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TMI Blog2015 (12) TMI 1647X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is a private revocable trust, filed its return at NIL income. In the Profit & Loss account, the assessee declared interest income of Rs. 3.67 crores. The AO asked the assessee to explain as to why interest income should not be taxed in the hands of the Trust/ AOP. The assessee, vide reply dtd 04.07.2011 and 24.10.2011 submitted that as per section 61 & 63 of the LT. Act, all income generated by the trust will be assessed in the hands of the contributors and the entire tax liability on account of income/capital gain generated from the investee company will be to the account of contributors. It was further submitted that the trust and the trustees of the Fund will not be liable to pay tax on account of income/capital gain generated from the investee company and, further, the income earned during the period is from dividend on mutual fund, interest on debentures placed with investee company, hence, entire income is claimed as exempt. However A.O. did not agree with the assessee's contention and taxed the entire income in assessee hands. 3. By the impugned order, the CIT(A) deleted the addition after observing as under :- "5.1 The first two grounds of appeal taken by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished to invest and hold equity related and other investments in Indian entities and the Fund shall invest the contributions obtained from the contributors in indentified investee companies carrying on any business promoted in India including but not limited to business relating to retail and real estate sector. The trust has been created with the initial statement amount of Rs. 10,000/- paid by the settler and settled towards the corpus of the trust under the terms of the Indenture. Class-A beneficiaries under the above indenture are the contributors and the Class-B beneficiaries mean the 'Investments Advisor'. The "contributors" are; 1. Ms. Ved Prakash Arya having his address at Andheri, Mumbai, 2. Army Group Insurance Fund having his registered office at Vasant Vihar, New Delhi and 3. Naval Group Insurance Funds having its registered office at Sena Bhavan, New Delhi. "Funds Investments" have been defined to mean investment made in any securities and instruments, including investments in investee companies by trust, in accordance with the unanimous resolution passed in the meeting of the Board of Trustees and the "Investee Company" means any company carring on any suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l contribution of Rs. 25 crore has been paid by the said contributor to the Trust in the manner provided under the agreement, whereby, the Contributor agreed to invest 4% of the contribution amount as the first installment with the execution of the agreement and the balance amount of 96% to be paid not later than 12 months from the Execution Date. The beneficial interest under the agreement means the beneficial interest of the Contributors calculated on the basis of the Capital Contribution made by the Contributor in proportion to the total capital Contributions received by the Trust from the Contributors. Under this agreement, "Distributable Proceeds" available to the trust from time to time shall be distributed and/or credited, as the case may be in the priority of firstly, to the contributors, upto an amount equivalent to its/his respective Pro- rated Capital Contribution, and, secondly, to the Contributors upto an amount equal to the Hurdle Shortfall (if any) and the remaining 10% to the Contributors in proportion to its/his Pro-rated Capital Contribution, 7.5% to the SRA (Special Reserve Account, which means an amount opened and maintained by the Trust and operated by the Trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en brought under the Act to curb the practice of diversion of income from the hands of assessee to a person who may with any intention to defraud the revenue, may carry out or indulge in a manner so as to take away the income from the said person, and, in the instant case, the appellant has attempted to shield itself from the taxation provisions by resorting to twisting the manner and applicability of the above section in its favour. 5.7 7 The relevant clauses of the Trust Deed and the Contribution Agreement reproduced above show, that the trust has been created as a revocable Trust wherein, it has been mentioned that the income generated by the trust will be assessed in the hands of the Contributors u/s 61 & 63 of the Act. It is also not in dispute that 35 crore has been brought in as capital contribution by the Army Group Insurance Fund and Naval Group Insurance Fund of the Indian Army and Naval establishment. The contribution of Shri Ved Prakash Arya is Rs. 20,000/- only. Thus, the entire contribution to the fund has been from the Army and Naval Group Insurance Funds. Moreover, the income of Army and Naval Group Insurance Funds is exempt u/s 10(23C)(iv) of the Act and, accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lor") by an indenture of Trust dated 25.9.2006 transferred a sum of Rs. 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 and to achieve commensurate returns to the contributors. The fund collected from the contributors 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 contributors to the fund are its beneficiaries. It is a Private Trust to which the provisions of Indian Trust Act, 1882 would apply. 