2025 (7) TMI 1579 - AT - Income Tax

Foreign Revocable Trust Income from Indian Debentures Not Taxable Under Sections 61, 63, or 161

The ITAT Mumbai held that income earned by the foreign revocable trust from investments in Indian non-convertible debentures is not taxable in India. ... Income earned by the revocable trust - Foreign Trust - Taxability of income accruing on investments made by the assessee - Income chargeable to tax in India - assessee earned interest income from investments made in non-convertible debentures of Indian portfolio companies Assessee is a trust based in New Jersey and was settled by Abu Dhabi Investment Authority (“ADIA”) as a revocable and determinant trust vide Deed of Settlement dated 22/07/2013 with Equity Trust (Jersey) Ltd as a trustee of the assessee trust. ADIA is a resident of the UAE and is also registered as a Foreign Institutional Investor (“FII”) with the Securities and Exchange Board of India (“SEBI”) HELD THAT:- We find that as in Abu Dhabi Investment Authority [2021 (10) TMI 1270 - BOMBAY HIGH COURT] while deciding the writ petition in favour of the petitioner quashed the order passed by the Hon’ble AAR and held that the income that accrues to the Green Maiden A 2013 Trust is not chargeable to tax in India. Income that accrues to the trust would not be chargeable to tax in India either by virtue of application of section 61 read with section 63 or on an application of section 161 of the Act conjointly with the provisions of Article 24 of the India-UAE DTAA. The coordinate bench of the Tribunal in assessee’s own case in Green Maiden A 2013 Trust [2023 (1) TMI 1485 - ITAT MUMBAI] for the assessment years 2016-17 to 2018-19, deleted the similar addition made by the AO - Assessee appeal allowed. ISSUES: Whether the final assessment order passed under section 147 read with section 144C(13) of the Income Tax Act, 1961 is barred by limitation under section 153 of the Act.Validity of reassessment proceedings initiated and conducted under the Act.Whether the Assessing Officer erred in not following binding judicial precedents of the jurisdictional High Court and Tribunal.Whether income earned by the trust is taxable in India when it has already been offered to tax in the hands of Abu Dhabi Investment Authority (ADIA).Whether income earned by a revocable trust is exempt from tax in India under section 61 read with Article 24 of the India-UAE Double Taxation Avoidance Agreement (DTAA).Taxability of income in the hands of the trustee under section 161 read with section 164 of the Act and Article 24 of the India-UAE DTAA.Whether credit for tax deducted at source (TDS) was wrongly denied.Whether incorrect rate of tax was applied contrary to section 115AD of the Act.Whether surcharge was levied at an incorrect rate.Validity of levy of interest under section 234B of the Act.Validity of initiation of penalty proceedings under section 270A of the Act for underreporting of income. RULINGS / HOLDINGS: The final assessment order under section 147 r.w.s. 144C(13) passed beyond the limitation period prescribed under section 153 of the Act is illegal and void-ab-initio. However, this ground was not pressed and thus kept open.The validity of reassessment proceedings was challenged but kept open as relief was granted on merits.The Assessing Officer erred in not following binding judicial precedents of the jurisdictional Bombay High Court and Tribunal in the assessee's own case for AY 2016-17 to AY 2018-19.The income earned by the trust is not taxable in India as it has already been included in the total income of ADIA, avoiding double taxation, consistent with the provisions of section 61 and Article 24 of the India-UAE DTAA.Income earned by the revocable trust is to be treated as income of the settlor (ADIA) under section 61 read with section 63 of the Act, and is exempt from tax in India under Article 24 of the India-UAE DTAA.Even if income is taxable in the hands of the trustee, tax can only be levied in a representative capacity under section 161(1) read with section 164 and Article 24 of the India-UAE DTAA, resulting in no tax liability for the trustee.The Assessing Officer erred in not granting credit for tax deducted at source amounting to Rs. 91,43,123; the issue is restored to the AO for verification and grant of credit as per law.The Assessing Officer erred in taxing the income at a rate higher than that prescribed under section 115AD of the Act; however, this ground was rendered infructuous after deletion of the addition.The levy of surcharge at 15% instead of 5% was incorrect; this ground was rendered infructuous following deletion of the addition.The levy of interest under section 234B of the Act is consequential and requires no separate adjudication.The initiation of penalty proceedings under section 270A of the Act was premature and thus dismissed. RATIONALE: The Court applied the provisions of sections 61, 63, 161, and 164 of the Income Tax Act, 1961, and Article 24 of the India-UAE DTAA to determine the taxability of income earned by a foreign revocable trust settled by ADIA.The Court relied on the jurisdictional Bombay High Court's decision quashing the Authority for Advance Ruling's (AAR) order that held the income taxable in India, emphasizing that the trust's revocable nature and settlor-beneficiary identity render the income taxable in the hands of ADIA, exempt under the DTAA.The Court recognized that the Act contemplates foreign trusts as trusts for tax purposes, supported by disclosure requirements in various income tax return forms.The Court followed the principle that a revocable transfer under section 63 includes transfers to foreign trusts and that income arising therefrom is taxable in the hands of the settlor under section 61.The Court noted that even if the trust structure is disregarded, the income must be regarded as arising to ADIA, thus attracting the benefit of the India-UAE DTAA.The Court applied the principle that tax on income assessed in the hands of the trustee under section 161(1) is in a representative capacity and must be levied 'in the like manner and to the same extent' as on the beneficiary, here ADIA.The Court followed binding precedents of coordinate benches of the Tribunal in the assessee's own case for AY 2016-17 to AY 2018-19, which deleted similar additions following the Bombay High Court ruling.The Court kept open issues relating to limitation and validity of reassessment proceedings as they were not pressed or rendered academic by the merits decision.The Court restored the issue of TDS credit to the Assessing Officer for verification and grant, consistent with statutory provisions.The Court dismissed penalty proceedings initiation as premature, reflecting the procedural safeguards under the Act.