TaxTMI 
TaxTMI 
2017 (2) TMI 1122
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....s. 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-bid enquiry, Yes Bank (hereinafter referred to as 'Yes Bank'/ Originator/Seller....
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....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 declaring taxable income at Nil, as according to the assessee, the amounts received by the assessee from Yes Bank a....
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....refore, 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 exempt from tax. The assessment was accordingly completed u/s 143(3) of the Act, vide order dated 30.11.2011. CIT(A)....
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....ence 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) failed to appreciate and ought to have held that: i. All the essentials for the creation of a valid trust were fulfilled; ii. Provisi....
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....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 assessment order 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 ....
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....erest 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 the Act to the contribution made by the Beneficiaries to the Appellant. Ground III: Diversion by overriding title without prejudice to grounds above: a. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the income of the Appellant is not diverted at source to the Beneficiaries/PTC Holders on the alleged ground that a....
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....hich, 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 vehicle (SPV) in return for an immediate cash payment. ii) Securitization involves a two-stage process. In the first stage, there is a sale of single asset or pooling and sale of pool of assets to a bankruptcy remote SPV in return of an immediate cash payment and in the second stage repackaging and selling the security interests representing claims on incoming cash flows from the asset or pool of assets to third party inves....
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....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 same amount of capital. On the supply side, securitization results in growth of retail loan portfolios in Banks/NBFCs. On the demand side, the capital available with mutual funds and other institutions is put to gainful use. Now we proceed to discuss the Grounds of appeal raised by the assessee. 6. Ground No. 1 6.1 Holding the trust to be not a valid trust and consequently that section 161(l) of the Act is not applicable: (a) On the fa....
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....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 Venture Capital Fund vs. ITO (ITAT Mum.) wherein it was held that when SEBI has granted registration to the venture capital fund, it is not open to the AO to go into the validity of the said registration as the same is not within the domain of the AO. 6.2.2 It was also submitted that the RBI Guidelines on Securitization provide that securitization can be undertaken by company, trust or firm. The assessee has undertaken the securitization as a 'trust', which is valid and which was duly reported to ....
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....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 facts properly and furnishing proper reasons. Merely by computing the interest accrued as income of the assessee instead of non taxable as claimed,, the inter-se rights of the assessee under any other statutory framework does not get affected. There is no requirement under the Income Tax Act that the AO has to get an order of the court for income determination. The requirement u/s 281 of the Act to get a suit initiated to annul a transfer of property before effecting attachment is totally different and has no connec....
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.... 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 decision of Pestonji Jalbhoy Chichgar vs. Jalbhoy Jehangir Chichgar 1934 AIR (Bom.) 64 is erroneous as it has no relevance to the facts of the present case. (vii) The initial contribution of Rs. 500/- is for the benefit of the initial investors who are also the beneficiaries of the Trust. Hence the conclusion of the CIT(A) that there is no beneficiary at the time of the settlement of the Trust is invalid and incorrect. (viii) Section 6 of the Trust Act inter alia provides that transfer of trust property to the trustee is pre requisite fo....
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....daben 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 transactions that went into the securitization process to contend that the trust was only a facade, if not a farce. The submissions of Revenue as regards the mistakes in the documentation related to the securitization process are elaborately outlined therein. The sum and substance of the contentions of the Revenue regarding the mistakes infirmities are summarized as under: - (i) The assessee trust is not a valid trust. (ii) Even before the trust was formed, the loan from Yes Bank has been assigned and all the procedures/ formalities related to the securitization h....
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....bmitted 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 correct to say that the agreement was executed after the securitization process was completed. The loan agreement provides that the loan agreement would be effective from 15th May, 2008. (iii) The loan agreement refers to the Demand Promissory Note to be executed by HPCL in favour of Yes Bank. In the Trust Deed instead of mentioning "to be executed on 21 Day of May, 2008" it has been stated as "dated 21st Day of May, 2008". Merely because a clause has not been properly drafted does not mean that the document or the agreement is null and void. (iv) If the proposed trustees have m....
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....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 investors by issuance of tradable debt securities. It is the contention of the Revenue that the assessee has executed the transaction in the reverse order i.e. they have executed the second step first and then the first step and, therefore, the assessee has breached the RBI Guidelines. It is wholly unrealistic to hold that the trust must itself first finance the securitization and then issue the PTCs to the mutual funds contributors. * All Clauses of the RBI Guidelines are required to be read in entirety. RBI Guidelines emphasize on transfer of assets from the Originator to SPV, issue of PTC by receiv....
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....e 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 repays the loan and interest to Yes Bank only. All the other transactions have been initiated and virtually controlled by Yes Bank. In fact, it is fairly accepted by the assessee that all the transactions are initiated and regulated by the Bank, by claiming that the RBI Guidelines envisage the lender to be the Originator. 6.8.2 The main contention of Revenue is that all the transactions related to securitization are a facade worked out by the Bank and the assessee trust is not a valid trust. The bank, the assessee trust, the mutual funds beneficiaries, and trustees, have worked closely together in putting up the facade of the trust and have come together to indulge in busines....