43. Sec.3 of the Indian Trust Act, 1882 defines "Trust" as an obligation annexed to the ownership of property, and arising out a confidence reposed in and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he trust under an advisory agreement. By an Indenture of trust, the Indian financial service company made an initial settlement of Rs. 1 lakh on the trustees on trust. This along with contributions that may be made to the trust fund by others is referred to as `Contribution Fund'. The Indian financial services company was the only contributor and also the only beneficiary under the trust deed. Clause 7 of the trust deed contains a provision to the following effect :- "Power of Addition 7. (a) The trustee shall have the power at any time or times during the trust period to add as beneficiaries such one or more persons or class of persons as the trustee shall in their absolute discretion determine. (b) Any such addition shall be made by deed signed by the trustee and : (i) naming or describing the person or persons or class of persons to be added as beneficiaries; (ii) specifying the date (not being earlier than the date of the deed but during the trust period) from which such person or persons to be thereby added as beneficiaries; and (c) It is hereby clarified that such beneficiaries will be entitled to only such share that is in proportion to the contribution mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the form of a trust which, under the Trust Act, merely represents certain obligations annexed to the ownership of property in the form of the contributed funds. The purposes of the trust cannot be said to be forbidden by law or likely to defeat the provisions of any law or fraudulent or involving injury to any person or property or opposed to public policy : vide s. 4 of the Indian Trusts Act (IV of 1882). It will appear later that, in entering into the present transactions, the parties took into account certain difficulties if the same transactions had been put through the format of a company and also took into account certain financial and tax implications. But these cannot render the purposes of the trust unlawful within the meaning of the Indian statute. The clause which enabled the trustees to admit any one as a beneficiary, the Authority felt, might introduce a degree of uncertainty regarding the element of beneficiaries under the trust. The parties have agreed to modify the clause as indicated above. The result is that now the trustee's choice of beneficiaries is restricted (a) by the overall limit of the fund; (b) only to institutional investors; and (c) to persons wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady seen in terms of Sec.164(1) a trust is assessed as a representative assessee in respect of income which it receives on behalf of its beneficiaries and if the beneficiaries are not certain or shares of beneficiaries are indeterminate, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Explanation 1 to Sec.164 deems that in certain situations beneficiaries shall be deemed to be not identifiable or their shares are unascertained or indeterminate or unknown. These provisions have already been set out in the earlier part of this order and are not being repeated. The legislative history of the above provisions needs to be examined to find out the object of introduction of the Explanation. Sec. 164(1) was in the Act when it was enacted in 1962 but its wording underwent a change, introducing a concept of taxation at marginal rate in 1970 by the Finance Act of 1970 w.e.f. 1st April, 1970. The object and scope of this amendment were elaborated in a circular of the CBDT (Circular No. 45 dt. 2nd Sept., 1970) as under :- "Private discretionary trusts. - Under the provisions of s. 164 of the IT Act before the amendment made by the Finance A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to decide the allocation of the income every year and in other ways. In such a situation, the trustees and beneficiaries are able to manipulate the arrangements in such a manner that a discretionary trust is converted to a specific trust whenever it suits them tax-wise. In order to prevent such manipulation, it is proposed to provide that unless the beneficiaries and their shares are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed, the trust will be regarded as a discretionary trust and assessed accordingly." 52. From the above extracts it can be seen that 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. 53. Having noticed the tax implications of discretionary trusts, we may now revert to the various issues raised by the Revenue in the grounds of appeal and the facts of the present case. The issue raised in grounds No.1 is general, calling for no specific adjudication. The issue raised by the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholders and therefore the dividend earned by the Trust from investment would be exempt from tax and therefore there would be no tax implications in the hands of the beneficiary. (2) Interest on loans given by the Trust/Fund to companies would suffer tax deduction at source. Nevertheless the beneficiaries have to declare interest income and pay tax thereon but claim refund of tax paid or credit for taxes already paid. (3) Gain on sale of Portfolio Investments would be subjected to tax either as Long Term Capital Gain or Short Term Capital Gain. There is also a reference to the fact that in case the gain on sale of securities of companies held/invested by the Trust/Fund are held to be in the nature of business income then such business income would be taxable in the hands of the beneficiaries at the relevant applicable rates. (4) Gain on redemption premium of debentures/bonds will also suffer tax either as long term or short term capital gain depending on the period of holding. 55. Under clause-2 of the contribution Agreement, the contributor/beneficiary/investor agrees to contribute a specified sum to the trust/fund. Clause-2.6 of the contribution agreement specifies that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel for the Assessee that the provisions of Sec.63(a) of the Act, which deems existence of power of revocation in certain circumstances, are also acceptable. In this regard prospectus inviting contribution from contributors clearly lay down in certain circumstances 75% of the contributors can revoke their contribution to the fund at any point of time and the trustees shall then terminate the fund. Though the above power of the transferor/beneficiary to revoke the transfer is not in the instrument of transfer but by virtue of the power conferred in a document by which the investment manager appointed by the trust by virtue of powers conferred under the trust deed, would be sufficient to conclude that the transferor/beneficiary had deemed powers of revocation. In this regard the reliance placed by the learned counsel for the Assessee on the ration laid down in the decision of the Hon'ble Supreme Court in the case of Jyothendrasinhji (supra) is