TaxTMI 
TaxTMI 
2015 (4) TMI 259
X X X X Extracts X X X X
X X X X Extracts X X X X
....logy Fund Do Dated:18-01-2011 All these appeals involve identical issues and arise under identical facts and circumstances. These appeals were heard together. We deem it convenient to pass a consolidated order. 2. The Assessees in all these appeals viz., India Advantage Fund-I, ICICI Emerging Sectors Fund and ICICI Econet, Internet and Technology Fund are three different trusts constituted under different instruments of trust. These trusts were created by transfer by the author of trust a sum of Rs. 10,000/- to the Trustee as initial corpus to be applied and governed by the terms and conditions of the indenture of trust by which they were created. The trustee appointed under the deed of trust was empowered to call for contributions from the contributors which will be invested by the Trustee in accordance with the objects of the trust. The objective of creation of the trust was set out in the trust deed which was to make investments in certain kind of securities and to achieve commensurate returns to the contributors. The fund collected from the contributors together with the initial corpus was to be handed over to the trustees under the provisions of the India....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income declared was the same with tax liability as nil, but the request for refund of TDS as made in the original return of income was reduced to Rs. 1,38,26,487. 4. For AY 2008-09, the Assessee in ITA No.177/Bang/2012, ICICI Emerging Sectors Fund, filed return of income declaring total income of Rs. 346,18,77,243/-. Along with the return of income the Assessee filed a letter dated 13.10.2008 intimating the AO that the income of the Assessee is included in the total income of the beneficiaries and offered to tax directly by them in their return of income. A revised return of income was filed on 29.3.2010 in which the total income declared was reduced to Rs. 343,27,09,174/- with tax liability as nil claiming refund of TDS. 5. For AY 2009-10, the Assessee in ITA No.475/Bang/2013, ICICI Emerging Sectors Fund, filed return of income declaring total income of Rs. 4,30,52,648/-. Thereafter the aforesaid ROI was revised u/s.139(5) of the Act, declaring "nil" income and claiming a refund of Rs. 21,51,930/- towards tax deduction at source. Along with the revised ROI a letter dated 4.5.2011, intimating that the income of the Assessee is included in the total income of the beneficiarie....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the case of ITO Vs. Ch. Atchaiah 218 ITR 239 (SC) wherein, in the context of assessment of income of an AOP, it was held by the Hon'ble Supreme Court that income has to be brought to tax in the hands of right person. The Assessee had before the AO relied on the following judicial pronouncements in support of its stand that there was no AOP in existence and therefore the Assessee should not be taxed at the maximum marginal rate. (1) Gopala Pillai A.K. Vs. ITO 75 ITR 120 (Mad); (2) CWT Vs. Trustees of HEH Nizam's Family (remainder Wealth) Trust 107 ITR 555 (SC); (3) CIT Vs. Shamaraju Trustees 56 Taxman 175 (Karn.); (4) Lakshmipat Singhania Vs. CIT 72 ITR 291 (SC). 7. The AO without discussing the facts of those cases and the ratio laid down in those decisions and as to how the facts of the Assessee's case are different from those cases, held that the cases cited are not applicable to the facts of the Assessee's case. 8. The AO also observed as follows:- "It is not denied that the business was carried on by the fund on behalf of the beneficiaries of the Trust (AOP) and that considerable profits were earned from the business. The control and management of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 5. The CIT (A) ought to have appreciated the fact, that the beneficiaries and the shares of the beneficiaries are not mentioned in the trust deed. 6. The CIT (A) ought to have appreciated the fact that, the shares of the beneficiaries are not determinate on the basis of the trust deed. Hence, the income of the Trust has to be assessed in the hands of the Trust and not in the hands of the beneficiaries. 7. The CIT (A) ought to have appreciated the fact that the shares of the beneficiaries are not distributed exactly as per the formula determinable from the trust deed rather the shares vary depending upon the amount contributed by the beneficiaries for asset management. 8. The CIT (A) erred in holding that the assessee, trust cannot be assessed as an "AOP". 