TMI Blog2017 (2) TMI 1122X X X X Extracts X X X X X X X X Extracts X X X X ..... head of income under which the income of a particular assessee is to be assessed. The decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (2010 (1) TMI 5 - SUPREME COURT OF INDIA ) squarely applies to the facts of this case. The assessee's appeal on this issue is dismissed. Validity of trust - Holding the trust to be not a valid trust and consequently that section 161(l) of the Act is not applicable - whether all the transactions related to securitization are a facade worked out by the Bank and the assessee trust is not a valid trust? - Held that:- That the procedures and processes involved in the formation of a trust have been followed is not in doubt. RBI Guidelines itself contemplate the securitization process to be carried out by the originator; Yes Bank in this case. Therefore, no adverse inference can be drawn of the point strenuously put forth by the Revenue that the originator has been the guiding force of the securitization process. Most of the infirmities/defects pointed out in the documents by the Revenue is mainly on the point that all the securitization transactions were carried out between 16.05.2008 and 20.05.2008 whereas the loan agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus, it follows that the income shall be taxed in the hands of the beneficiaries, i.e. the Mutual Funds who purchase the PTCs from the assessee trust. In this view of the matter, we allow this ground of appeal No. II raised by the assessee Diversion by overriding title - assessee’s contention is that the amounts received by the assessee from Yes Bank under the Deed of Assignment dated 20th May, 2008 are diverted at source by an overriding title to the PTC holders (Mutual Funds) and therefore the amount of ₹ 21,49,72,486 /- handed over to the assessee and paid to the PTC holders in proportion to their respective investments is not income of the assessee for the A.Y. 2009-10 - Held that:- As held by the Hon'ble Apex Court in the case of CIT vs. Tollygunge Club Ltd. (1977 (3) TMI 1 - SUPREME Court ) every receipt in the hands of the assessee need not be its income and it is only when it bears the character of income at the time when it reaches the hands of the assessee that it becomes exigible to tax. In the case on hand, even at the initial stage, even before the money flows to the assessee, it was always clearly intended to be passed on to and only to the beneficiaries, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground No. V as the same has been rendered infructuous and is accordingly dismissed. Enhancement of Income - Held that:- Para 3.5 of the Loan Agreement states that interest has to be computed on number of day basis using 365 days as a year basis. The above wordings cannot be stretched to mean that the interest has to be charged on day to day basis. Also, the Deed of Assignment under which the assessee is to receive the amount clearly provides that the assessee is entitled to receive the amounts on the 1st of the next month and to be passed on to the PTC holders in the proportion to the amount of their investments on the very next day. In view of the above clear provisions laid out in para 3.5 of the Loan Agreement and Deed of Assignment, we are of the considered view and hold that it is crystal clear that the interest for a particular month accrues on the first day of the next month as laid out in para 3.5 of the Loan Agreement and recital in the Deed of Assignment. Accordingly, ground No. VI of assessee’s appeal is allowed. Disallowance of expenses on accrual basis (if enhancement is upheld) - Held that:- In this ground, the assessee has raised an alternate ground that if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aries to the trust are seven Mutual Funds, namely, (1) UTI Mutual Fund, (2) SBI Mutual Fund, (3) DBS Chola Mutual Fund, (4) ICICI Prudential Mutual Fund, (5) HDFC Mutual Fund, (6) Lotus Mutual Fund and (7) Franklin Templeton Mutual Fund. The beneficial interest of these mutual funds in the trust is proportionate to their contribution in the assessee trust. 2.1.3 In the case on hand, Hindustan Petroleum Corporation Ltd. (HPCL), a Government company, proposed to raise loans for ₹ 300 crores. Based on an e-bid enquiry, Yes Bank (hereinafter referred to as Yes Bank / Originator/Seller) made the loan offer which was accepted by HDFC on 15.05.2008, to be effective from 16.05.2008 for 364 days at an interest rate of 9.18%. An Agreement for the loan was purportedly entered into between HPCL and Yes Bank on 15.05.2008, which specified that a standard format agreement shall be executed. This standard format agreement was executed on 21.05.2008, making it effective from 16.05.2008. Yes Bank entered into a Deed of Assignment dated 20.05.2008 assigning the receivables under the aforesaid loan to the Assessee for a consideration of ₹ 300,55,82,700/-. This transaction of Yes Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PCL is out of all these transactions. HPCL shall pay the interest and loan repayment only to Yes Bank. Yes Bank, in terms of all these transactions will transfer the receivables, comprising both the loan amount and the interest thereon, to the assessee trust to be received by the mutual funds, being the beneficiaries of the assessee trust. It is in the background of these facts that the AO has held the Trust to be not genuine. Assessee s stand 2.2 The assessee filed its return of income for A.Y. 2009-10 declaring taxable income at Nil, as according to the assessee, the amounts received by the assessee from Yes Bank and in turn paid by it to the beneficiaries in proportion to their investment in PTCs as pay outs in a pre determined manner are not chargeable to tax in the hands of the assessee. During the assessment year under consideration, the assessee received an amount of ₹ 21,49,72,486/- as interest from Yes Bank and the entire proceeds were distributed to the beneficiaries of the assessee Trust, i.e. the MF beneficiaries through the PTCs, in proportion to their investment. It is the claim of the assessee that it received the interest for and