TMI Blog2020 (9) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... ervations, we are of the considered view that the CIT(A) had rightly dislodged the aforesaid view of the A.O, and in the totality of the facts had correctly observed that the assessee is a valid trust. Holding the trust as a non-revocable trust - HELD THAT:- No hesitation in observing that the income therein arising has to be brought to tax in the hands of the SR holders, i.e as per the provision of Sec. 61 to 63 of the Act. Insofar, the view taken by the A.O, that as the revocation of the contributions is conditional upon the consent of the contributors holding 75% of the units, we are afraid that the same would not render the contributions as irrevocable. Our aforesaid view is fortified by the judgment in the case of Behramji Sorabji Lalkaka Vs. CIT [1948 (3) TMI 41 - BOMBAY HIGH COURT] . As observed by the Hon ble High Court that the words revocable transfer are well understood in law and a transfer does not cease to be revocable because the power of revocation cannot be exercised by the settlor without the consent of the named individuals or any of them. As observed by the Hon ble High Court, a transfer is nonetheless revocable even if it can be revoked only with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. CIT(A) in the totality of the facts involved in the case before us, had rightly concluded, that as the principle of diversion of income at the source by overriding title is attracted, therefore, the receivable of NPAs were the income of the SR holders, irrespective of the fact that the same had flowed through the books of accounts of the assessee trust. Holding assessee trust as an indeterminate Trust (discretionary trust) - HELD THAT:- We are in agreement with the view taken by the CIT(A) that as neither any discretion have been given to the trustee to decide the allocation of the income every year, nor any right is given to the beneficiary to exercise an option to receive the income or not each year, therefore, it cannot be held that the share of the beneficiaries were indeterminate. In our considered view, as the names of the beneficiaries of the assessee trust and their shares were known since inception i.e at the time of the formation of the trust as is evident from the minutes of the meeting dated 27.12.2007, therefore, it can safely be concluded that the assessee trust is a determinate trust i.e a non-discretionary trust. Accordingly, finding no infirmity in the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 57,56,60,600/-, made on account of surplus from income and expenditure account holding that it is a result of write-back of impairment provision of ₹ 59,76,25,576/-, without appreciating the fact that there was interest income of ₹ 23,90,228/- and other (income of ₹ 4598/- and out of total assets of ₹ 460,OO,52,378/- assets of ₹ 96,91,64,749.71 were realized during AY 2013-14 and cumulatively over the years assets of ₹ 248,60,41,676.40 were realized while the acquisition expense during the year under consideration was merely ₹ 223.14? 4. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in not appreciating the action of the AO in holding that the assessee trust is not a revocable trust since contributors have practically no control over the income arising out of the activities of the fund and the contribution can be revoked only with the consent of the contributors holding 75% of the units and thus the assessee will not be eligible for the benefit of section 61 to 63 of the Income Tax Act, 1961 not being a revocable trust. The Ld. CIT(A) has also erred in not appreciating the action of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee trust that was set up for the purpose of liquidating/recovering/realizing the non-performing assets (NPAs) which were taken over by the assessee was registered under Sec. 3 of the SARFAESI Act, 2002 by the RBI, and had the following partners/members/shareholders: Sr. No. Name of the Shareholders Percentage of equity shares held 1. Asset Reconstruction Company (India) Ltd. 5% 2. ICICI Bank Ltd. 95% Total Shareholding 100% As observed by the A.O, the assessee derived income from assets reconstruction activity and handling of non-performing assets of banks/financial institutions. After perusing the records the A.O called upon the assessee to explain as to on what basis it had claimed its receipts as not exigible to tax. Also, the assessee was directed to put forth an explanation as to why the income/loss derived by it may not be taxed in its hands in the status as that of a trust/AOP. In reply, it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing from revocable transfer shall be assessed in the hands of the contributors pursuant to section 61 of the Act. As per Section 61 all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. For the above purpose, section 63 defines revocable transfer and read as follows: For the purposes of sections 60, 61 and 62 and of this section, - (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 reassume 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. (Emphasis supplied by us) On a conjoint reading of all the provisions of section 61 to section 63, it is evident that, in case of revocable transfer of the assets by the transferor, the income is taxed in the hands of the transferor. This is based on the reasoning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... validly executed, and (b) The Trust Account is duly established. 