TaxTMI 
TaxTMI 
2017 (2) TMI 1122
X X X X Extracts X X X X
X X X X Extracts X X X X
.... at Nil. In the said return of income, the assessee had showed interest of Rs. 21,49,72,486/-, under the head "other income" and at item No. 50 thereof - Distribution to Beneficiaries of the same amount. Consequently, the total income returned was shown as Nil. In the course of assessment proceedings, the Assessing Officer (AO) sought to bring this interest income to tax in the assessee's hands and this was how this issue came to be raised. 2.1.2 ITCL is a company registered under the Companies Act, 1956. It is the trustee of the assessee, which is a trust, formed by ITCL by means of Trust Deed dated 20th May, 2008. Thus, the assessee is a private specific trust. The beneficiaries to the trust are seven Mutual Funds, namely, (1) UTI Mutual Fund, (2) SBI Mutual Fund, (3) DBS Chola Mutual Fund, (4) ICICI Prudential Mutual Fund, (5) HDFC Mutual Fund, (6) Lotus Mutual Fund and (7) Franklin Templeton Mutual Fund. The beneficial interest of these mutual funds in the trust is proportionate to their contribution in the assessee trust. 2.1.3 In the case on hand, Hindustan Petroleum Corporation Ltd. (HPCL), a Government company, proposed to raise loans for Rs. 300 crores. Based on an e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st (20.05.2008) (vii) Issue of PTCs by the assessee trust - the procedures and approvals for such issue (viii) Issue of Information Memorandum by assessee and Yes Bank, inviting MFs to subscribe to the PTCs (20.05.2008) (ix) Approval procedures in the seven MFs to subscribe to the PTCs (x) Subscription by the beneficiary MFs to the PTCs (xi) Transfer of funds by the assessee to Yes Bank, in terms of the Assignment Deed All these transactions have happened between 15.05.2008 (when Yes Bank and HPCL executed the agreement of intent for the loan) and 21.05.2008, when the standard format agreement was executed between Yes Bank and HPCL. The main borrower, HPCL is out of all these transactions. HPCL shall pay the interest and loan repayment only to Yes Bank. Yes Bank, in terms of all these transactions will transfer the receivables, comprising both the loan amount and the interest thereon, to the assessee trust to be received by the mutual funds, being the beneficiaries of the assessee trust. It is in the background of these facts that the AO has held the Trust to be not genuine. Assessee's stand 2.2 The assessee filed its return of income for A.Y. 2009-10 declar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the activity of the assessee is business in nature and therefore Sec. 161(1A) of the Act was attracted. Therefore, the AO held that the interest income so earned is out of the business and was chargeable to tax in the assessee's hand as "Income from business or Profession". The AO accordingly, completed the assessment bringing to tax the entire amount of Rs. 21,49,72,486/- as business income in the hands of an Association of Persons(AOP) comprising eight members - the trustee and the seven mutual funds. Having held this interest income as being derived out of "Income from Business", the AO alternatively held that even if the assessee was to be regarded as a valid trust, the assessment would be made in the hands of the trustee as a single unit and tax shall be payable at maximum marginal rate in terms of section 161(1A) of the Act, because as per the A.O, Section 161(1A) of the Act overrides section 161(1) and accordingly, the fact that the income of the beneficiary mutual funds is exempt under section 10(23D) of the Act , would be of no consequence. The provision of section 161(1A) of the Act would still be applicable even if the income of the individual beneficiaries is exe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....interest at Rs. 23,84,28,493/- as against Rs. 21,49,72,486/- declared by the assessee, thereby enhancing the income by the difference of these two amounts. Having held thus, the CIT(A) held that the assessee was entitled to deduction payment etc. aggregating to Rs. 20,61,55,310/- during the year and recomputed the total income of the assessee at Rs. 3,22,73,183/- against Rs. 21,49,72,486/- assessed by the AO. The assessee is in appeal against the order of the CIT(A) enhancing the interest income and the Department is in appeal against the learned CIT(A) ordering deduction of Rs. 20,61,55,310/-, on account of interest payment being allowed to the assessee. Thus, both the assessee and the Revenue are in appeal before us against the impugned order of the CIT(A). These appeals are being disposed off in seriatum as under: - 3. Grounds of appeal of assessee in ITA No. 3986/Mum/2013 3.1 In this appeal the assessee raised the following grounds and concise grounds of appeal: - "I. Ground I: Holding the Trust to be not a valid Trust a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in ruling that the Trust is not a valid trust. b. The CIT(A) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by voluntary act of the parties; and ii. Without prejudice, the income is diverted as an overriding title is created as per the RBI Guidelines on Securitization of Standard Assets. c. The Appellant prays that it be held that the income of the Trust is divested at source by overriding title and is not chargeable in the hands of the trust. IV. Ground IV: Treating the status of the appellant as "AOP" a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the status of the Appellant is that of an "Association of Person. b. The CIT(A) failed to appreciate and ought to have held that: i. The beneficiaries have not joined in a common venture or a joint enterprise but have made investments in the Trust individually; and ii. The fact as to whether one Mutual Fund knows which other Mutual Funds are the beneficiaries under the Trust is not decisive of the legal relationship and a mere co-investor or co-beneficiaries cannot be regarded as having formed an Association of Persons in law. c. The Appellant prays that it be held that the Appellant is not an AOP. V. Ground V: Invalidity of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on receivables is upheld, then the corresponding expense be also allowed as a deduction. VIII. Ground VIII: Levy of interest u/s 234B & 234C of the ACT a. The AO erred in levying interest amounting to Rs. 5484850/- and Rs. Nil u/s 234B and 234C of the Act. The Appellant denies its liability towards the same b. The Appellant prays that the interest levied u/s 234B and 234C of the Act be deleted. IX. Ground IX: General The Appellant craves leave to add to, alter or modify all or any of the above grounds of appeal. 