on behalf of the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as a valid trust, the assessment would be made in the hands of the trustee as a single unit and tax shall be payable at maximum marginal rate in terms of section 161(1A) of the Act, because as per the A.O, Section 161(1A) of the Act overrides section 161(1) and accordingly, the fact that the income of the beneficiary mutual funds is exempt under section 10(23D) of the Act , would be of no consequence. The provision of section 161(1A) of the Act would still be applicable even if the income of the individual beneficiaries is exempt from tax. The assessment was accordingly completed u/s 143(3) of the Act, vide order dated 30.11.2011. CIT(A)'s stand 2.4.1 Aggrieved by the order of assessment for A.Y 2009-10 dated 30.11.2011, the assessee carried the matter in appeal to the CIT(A) - 30, Mumbai. The CIT(A), vide order dated 30th March, 2013, upheld the action of the AO in holding that the trust is not a valid trust and that the assessee constituted an AOP, not of eight members as held by AO, but consisting of nine members - the bank (Yes Bank), the trustee and seven mutual funds who were the beneficiaries. In support of his decision that the assessee is not a valid trust, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment being allowed to the assessee. Thus, both the assessee and the Revenue are in appeal before us against the impugned order of the CIT(A). These appeals are being disposed off in seriatum as under: - 3. Grounds of appeal of assessee in ITA No. 3986/Mum/2013 3.1 In this appeal the assessee raised the following grounds and concise grounds of appeal: - I. Ground I: Holding the Trust to be not a valid Trust a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in ruling that the Trust is not a valid trust. b. The CIT(A) failed to appreciate and ought to have held that: i. All the essentials for the creation of a valid trust were fulfilled; ii. Provisions of sections 6 or 8 of the Indian Trust Act, 1882 have not been breached; iii. There is no violation of the provisions of section 293(1)(e) of the Companies Act, 1956; iv. The circumstances relied upon by him do not render invalid creation of the trusts by IL FS Trust Company Ltd; v. The Settlor in the present case is empowered under its Memorandum of Association to carry on the Trusteeship business and to do all that may he essential for achiev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to have held that: i. The beneficiaries have not joined in a common venture or a joint enterprise but have made investments in the Trust individually; and ii. The fact as to whether one Mutual Fund knows which other Mutual Funds are the beneficiaries under the Trust is not decisive of the legal relationship and a mere co-investor or co-beneficiaries cannot be regarded as having formed an Association of Persons in law. c. The Appellant prays that it be held that the Appellant is not an AOP. V. Ground V: Invalidity of assessment order a. The CIT(A) having held that the AOP is constituted by Yes Bank Limited (originator), the Seven Mutual fund (PTC Holders) and IL FS Trust Co. Ltd. ought to have quashed the assessment made by the AO on the AOP constituted by the Seven Mutual fund (PTC Holders) and IL FS Trust Co. Ltd. b. The CIT(A) failed to appreciate that once he has come to the conclusion that the members of the AOP is not the same as what has been treated as the members of the AOP by the AO, the assessment made by the AO ought to be quashed as the said assessment is on a non existing entity. VI. Ground VI: Enhancement of income by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal which are without prejudice to the original grounds of appeal filed by the Appellant. Ground I: Holding the Trust to be not a valid Trust a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in ruling that the Appellant is not a valid trust on the alleged ground that all the essentials for a valid trust were not fulfilled. Ground II: Holding that the Trust was not revocable a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the applicability of sections 61 to 63 of the Act to the contribution made by the Beneficiaries to the Appellant. Ground III: Diversion by overriding title without prejudice to grounds above: a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the income of the Appellant is not diverted at source to the Beneficiaries/PTC Holders on the alleged ground that an overriding title cannot be created by voluntary act of parties and, hence, not chargeable to tax in the hands of the Appellant. Ground IV: Treating the status of the appellant as AOP a. On the facts and in the circumstances of the case and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary to discuss the principle of securitization of loans and the legal and statutory framework governing the same. The concept of securitization of loans is guided by the RBI guidelines, issued under the name and style of Guidelines on Securitization of Standard Assets dated February 01, 2006. Some of the salient concepts, procedures and features of the RBI Guidelines on securitizations are outlined in the following paragraphs, as under: i) Securitization is defined as a process by which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. ii) Securitization involves a two-stage process. In the first stage, there is a sale of single asset or pooling and sale of pool of assets to a bankruptcy remote SPV in return of an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of tradable debt securities. iii) 'SPV' is special purpose vehicle set up during the process of securitization to which the beneficial interest in the securitized assets are sold/transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement with the SPV, and the payments/repayments from the borrowers are routed through it, it shall be under no obligation to remit funds to the SPV/investors unless and until these are received from the borrowers. xii) The originator shall not indulge in market- making or dealing in the securities issued by the SPV. 5.2 By securitizing the existing loans, the banks can free up the funds for lending without diluting equity or incurring constraints of additional deposits. Thus the banks will be able to undertake larger volumes of business using the same amount of capital. On the supply side, securitization results in growth of retail loan portfolios in Banks/NBFCs. On the demand side, the capital available with mutual funds and other institutions is put to gainful use. Now we proceed to discuss the Grounds of appeal raised by the assessee. 