2025 (5) TMI 2207 - AT - Income Tax

Tax additions deleting offshore family trust peak balance and Rs.57 lakh payment reversed after beneficiary and bank evidence shown

ITAT held that additions treating peak foreign-bank balance of an offshore family trust as assessee's undisclosed income were unsustainable and deleted ... Addition as undisclosed income of the assessee on the ground that money in the bank account of an off-shore non-resident trust with HSBC private Bank belongs to the assessee - whether the addition being the peak amount standing for F.Y. 2005- 06 of USD 2361551.79 in the bank account belonging to Chagganlal Suchak Family Trust (CSFT) in the various bank accounts of HSBC Bank, Geneva can be added in the hands of the assessee - HELD THAT:- Simply because there is a foreign bank account in the name of the trust and assessee is linked in the fiduciary capacity, how can addition be made once there are other facts and material on record that neither the source of the funds nor the ultimately destination of the fund has any direct or indirect link with the assessee. In none of the material found from the possession of the assessee which has been referred extensively by the ld. AO and ld. CIT(A) in their respective orders, there is any evidence that assessee had made investment through an undisclosed sources in the foreign bank account or had received the money at any point of time upto the date of search. Both the authorities have ignored the trust deed, list of beneficiaries, letter by the Swiss Federal Tax authorities which department itself has sought from the Swiss Government and the affidavit of Mr. Surykant Chagganlal Suchak who has clarified the source of beneficiaries of the fund and has categorically stated that the trust account in Geneva was closed in before 2012 and all the three brothers were principal beneficiaries of the CSFT and neither Mr. Dilip Thakkar nor Mrs. Indira Thakkar or their two daughters and the families have received any amount. He has given another affidavit and this SCS Family Trust was secured by his mother for the benefit of himself and his immediate family members and the funds which were received from Chagganlal Suchak Family Trust was invested in mutual funds as directed by him in that trust, he and his wife were the trustees, however, the said bank account also was closed and the entire funds were deposited to the beneficiaries for his wife Mrs. Dina Suryakant Suchak and his daughter Ms. Deepa Jaitha and another daughter Mrs. Anika and son Mr. Anish S Suchak. Another important fact which is that, there is ITAT order for A.Y. 1998-99 in the case of Suryakant Suchak who was UK citizen wherein the Tribunal while dealing with the issue of investment of Rs. 1.5 million GBP in State Bank of India's Resurgent India Bonds in October 1998, the Tribunal held that the assessee was a non-resident residing outside India since several decades, therefore, he qualifies the primary condition of being NRI individual for making the investment. Thus, it clearly shows that the source of funds in RIB was made by Mr. Suryakant Suchak. Accordingly, the source of funds was never made by the assessee or his wife. Once the source of funds is neither by the assessee nor he or his family were beneficiaries, we do not find any reason to hold that the peak balance in the foreign bank account should be added as taxable income of the assessee in India. Thus, incontrovertibly demonstrates that the bank accounts in question, held under the aegis of Chagganlal Family Trust were opened by non-residents, ostensibly and explicitly for the benefit of non-residents and the source of funds is irrefutably traced to non-residents and ultimately the accrual and aggregation of funds were repository/ credited in the accounts of non-residents. Hence no part of such deposits or peak balance can be taxed in the hands of the assessee in India. Accordingly, the addition made in the hands of the assessee is deleted. Addition of payment made to Mr. Jehil Ashok Thakkar, it has been stated that these funds were given to the nephew of the assessee towards compensation of value of flat as one of the flat belonging to the mother of the assessee which she was equally bequeathed to assessee and his brother Ashok Thakkar - From the perusal of the facts and material on record, we find that assessee's mother, Late Mrs. Snehila Jayantilal Thakkar in her will dated 01/11/2000 bequeathed her only residential flat in Mumbai equally to her two grand children, Mrs. Mitali Rohit Lakhanpal (daughter of assessee) and Jehil Ashok Thakkar (son of assessee's brother). The deceased mother's estate was bequeathed to HUF of Dilip Jayantilal Thakkar and HUF of Ashok Jayantilal Thakkar. This is clear from the contents of the 'will' given in the paper book at pages 145-147. Her 'will' also stated that either of her two grand children can acquire one half of the share as per the valuation of the flat at the time of her death. After her death on 03/02/2005, flat was valued by the Approved Valuer at Rs. 1,10,00,000/- and half of it (Rs. 55,00,000/-) plus compensation for late payment aggregated to Rs. 57,00,000/- which was paid to Ashok Jayantilal Thakkar through from Dilip Jayantilal Thakkar HUF in his mother's bank account and there by paid by cheque as legacy to Jehil Ashok Thakkar. Thus, it was submitted that the payment was made from the bank account of the assessee as Karta of HUF through declared sources hence it could be held that the payment made was from undisclosed sources. The assessee had also filed an affidavit of Mr. Jayhil Ashok Thakkar before the authorities below about the payment of Rs. 57,00,000/ -. Once assessee has given the source of funds as given above from his bank account, we fail to understand how the payment of Rs. 57,00,000/- remain unexplained. Accordingly, the addition made by the ld. AO is deleted. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether peak balances standing in foreign bank accounts maintained in the name of an offshore family trust can be treated as undisclosed income of the taxpayer when the taxpayer and spouse appear as trustees/authorized signatories and are alleged to have managed the trust's affairs. 