9. The CIT (A) ought to have appreciated the fact that Section 2(31) of the I. T. Act gives an inclusive definition for the word "Person". There is no separate status of Trust envisaged in the definition of person. All the trusts are assessed on the status of AOP. This being the case, the assessment of the assessee in the status of AOP is in order. Accordingly, whatever provisions of the Act applies to AOPs will appl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....venture undertaken by the Trust, author of the trust and the identified beneficiary at the time of creation of the trust who happens to be the beneficiary and the Investment Manager to whom without any option the management of the trust fund had to be entrusted. It is like any other form of business organization mobilizing funds for investments and promising returns to the contributors. Can such objective be achieved by forming a trust? 45. Similar questions arose for consideration before the Authority for Advance Ruling in the case of XYZ, In Re 224 ITR 473 (AAR). We need to look at the facts of the said case before we set out the ruling given by the AAR. An American company in collaboration with an Indian financial services company proposed to set up another fund. For this purpose a trust was created whereby the Indian Financial services company was the author of the trust and another Indian Trust company was appointed as Trustee. The funds of the Trust were to be invested in Indian companies and projects in India. The Indian financial service company was to act as the principal Investment Adviser in India to the trust under an advisory agreement. By an Indenture of trust, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vestor." After a little discussion he was willing also to drop the last seven words which were considered to be somewhat vague. 9. One may pause here to consider whether there could be any valid objections to the constitution of a trust in this manner. The authors of the trust are the IC, the Indian financial service company and others contributing to the trust by the date of the trust deed. Indeed even institutional investors contributing to the trust, in helping the CT achieve its target of 50 million dollars can be considered as supplemental authors of the trust, the CA constituting r/w the trust deed, the instruments constituting the trust in their cases. The purposes of the trust are, as stated in the TD, to invest the trust funds and distributing the proceeds to the beneficiaries. This is, in a sense, nothing more than an arrangement by which certain parties agreed to contribute funds for a common purpose and divide the profits amongst themselves. No doubt the same objective could be achieved by the constitution of a firm or a company but, equally, there seems to be no valid objection if the parties wish to do it in the form of a trust which, under the Trust Act, merely....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tribunal: "50. .......the Finance Act, 1970, has replaced s. 164 of the IT Act by a new section. Under s. 164 as so replaced, a `representative assessee' who receives income for the benefit of more than one person whose shares in such income are indeterminate or unknown, will be chargeable to income-tax on such income at the flat rate of 65% or the rate which would be applicable if such income were the total income of an AOP, whichever course would be more beneficial to the Revenue. 51. When the Explanation was added in 1980, the CBDT issued the following circular [see (1980) 123 ITR (St) 159] [The quotation has been taken from the Memorandum explaining the provisions of the Finance (No. 2) Bill, 1980 and not from the relevant circular, which is Circular No. 281 dt. 22nd Sept., 1980 reported in (1981) 131 ITR (St) 4, though the Circular uses similar language-Ed.] : "49. xxx xxx xxx (iv) Under the existing provisions, the flat rate of 65% is not applicable where the beneficiaries and their shares are known in the previous year, although such beneficiaries or their shares have not been specified in the relevant instrument of trust, order of the Court or wakf deed. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... settlor, it has to be assessed in the hands of settlor, whether the settlement is revocable or irrevocable. If under a settlement any income arises to any other person apart from the settlor such income can still be assessed in the hands of the settlor provided the settlement is revocable. Even if a settlement on the face of it is stated to be irrevocable, if the same provides for direct or indirect retransfer of income or assets of the settlement to the settlor or gives the settlor a right to resume power directly or indirectly over such income or asset, the settlement should be deemed to be revocable. 