6. Ground No. 1 6.1 Holding the trust to be not a valid trust and consequently that section 161(l) of the Act is not applicable: (a) On the facts and in the circumstances of the case and in law, the CIT(A) erred in ruling that Trust is not a valid Trust. (b) The CIT(A) failed to appreciate and ought to have held that: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pendency of income-tax proceedings, the AO will have to get an order from the Competent Court to declare the transaction to be invalid as per section 281 of the Act. Reliance in this regard is placed on the decisions of: i. TRO vs. Gangadhar Vishwanath Ranade 234 ITR 188 (SC) at S. No. 7 of Assessee's Legal Compilation Box File No. 1 ii. Sancheti Leasing Co. Ltd. vs. ITO 246 ITR 814 (Mad.) at S. No. 5 of Assessee's Legal Compilation Box File No. 1 Reliance was also placed on the decision in the case of DHFL Venture Capital Fund vs. ITO (ITAT Mum.) wherein it was held that when SEBI has granted registration to the venture capital fund, it is not open to the AO to go into the validity of the said registration as the same is not within the domain of the AO. 6.2.2 It was also submitted that the RBI Guidelines on Securitization provide that securitization can be undertaken by company, trust or firm. The assessee has undertaken the securitization as a 'trust', which is valid and which was duly reported to the RBI and the RBI has not raised any objections to the securitization. It was also submitted that the reliance placed by Revenue on the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not bound by the directions of the RBI to NBFC; that the Income-tax Act is a separate code by itself and the taxable total income has to be computed in terms of the provision of the IT Act. 6.4 After having heard heard the rival submissions and perusing and carefully considering the material on record and judicial precedents cited, we are of the considered view that the AO is competent to compute the income of an assessee under a head of income, other than what was claimed by the assessee, of course, after marshalling the facts properly and furnishing proper reasons. Merely by computing the interest accrued as income of the assessee instead of non taxable as claimed,, the inter-se rights of the assessee under any other statutory framework does not get affected. There is no requirement under the Income Tax Act that the AO has to get an order of the court for income determination. The requirement u/s 281 of the Act to get a suit initiated to annul a transfer of property before effecting attachment is totally different and has no connection to this issue. The Income Tax Act is a self-contained Act and the AO is entitled to determine the head of income under which the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary, section 9 of the Trust Act provides that every person capable of holding property may be a beneficiary. A trust is capable of holding property and is therefore entitled to be a beneficiary of another trust. In this regard, reliance is placed on the following decisions wherein the beneficiary of a trust was another trust: (a) CIT vs. Trustees of Jadi Trust 133 ITR 494 (Born.) (b) Dr. D. E. Anklesharia vs. CIT 207 ITR 1068 (Guj.) (c) CIT vs. Sinivali Trust 267 ITR 165 (Guj.) (vi) The reference by the learned CIT(A) to the decision of Pestonji Jalbhoy Chichgar vs. Jalbhoy Jehangir Chichgar 1934 AIR (Bom.) 64 is erroneous as it has no relevance to the facts of the present case. (vii) The initial contribution of ₹ 500/- is for the benefit of the initial investors who are also the beneficiaries of the Trust. Hence the conclusion of the CIT(A) that there is no beneficiary at the time of the settlement of the Trust is invalid and incorrect. (viii) Section 6 of the Trust Act inter alia provides that transfer of trust property to the trustee is pre requisite for creation of a valid trust, except when the author of the Trust is the trustee himself. 6.5.2 In vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 (Bom.) and CIT vs. Marsons Beneficiary Trust 188 ITR 224 (Bom.) 6.5.4 Therefore, the contention of the assessee is that it is a valid trust and since it has complied with all the required statutory approvals and procedures, it cannot be considered as an invalid trust, for income tax purposes. 6.6.1 Per contra, the learned counsel for Revenue strongly argued that the assessee is not a valid trust. In detailed arguments, both oral and written submissions, the learned counsel for Revenue strongly relied on the documents created for the transactions that went into the securitization process to contend that the trust was only a facade, if not a farce. The submissions of Revenue as regards the mistakes in the documentation related to the securitization process are elaborately outlined therein. The sum and substance of the contentions of the Revenue regarding the mistakes infirmities are summarized as under: - (i) The assessee trust is not a valid trust. (ii) Even before the trust was formed, the loan from Yes Bank has been assigned and all the procedures/ formalities related to the securitization had been completed. Therefore, the entire securitization process is only a fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.7.2 In this context, the assessee has put forth the following arguments: (i) Neither the AO nor the learned CIT(A) have held that the various documents executed are bogus or to be disregarded. Both the AO and the learned CIT(A) have accepted these documents and based their findings on the same. This argument put forth is an afterthought by the Department. (ii) The Agreement to give the loan by Yes Bank to HPCL was executed on 15th May, 2008, which provided for a standard format agreement to be executed. Hence, it is not correct to say that the agreement was executed after the securitization process was completed. The loan agreement provides that the loan agreement would be effective from 15th May, 2008. (iii) The loan agreement refers to the Demand Promissory Note to be executed by HPCL in favour of Yes Bank. In the Trust Deed instead of mentioning to be executed on 21 Day of May, 2008 it has been stated as dated 21st Day of May, 2008 . Merely because a clause has not been properly drafted does not mean that the document or the agreement is null and void. (iv) If the proposed trustees have made the bank opening application before the settling of the Trust knowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself must also be treated as asset backed loan as there is a provision for creation of a security in case of default. 