2. Whether the described trust is an Indian trust (juridical person subject to Indian tax law) or a foreign trust, in light of the trust deed, stamp paper, administrative address, trustees'/residents' status and factual matrix. 3. Whether receipts by family members (legacy/maturity proceeds of Resurgent India Bonds) constituted distributions from the trust and, if so, whether such receipts establish beneficial ownership or taxable nexus in the hands of the taxpayer or his family. 4. What evidentiary weight attaches to information/clarifications received from foreign competent authority (Swiss Federal Tax Administration) under exchange-of-information procedures where temporal scope is limited, and whether such communication rebuts departmental inferences for earlier years. 5. Whether the assessment for the relevant assessment year was time-barred given exchange-of-information requests and the extended limitation under the statutory provision invoked by the department. 6. Whether a payment of Rs. 57,00,000 by the taxpayer's HUF (cheque) to a relative in settlement of inheritance-related entitlement is an unexplained expenditure / unexplained source attracting addition. 7. Consequent issue: whether penalty under section 271(1)(c) could be sustained where the quantum additions are deleted on merits. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxation of foreign trust account balances as taxpayer's undisclosed income Legal framework: Income-tax liability depends on legal/beneficial ownership, source of funds and nexus with India; mere position as trustee/authorized signatory in fiduciary capacity does not automatically create beneficial ownership or income taxable in the trustee's hands absent evidence that funds belong to or were appropriated by the taxpayer. Precedent treatment: No specific judicial precedent cited by the authorities in the text; the Court considered statutory principles and evidentiary standards rather than overruling or following named precedents. Interpretation and reasoning: The department relied on seized documents, account-mandates, internal 'base note' and statements to infer control and beneficial ownership. The taxpayer produced trust deed, bank documents and affidavits showing settlor, principal beneficiaries and origination of funds from non-resident family members. The Court examined (a) trust deed schedules showing beneficiaries (none being the taxpayer or spouse); (b) source of funds traced to non-resident settlor/beneficiaries (RIB maturity proceeds); (c) communications from Swiss authority identifying beneficiaries outside India and denying beneficial interest of taxpayer/spouse for the period for which information was provided; and (d) affidavits by principal beneficiary explaining role of trustees as fiduciaries and confirming that funds did not belong to the taxpayer or family. Ratio vs. Obiter: Ratio - where independent evidence establishes that (i) the corpus originated from non-resident settlor/beneficiaries, (ii) beneficiaries were third-party non-residents, and (iii) there is no evidence of routing of funds through or appropriation by the taxpayer, an addition of the trust's foreign account peak balance to the taxpayer's income cannot be sustained merely on the basis of trustee/authorized-signatory status and isolated transaction instructions. Obiter - observations on the probative value of base notes and seized loose papers where they concern related but distinct trusts (analytical comments about use of mixed documents). Conclusions: The Court concluded that the peak balance addition of Rs. 10,50,41,824 (USD 2,361,551.79) could not be sustained as undisclosed income of the taxpayer; the evidence established the trust funds' origin and beneficiaries were non-residents and the Swiss communication and beneficiary affidavit rebutted the inference of beneficial ownership by the taxpayer. The addition was deleted. Issue 2 - Characterization of the trust as Indian or foreign for tax purposes Legal framework: Taxability of a trust in India depends on domicile/residence, place of administration/control and the presence of a nexus or source in India; formalities such as stamp paper purchase or a local address are relevant facts but not determinative alone. Precedent treatment: No appellate precedent was applied as a binding rule in the text; the Court applied fact-sensitive principles of residence/control and source. Interpretation and reasoning: The authorities pointed to stamp paper purchased in India, presence of an Indian address and some administrative links. The taxpayer and defendants countered with documentary evidence (trust deed, affidavits, chronology showing RIB investment by non-resident, transfer of maturity proceeds abroad, and trust management primarily outside India). The Court held that while certain indicia pointed to an Indian connection, the decisive factors were the non-resident origin of funds and beneficiaries and the foreign locus of the substantive economic interest; those facts undermined the department's claim that the trust should be treated as an Indian taxable entity vis-à-vis the taxpayer. Ratio vs. Obiter: Ratio - characterization requires a holistic appraisal (source of funds, beneficiaries' residence, de facto control/management nexus) and not a sole reliance on stamp paper or correspondence address. Obiter - commentary that administrative address used for correspondence does not conclusively make a trust taxable in India. Conclusions: The Court found the departmental conclusion that the trust was effectively an Indian taxable entity vis-à-vis the taxpayer unsubstantiated for the relevant period; therefore, the trust's foreign accounts could not be imputed as taxable income of the taxpayer on that basis. Issue 3 - Effect of RIB maturity proceeds and legacy receipts by family members Legal framework: Receipt of legacy or maturity proceeds may be capital/non-taxable in nature depending on law and factual character; but if such receipts were part of the trust corpus and beneficiaries were non-residents, mere earlier legacy receipts do not establish that the taxpayer