3.2 Concise grounds of appeal As per the Tribunal's direction we file the concise grounds of appeal which are without prejudice to the original grounds of appeal filed by the Appellant. Ground I: Holding the Trust to be not a valid Trust a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in ruling that the Appellant is not a valid trust on the alleged ground that all the essentials for a valid trust were not fulfilled. Ground II: Holding that the Trust was not revocable a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the applicability of sections 61 to 63 of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....above grounds of appeal." 4. Both the learned Senior Counsel for the assessee, Shri S.E. Dastur and the Senior Standing Counsel for Revenue, Shri P.C. Chhotaray have made detailed oral and voluminous written submissions on the facts of the case, issues involved and the legal principles governing the issues in appeal. The same has been entirely perused and carefully considered and references to those portions which, in our view, is relevant to the issues on hand are being made in this order. 5. Concept of securitization 5.1 Before discussing the individual grounds of appeal and the issues involved, it will be useful and necessary to discuss the principle of securitization of loans and the legal and statutory framework governing the same. The concept of securitization of loans is guided by the RBI guidelines, issued under the name and style of "Guidelines on Securitization of Standard Assets" dated February 01, 2006. Some of the salient concepts, procedures and features of the RBI Guidelines on securitizations are outlined in the following paragraphs, as under: i) Securitization is defined as a process by which assets are sold to a bankruptcy remote special purpose vehicl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r. ix) The sale shall be only on cash basis and the consideration shall be received not later than at the time of transfer of assets to the SPV. The sale consideration should be market based and arrived at in a transparent manner on the arm's length basis. x) The originator should effectively transfer all risks/rewards and rights/obligations pertaining to the asset and shall not hold any beneficial interest in the asset after its sale to the SPV. The originator shall not have any economic interest in the assets after its sale. xi) In case the originator also provides servicing of assets after securitization, under an agreement with the SPV, and the payments/repayments from the borrowers are routed through it, it shall be under no obligation to remit funds to the SPV/investors unless and until these are received from the borrowers. xii) The originator shall not indulge in market- making or dealing in the securities issued by the SPV. 5.2 By securitizing the existing loans, the banks can free up the funds for lending without diluting equity or incurring constraints of additional deposits. Thus the banks will be able to undertake larger volumes of business using the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the assessee needs to be discussed. The assessee has questioned the authority of the AO and CIT(A) in holding that the Trust is invalid and to treat the assessee as an AOP. It was the contention of the assessee that the Trust has been created by a valid Deed of Trust and the AO cannot on his own come to the conclusion that the instrument of trust is invalid. As per the assessee, a trust can be declared invalid only by a court of competent jurisdiction and not by the AO. In this context, it is submitted that while Section 281 of the Act provide a transaction to be void as against tax payable by the transferor, if the transaction has taken place during the pendency of income-tax proceedings, the AO will have to get an order from the Competent Court to declare the transaction to be invalid as per section 281 of the Act. Reliance in this regard is placed on the decisions of: i. TRO vs. Gangadhar Vishwanath Ranade 234 ITR 188 (SC) at S. No. 7 of Assessee's Legal Compilation Box File No. 1 ii. Sancheti Leasing Co. Ltd. vs. ITO 246 ITR 814 (Mad.) at S. No. 5 of Assessee's Legal Compilation Box File No. 1 Reliance was also placed on the decision in the case of DHFL V....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Assessment of income and the legal title to the property are different thing altogether. (ii) The Assessing Officer has to administer the provisions of the Incometax Act and need not get influenced by any other authority like RBI in this regard. (iii) It is also not necessary to get the trust declared as void by the courts, for the purpose of income determination under the Income Tax Act. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. vs. JCIT, Coimbatore, [2010], 320 ITR 577(SC). In that case, the Hon'ble Supreme Court held that the AO is bound by the provisions of the Income-tax and is not bound by the directions of the RBI to NBFC; that the Income-tax Act is a separate code by itself and the taxable total income has to be computed in terms of the provision of the IT Act. 6.4 After having heard heard the rival submissions and perusing and carefully considering the material on record and judicial precedents cited, we are of the considered view that the AO is competent to compute the income of an assessee under a head of income, other than what was claimed by the assessee, of course, after marshalling the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and earn trusteeship fees from such trust. In any case, the total alleged contribution of Rs. 4,34,100/- is less than the 5% of the total income of ITCL, which is within the specified limit. (iv) Section 8 of the Indian Trust Act provides that the subject matter of a trust must be property transferable to the Beneficiary and not be merely beneficial interest under a subsisting Trust. In case of the assessee, the subject matter of the Trust is Rs. 500/-. The subject matter is not a beneficial interest held by the settlor under a subsisting trust. (v) Section 8 does not provide that a Trust cannot be a beneficiary of another Trust. On the contrary, section 9 of the Trust Act provides that every person capable of holding property may be a beneficiary. A trust is capable of holding property and is therefore entitled to be a beneficiary of another trust. In this regard, reliance is placed on the following decisions wherein the beneficiary of a trust was another trust: (a) CIT vs. Trustees of Jadi Trust 133 ITR 494 (Born.) (b) Dr. D. E. Anklesharia vs. CIT 207 ITR 1068 (Guj.) (c) CIT vs. Sinivali Trust 267 ITR 165 (Guj.) (vi) The reference by the learned CIT(A) to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ank of the loan advanced to HPCL is not disputed. (iii) Revenue accepts that a loan has been advanced by Yes Bank; that Yes Bank has assigned the receivables to the assessee (which is constituted as a trust), contributions have been made to the assessee by the mutual funds, but yet in contradiction to the above it disputes the validity of the trust. If a valid trust is not in existence, then the entire securitization scheme would fail. (iv) A trust cannot be regarded as an AOP, as held by the Jurisdictional High Court in the case of: (l) DIT vs. Shardaben Bhagubhai Mafatlal 247 ITR 1 (Bom.), L R. Patel Family Trust vs. ITO 262 ITR 520 (Bom.) and CIT vs. Marsons Beneficiary Trust 188 ITR 224 (Bom.) 6.5.4 Therefore, the contention of the assessee is that it is a valid trust and since it has complied with all the required statutory approvals and procedures, it cannot be considered as an invalid trust, for income tax purposes. 6.6.1 Per contra, the learned counsel for Revenue strongly argued that the assessee is not a valid trust. In detailed arguments, both oral and written submissions, the learned counsel for Revenue strongly relied on the documents created for the transa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s not rendered on the merits of the case on any issue before the Bench in the case on hand but only on the applicability of section 263 of the Act. This was specifically clarified by the Coordinate Bench in Para 5.8 at Pg. 18 of its order. The reference to the facts of the case by the tribunal was in the context of its observation that the facts have not been understood by the AO or CIT and fresh application of mind was required in the matter. At Para 5.5 of the order, the Tribunal has specifically mentioned that it is not opining on the merits of the case. It was also submitted that the High Court has admitted appeal against the Tribunal's order. 6.7.2 In this context, the assessee has put forth the following arguments: (i) Neither the AO nor the learned CIT(A) have held that the various documents executed are bogus or to be disregarded. Both the AO and the learned CIT(A) have accepted these documents and based their findings on the same. This argument put forth is an afterthought by the Department. (ii) The Agreement to give the loan by Yes Bank to HPCL was executed on 15th May, 2008, which provided for a standard format agreement to be executed. Hence, it is not cor....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... relevance/concern to the income tax department. 6.7.4 As regards the point that the Securitization process is in breach of provision of SEBI (Mutual Fund) Regulations, 1996 and the point that the loan by Yes bank to HPCL is an unsecured loan and therefore the securitization debt instrument is not asset backed or mortgage backed, it is submitted that the RBI Guidelines refer to sale of 'single asset' or a 'pool of assets' i.e. the receivables are assets which back the PTCs. Also, as per clause 11 of the loan agreement, security to the satisfaction of the lender is required to be created in case of default by HPCL. Therefore, the loan itself must also be treated as asset backed loan as there is a provision for creation of a security in case of default. 6.7.5 As regards the point of breach of RBI Guidelines for securitization of standard assets, it was submitted that securitization transaction is a twostage process. In the first stage there is sale of single asset to the SPV in return for an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset to third party invest....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....7.6 It was also submitted that the judicial pronouncements relied on by the Revenue, to substantiate the arguments that the documents are bogus and the same should be disregarded are not applicable to the facts of the assessee's case. The assessee placed reliance on the following judicial pronouncements to support its stand: - (a) Delhi Development Authority vs. Durga Chand AIR 1973 SC 2609 (b) Provident Investment Co. Ltd. vs. CIT 24 ITR 33 (Bom) affirmed in 32/190(SC) (c) Sumathy Amma vs. Sankara Pillai AIT 1987 Ker 84 (d) Delta International Ltd. vs. Shyam Sunder Ganeriwalla 1999 4 SCC 545 In view of the above, it is submitted that the assessee must be regarded as a valid Trust. 