2017 (10) TMI 676 - AT - Income Tax

Appellate Tribunal Confirms Trust Status Over A.O.P., Clarifies Tax Liability

ITO – 23 (1) (2), Mumbai Versus India Innovation fund The IL & FS Financial Centre

The appellate tribunal upheld the decision of the Commissioner of Income Tax (Appeals) that the appellant is a determinate trust under the Indian Trusts ... Treatment to the assessee as a determinate Trust or A.O.P - CIT (Appeals) held that the assessee is a revocable trust and not the A.O.P. - Held that:- We find that the Ld. CIT(A) was satisfied from the fact that the assessee possessing all the ingredients that constitute the assessee as a trust. The Ld. CIT(A) while coming to the conclusion had relied upon the order passed by Hon’ble ITAT in the case of M/s India Advantage Fund-VII [2014 (10) TMI 614 - ITAT BANGALORE ] wherein it has been held that the income earned by a fund set up as a revocable trust is to be taxed only in the hands of the beneficiaries as per the provisions of section 61 to 63. It was further held in the said order that the trust could not be regarded as an AOP, as the beneficiaries had not set up the trust, they had not come together with the object of carrying on investment in a mezzanine fund, which was the object of the trust and there was no inter se agreement between the beneficiaries of the fund. The Ld. CIT(A) while appreciating the facts of the present case has rightly held that the trust deed mentions that units shall be issued to the contributors who are entitled to the specific share of the profits. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Since the Ld. CIT(A) while deciding these grounds have relied upon the orders passed by Hon'ble ITAT in identical circumstances and even on the principle of consistency also, the Ld. CIT(A) has rightly held that the income from the contributions made by the beneficiaries of the trust is taxable only in their hands and not in the hands of the assessee. Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned Whether income of the assessee is taxable in the hands of contributors/beneficiaries as per section 161(1) of the I.T. Act, 1961, and not in its own hands in status of an A.O.P.? - Held that:- CIT(A) has categorically held that as per the facts of the case , the assessee was having ideal funds which were temporarily earning interest income, therefore Ld. CIT(A) after appreciating the facts of the case had concluded that such interest ought to be taxed under the head income from other sources. In support of its finding, Ld. CIT(A) relied upon section 161(1A) and held that this section does not create a charge of tax on the representative assessee, but only provides the rate of tax on its income where the same consists of business income and since it was held that the income is taxable in the hands of the contributors/beneficiaries, so the treatment of interest income as business income or income from other sources is not relevant. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld CIT (A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld. CIT (A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Decided against revenue Issues Involved:1. Determination of trust status vs. Association of Persons (A.O.P.)2. Taxability of income in the hands of contributors/beneficiaries vs. trust3. Classification of income from commercial lending businessIssue 1: Determination of Trust Status vs. Association of Persons (A.O.P.):The appeal by the revenue challenged the order treating the assessee as a determinate trust instead of an A.O.P. The Commissioner of Income Tax (Appeals) had held that the assessee is a revocable trust and not an A.O.P. The appellate tribunal examined the trust deed and contribution agreements, concluding that the appellant is a trust under the Indian Trusts Act, 1882. The tribunal referred to a previous ITAT decision and emphasized that for a trust to be determinate, it is sufficient if the trust deed specifies the beneficiaries and their shares. It was noted that the trust could not be considered an A.O.P. as the beneficiaries had not collectively set up the trust with a common investment objective. The tribunal upheld the CIT(A)'s decision that the income from contributions made by beneficiaries is taxable only in their hands, not the trust's.Issue 2: Taxability of Income in the Hands of Contributors/Beneficiaries vs. Trust:The revenue contested the CIT(A)'s ruling that the income of the assessee is taxable in the hands of contributors/beneficiaries under section 161(1) of the Income Tax Act, 1961, not in the trust's hands as an A.O.P. The tribunal reviewed the CIT(A)'s order, which determined that the interest income earned by the trust was to be taxed under 'income from other sources' due to the nature of the funds being temporarily invested. The CIT(A) relied on section 161(1A) to explain that this section does not create a tax charge on the representative assessee but only provides the tax rate on its income. As the income was deemed taxable in the hands of contributors/beneficiaries, the categorization of interest income as business income or income from other sources was deemed irrelevant. The tribunal found no reason to overturn the CIT(A)'s well-reasoned decision.Issue 3: Classification of Income from Commercial Lending Business:The revenue also challenged the CIT(A)'s decision that income received from a complex commercial lending business is not classified as 'Income from Business and Profession' but as 'Income from Other Sources.' The tribunal examined the CIT(A)'s reasoning, which concluded that the interest income from the temporary investments should be taxed under 'income from other sources.' No new facts or contradictory judgments were presented to challenge the CIT(A)'s findings. Consequently, the tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.In conclusion, the appellate tribunal affirmed the Commissioner of Income Tax (Appeals)'s decision on all grounds, determining the trust status, taxability of income, and classification of income from the commercial lending business. The appeal filed by the revenue was dismissed, and the order was pronounced on 4th August 2017.