Revocable trust and AOP treatment in securitisation trusts under income tax law

A securitisation trust may qualify as a revocable trust under sections 61 to 63 of the Income-tax Act even where revocation operates collectively or through a conditional mechanism in the trust deed; unilateral or unconditional revocation is not required. Where the trust instrument preserves re-transfer of the fund to the security receipt holders and allows contributors to reassume control, the transfer remains revocable and the income is taxable in the transferor's hands. A regulatory securitisation trust formed under the SARFAESI framework and RBI guidelines is not a voluntary association of persons, and where beneficiaries are identifiable and their shares are determinable, section 164 does not independently justify taxation in the trust's hands.

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Issues: (i) Whether the securitisation trust was a revocable trust within the meaning of sections 61 to 63 of the Income-tax Act, 1961, and whether conditional or collective revocation negated revocability. (ii) Whether the trust could be assessed as an Association of Persons and whether section 164 of the Income-tax Act, 1961 applied to tax the income in the trust's hands.

Issue (i): Whether the securitisation trust was a revocable trust within the meaning of sections 61 to 63 of the Income-tax Act, 1961, and whether conditional or collective revocation negated revocability.

Analysis: The trust deed contemplated re-transfer of the trust fund to the security receipt holders on revocation and preserved a mechanism by which contributors could re-assume control over the assets. The statutory scheme of sections 61 to 63 treats income from a revocable transfer as taxable in the hands of the transferor, and does not require unilateral or unconditional revocation. A collective revocation mechanism embedded in the trust instrument is sufficient to attract the definition of revocable transfer.

Conclusion: The trust was held to be a revocable trust, and the Revenue's objection based on conditional revocation was rejected.

Issue (ii): Whether the trust could be assessed as an Association of Persons and whether section 164 of the Income-tax Act, 1961 applied to tax the income in the trust's hands.

Analysis: The trust was a regulatory vehicle formed under the SARFAESI framework and RBI guidelines, not a voluntary association formed by persons with common volition. The beneficiaries were identifiable and their shares were determinable from the trust documentation and contribution records. Once the trust was held to be revocable, section 164 had no independent application, and the income was not taxable in the hands of the trust as an AOP.

Conclusion: The trust could not be assessed as an Association of Persons, section 164 did not apply, and the additions made by the Assessing Officer were not sustainable.

Final Conclusion: The Tribunal affirmed the relief granted by the appellate authority and rejected the Revenue's challenge in both appeals.

Ratio Decidendi: Under sections 61 to 63 of the Income-tax Act, 1961, a revocable transfer may exist even where revocation is collective or conditional under the trust instrument, and a securitisation trust formed under the statutory and regulatory framework cannot be treated as an Association of Persons when its beneficiaries are determinable.

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