6.8.1 We have heard the rival contention and perused and carefully considered the submissions made, the judicial pronouncements cited by both the parties and the rebuttal submitted by each of the parties to the arguments of the other. That HPCL, the borrower, had borrowed the loan from Yes Bank is not disputed. After this loan transaction, HPCL is totally out of all other transactions in connection with securitization. In fact, even after all the securitization transactions, HPCL r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....funds in advancing loans. By using the intermediary trust and the medium of the trust's PTCs, mutual funds were in fact investing in loans. (iv) ITCL merely lends its name and forms hundreds of intermediary trusts and earns money for merely lending its name and doing nothing. (v) Yes Bank has flouted rules related to bank accounts and other procedures. 6.8.4 We have carefully considered the rival submissions. That the procedures and processes involved in the formation of a trust have been followed is not in doubt. RBI Guidelines itself contemplate the securitization process to be carried out by the originator; Yes Bank in this case. Therefore, no adverse inference can be drawn of the point strenuously put forth by the Revenue that the originator has been the guiding force of the securitization process. Most of the infirmities/defects pointed out in the documents by the Revenue is mainly on the point that all the securitization transactions were carried out between 16.05.2008 and 20.05.2008 whereas the loan agreement was signed on 21.05.2008. The agreement between HPCL and Yes Bank was first signed on 15.05.2008, which provided that the standard format agreement will be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....process is only a facade and the trust is not valid, then it follows that the only transaction that subsists will be the loan transaction between HPCL and Yes Bank and further the question of assessing the assessee trust as AOP or any other head of income is just not tenable, Even assuming for a moment that the infirmities in the documents point to a collaborative exercise between the concerned parties, the fact of the matter is that funds have flowed from the mutual funds beneficiaries to the trust through the medium of PTCs and the assessee trust, in turn, has taken over the receivables on Yes Bank loan to HPCL. The documents, though they may be having marginal mistakes, have to be accepted in order to give a legal framework to the flow of funds. 6.8.7 Considering the totality of the factual and legal matrix of the issue, as discussed above, we are inclined to hold that the learned CIT(A) was wrong in holding that the assessee trust was not a valid trust. In our considered view all the necessary ingredients for the formation and existence of the trust have been fulfilled and all these documents, processes and money trail cannot be disregarded, only due to the marginal mistakes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or revoking the Trust; and (ii) the contributions are deemed revocable transfers under section 63 of the Act as there is a provision for re-transfer of the income and/or assets to the contributor. 7.3.2 It was submitted that the assessee trust is a revocable trust as the beneficiaries are entitled to revoke the trust. In this regard, our attention was drawn to section 10.02 and section 10.04 of the Trust Deed. The assessee also drew our attention to several pages in the Trust deed and the Deed of Assignment to support its stand. It was submitted that Section 10.02 of the Trust Deed provides that the trust may be terminated with consent of all the beneficiaries, who are the PTC holders. Section 10.04 thereof provides that when the PTC holders unanimously agree and decide to transfer the receivables, the Trustee shall revoke the Trust at the request of the beneficiaries/PTC holders, and shall assign legal ownership in the receivables and in the Other Benefits to the PTC holders in the proportion in which the amounts payable to them under the PTCs held by each of them bears to the aggregate amount of all the receivables remaining outstanding at that time and thereupon the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Revenue friendly provisions, which the assessee is using to evade tax. 7.5 In Rejoinder, The learned senior Counsel of the assessee submitted that the averments of Revenue (supra) cannot be reason enough for not considering the principles enunciated in the judicial pronouncements relied upon. The assessee submitted that the beneficiaries are recognized mutual funds and cannot be called fraudulent. It was also submitted that there cannot be friendly or adverse provisions in law and any provisions of law should be applied to all the parties equally and not in favour of or against any party. If the law had intended to make such restriction, it is specifically provided. As no such restriction is provided in section 61 to section 63 of the Act, such a restriction cannot be read into these sections. Sections 61 to 63 of the Act and the wordings employed therein lay down absolute rules which have to be applied in all cases which come within the scope of these provisions irrespective of (a) who benefits (b) what is the reason for the transfer being dubbed as revocable (c) the intention of the parties (d) whether the circumstances which render the transfer revocable has actually taken p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the aforesaid prelude, he made submission on the grounds raised by the Revenue before the Tribunal in the grounds of appeal. On ground No.3 raised by the Revenue in which the revenue has attacked the findings of the CIT(A) that the Assessee trust is a revocable trust and it need not be subjected tax as the tax obligation have been fully discharged by the beneficiaries of the Assessee trust, the learned counsel for the Assessee drew our attention to Sec.61 and 63 of the Act. Section 61 of the Act provides that "All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income". Section 63 defines as to what is "transfer" and "revocable transfer" for the purpose of Sec.61 of the Act. It provides that:- (a) a transfer shall be deemed to be revocable if - (i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets; (b) "transfer" inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r their respective nominees and assigns. 