squarely applicable to the present case. In the aforesaid decision the Hon'ble Supreme Court held that Sec. 63(1) of the Act does not say that the deed of transfer must confer or vest an unconditional or an exclusive power of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t thereof is receivable during the previous year is expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed;(ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the Court or the instrument of trust or wakf deed, as the case may be, and are ascertainable as such on the date of such order, instrument or deed." 61. The general rule as laid down in Sec. 161(1) is that income received by a trustee on behalf of the beneficiary shall be assessed in the hands of the trustee as representative assessee and such assessment shall be made and the tax thereon shall be levied upon and be recovered from the representative assessee "in like manner and to the same extent as it would be leviable upon the recoverable from the person represented by him". To the above rule, however, three exceptions hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. We find that Clause 1.1.13 of the Trust Deed clearly lays down that beneficiaries means the Persons, each of whom have made or agreed to make contributions to the Trust in accordance with the Contribution Agreement. We are of the view that the above clause is sufficient to identify the beneficiaries. 65. On the aspect of ascertainment of share of the beneficiaries, we find that Article 6.5 of the Trust Deed clearly specifies the manner in which the income of the Assessee is to be distributed. The said clause details formula with respect to the share of each beneficiary. As rightly contended on behalf of the Assessee it is not the requirement of law that trust deed should actually prescribe the percentage share of the beneficiary in order for the trust to be determinate. It is enough if the shares are capable of being determined based on the provisions of the trust deed. In the case of the Assessee the trustee have no discretion to decide the share of each beneficiary and are bound by the provisions of the trust deed and is duty bound to fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no separate status of Trust for making assessment envisaged under the Act. In this regard the definition of person u/s. 2(31) of the Act which does not specifically refer to "Trust" is being highlighted in the grounds raised by the Revenue. These grounds can be conveniently dealt with together. 67. Sec.2(31) of the Act defines the term "Person". The definition includes "Association of Persons"(AOP). There is no definition of the expression AOP occurring in the 1922 Act. By a series of decisions, the meaning of this expression was precisely defined and tests were laid down in order to find out when a conglomerate of persons could be held to be an AOP for the purposes of section 3 of the 1922 Act. While interpreting this expression occurring in section 3 of the Indian IT Act, 1922, the Supreme Court in CIT vs. Indira Balkrishna (supra) held "an AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains". The Supreme Court, however, administered the following caution : ‗‗There is no for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 68. It can thus be seen 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 arrangement with the Assessee. Therefore it cannot be said that two or more beneficiaries joined in a common purpose or common action and therefore the tests for considering the Assessee as AOP was satisfied. The beneficiaries have not set up the Trust. 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 reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court after making a reference to the above circulars held that once a beneficiary is assessed and his assessment is completed prior in point of time, and his assessment is an element of finality, it is a natural consequence flowing there from that the Department does not get any permission to go behind it for the purpose of scrutinising the procedure, for finding out faults in regard thereto, the sole object of which is to justify the subsequent action taken by the Department. These are in fact the normal consequences that flow from the principle of finality. This principle especially emerges from three circulars and has established into a settled practice, any time a deviation therefrom cannot be permitted, even on the ground of a mistake with regard to the merits of the situation that received finality. Similar view has been taken by the Hon'ble M.P.High Court in the case of Rai Sahe Seth Ghisalal Modi Family Trust (supra) and Hon'ble Bombay High Court in the case of Trustees Of Chaturbhuj Raghavji Trust (supra). 72. The Hon'ble Bombay High Court in the case of Trustees of Chaturbhuj Raghavji Trust (supra) held that under sub-s. (2) of s. 41, it is permissible for the IT aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, in our view, will not be of any use for the reason that the said Circular was not in force at the relevant AY when the assessment was made by the AO on the present Assessee. Circulars not in force in the relevant Assessment year cannot be applied as held by the Hon'ble Bombay High Court in the case of BASF (India) Ltd. & Anr. vs. W. Hasan, CIT & Ors. 280 ITR 136 (Bom). The decision of the Hon'ble Supreme in the case of Ch. Atchaiah (supra) on which the AO placed reliance in making assessment on the Assessee in our view is not applicable to the facts of the present case. In the said decision the status of the Assessee as that of an AOP was not disputed but it was argued that the ITO had option to assess either the AOP or the individual member of the AOP. The Hon'ble Supreme Court held that unlike under s. 3 of the 1922 Act, the ITO did not have an option under s. 4 of the IT Act, 1961, to assess either the AOP or the individual members thereof. If the ITO has assessed a wrong person, say individual instead of AOP, he is not precluded, in contradistinction to the 1922 Act, to seek to assess the right person under the 1961 Act. The Hon'ble Court made it clear that wherever such on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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