5. 1.4 This Deed shall take effect on the Commencement Date and continue in full force and effect until full redemption/extinguishment of all the Security Receipts issued pursuant to this Deed, in accordance with the terms. 5.2 Revocation of contributions 5.2.1 The Security Receipt Holders shall be entitled to revoke the Contributions made by them, at any time during the term of this Deed, in accordance with the terms and conditions contained therein, for any reason, including but not limited to circumstances resulting from any adverse tax consequences (for either the Trust or the Security Receipts Holders) or any direction of any Statutory Authority, provided that no such revocation shall take effect unless the consent of the Security Holders holding security Receipts representing not less than 75% of the total face value of the then outstanding Security receipts, issued pursuant to this Deed has been obtained, in this behalf, provided that a notice of not less than 60 days of the intention to revoke the contribution is given to the Trustee. 5.2.2 In the event that the Trustee, at any t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociate means, according to the Oxford Dictionary, to join in common purpose, or to join in an action. Accordingly, an association of persons is one in which two or more persons join in a common purpose or common action to earn the profit. The assessee has been incorporated as a trust under the provisions of the SARFAESI Act, 2002 read with RBI Guidelines. Thus, it is a statutorily formed entity. Relevant extract of the SARFAESI Act, 2002, is enclosed herewith. Accordingly, it is submitted that the assessee is a trust and not an AOP. The trust cannot be called an AOP as there is no inter se agreement between one contributory/beneficiary and the other contributory/beneficiary as each of them enter into separate contribution arrangement with the assessee. These Trusts have been formed under SARFAESI Act 2002 with the trustee as Arcil who has professional expertise in dealing with management and realisation of Non Performing Assets. Further, beneficiaries do not have any say on the activities carried on by the trustee in managing the trust. The beneficiaries have only a passive role and are only entitled to the distribution of the recovery made by trust. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction and the artificial device created by it to generate income and avoid taxability, while for the substance of the transaction was that the assessee had carried on business from the contributions of various beneficiaries with a common motive to earn income, which proved beyond doubt that in sum and substance the assessee was an AOP. On a perusal of the assessment order, we find, that the A.O had rejected the contentions of the assessee by summing up as under: 1. Whereas in the case of the trust, settlor, contributor and beneficiaries, all have to be independent and distinct. In the case of the assessee, the contributors are the beneficiaries themselves, therefore, the assessee cannot be treated as a trust, but as an AOP having members in the form of QIBs and financial institution. 2. After its creation, the so-called trust entered into contribution assignment through offer document dated 27.12.2007 for the sole purpose of taking NPAs for sale at a profit. Such entity can at best be classified as an AOP created jointly by several persons for earning profits. 3. Capital contribution is a revocable transfer by the transferors, but the income arising out of the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiple issues on the basis of which the A.O had rejected the claim of the assessee and brought its surplus income to tax, as under: (A) The trust was a colourable device to evade taxes: (i) On a perusal of the records, we find that the A.O had observed, that in a trust the three constituents i.e settlor, contributors and beneficiaries should be independent and distinct, whereas in the instant case the contributors were themselves the beneficiaries. Accordingly, the A.O held a conviction that the assessee had created a smokescreen in the name of trust with an ulterior motive to evade taxes. Rebutting the aforesaid view of the A.O, we find that the CIT(A) had observed as under: 8.3 I have carefully considered the aforesaid arguments of the Ld AR and find merit in it. Section 9 of the Indian Trust Act. 1882 defines beneficiary as 9. Who may be beneficiary Every person capable of holding property may be a beneficiary. Section 7 of the Indian Trust Act, states the person who can create trust as follows: 7. Who may create trusts A trust may be created- (a) by every person competent to contract, and (b) with the permission of a princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settlor of the trust. In the backdrop of our aforesaid observations we concur with the CIT(A) that the observations of the A.O that the assessee trust was not a valid trust, for the reason, that its contributors and beneficiaries were the same, clearly militates against the express provisions of the Indian Trust Act, 1882, and thus, cannot be accepted. As a matter of fact, we find that as observed by the CIT(A), all the necessary ingredients for the formation and existence of the trust had been fulfilled, and the RBI guidelines had duly been followed