13.4.5 distribute the residual portfolio in specie." 26. It was submitted by him that the above power of revocation which is a general power of revocation is sufficient for construing the transfer in the present case as a revocable transfer. According to him it is not necessary that the power of revocation should be at the instance of the contributors/beneficiaries and it can be at the instance of any person either the settler, trustee or the beneficiaries. According to him the provisions of Sec.61 of the Act does not contemplate a power of revocation only at the instance of the transferor. In support of the above contention the learned counsel for the Assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of Addl.CIT Vs. Surat Art Silk Cloth Mfrs. Association 121 ITR 1 (SC) at page-17, wherein the Hon'ble Supreme Court had to examine the question as to whether the expression " advancement of any other object of general public utility not involving the carrying on of any activity for profit" would mean that the charitable organisation cannot carry on any business. The Hon'ble Supreme Court observed as follows....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransfer and therefore Sec.61 would apply and there is no need to resort to the provisions of Sec.63 of the Act. Consequently the income arising by virtue of the transfer has to be brought to tax only in the hands of the transferor/beneficiary and not in the hands of the trustee/transferee. 28. His next submission was that even if it is assumed for the sake of argument that there is no direct specific power to revoke Transfer, the provisions of Sec.63 defining "revocable transfers" will apply and consequently income has to be brought to tax only in the hands of the beneficiary/transferor. In this regard our attention was drawn to the document in the form of prospectus inviting contribution from contributors wherein the following clauses are found: "The Fund is expected to terminate seven years from the date of the Indenture of Trust. The process of redemption/termination shall be completed within a period of twelve months to completely liquidate its assets. However, in the event that the investments in the Portfolio Companies are not realised at the end of seven years from the date of the Indenture of Trust, its term may be extended for two additional periods of one year....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is, Income, gains and any other receipts that are realized and received in cash by the Fund and which the Fund does not have a right to retain pursuant to the terms of this Indenture, the Private Placement Memorandum or the Contribution Agreements will be distributed as soon as practicable after such gains are realized. The Trustee may retain Income, gains and/or other receipts of the Fund to satisfy current or anticipated liabilities of the Fund. However there may be times when the Trust may not distribute any income. The Trust may also declare special distributions, if any, on as-needed basis. Further, to the extent of any un-drawn Capital Commitments, the Fund may, at the discretion of the Investment Manager, apply any Distribution Proceeds (as defined below) towards any purpose, which could otherwise have been funded by a Drawdown from Contributors. However the distribution will be at the discretion of the Trustee in consultation with the Investment Manager." 32. Our attention was drawn to the order of the CIT(A) in which the remand report of the AO filed before CIT(A) is extracted in the order of the CIT(A). In para-17.5 of the CIT(A)'s order the remand report of the AO on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en explained to the effect that for identification of beneficiaries it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the Court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the order of the Court or the instrument of trust or wakf deed on the date of such order, instrument or deed. He also drew our attention to the following decisions:- (1) CIT Vs. P. Sekar Trust 321 ITR 305 (Mad) wherein the Hon'ble Madras High Court held that so long as the trust deed gives the details of the beneficiaries and the description of the person who is to be benefited, the beneficiaries cannot be said to be uncertain, merely because wife/children cannot be known until the marriage and begetting of children by the stated beneficiaries. The Hon'ble Court noticed in the above case that the Beneficiaries were five in number for the period from 1st April, 1986 to 31st March, 1989 and the respective share of each beneficiary was in different percentage as stated in the deed itself. From 1st April, 1989 onwards the beneficiaries were seven in number and their shares ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Incorporated in Maurituis, In Re 224 ITR 473 (AAR): The Authority for Advance Ruling (AAR) held that if the trust deed sets out expressly the manner in which the beneficiaries are to be ascertained and also the share to which each of them would be entitled without ambiguity, then it cannot be said that the Trust deed does not name the beneficiaries or that their shares are indeterminate. The persons as well as the shares must be capable of being definitely pin-pointed and ascertained on the date of the trust deed itself without leaving these to be decided upon at a future date by a person other than the author either at his discretion or in a manner not envisaged in the trust deed. Even if the Trust deed authorises addition of further contributors to the trust at different points of time in addition to initial contributors, than the same would not make the beneficiaries unknown or their share indeterminate. Even if the scheme of computation of income of beneficiaries is complicated, it is not possible to say that the share income of the beneficiaries cannot be determined or known from the trust deed." 7.6.4 From an appreciation of the above extracted paragraphs of the decision o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....created as per the RBI Guidelines on Securitization of Standard Assets. c. The Appellant prays that it be held that the income of the Trust is divested at source by overriding title and is not chargeable in the hands of the trust." 