2022 (1) TMI 1467 - AT - Income Tax

Offshore trust assets cannot be taxed in hands of resident Indian trustee without proof of contribution or benefit

Shri Vilas Waman Katre Versus DCIT-Central Range-7 (1), Mumbai

ITAT Mumbai held that offshore trust assets and bank account credits of an independent company incorporated outside India cannot be taxed in the hands of ... Beneficial ownership of assets/corpus of the Trust - assets and credits in the bank account of an independent company incorporated outside India treated or held to be belongs to the Assessee - Real owners of bank accounts in foreign jurisdictions pertaining to offshore entities where assessee is declared as ‘beneficial owner’ for anti-money laundering HELD THAT:- We observe that the Income Tax Act does acknowledges the existence of oral trusts within the framework of Section 160(1)(v) read with section 164A, as well as the Indian Trusts Act, 1882. Offshore trust structures are governed by laws of incorporation of the respective countries in which they are incorporated, which in this case, are governed by the laws of British Virgin Islands. The coordinate Bench in the case of Yashovardhan Birla [2021 (1) TMI 381 - ITAT MUMBAI] has held that offshore trusts / entities incorporated in offshore jurisdictions are liable to be taxed in their respective offshore jurisdictions. With regard to the signatory powers and bank records of the Trust Vehicle, the matter is clearly settled in the case of Yashovardhan Birla [2021 (10) TMI 158 - ITAT MUMBAI] also in the matter of Kamal Galani [2020 (10) TMI 1077 - ITAT MUMBAI] and Shri Jatinder Mehra [2021 (7) TMI 325 - ITAT DELHI] and where they have concluded inter alia that bank accounts in foreign jurisdictions pertaining to offshore entities cannot, merely because the assessee is declared as ‘beneficial owner’ for anti-money laundering, purposes be treated as belonging to the assessee. Therefore, on the basis of declaration of beneficial ownership in the bank account opening form, it cannot be concluded that the bank account belongs to the Assessee and therefore the credits to the bank account cannot be taxable in the hands of the Assessee. As not disputed that the Assessee, a resident Indian, who accepted the obligation associated with the office of trustee, arising out of an abiding familial relationship with the Settlor, which was revoked at the discretion of the Settlor six years later in 2012. AO has not brought out any evidence of the Assessee having international transactions relating to the bank account of the Trust Vehicle or having contributed to the corpus/funds in the bank account of the Trust Vehicle nor any allegation or material to the effect that the Assessee has received any funds or any other benefit. AO has also not established nor contented the Trust Vehicle or its underlying entity is a bogus or fictitious entity, nor the case of the Assessing Officer that the Assessee was the controlling person of the Trust Vehicle or its underlying entity or in any manner a contributor to the corpus/assets of the Trust Vehicle from any source in India. Therefore, sums lying in its bank account and/or its income from investments, are not subject to tax in the hands of the Assessee. As well settled law that in the case of additions of similar nature where the onus of proof to establish the (beneficial) ownership particulars of the non-resident Trust Vehicle, will always rest with the Revenue. The Revenue cannot attempt to shift the onus upon the Assessee, including through calling upon an assessee to offer negative proof. Nature of additions that have been made u/s 56, 68 and 69 - Hon’ble Supreme Court has clearly laid out the Principles of strict interpretation of a taxing statute in the case of PCIT v. Aarham Softronics [2019 (2) TMI 1285 - SUPREME COURT] and therefore arbitrary invocation of ss. 56(1), 68 and 69 of the Act cannot be resorted to. In the case of the Assessee, the explanations about the nature and source of sum so credited can proper only be offered by the non-resident entity in whose books/bank accounts such cash credit recorded. AO has applied Section 68 to sums lying to the credit of the bank account of a non-resident entity as cash credit in the hands of the Assessee. The Assessee has also pointed out that in any event, without prejudice, the opening balance of sums lying to the credit of the non-resident entity cannot be taken into account for computing taxable income of the Assessee under s. 68 for assessment years 2009-10. Under Section 69 of the Act, investments not recorded in the books of accounts of the Assessee, but in relation to which the Assessee has ‘beneficial ownership’, has been brought to tax in the hands of the Assessee. Further, the scope of Section 69 cannot be extended to bringing to tax investments of a nonresident entity in the hands of a resident individual, in the absence of material to