by the assessee trust. Interestingly, we find that in case the claim of the A.O that the assessee is not a valid trust and its creation was only a fa ade for evasion of taxes was to be accepted, then it would be imply that the trust does not exist at all. If that be so, then we concur with the CIT(A) that there would be no legal sanction to treat the trust as an AOP, as had been advocated by the A.O. Under such a situation, the only transaction that would subsist will be the direct investment by the beneficiaries in the financial assets, and therefore, the question of assessing the assessee trust as an AOP or under any other head of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 ) i t , 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. In this regard, I agree with the Ld. AR that the provisions of the I.T. Act nowhere state that if the transfer is 'explicitly revocable, the provisions of sect ion 61 and sect ion 63 would not apply. I have also careful ly gone through the relevant clauses of the trust deed, as highlighted by the Ld. AR. The said clauses read as under- 5. PROVISIONS RELATING TO SECURITY RECEIPT HOLDERS 5.1 Contributions 5.1.1 Upon the making of the Contribution, and within a period of ninety (90) days from the date of closure of the respective issue of Security Receipts under the relevant Offer Document, the Trustee shall credit the Depository Account of each Security Receipt Holder with, or issue physical certificates in the form prescr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Holders shall be obliged to revoke their Contribution. 5.2.3 In the event that the Contributions are revoked in terms of this Section 5.2, the Trust Fund shall automatically stand transferred and shall automatically and without any further act deed or writing operate as an assignment vesting the Trust Fund jointly in favour of each of the Security Receipt Holders (in proportion to their Contributions) or to any person designated by the Security Receipt Holders in this behalf provided that the Trustee has received payment of all amounts due or accrued to the Trustee in full, in accordance with the terms of the Deed. Upon such transfer all the provisions of the relevant Financing Documents and the Assignment Agreements shall apply mutatis mutandis to the Security Receipt Holders or their designee, and the Security Receipt Holders or their designee shall be entitled to all rights and remedies of the Trustee and shall be obliged to perform all its duties and obligations under the relevant Financing Documents and the assignment Documents and the assignment Agreements, as if the Security Receipt Holders or their designee were party to the Financing Documents and the Assignment Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Army Navy Trust (supra) we hold that the assessee Trust is a revocable Trust and contribution by beneficiaries is a revocable transfer. Having held 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. 9.6 Considering the fact as highlighted above and respectfully following the decision of superior authorities, it is held that the appellant trust is a revocable trust and the provisions of section 61 to 63 of the I.T. Act will be applicable to it. Hence, contribution by beneficiaries is a revocable transfer implying that the income will be taxed in the hands of the beneficiaries and not the appellant trust. We have given a thoughtful consideration to the observations of the lower authorities, and concur with the view taken by the CIT(A) that the assessee trust is a revocable trust, and thus, the provisions of Sec. 61 to 63 of the Act would be applicable to it. On a perusal of Sec. 61 of the Act, we find that the same therein provides that an income arising to a person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act would be applicable to it. (C) Status of the trust as that of an AOP: As is discernible from the assessment order, the A.O had observed that since the beneficiaries had associated and joined hands for a common purpose or action through offer dated 27.12.2007 with QIBs for the sole purpose of acquisition of NPAs, and therein transferring those at a profit with a motive of earning income, profits and gains out of the same, therefore, they were liable to be assessed in the status as that of a AOP. The CIT(A) dislodging the aforesaid view of the A.O had observed as under: 10.3 Upon careful consideration of the facts on record and various judicial decisions, I find that a common purpose or a common action is the core strength and foundation for an AOP to come into existence with the sole objective to earn common income and profit. The Ld. AR has pointed out that there is nothing on record to suggest that the beneficiaries have agreed for any common objective. The beneficiaries do not have any control on the activities carried on by the trustee in managing the trust . The beneficiaries make investment based on the offer documents and on the basis of the investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any control over the activities carried on by the trustee in managing the trust, had made their respective investments based on the offer documents, and on the basis of their investments made in the trust were allotted the SRs which represented their undivided and proportionate interest in the corpus of the trust. We are unable to comprehend as to on what basis the A.O had concluded