persons mentioned in cl. (iv) of sub- section (1) of Section 160 is liable as representative assessee or any part thereof (i) is not specifically receivable on behalf or for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neficiaries are not identifiable or the individual shares of the persons on whose behalf and for whose benefit the income is receivable are indeterminate or unknown, such income, again, will be taxed at the maximum marginal rate . (c) In certain other circumstances, set out in the proviso to s. 164(1), the relevant income will be assessable not at the maximum rate but at the rate applicable to it as if it were the total income of an AOP. 62. In the present case the AO has not invoked the provisions of Sec.161(1A) of the Act or the proviso to Sec.164(1) of the Act and therefore, we need not examine those provisions. As far as identification of individual shares of the Sec.164(1) of the Act will not get attracted for the reason that the beneficiaries are not identifiable. 63. The question for our consideration therefore is regarding applicability of Sec.164(1) of the Act. There are two aspects to be noticed in the above provisions. The first aspect is the identification of the beneficiaries. The second aspect is with regard to ascertainment of the share of the beneficiaries. 64. On the aspect of identification of the beneficiaries, it is the plea of the learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect, we find the AAR in the case of XYZ In re (supra) has considered similar clause in a trust deed with specific reference to the provisions of Sec.164(1) of the Act and has held that if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also the share to which each of them would be entitled without ambiguity, then it cannot be said that the Trust deed does not name the beneficiaries or that their shares are indeterminate. The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. Even if the Trust deed authorises addition of further contributors to the trust at different points of time, in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d w.e.f. 1st April, 2003 an Explanation to clarify that object of deriving income is not necessary for AOP, BOI, local authority or an artificial juridical person in order that such entity may come within the definition of Person in section 2(31). If income results than they are liable to be taxed as AOP if the other conditions laid down by judicial decisions are satisfied. In the light of the above definition of AOP, let us examine the facts of the present case. (i) The Assessee is a trust constituted under an instrument of trust dated 25/9/2006. M/S.ICICI Venture Funds Management Company Limited (hereinafter referred to as Settlor ) by an indenture of Trust dated 25.9.2006 transferred a sum of ₹ 10,000/- to M/S. The Western India Trustee and Executor Company Limited (hereinafter referred as the Trustee ) as initial corpus to be applied and governed by the terms and conditions of the indenture dated 25.9.2006. The trustee was empowered to call for contributions from the contributors which will be invested by the Trustee in accordance with the objects of the trust. The objective of creation of the trust was to invest in certain securities called mezzanine instruments a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for filing return of income by a Trust in the status other than AOP. The CBDT realised this difficulty faced by 'private discretionary trusts' having total income exceeding ten lakh rupees facing problem in filing their return of income electronically in cases where they are filing their return in the status of an individual because status of a private discretionary trust has been held in law as that of an 'individual' gave instructions in Circular No.6/2012 dated 3.8.2012 to the effect that it will not be mandatory for 'private discretionary trusts', if its total income exceeds ten lakh rupees, to electronically furnish the return of income for assessment year 2012-13. Form No.49A which was the prescribed form of application for allotment of Permanent Account Number (PAN) also did not contain a separate status Trust but contained a column AOP (Trust) . The revised Form No.49A later notified contains a column for status as Trust . Therefore the argument of the revenue that all Trusts are AOPs is not correct. If the contention of the Revenue as raised in Ground No.9 is accepted than the provisions of Sec.161(1) of the Act would become redundant. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing beneficiary in respect of the income, the other was no longer available to the Department. It was contended on behalf of the Revenue that the option was of the ITO who was assessing the trust to decide whether he would assess the income in the hands of the trustees or directly in the hands of the beneficiary. This contention was rejected by the Hon'ble High Court which held that Sec. 41 was a special enabling provision which permitted the assessment in the hands of the trustees but did not preclude the direct assessment in the hands of the beneficiaries. There is nothing in s. 41 which would indicate that the choice between the alternative methods provided therein has to be made only at the time of the assessment of the trustees or that the choice only belongs to the ITO who is assessing the trust. In Circular No.157 dated 26.12.1974 of CBDT the CBDT has clarified on assessment of trust where share of beneficiaries are unknown. It has been clarified therein that the ITO should at the time of raising the initial assessment either of the trust or the beneficiaries adopt a course beneficial to the Revenue. Having exercised his option once, it will not be open to the ITO to ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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