54. In Chapter X of the private placement memorandum issued by the investment manager inviting contribution from investors, the tax considerations in making investments as understood by them have been set out. The contents thereof in brief are that the contribution by the contributors are akin to "revocable transfer" u/s.61 of the Act read with Sec.63 of the Act and therefore income arising from the transfer are assessable in the hands of the contributors. The contributors are therefore informed that in respect of their pro-rata share of income received by the Fund it is the con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the Assessee before us was that the Contribution agreement has to be read along with the Trust Deed as well as the Investment Management agreement and offer document for private placement issued by the Investment Manager. Article-13 of the Trust Deed provides for termination of the Trust. Though such a power is not with the beneficiary/transferor, it is not the requirement of Sec.61 that the power of revocation must be at the instance of the beneficiary/transferor. The power of revocation under Clause13 of the Deed of Trust is a general power of revocation and the same would be sufficient for construing the transfer in the present case as a revocable transfer. As rightly contended by the learned counsel for the Assessee it is not necessary that the power of revocation should be at the instance of the contributors/beneficiaries/ transferor and it can be at the instance of any person either settlor, trustee, transferee or the beneficiaries. Provisions of Sec.61 of the Act do not contemplate a power of revocation only at the instance of the transferor. In this regard the reliance placed by the learned counsel for the Assessee on the observations of the Hon'ble Supreme Court in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eed, the Contribution Agreement and the Memorandum of private placement are identical in substance and there is no dispute on this aspect either before the Revenue authorities or before the Tribunal. 14.4 On the issue raised in Ground No.4 to 7 of the grounds of appeal in these appeals, the Tribunal dealt with identical grounds in the case of India Advantage Fund-VII (supra) and held as follows: "61. The general rule as laid down in Sec. 161(1) is that income received by a trustee on behalf of the beneficiary shall be assessed in the hands of the trustee as representative assessee and such assessment shall be made and the tax thereon shall be levied upon and be recovered from the representative assessee "in like manner and to the same extent as it would be leviable upon the recoverable from the person represented by him". To the above rule, however, three exceptions have been incorporated in the Act:- (a) Under s. 161(1A), this rule of apportionment and determination of proportionate tax attributable to the beneficiary will not apply to any income earned by the trustee as profits and gains of a business. The whole of such income shall be taxed at the "maximum marginal rate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rust in accordance with the Contribution Agreement. We are of the view that the above clause is sufficient to identify the beneficiaries. 65. On the aspect of ascertainment of share of the beneficiaries, we find that Article 6.5 of the Trust Deed clearly specifies the manner in which the income of the Assessee is to be distributed. The said clause details formula with respect to the share of each beneficiary. As rightly contended on behalf of the Assessee it is not the requirement of law that trust deed should actually prescribe the percentage share of the beneficiary in order for the trust to be determinate. It is enough if the shares are capable of being determined based on the provisions of the trust deed. In the case of the Assessee the trustee have no discretion to decide the share of each beneficiary and are bound by the provisions of the trust deed and is duty bound to follow the distribution mechanism specified in the trust deed. The further aspect that may require consideration in the present case is with regard to the clause in the Trust Deed which authorises addition of further contributors to the trust at different points of time in addition to initial contributors. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sment envisaged under the Act. In this regard the definition of person u/s. 2(31) of the Act which does not specifically refer to "Trust" is being highlighted in the grounds raised by the Revenue. These grounds can be conveniently dealt with together. 67. Sec.2(31) of the Act defines the term "Person". The definition includes "Association of Persons"(AOP). There is no definition of the expression AOP occurring in the 1922 Act. By a series of decisions, the meaning of this expression was precisely defined and tests were laid down in order to find out when a conglomerate of persons could be held to be an AOP for the purposes of section 3 of the 1922 Act. While interpreting this expression occurring in section 3 of the Indian IT Act, 1922, the Supreme Court in CIT vs. Indira Balkrishna (supra) held "an AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains". The Supreme Court, however, administered the following caution: ''There is no formula of universal application as to what facts, how many of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....estors on a confidential basis for them to consider an investment in mezzanine Fund. An investor who wishes to contribute to the fund enters into a contribution agreement with the trust, the trustees acting on behalf of the trust and the Settlor acting in his capacity as investment manager. 