that the motive behind creation of the trust was the income earning asset reconstruction activity and handling of NPAs. On a perusal of the records, we find that the two beneficiaries viz. (i) ARCIL; and (ii) ICICI Bank Ltd., had made investments based on the offer document separately, and not jointly, on the basis of which they had been allotted the security receipts (SRs) representing their undivided and proportionate interest in the corpus of the trust. In our considered view, as the A.O had failed to place on record any material which would even remotely suggest that there was a concerted effort by the beneficiaries to earn income jointly, therefore his unsubstantiated view that the assessee was to be treated as an AOP cannot be sustained and has rightly been vacated by the CIT(A). (D) Taxability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant trust. We have deliberated at length on the aforesaid issue and are unable to persuade ourselves to subscribe to the view taken by the A.O. In our considered view, at the initial stage, even before the money flows to the assessee, it was always intended to be passed on to and only to the beneficiaries, i.e the SR holders in proportion to their interest in the corpus of the assessee trust as per the trust deed and offer documents. We are unable to accept the claim of the A.O that as the amounts are first realized/received in the books of the assessee trust, and then passed on to the SR holders, viz. ARCIL and ICICI bank, the same therefore was liable to be assessed as the income of the assessee trust. We concur with the view taken by the CIT(A) that merely because the realization flows through the assessee, it would not mean that it is the income in the hands of the assessee. As observed by the Hon ble Supreme Court in the case of CIT vs. Tollygunje Club Ltd. (107 ITR 776), every receipt in the hands of an 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 eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved from the provisions of the trust deed that the beneficiaries are SR holders which are known at all times. The Ld AR has brought the attention of undersigned the clause 5.1.2 of the Trust Deed. The same is reproduced herein. 5.1.2 Upon the making of the Contribution, each Security Receipt Holder shall be entitled to the undivided right, title and interest in the Trust Fund evidenced by the Security Receipts issued to it, on the terms and conditions contained in the Security Receipts and the relevant Offer Document. Thus, it is clear that each SR holder shall be entitled to the undivided right, title and interest in the Trust Fund evidenced by the SRs issued to it. Hence, the shares of the beneficiaries are determinate at the time of drawing the Trust deed. As stated above, the position as to whether the beneficiaries are identifiable or not and whether their shares are known or not are required to be seen at the time of formation of the trust. In the appellant case, the names of beneficiaries of the appellant trust and their shares are known at the time of formation of the trust as evident from the minutes of the meeting dated 27th December, 2007. Hence, in my considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any reasoning as to why the write-back of impairment provision was being treated as income of the assessee trust, the A.O had concluded that the same was to be assessed as the income of the assessee. In fact, as observed by the CIT(A), even in the remand report no justification was given by the A.O as to how the write-back was being treated by him as the income of the assessee trust. On the contrary, the assessee had assailed the aforesaid treatment of the impairment provision of ₹ 59,76,25,576/- as its income by the A.O. It was the claim of the assessee that it had merely passed a book entry for reversal of impairment provision created in the earlier years in respect of the financial asset i.e the loan taken from the banks, and the same had no bearing on its income for the year under consideration. In fact, it was the claim of the assessee that in case the income was to be taxed in the hands of the assessee trust, then the reversal of the provision for impairment of ₹ 59,76,25,576/- was also required to be reduced from the computation of income as the same represented a mere book entry , and was not in the nature of any real income . In sum and substance, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the Ld. AR such provision of diminution in value of asset was never allowed in any of the years. This is evident from the fact that the appellant has not claimed any carry forward of losses in any of the earlier years. The only conclusion that can be drawn from it is that the same would not be taxable in the year of reversal. The income and expenditure account of different years reflecting provisions for impairment of asset as brought on record are: Assessment year (Provision created/write back) A.Y. 2008-09 - A.Y. 2009-10 - A.Y. 2010-11 (944,554,938) A.Y.2011-12 (970,821,329) A.Y.2012-13 (495,945,440) A.Y.2013-14 597,625,576 Total (913,696,131) 14. 8 In view of the above, it is held that the provision written back of Rs . 59,76,25,576/- in respect of the impairment of the asset will not partake the character of taxable income of the appellant trust . This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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