6.7.5 As regards the point of breach of RBI Guidelines for securitization of standard assets, it was submitted that securitization transaction is a twostage process. In the first stage there is sale of single asset to the SPV in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset to third party investors by issuance of tradable debt securities. It is the contention of the Revenue that the assessee has executed the transaction in the reverse order i.e. they have executed the second step first and then the first step and, therefore, the assessee has breached the RBI Guidelines. It is wholly unrealistic to hold that the trust must itself first finance the securitization and then issue the PTCs to the mutual funds contributors. All Clauses of the RBI Guidelines are required to be read in entirety. RBI Guidelines emphasize on transfer of assets from the Originator to SPV, issue of PTC by receiving contributions from the PTC holders and payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard the rival contention and perused and carefully considered the submissions made, the judicial pronouncements cited by both the parties and the rebuttal submitted by each of the parties to the arguments of the other. That HPCL, the borrower, had borrowed the loan from Yes Bank is not disputed. After this loan transaction, HPCL is totally out of all other transactions in connection with securitization. In fact, even after all the securitization transactions, HPCL repays the loan and interest to Yes Bank only. All the other transactions have been initiated and virtually controlled by Yes Bank. In fact, it is fairly accepted by the assessee that all the transactions are initiated and regulated by the Bank, by claiming that the RBI Guidelines envisage the lender to be the Originator. 6.8.2 The main contention of Revenue is that all the transactions related to securitization are a facade worked out by the Bank and the assessee trust is not a valid trust. The bank, the assessee trust, the mutual funds beneficiaries, and trustees, have worked closely together in putting up the facade of the trust and have come together to indulge in business activities for a profit and therefore h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forth by the Revenue that the originator has been the guiding force of the securitization process. Most of the infirmities/defects pointed out in the documents by the Revenue is mainly on the point that all the securitization transactions were carried out between 16.05.2008 and 20.05.2008 whereas the loan agreement was signed on 21.05.2008. The agreement between HPCL and Yes Bank was first signed on 15.05.2008, which provided that the standard format agreement will be signed. The standard format agreement was signed on 21.05.2008. All the procedures and documents related to the securitization process was carried out on 20.05.2008. The insistence of Revenue that only the standard format agreement has to be reckoned and not the agreement dated 15.05.2008 does not appear to be tenable. Even assuming that the agreement dated 15.05.2008 was only in the nature of a letter of intent, it cannot be disputed that the lender, Yes Bank had full knowledge of the loan and had disbursed the amount. Therefore, it is very likely that Yes Bank had initiated the securitization process, pending signing of the standard format agreement. These are all standard documents that are signed up in such trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... framework to the flow of funds. 6.8.7 Considering the totality of the factual and legal matrix of the issue, as discussed above, we are inclined to hold that the learned CIT(A) was wrong in holding that the assessee trust was not a valid trust. In our considered view all the necessary ingredients for the formation and existence of the trust have been fulfilled and all these documents, processes and money trail cannot be disregarded, only due to the marginal mistakes in the clauses in the documents and also the timing of signing of these documents. Accordingly we hold that the assessee Trust is a valid Trust. 6.8.8 Consequently, this portion of ground of appeal No. 1 is decided in favour of the assessee by holding the assessee to be a valid trust. 7. Ground II: Holding the trust was not a revocable trust/ contribution by beneficiaries was not a revocable transfer: 7.1 In this regard, the assessee has raised the following grounds of appeal: - a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting, the applicability of sections 61 to 63 of the Act on the ground that (i) there is no contribution by the Beneficiary to the trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f provides that when the PTC holders unanimously agree and decide to transfer the receivables, the Trustee shall revoke the Trust at the request of the beneficiaries/PTC holders, and shall assign legal ownership in the receivables and in the Other Benefits to the PTC holders in the proportion in which the amounts payable to them under the PTCs held by each of them bears to the aggregate amount of all the receivables remaining outstanding at that time and thereupon the assessee shall stand extinguished and revoked. 