8.2.1 In this ground, the assessee's contention is that the amounts received by the assessee from Yes Bank under the Deed of Assignment dated 20th May, 2008 are diverted at source by an overriding title to the PTC holders (Mutual Funds) and therefore the amount of Rs. 21,49,72,486 /- handed over to the assessee and paid to the PTC holders in proportion to their respective investments is not income of the assessee for the A.Y. 2009-10. It was submitted that 'irrespective of whether the assessee is regarded as a 'Trust' or an 'AOP' the doctrine of diversion at source by overriding title will apply so as to render the amount as not being taxable as the assessee's income. 8.2.2 The assessee submits that there is a diversion of income by overriding title for the following reasons: - (i) "Series A1/A2/A3 Pass Through Certificate" is defined in the Trust Deed as evidencing an undivided share in the right and the beneficial interest of the holder....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a 10, pg. 34 of the impugned order). It is argued that having accepted in substance the submission on "diversion", the learned CIT(A) did not take the matter to its logical conclusion; but instead held that diversion by overriding title cannot take place by voluntary act of parties. In support of the propositions/arguments put forth assessee relied on the following judicial pronouncements wherein it was held that overriding title can be created by voluntary act of parties: - (i) CIT vs. C. N. Patuck (71 ITR 713) (Bom.) (ii) Rajkot District Gopalak Co-operative Milk Producers Union Ltd. vs. CIT (204 ITR 590) at 594 (Guj.) (iii) CIT vs. Tollygunge Club Ltd. (107 ITR 776) (SC) (iv) CIT vs. A. Tosh & Sons (P.) Ltd. (Cal.) (166 ITR 867) (v) CIT vs. Raja Ram Jaiswal (All.) (195 ITR 834) 8.3 Per contra, the learned senior standing counsel for Revenue, relying on various judicial pronouncements, emphatically contested the assessee's claim of diversion of income by overriding title. It was submitted that the interest income is received by the assessee and then the same is paid to the PTC holder and therefore the assessee's case is not one of diversion of income at sour....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Mfg. Co. Ltd. vs. CIT (SC) (supra). 8.4.2 The Learned Senior Counsel for the assessee sought to distinguish, as not applicable, the decisions cited by Revenue, as under: - (i) CIT vs. Sitaldas Tirathdas 41 ITR 367 (SC) - (Department's paper book, Vol. II - Exhibit 22 - pg. 199) It is argued that in the cited case an overriding charge was not created whereas in the case on hand, a charge has been created on the property and income of the assessee and therefore the cited case is not applicable. (ii) Moti Lai Chhadami Jai lain vs. CIT 190 ITR 1 (SC) It was held that a charitable trust had been created and there was diversion of income unlike in the first transaction where a part of the rent payable to the lessor was to be paid to a trust. This case is factually different and accordingly not applicable. (iii) Provat Kumar Mitter vs. CIT 41 ITR 624 (SC) The facts in the case on hand are clearly different from the cited case, as the PTC holders have an undivided proportionate interest in the asset i.e. the receivable and have paid consideration for acquiring the same. (iv) K.A. Ramachar vs. CIT 42 ITR 25 (SC) The Hon'ble Apex Court had concluded that income wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nment is the first document in the securitization process and since the undivided interest of the PTC holder is indicated in that document, we find that there is merit in the argument that the ultimate recipient was always intended to be the PTC holders and there was a charge in favour of them. Further, the PTC is defined in the trust deed as evidencing an undivided share in the right and the beneficial interest of the holder in the trust property; in this case, the loan and interest thereon (i.e. the receivables). 8.5.2 Even otherwise, the scheme of securitization is so devised that, by definition, the funds are to travel to the PTC holders. PTC is defined as an instrument issued by a SPV (the assessee in this case) which possessed any receivable assigned to the assessee and acknowledging the beneficial interest of the investors in the receivables. In the context of exposure norms for investment in PTCs, the RBI Guidelines state that the counterparty for the investor in the securities would not be the SPV but the underlying assets (receivables in this case) thereby indicating a direct link between the PTC holders (investors) with the receivables. 8.5.3 The contentions of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Appellant prays that it be held that the Appellant is not an "AOP." 9.2.1 Revenue's main contention on this issue is that all the players in the securitization process have acted together and in unison and have carried out an adventure in the nature of trade to earn income, which is in the nature of "business". Therefore, all the stake holders have to be assessed together as "AOP". 