Revocable trust with identifiable beneficiaries cannot be taxed as an Association of Persons for asset reconstruction income.

A trust constituted under the SARFAESI framework for acquisition and reconstruction of non-performing assets was found to have identifiable Security Receipt holders with known shares from inception. Because the beneficiaries contributed separately, had no inter se arrangement, and the arrangement was treated as revocable, the statutory rules on revocable transfers and beneficiary taxation applied. The Tribunal rejected assessment of the trust as an Association of Persons and held that the income from realised assets could not be taxed in the trust's own hands merely because it carried on asset reconstruction activity. Income was therefore taxable in the hands of the Security Receipt holders.

---

---

Issues: Whether the assessee trust could be assessed as an Association of Persons, and whether the trust income was taxable in its own hands or as a pass-through in the hands of the Security Receipt holders under the provisions governing revocable transfers and beneficiary taxation.

Analysis: The Trust was constituted under the SARFAESI framework and RBI guidelines for acquisition and reconstruction of non-performing financial assets. The beneficiaries were the Security Receipt holders, their shares were ascertainable from inception, and there was no inter se arrangement among them beyond their separate contribution agreements with the Trust. The contributions were treated as revocable within the meaning of the Act, and the income from realised financial assets was distributed to the holders after meeting expenses. In these circumstances, the statutory scheme governing revocable transfers and beneficiary taxation applied, while the treatment of the entity as an AOP or as an indeterminate trust was not accepted. The Tribunal followed its earlier coordinate bench decision on identical facts and held that the income could not be brought to tax in the hands of the Trust as an AOP.

Conclusion: The assessee trust could not be assessed as an AOP, and the income was taxable in the hands of the Security Receipt holders rather than in the hands of the Trust.

Final Conclusion: The Revenue's challenge failed because the Trust was accepted as a valid revocable trust with identifiable beneficiaries and known shares, so the impugned assessments were not sustained.

Ratio Decidendi: Where a trust has identifiable beneficiaries with known shares from inception and operates as a revocable arrangement, its income is governed by the provisions applicable to revocable transfers and cannot be assessed as the income of an Association of Persons merely because the Trust carries out investment or asset reconstruction activity.

---