7.3.3 It was submitted that these two sections in the Trust Deed show that the assessee Trust is a revocable trust and the income of the Trust would be chargeable to tax in the hands of the Beneficiaries. It was also submitted that the contributions by the PTC holders are revocable transfer as per section 63(a)(i) of the Act, as there is a provision for retransfer of the receivables, i.e. the income as well as the contributions made by the transferor/PTC holders. Therefore, the receivables collected by the assessee are taxable in the hands of the mutual fund beneficiaries, i.e. the transferor/PTC holders as per provisions of section 61 of the Act. In this regard, relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 61 to section 63 of the Act, such a restriction cannot be read into these sections. Sections 61 to 63 of the Act and the wordings employed therein lay down absolute rules which have to be applied in all cases which come within the scope of these provisions irrespective of (a) who benefits (b) what is the reason for the transfer being dubbed as revocable (c) the intention of the parties (d) whether the circumstances which render the transfer revocable has actually taken place. Reliance for this proposition was placed on, inter alia, the decision of the Hon'ble Calcutta High Court in case of Tarunendra Nath Tagore vs. CIT 33 ITR 492 (Cal.) and few more judicial pronouncements. 7.6.1. We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the Bangalore Bench of ITAT, in the case of DCIT vs. India Advantage Fund VII (supra) has explained the principles related to Trusts and their taxation. Even though the facts of the cited case does not pertain to securitization, as pointed out by the Revenue, the principles enunciated in that decision are universally applicable and certainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fines as to what is transfer and revocable transfer for the purpose of Sec.61 of the Act. It provides that:- (a) a transfer shall be deemed to be revocable if (i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets; (b) transfer includes any settlement, trust, covenant, agreement or arrangement. The first aspect pointed out by him was that the beneficiaries transfer funds to the trust in accordance with the terms of the trust deed and therefore there is a transfer within the meaning of Sec.61 of the Act. It was his contention that the Sec.61 talks of a specific power of revocation conferred under the instrument of transfer and Sec.63 defining revocable transfer deals with deemed revocable transfers . According to him, if there is a direct power or revocation under the instrument of transfer there is no need to resort to the provisions of Sec.63 of the Act. 25. He next drew our attention to Article-13 of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above contention the learned counsel for the Assessee placed reliance on the decision of the Hon ble Supreme Court in the case of Addl.CIT Vs. Surat Art Silk Cloth Mfrs. Association 121 ITR 1 (SC) at page-17, wherein the Hon ble Supreme Court had to examine the question as to whether the expression advancement of any other object of general public utility not involving the carrying on of any activity for profit would mean that the charitable organisation cannot carry on any business. The Hon ble Supreme Court observed as follows:- It is clear on a plain natural construction of the language used by the legislature that the ten crucial words not involving the carrying on of any activity for profit go with object of general public utility and not with advancement . It is the object of general public utility which must not involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these last ten words is the linking of activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he form of prospectus inviting contribution from contributors wherein the following clauses are found: The Fund is expected to terminate seven years from the date of the Indenture of Trust. The process of redemption/termination shall be completed within a period of twelve months to completely liquidate its assets. However, in the event that the investments in the Portfolio Companies are not realised at the end of seven years from the date of the Indenture of Trust, its term may be extended for two additional periods of one year each, upon the recommendation of the Investment Manager and the approval of 75% of the Contributors. In addition, 75% of the Contributors, if unsatisfied with the performance of the Fund, by a written notice can revoke their Contribution to the Fund at any point of time and the Trustee shall then terminate the Fund subject to the following: (i) Capital Commitments will not be terminated to the extent necessary to pay Fund Expenses or honour investment commitments previously made by the Fund; (ii) The Fund will continue for such period of time as may be necessary to liquidate existing investments in an orderly manner; and (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the discretion of the Investment Manager, apply any Distribution Proceeds (as defined below) towards any purpose, which could otherwise have been funded by a Drawdown from Contributors. However the distribution will be at the discretion of the Trustee in consultation with the Investment Manager. 