9.2.2 According to the learned Senior Counsel, the assessee cannot be treated as an AOP, both on facts of the case and in view of the judicial pronouncements rendered in this regard. The gist of the assessee's submissions on the facts of the issue are as under: - (i) An AOP is constituted when people join in common purpose or common action, the object of which is to produce common income, profits and gains. On this issue itself, the assessee trust will not qualify for AOP, even if it is considered as an invalid trust. (ii) In the case on hand, the mutual funds have not joined in common action. All the mutual funds have independently applied for and subscribed to the PTCs and therefore, they do not form an AOP. Normally all the members have a share in the AOP's income. Here the income....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... AOP and not a trust, to press home the point that it cannot be an AOP: - (i) The alleged AOP would not have any income as the Deed of Assignment has not been entered into by the AOP. The Deed of Assignment has been entered into by the ITCL as trustees of the assessee Trust, it cannot be regarded as having been entered into by the AOP. (ii) Interest has been received by the assessee Trust for being made over to the PTC holders and the same cannot be said to have been received by the AOP. (iii) There is no authorisation from the members of the AOP in favour of the Trustees to Act on their behalf and, therefore, there is no question of the alleged AOP having any taxable or even non-taxable income does not arise. 9.3 Per contra, the main contention advanced by learned Senior Standing Counsel of Revenue is that all the players knew things in advance and the very fact that they have completed all the actions and documentations in very few days show that they have all worked together, in a concerted manner, to earn income from a business adventure. . 9.4 In Rejoinder to Revenue's contention the assessee's submission is that the stand of the Revenue is based on surmises....
X X X X Extracts X X X X
X X X X Extracts X X X X
....part of the beneficiaries in completing the securitization process, has not travelled beyond the stage of suspicion and surmise and therefore in our view Revenue has not discharged the onus of establishing the existence of an AOP in the case on hand. Even otherwise, since we have already held that the assessee trust is a valid trust, the controversy regarding treating the assessee as AOP does not arise. Consequently, this ground No. IV raised by the assessee is allowed. 10. Ground V: Invalidity of assessment and the confirmation by the CIT(A) 10.1 The assessee has raised the following detailed grounds: - "a. The CIT(A) having held that the AOP is constituted by Yes Bank Limited (originator), the Seven Mutual fund (PTC Holders) and IL&FS Trust Co. Ltd. ought to have quashed the assessment made by the AO on the AOP constituted by the Seven Mutual fund (PTC Holders) and IL&FS Trust Co. Ltd. b. The CIT(A) failed to appreciate that once he has come to the conclusion that the members of the AOP is not the same as what has been treated as the members of the AOP by the AO, the assessment made by the AO ought to be quashed as the said assessment is on a non existing entity." ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m an AOP of nine members. Since the original order made by the AO was on an AOP of eight members, the order passed by the AO becomes invalid and the CIT(A) ought to have cancelled/ struck down the original order made by the AO as invalid and bad in law. In this regard reliance is placed in the case of CIT vs. Ashok Kumar Bharati & Vijay Kumar Goel 282 Taxman 496 where a notice was issued to an AOP said to consist of three members the assessment made on an AOP of two members was held to be illegal by the Hon'ble Allahabad High Court. 10.2.4 The assessee further submits that having made the assessment on the AOP, the AO in the assessment order has stated that the assessee would be treated as a 'Trust", in the event the status as "AOP" was held to be wrong. It is the contention of the assessee that it is not permissible for the AO to pass an assessment order, characterizing the assessee under to different heads, i.e. as an AOP and also as a Trust since they would be two separate assessees and such dual classification is not tenable. The learned CIT(A) ought to have held that the assessment order is bad in law as the assessment has been made on the AOP and in the alternate as a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e a valid Trust, there is no question of the assessee being assessed in the capacity of an 'AOP', and therefore there is no requirement for adjudicating this ground No. V as the same has been rendered infructuous and is accordingly dismissed. 11. Ground VI: Enhancement of Income 11.1 Assessee has raised the following grounds in this connection: - "a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in enhancing the income of the Appellant. b. The CIT(A) erred in holding that income by way of interest on receivables accrues on day to day and not as and when it becomes due. c. The CIT(A) failed to appreciate and ought to have held that: i. The Trust not being a corporate entity is free to accrue its income either under the cash or mercantile method and that mercantile method is not mandatory in law; and ii. Even under the mercantile method, the income by way of interest on receivables accrues as and when it is due and not on day to day basis. d. The Appellant prays that the gross interest as computed by the CIT(A) amounting to Rs. 238428493/- be reduced to a sum of Rs. 214972490/- as disclosed by the Appellant in its return and ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eceive the income, as mentioned in the Deed of Assignment, namely on 1st April, 2009 for the month of March, 2009. 