support the inference of ‘beneficial ownership’. In our view, the additions made u/s 68 / 69 fail the test of taxability under those sections and therefore cannot be upheld. Thus, we hold that the credit to the bank account belonging to Eagle Ridge Services Limited, an independent entity registered outside India and income as well as the assets of that company cannot be brought within the purview of income tax in India in the case of the Assessee particularly when the assessee was acting as a trustee holding one share of the company again holding the shares in the capacity of trustee. All the additions made in the capacity of holding as trustee of offshore trust and nominee shareholder are hereby deleted. Appeal filed by the assessee is allowed. Issues Involved:1. Validity of reopening of assessments under Section 147/148 of the Income Tax Act.2. Taxability of income and assets of a non-resident trust vehicle in the hands of the Assessee.3. Applicability of Sections 56, 68, and 69 of the Income Tax Act on the Assessee.4. Principles of beneficial ownership and fiduciary capacity.5. Procedural fairness and adherence to natural justice principles.Issue-wise Detailed Analysis:1. Validity of Reopening of Assessments:The Assessee challenged the validity of the reopening of assessments under Section 147/148, arguing that the Assessing Officer lacked concrete evidence to believe that income had escaped assessment. The Assessee contended that the reopening was based on documents related to a foreign entity, Eagle Ridge Services Limited, and not directly linked to the Assessee. The requirement to disclose foreign assets was mandatory only from the Assessment Year 2012-13 onwards, and the Assessee argued that there was no failure to disclose any such assets for the years in question. However, the tribunal noted that the Assessee did not press this issue during the hearing, and thus, the grounds related to reopening were dismissed as not pressed.2. Taxability of Income and Assets of Non-Resident Trust Vehicle:The core issue was whether the income and assets of Eagle Ridge Services Limited, a non-resident entity, could be taxed in the hands of the Assessee. The Assessee was a trustee of a revocable offshore trust and argued that he held only a fiduciary role without beneficial ownership. The tribunal observed that the Assessee did not have beneficial ownership of the trust's assets, as the trust was governed by the laws of the British Virgin Islands and managed out of Singapore. The tribunal noted that the Assessee was neither a shareholder nor a director and had not received any income or benefits from the trust. The tribunal concluded that the income and assets of the trust vehicle could not be taxed in the hands of the Assessee.3. Applicability of Sections 56, 68, and 69:The Assessing Officer had invoked Sections 56, 68, and 69 to tax the income and assets of the trust vehicle as income of the Assessee. The tribunal emphasized the principles of strict interpretation of taxing statutes, noting that the invocation of these sections was arbitrary. Section 68 requires the credit of amounts in the books maintained by the Assessee, which was not the case here. The tribunal found no evidence that the Assessee had beneficial ownership of the investments or income of the non-resident entity, and thus, the additions under these sections could not be sustained.4. Principles of Beneficial Ownership and Fiduciary Capacity:The tribunal recognized the distinction between legal and beneficial ownership, noting that a trustee can have legal ownership but not beneficial ownership unless explicitly stated. The Assessee's role as a trustee did not confer beneficial ownership of the trust's assets. The tribunal referred to case law establishing that fiduciaries with narrow powers are not beneficial owners. The Assessee's fiduciary role, which ended in 2012, did not imply beneficial ownership, and the tribunal concluded that the Assessee could not be taxed on the trust's income or assets.5. Procedural Fairness and Natural Justice:The tribunal addressed the procedural aspects, noting that the Assessing Officer had not provided the Assessee with an opportunity to cross-examine relevant parties or documents. The tribunal emphasized the importance of following principles of natural justice and due process. The tribunal criticized the lower authorities for not adequately considering the Assessee's submissions and evidence, leading to an arbitrary assessment.Conclusion:The tribunal allowed the appeals partly, holding that the income and assets of the non-resident trust vehicle could not be taxed in the hands of the Assessee. The tribunal deleted the additions made under Sections 56, 68, and 69, affirming the Assessee's fiduciary role without beneficial ownership. The decision emphasized the need for strict interpretation of taxing statutes and adherence to procedural fairness.