32. Our attention was drawn to the order of the CIT(A) in which the remand report of the AO filed before CIT(A) is extracted in the order of the CIT(A). In para-17.5 of the CIT(A) s order the remand report of the AO on the aspect of the trust being revocable has been set out. It was pointed out by the learned counsel for the Assessee that the AO has not disputed in his remand report the fact that the Assessee trust is revocable but only says that beneficiaries are assessed at different places in India and 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. To avoid such eventuality it would be correct to Assessee the trustee/representative Assessee. It was his submission that once the trust is accepted to be revocable then there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be benefited, the beneficiaries cannot be said to be uncertain, merely because wife/children cannot be known until the marriage and begetting of children by the stated beneficiaries. The Hon ble Court noticed in the above case that the Beneficiaries were five in number for the period from 1st April, 1986 to 31st March, 1989 and the respective share of each beneficiary was in different percentage as stated in the deed itself. From 1st April, 1989 onwards the beneficiaries were seven in number and their shares in the income was equal. As per trust deed, as and when B and P are married, their spouses would automatically become beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting years and equally divide the beneficial interest in income of the aforesaid beneficiaries. Likewise, as and when any child or children is/are born to the said B and P the child or children so born shall automatically become a beneficiary/ beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting years and equally divide the beneficial interest in income of the aforesaid beneficiaries. Deed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7.6.4 From an appreciation of the above extracted paragraphs of the decision of the Bangalore Bench of ITAT in India Advantage Fund VII (supra), in our view, it emerges that: - (i) It is the power to revoke the transfer that has to be seen and not the person at whose instance such revocation can be done. (ii) The provisions of section 63 of the Act defining revocable transfer will apply and consequently income has to be brought to tax only in the hands of the beneficiary/transferor. iii) The section does not say the deed of transfer must confer or vest an unconditional or an exclusive power of revocation in the transferor. What emerges from out of the above discussion is that the beneficiaries need to be identifiable and the Trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009-10. It was submitted that irrespective of whether the assessee is regarded as a Trust or an AOP the doctrine of diversion at source by overriding title will apply so as to render the amount as not being taxable as the assessee's income. 8.2.2 The assessee submits that there is a diversion of income by overriding title for the following reasons: - (i) Series A1/A2/A3 Pass Through Certificate is defined in the Trust Deed as evidencing an undivided share in the right and the beneficial interest of the holder in the Trust Property, consisting of the Loan, Interest and other benefits, which is clear evidence that charge is created as the PTC holders have a direct interest in the property, which are the receivables from Yes Bank. Therefore, there it is a clear case of diversion at source by overriding title. The Recital A of the Deed of Assignment also states that the PTC's represent undivided interest of the holder of the PTC in the receivable. (ii) As per clause (ie) of Securities Contract (Regulation) Act, 1956, a PTC is an instrument issued by a SPV (assessee, in this case) which possesses any receivable (in Loan of Yes Bank) assigned to the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (107 ITR 776) (SC) (iv) CIT vs. A. Tosh Sons (P.) Ltd. (Cal.) (166 ITR 867) (v) CIT vs. Raja Ram Jaiswal (All.) (195 ITR 834) 8.3 Per contra, the learned senior standing counsel for Revenue, relying on various judicial pronouncements, emphatically contested the assessee s claim of diversion of income by overriding title. It was submitted that the interest income is received by the assessee and then the same is paid to the PTC holder and therefore the assessee's case is not one of diversion of income at source by overriding title, but one of application of the income and therefore, the income cannot be said to be diverted at source. In support of this contention, the learned Senior Counsel of Revenue referred to the Information Memorandum showing the inflow and outflow of funds and the bank statements reflecting the receipts credited in the accounts of the assessee and then given to the PTC holders. Reference was also made to the return of income for A.Y. 2009-10 to argue that the assessee had added distribution to beneficiaries as a line item and the full amount of Profit before Tax was shown as distribution. On this basis, it was argued by Revenue that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first transaction where a part of the rent payable to the lessor was to be paid to a trust. This case is factually different and accordingly not applicable. (iii) Provat Kumar Mitter vs. CIT 41 ITR 624 (SC) The facts in the case on hand are clearly different from the cited case, as the PTC holders have an undivided proportionate interest in the asset i.e. the receivable and have paid consideration for acquiring the same. (iv) K.A. Ramachar vs. CIT 42 ITR 25 (SC) The Hon'ble Apex Court had concluded that income was not diverted by overriding title on the specific wording of the document that the amount was to be paid by the assessee from the income of the assessee and therefore the cited decision is not applicable in the present case on hand. (v) CIT vs. Sunil J. Kinariwala 259 ITR 10 (SC) This decision turned on its peculiar facts and is not applicable to the case under consideration. (vi) Associated Power Co. Ltd. vs. CIT (218 ITR 195) (SC) In this case the Hon'ble Apex Court held that there was no diversion of income as the assessee is in control of the money and merely because restriction was put on use of the money could not make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders. PTC is defined as an instrument issued by a SPV (the assessee in this case) which possessed any receivable assigned to the assessee and acknowledging the beneficial interest of the investors in the receivables. In the context of exposure norms for investment in PTCs, the RBI Guidelines state that the counterparty for the investor in the securities would not be the SPV but the underlying assets (receivables in this case) thereby indicating a direct link between the PTC holders (investors) with the receivables. 