later enjoyed or controlled other trust balances. Precedent treatment: No precedent cited; Court treated RIBs as Indian securities held by non-resident investors and examined factual trail from investment to trust corpus and distributions. Interpretation and reasoning: The trust deed incorporated the RIB proceeds into corpus on maturity; however, documentary and testimonial material (affidavit of principal beneficiary, bank records, prior tribunal order dealing with the RIB investor's non-resident status) showed that the RIB investment and distributions ultimately benefited non-resident beneficiaries and that the taxpayer's family received limited legacy amounts earlier declared as capital/legacy. The Court emphasized absence of evidence that later trust balances derived from RIB maturities were appropriated by the taxpayer. Ratio vs. Obiter: Ratio - prior legacy receipts by family members do not, by themselves, convert trust corpus balances into taxable income of a related trustee unless there is evidence of appropriation or beneficial ownership by the trustee. Obiter - remarks on characterization of RIB receipts as legacy/non-taxable in context. Conclusions: The Court found no basis to treat the RIB proceeds or later trust balances as the taxpayer's income; distributions that occurred earlier were explained and did not establish the taxpayer's beneficial ownership of peak balances assessed. Issue 4 - Evidentiary weight of foreign competent authority communications (Swiss FTA) and temporal scope Legal framework: Information exchanged under DTAA/Article 26 is material evidence; its temporal scope and content determine admissibility and weight. Where foreign authority provides a limited temporal response, that limitation affects evidentiary reach for earlier years. Precedent treatment: None cited. Interpretation and reasoning: The Swiss response provided details for the period covered by the amended DTAA (starting 01.04.2011) and stated that beneficiaries were residents in Canada/UK and that the taxpayer/spouse were not beneficiaries for the period covered. The department argued that the Swiss reply did not cover the earlier assessment year at issue; the Court acknowledged the temporal limitation but held that the Swiss communication and accompanying affidavits and documentary trail nevertheless supported the taxpayer's contention by corroborating the foreign origin and beneficiary status for the trust and rebutting the inference of taxpayer beneficial ownership. Ratio vs. Obiter: Ratio - foreign competent authority communications, even if temporally limited, can be cogent corroborative evidence when considered with other documentary and testimonial materials. Obiter - observations on the need for supplementary requests where nexus to India needs elucidation. Conclusions: The Swiss communication and related affidavits materially contributed to displacing the department's inference and were accorded significant evidentiary weight; they supported deletion of the addition despite the temporal scope caveat. Issue 5 - Limitation/time-bar of assessment given exchange-of-information request Legal framework: Time-bar is governed by statutory limitation provisions, including extensions where authorities have sought exchange of information under applicable provisions; explanation invoked by department extended limitation in AO's view. Precedent treatment: No specific case law relied upon; factual application of statutory extension was considered. Interpretation and reasoning: Department asserted that a timely exchange-of-information request extended the limitation; the Court treated time-bar argument as academic once additions were deleted on merits and noted that the assessment order was held within the extended limitation by the lower authorities. Ratio vs. Obiter: Obiter in final outcome - limitation analysis not decisive because the substantive additions were deleted. Ratio - where merits dispose the matter, limitation objection may become academic. Conclusions: Time-bar contention rendered academic; the Court did not disturb the lower authorities' finding on extension but considered it unnecessary to resolve fully after deletion of additions. Issue 6 - Addition of Rs. 57,00,000 relating to inheritance/compensation payment Legal framework: Assessability of payments depends on source and whether payment constitutes unexplained investment or expenditure; documentary proof of source (bank account entries, cheque transactions and contemporaneous records) can explain such payments. Precedent treatment: None cited. Interpretation and reasoning: The taxpayer produced the will, valuation, HUF bank records and bank cheques demonstrating payment from the taxpayer's HUF account in discharge of inheritance-related obligation. The authorities contended absence of supporting ledger/bank statements but the Court accepted the fund-flow explanation and affidavit/evidence showing declared source and cheque payment. Ratio vs. Obiter: Ratio - a payment made by cheque from an identified bank account supported by will/valuation and corroborative statements can be accepted as explained source absent firm contrary evidence. Obiter - caution about admission of additional evidence without proper procedure (not decisive here). Conclusions: The addition of Rs. 57,00,000 was deleted as the payment was satisfactorily explained as HUF funds used to discharge an inheritance obligation. Issue 7 - Penalty under section 271(1)(c) Legal framework: Penalty under section 271(1)(c) is consequential upon assessment additions; if additions are deleted on merits, penalty based on those additions cannot subsist. Precedent treatment: Not invoked; statutory logic applied. Interpretation and reasoning: Since the quantum additions (foreign account peak balance and Rs. 57,00,000) were deleted on merits, there was no sustainable basis for penalty assessed in respect of those additions. Ratio vs. Obiter: Ratio - penalty predicated on disallowance/addition must fall when the underlying additions are deleted. Obiter - none. Conclusions: Penalty levied under section 271(1)(c) in relation to the deleted additions was deleted accordingly.