68. It can thus be seen that the beneficiaries contributed their money to the Assessee and a separate agreement was entered into between the Assessee and each beneficiary. There is no inter se arrangement between one contributory/ beneficiary and the other contributory/beneficiary as each of them enter into separate contribution arrangement with the Assessee. Therefore it cannot be said that two or more beneficiaries joined in a common purpose or common action and therefore the tests for considering the Assessee as AOP was satisfied. The beneficiaries have not set up the Trust. Therefore it cannot be said that the beneficiaries have come together with the object of carrying on investment in mezzanine funds which is the object of the trust. The beneficiaries are mere recipients of the income earned by the trust. They cannot therefore be regarded as an AOP. Ground No.8 raised by the Revenue is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....time. 71. In the case of David Joseph (supra) the Hon'ble Kerala High Court after making a reference to the above circulars held that once a beneficiary is assessed and his assessment is completed prior in point of time, and his assessment is an element of finality, it is a natural consequence flowing therefrom that the Department does not get any permission to go behind it for the purpose of scrutinising the procedure, for finding out faults in regard thereto, the sole object of which is to justify the subsequent action taken by the Department. These are in fact the normal consequences that flow from the principle of finality. This principle especially emerges from three circulars and has established into a settled practice, any time a deviation therefrom cannot be permitted, even on the ground of a mistake with regard to the merits of the situation that received finality. Similar view has been taken by the Hon'ble M.P.High Court in the case of Rai Sahe Seth Ghisalal Modi Family Trust (supra) and Hon'ble Bombay High Court in the case of Trustees Of Chaturbhuj Raghavji Trust (supra). 72. The Hon'ble Bombay High Court in the case of Trustees of Chaturbhuj Raghavji Trust (supra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... maximum marginal rate. 73. The reliance placed on the aforesaid circular, in our view, will not be of any use for the reason that the said Circular was not in force at the relevant AY when the assessment was made by the AO on the present Assessee. Circulars not in force in the relevant Assessment year cannot be applied as held by the Hon'ble Bombay High Court in the case of BASF (India) Ltd. & Anr. vs. W. Hasan, CIT & Ors. 280 ITR 136 (Bom). The decision of the Hon'ble Supreme in the case of Ch. Atchaiah (supra) on which the AO placed reliance in making assessment on the Assessee in our view is not applicable to the facts of the present case. In the said decision the status of the Assessee as that of an AOP was not disputed but it was argued that the ITO had option to assess either the AOP or the individual member of the AOP. The Hon'ble Supreme Court held that unlike under s. 3 of the 1922 Act, the ITO did not have an option under s. 4 of the IT Act, 1961, to assess either the AOP or the individual members thereof. If the ITO has assessed a wrong person, say individual instead of AOP, he is not precluded, in contradistinction to the 1922 Act, to seek to assess the right person....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sent appeal against the said order of the CIT(A). 17. At the time of hearing of the appeal, it was agreed by the parties that the assessment for AY 08-09 was later taken up for scrutiny and an order u/s.143(3) was passed. The said order is subject matter of appeal ITA No.177/Bang/2012. The issue raised in the order u/s.154 of the Act and the issue raised in ITA No.177/Bang/2012 are identical. The intimation u/s.143(1) of the Act to the extent it is modified in proceedings u/s.143(3) of the Act cannot be sustained. Therefore the intimation u/s.143(1) of the Act on passing of the order u/s.143(3) of the Act no longer survives. Therefore the order u/s.154 of the Act and further proceedings thereon are also superfluous. The appeal, therefore, has to be dismissed as infructuous and of no legal effect in view of the subsequent proceedings u/s.143(3) of the Act. Accordingly, ITA No.348/Bang/2011 is dismissed. ITA No. 347/Bang/2011 18. For AY 2008-09, the Assessee in ITA No.347/Bang/2011, ICICI Econet, Internet & Technology Fund, filed return of income declaring total income of Rs. 99,50,36,467/- and tax liability of Nil. The Assessee claimed that the income of the Assessee is includ....