8.5.3 The contentions of the Revenue are based on the fact that the moneys are received by the assessee trust and then passed on to the PTC holders. As held by the Hon'ble Apex Court in the case of CIT vs. Tollygunge Club Ltd. (supra) every receipt in the hands of the assessee need not be its income and it is only when it bears the character of income at the time when it reaches the hands of the assessee that it becomes exigible to tax. In the case on hand, even at the initial stage, even before the money flows to the assessee, it was always clearly intended to be passed on to and only to the beneficiaries, i.e., the PTC holders in proportion to their interest i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are as under: - (i) An AOP is constituted when people join in common purpose or common action, the object of which is to produce common income, profits and gains. On this issue itself, the assessee trust will not qualify for AOP, even if it is considered as an invalid trust. (ii) In the case on hand, the mutual funds have not joined in common action. All the mutual funds have independently applied for and subscribed to the PTCs and therefore, they do not form an AOP. Normally all the members have a share in the AOP's income. Here the income is to be received by different mutual funds as per each individual contract. (iii) The contributors wishing to subscribe to the PTCs have to make an application to the assessee and the allotment of PTC is at the discretion of the assessee. Therefore, there can be no question of mutual funds coming together , since even after making an application there is no certainty of being allotted a PTC. (iv) The fact that the mutual funds can transfer the PTCs would show that they have not come together to join in common purpose, but each one has individually decided to invest and can transfer the PTC's of its own accord in so far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the alleged AOP having any taxable or even non-taxable income does not arise. 9.3 Per contra, the main contention advanced by learned Senior Standing Counsel of Revenue is that all the players knew things in advance and the very fact that they have completed all the actions and documentations in very few days show that they have all worked together, in a concerted manner, to earn income from a business adventure. . 9.4 In Rejoinder to Revenue s contention the assessee's submission is that the stand of the Revenue is based on surmises and conjectures, without any basis. For making an investment decision, the mutual funds had only to decide whether the rate of interest of 9.18% was a reasonable rate of return for their investment or not. On the issue of the activity being in the nature of business, it was submitted that in the present case, none of the attributes of trade is present. The assessee (i) receives fixed income, akin to bank interest; (ii) the assessee is holding on to the asset till maturity, with no intention what so ever to resell the asset; (iii) the interest received is immediately paid over to the contributors (Mutual Funds) as mandated in the Assig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing held that the AOP is constituted by Yes Bank Limited (originator), the Seven Mutual fund (PTC Holders) and IL FS Trust Co. Ltd. ought to have quashed the assessment made by the AO on the AOP constituted by the Seven Mutual fund (PTC Holders) and IL FS Trust Co. Ltd. b. The CIT(A) failed to appreciate that once he has come to the conclusion that the members of the AOP is not the same as what has been treated as the members of the AOP by the AO, the assessment made by the AO ought to be quashed as the said assessment is on a non existing entity. 10.2.1 In this ground the assessee contends that the assessment order for A.Y. 2009-10 showing the status of the appellant as AOP is invalid. It is submitted that the assessment order holding the assessee to be an AOP is invalid, when the return of income filed by the assessee was not in the status of AOP. Assailing the action of the AO and learned CIT(A) in holding the assessee as AOP and assessing it in such status, the learned senior counsel of the assessee contended that the AO and learned CIT(A) do not have the jurisdiction and powers to change the characterization of the head of income of the assessee as AOP when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessment order has stated that the assessee would be treated as a Trust , in the event the status as AOP was held to be wrong. It is the contention of the assessee that it is not permissible for the AO to pass an assessment order, characterizing the assessee under to different heads, i.e. as an AOP and also as a Trust since they would be two separate assessees and such dual classification is not tenable. The learned CIT(A) ought to have held that the assessment order is bad in law as the assessment has been made on the AOP and in the alternate as a Trust. 10.3.1 Per contra, on the change of status of the assessee by the AO, the learned standing counsel for Revenue contends that the return must be treated as filed, i.e. in the status of AOP. It was submitted that if there was no ITR Form available for the status of Trust then the assessee should not have filed return of income. It was further contented that if the status of the trust is that of its beneficiary, then the Form applicable to beneficiary should have been filed. It was also submitted that the status of the assessee cannot be of individual, as the status of trust depends on status of beneficiary. 10.3.2 On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The CIT(A) failed to appreciate and ought to have held that: i. The Trust not being a corporate entity is free to accrue its income either under the cash or mercantile method and that mercantile method is not mandatory in law; and ii. Even under the mercantile method, the income by way of interest on receivables accrues as and when it is due and not on day to day basis. d. The Appellant prays that the gross interest as computed by the CIT(A) amounting to ₹ 238428493/- be reduced to a sum of ₹ 214972490/- as disclosed by the Appellant in its return and accordingly, the enhancement of ₹ 23456003/- be deleted. 