11.3.1 Per contra, the learned senior standing counsel for Revenue countered the submissions of the assessee, by referring to para 3.5 of the Loan Agreement, wherein it is stated that interest has to be computed on number of day basis using 365 days as a year basis. He urged that this clause implies that the interest accrues on day to day basis. It was also submitted that interest on loan is not return on securities. In support thereof reliance was placed on the decisions of the Hon'ble Supreme Court in the cases of CIT vs. Shri Goverdhan Ltd. 69 ITR 675 (SC) and Morvi Industries Ltd. vs. CIT 82 ITR 835 (SC). 11.3.2 Revenue further contended that the decision of the Hon'ble Bombay High Court relied by the appellant in the case of Credit Suisse (Department's paper book Vol. II, pg. 227 to 234) was not applicable as the present case is not that of securities, as was the case before the Hon'ble High Court. According to Revenue, the decision of the Hon'ble High Court applies to interest on securities and would not be applicable to interest on loan. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the dispute before us is essentially on the interpretation of the relevant paragraph 3.5 of the Loan Agreement. Para 3.5 of the Loan Agreement states that interest has to be computed on number of day basis using 365 days as a year basis. The above wordings cannot be stretched to mean that the interest has to be charged on day to day basis. Also, the Deed of Assignment under which the assessee is to receive the amount clearly provides that the assessee is entitled to receive the amounts on the 1st of the next month and to be passed on to the PTC holders in the proportion to the amount of their investments on the very next day. In view of the above clear provisions laid out in para 3.5 of the Loan Agreement and Deed of Assignment, we are of the considered view and hold that it is crystal clear that the interest for a particular month accrues on the first day of the next month as laid out in para 3.5 of the Loan Agreement and recital in the Deed of Assignment. Accordingly, ground No. VI of assessee's appeal is allowed. 12. Ground No. VII: Disallowance of expenses on accrual basis (if enhancement is upheld) 12.1 In this regard assessee has raised the following grounds: - "a. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowing deduction of Rs. 20,61,55,3101- in computing the taxable income ignoring the following facts: a) When the assessee had not claimed deduction of any such expenditure either in the return filed u/s 139(1) of the Act or revised return it/s 139(4) of the Act but only in letter filed on 01.12.2011, after the assessment order was passed, the question of allowing any such expenses does not arise, as no valid claim was made by filing revised return as is required by the assessee as per provisions of Sec. 139 of the Act; this view has also been upheld by the Hon'ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT [284 ITR 323 (SC)] wherein it was held that "After filing original return, further deduction was claimed through a letter - no revised return filed - Assessing Officer cannot entertain the claim". b) The deduction has been allowed based on various additional submissions made during the course of appellate the proceedings which should have been remanded to the assessing officer for his verification as provided in Rule 4 of the IT Rules 1962. However, no such exercise has been carried out before entertaining the claim of the assessee made during ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....department filed additional grounds. The Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. 187 ITR 688 held that the Act does not contain any express provision debarring an assessee from raising an additional ground in appeal and there is no provision in the Act placing restriction on the power of the appellate authority in entertaining an additional ground of appeal. The Bombay High Court in the case of Pruthvi Brokers & share Holders, 349 ITR 336, held that the assessee is entitled to raise before the appellate authorities additional grounds in terms of additional claims not made in return filed by it. The Bombay High Court also in the case of Ahmedabad Electricity Co. Ltd. Vs. CIT 199 ITR 351(Bom) held that the Tribunal had jurisdiction to permit additional grounds to be raised before it even though these might not have arisen from AAC's order, so long as these grounds were in respect of subject matter of entire tax proceedings. The Courts have also upheld admission of additional grounds in the following cases: • CIT Vs. S. Nelliappan (66 ITR 722 (SC) • Ashok Vardhan Birla Vs. CWT (208 ITR 958 (Bom) 7. The Hon'ble ITAT M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ithdrawn grounds and sought to re-insert the same, raised additional grounds raised and withdrawn, sought to modify additional grounds, etc. This shows complete non-application of mind and taking advantage of a judicial forum's patience. The sequence of the sorry state of affairs of the Department is set out hereunder: S.No. Date of filing Department Appeal 1 30th May, 2013 Filed original appeal with G. No. 1(a) and (b) 2 1st November, 2013 Additional G. No. 2 and Additional G. No. 3 filed by the ITO 3 17th July, 2014 DPB Vol. III written submissions filed by the CIT-DR wherein at Para 4, Pg. 2 - Revenue submitted that Original G. No. 1 no to be pressed and it also mentioned that only G. No. 3 to be pressed which by implication means Additional grounds No. 2 is also not pressed. 4 14th January, 2016 RA handed over Additional G. No. 4 dated 14^th January, 2016 5 28th September, 2016 RA orally urged that G. No. 1 and Additional Ground No. 2 of the Department Appeal are not pressed by reading the written submissions dated 17th July, 2014. 6 29th September, 2016 RA orally requested to modify Additional G. No. 3 7 3rd ....