TMI Blog2015 (12) TMI 1647X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out any activity in the spirit of Trust. (3) The appellant prays that the order of CIT(A) on the above ground be set aside and that of the AO be restored. 2. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a private revocable trust, filed its return at NIL income. In the Profit Loss account, the assessee declared interest income of ₹ 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 claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India residing at Thane and Mr. Sumit Somani, a citizen of India residing at Kandivili, Mumbai being the Individual Trustee . Both, the corporate trustees and the individual trustees collectively are to be referred as Board of Trustees or the Trustees . The trust has been established 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indenture of Trust executed on 28.11.2007, the appellant entered into three separate contribution agreements dated 03.11.2007 at New Delhi. The first agreement was with Army Group Insurance Fund, having its registered office at Vasant Vihar, New Delhi. Under the said agreement capital contribution of ₹ 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectric Company, has held that the appellant is an AOP and required to be taxed accordingly. A.O. has also invoked section 161 (1A) of the Act. In so far as the appellant's contention that it is a revocable trust is concerned, the A.O. has rejected the same on the ground that sections 61 to 63 have been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vocable trust and held as under:- 42. We have given a very careful consideration to the rival submissions. The Assessee, as we have already seen, is 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust was created whereby the Indian Financial services company was the author of the trust and another Indian Trust company was appointed as Trustee. The funds of the Trust were to be invested in Indian companies and projects in India. The Indian financial service company was to act as the principal Investment Adviser in India to the trust under an advisory agreement. By an Indenture of trust, the Indian financial service company made an initial settlement of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the proceeds to the beneficiaries. This is, in a sense, nothing more than an arrangement by which certain parties agreed to contribute funds for a common purpose and divide the profits amongst themselves. No doubt the same objective could be achieved by the constitution of a firm or a company but, equally, there seems to be no valid objection if the parties wish to do it in 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dthrift, which inebriate, which will marry millionaires and which missionaries . The trustee can take all these factors into consideration in making their decisions. 49. When it comes to tax on income received by the Trust on behalf of the beneficiaries, there are some implications depending on whether the trust is a discretionary trust or a non-discretionary trust. As we have already 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 wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Ed.] : 49. xxx xxx xxx (iv) Under the existing provisions, the flat rate of 65% is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the Court or wakf deed. This provision has been misused in some cases by giving discretion to the trustees 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 shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butors are therefore informed that in respect of their pro-rata share of income received by the Fund it is the contributors who will be liable to tax and not the Trust/Fund. The nature of income that is likely to arise from the revocable transfer has also been set out therein and the same is referred to as (1) Dividend declared by companies whose shares are held by the Trust, are exempt in the hands of the shareholders 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard the reliance placed by the learned counsel for the Assessee on the observations of the Hon ble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) support the plea taken by him. As rightly contended by him the existence of a power to revoke the transfer that has to be seen and not the manner in which/ or at whose instance such revocation is brought about. 58. The alternative submission of 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of relevant income and beneficiaries , respectively), tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate. Explanation 1 to Sec.164 lays down that any income or part thereof to which Section 164(1) applies shall be deemed as being not specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) has taken a view that 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. Consequently Grounds 4 to 7 raised by the Revenue are held to be without merit. 66. In ground No.8, the Revenue has challenged the order of the CIT(A) whereby the CIT(A) held that the Assessee cannot be assessed as an AOP . In Ground No.9 the Revenue has contended that there 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o should be resident in India and achieve returns to such contributors. The contributors to the fund are its beneficiaries. (ii) 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. (iii) 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. 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 Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 the Revenue has raised issue that income has to be brought to tax in the hands of the right person in the right status. In this regard there are circulars dt. 24th Feb., 1967, 26th Dec., 1974 and 24th Aug., 1966 on the issue wherein it has been opined that once the choice is made by the Department to tax either the trust or the beneficiary, it is no more open to the Department to go behind it and assess the other at the same time. 71. In the case of David Joseph (supra) the Hon ble Kerala High 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 theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not venture capital funds and which are non-charitable trusts where the investors name and beneficial interest are not explicitly known on the date of its creation- such information becoming available only when the funds starts accepting contribution from the investors, have to be treated as falling within Sec.164(1) of the Act and the fund should be taxed in respect of the income received on behalf of the beneficiaries at the maximum marginal rate. 73. The reliance placed on the aforesaid circular, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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