11.2.1 In the course of appellate proceedings, the learned CIT(A) observed that the interest receipts have not been accounted for as per the accrual concept, due to which the interest income accruing in March, 2009 has not been accounted for. The learned CIT(A) issued an enhancement notice and added the interest income pertaining to the period March 2 to March 31, 2009 amounting to ₹ 23,84,493/-. 11.2.2 Before us, the learned Senior Counsel for the assessee submitted that under the terms of the loan advanced by Yes Bank to HPCL, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Hon'ble Supreme Court in the cases of CIT vs. Shri Goverdhan Ltd. 69 ITR 675 (SC) and Morvi Industries Ltd. vs. CIT 82 ITR 835 (SC). 11.3.2 Revenue further contended that the decision of the Hon'ble Bombay High Court relied by the appellant in the case of Credit Suisse (Department s paper book Vol. II, pg. 227 to 234) was not applicable as the present case is not that of securities, as was the case before the Hon'ble High Court. According to Revenue, the decision of the Hon'ble High Court applies to interest on securities and would not be applicable to interest on loan. 11.4.1 In rejoinder to the averments by Revenue, the learned senior counsel for the assessee countered the claims of Revenue, stating that the concerned para 3.5 of the Loan Agreement has been misunderstood. It was submitted that this para only gives the basis to compute the interest and it does not say anywhere that interest would accrue on day to day basis. The import of para 3.5 which stipulated that interest was to be computed on the number of days basis using 365 days as a year basis was that interest for different months would be different depending on the number of days in month, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir investments on the very next day. In view of the above clear provisions laid out in para 3.5 of the Loan Agreement and Deed of Assignment, we are of the considered view and hold that it is crystal clear that the interest for a particular month accrues on the first day of the next month as laid out in para 3.5 of the Loan Agreement and recital in the Deed of Assignment. Accordingly, ground No. VI of assessee s appeal is allowed. 12. Ground No. VII: Disallowance of expenses on accrual basis (if enhancement is upheld) 12.1 In this regard assessee has raised the following grounds: - a. CIT(A) erred in not allowing expense by way of interest / return on investment payable to the PTC holders on the same basis as applied by him for charging to tax the interest income on receivables. b. The CIT(A) failed to appreciate and ought to have held that: i. Whatever income is receivable by the Trust is all payable by the Trust to the beneficiaries; and ii. There cannot be double standards for charging of income and for allowance of expense. c. The Appellant prays that if enhancement of income by way of interest on receivables is upheld, then the correspond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT [284 ITR 323 (SC)] wherein it was held that After filing original return, further deduction was claimed through a letter - no revised return filed - Assessing Officer cannot entertain the claim . b) The deduction has been allowed based on various additional submissions made during the course of appellate the proceedings which should have been remanded to the assessing officer for his verification as provided in Rule 4 of the IT Rules 1962. However, no such exercise has been carried out before entertaining the claim of the assessee made during appellate proceeding, which is not in consonance with rule 46A of the IT Rules. (2) Without prejudice to the above, the Ld. CIT(A) grossly erred in allowing deduction of ₹ 48,86,795/-, comprised in the sum of ₹ 20,61,55,310/- on the ground that the same represented premium allowable as an expense even though it formed part of total consideration of ₹ 300,55,82,700/- paid for purchasing loan of ₹ 300 crores from Yes Bank Ltd. as capital asset. (3) Without prejudice to the above, the Ld. CIT(A) grossly erred in allowing deduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate authorities additional grounds in terms of additional claims not made in return filed by it. The Bombay High Court also in the case of Ahmedabad Electricity Co. Ltd. Vs. CIT 199 ITR 351(Bom) held that the Tribunal had jurisdiction to permit additional grounds to be raised before it even though these might not have arisen from AAC's order, so long as these grounds were in respect of subject matter of entire tax proceedings. The Courts have also upheld admission of additional grounds in the following cases: CIT Vs. S. Nelliappan (66 ITR 722 (SC) Ashok Vardhan Birla Vs. CWT (208 ITR 958 (Bom) 7. The Hon'ble ITAT Mumbai in the case of Pradeep G. Vora vide ITA No. 2187/Mum/2006 pronounced on 30.05.2014 examined the issue of admission of additional ground in detail vide para Nos. 3.1, 3.2 and 3.3 of the order. In paragraph No. 3.1, it is held that the power of the Tribunal to allow an additional plea/additional evidence originates from the principle that substantial justice should not suffer because of non consideration of an additional ground or an additional evidence. The Hon'ble Tribunal vide para 3.3 concluded as under: We would like t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 1st November, 2013 Additional G. No. 2 and Additional G. No. 3 filed by the ITO 3 17th July, 2014 DPB Vol. III written submissions filed by the CIT-DR wherein at Para 4, Pg. 2 Revenue submitted that Original G. No. 1 no to be pressed and it also mentioned that only G. No. 3 to be pressed which by implication means Additional grounds No. 2 is also not pressed. 4 14th January, 2016 RA handed over Additional G. No. 4 dated 14 th January, 2016 5 28th September, 2016 RA orally urged that G. No. 1 and Additional Ground No. 2 of the Department Appeal are not pressed by reading the written submissions dated 17th July, 2014. 6 29th September, 2016 RA orally requested to modify Additional G. No. 3 7 3rd October, 2016 The Modified Additional G. No. 3 dated 30 th September, 2016 was filed by the Department with further modifications made in ink after the verification by the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