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....f 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 signed. The standard format agreement was signed on 21.05.2008. All the procedures and documents related to the securitization process was carried out on 20.05.2008. The insistence of Revenue that only the standard format agreement has to be reckoned and not the agreement dated 15.05.2008 does not appear to be tenable. Even assuming that the agreement dated 15.05.2008 was only in the nature of a letter of intent, it cannot be disputed that the lender, Yes Bank had full knowledge of the loan and had disbursed the amount. Therefore, it is very likely that Yes Bank had initiated the securitization process, pending signing of the standard format agreement. These are all standard documents that ....
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.... 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 in the clauses in the documents and also the timing of signing of these documents. Accordingly we hold that the assessee Trust is a valid Trust. 6.8.8 Consequently, this portion of ground of appeal No. 1 is decided in favour of the assessee by holding the assessee to be a valid trust. 7. Ground II: Holding the trust was not a revocable trust/ contribution by beneficiaries was not a revocable transfer: 7.1 In this regard, the assessee has raised the following grounds of appeal: - 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 the Act on the ground that (i) there is no contribution by the Beneficiary to ....
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.... 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 assessee shall stand extinguished and revoked. 7.3.3 It was submitted that these two sections in the Trust Deed show that the assessee Trust is a revocable trust and the income of the Trust would be chargeable to tax in the hands of the Beneficiaries. It was also submitted that the contributions by the PTC holders are revocable transfer as per section 63(a)(i) of the Act, as there is a provision for retransfer of the receivables, i.e. the income as well as the contributions made by the transferor/PTC holders. Therefore, the receivables collected by the assessee are taxable in the hands of the mutual fund beneficiaries, i.e. the transferor/PTC holders as per provisions of section 61 of the Act. In this regard, reliance was placed on....
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...., 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 place. Reliance for this proposition was placed on, inter alia, the decision of the Hon'ble Calcutta High Court in case of Tarunendra Nath Tagore vs. CIT 33 ITR 492 (Cal.) and few more judicial pronouncements. 7.6.1. We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the Bangalore Bench of ITAT, in the case of DCIT vs. India Advantage Fund VII (supra) has explained the principles related to Trusts and their taxation. Even though the facts of the cited case does not pertain to securitization, as pointed out by the Revenue, the principles enunciated in that decision are universally applicable and certainly to the case on hand, as the issu....
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....e 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" includes any settlement, trust, covenant, agreement or arrangement. The first aspect pointed out by him was that the beneficiaries transfer funds to the trust in accordance with the terms of the trust deed and therefore there is a transfer within the meaning of Sec.61 of the Act. It was his contention that the Sec.61 talks of a specific power of revocation conferred under the instrument of transfer and Sec.63 defining "revocable transfer" deals with "deemed revocable transfers". According to him, if there is a direct power or revocation under the instrument of transfer there is no need to resort to the provisions of Sec.63 of the Act. 25. He next drew our attention to Article-13 of the Trust deed which reads thus:- "13 Term and termination of the Trust....
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.... 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:- "It is clear on a plain natural construction of the language used by the legislature that the ten crucial words "not involving the carrying on of any activity for profit" go with "object of general public utility" and not with "advancement". It is the object of general public utility which must not involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these last ten words is the linking of activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the means to carry out the object should not involve an activity for profit. That is not the mandate of the newly added words.....
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....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 each, upon the recommendation of the Investment Manager and the approval of 75% of the Contributors. In addition, 75% of the Contributors, if unsatisfied with the performance of the Fund, by a written notice can revoke their Contribution to the Fund at any point of time and the Trustee shall then terminate the Fund subject to the following: (i) Capital Commitments will not be terminated to the extent necessary to pay Fund Expenses or honour investment commitments previously made by the Fund; (ii) The Fund will continue for such period of time as may be necessary to liquidate existing investments in an orderly manner; and (iii) The Management Fee will continue to be payable until the Fund terminates based upon the total Capital Commitments without regard to any terminatio....
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....rawdown 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 the aspect of the trust being revocable has been set out. It was pointed out by the learned counsel for the Assessee that the AO has not disputed in his remand report the fact that the Assessee trust is revocable but only says that beneficiaries are assessed at different places in India and it is very difficult to monitor all these beneficiaries as to whether they have filed their returns and even if filed, whether correct share of income received/receivable from the Assessee are admitted. To avoid such eventuality it would be correct to Assessee the trustee/representative Assessee. It was his submission that once the trust is accepted to be revocable then there is no question of assessing the transferee and it is only the transferor who can be assessed. It was his submission that Sec.61 mandates that income arising to any perso....
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.... 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 in the income was equal. As per trust deed, as and when B and P are married, their spouses would automatically become beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting years and equally divide the beneficial interest in income of the aforesaid beneficiaries. Likewise, as and when any child or children is/are born to the said B and P the child or children so born shall automatically become a beneficiary/ beneficiaries along with the other continuing beneficiaries in the said accounting year and subsequent accounting years and equally divide the beneficial interest in income of the aforesaid beneficiaries. Deed also provided that in the event of death of a beneficiary what should be done. The Hon'ble High Court having regard to the terms of the trust deed, held that the deed clearly prescribes the b....
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....ciaries 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 of the Bangalore Bench of ITAT in India Advantage Fund - VII (supra), in our view, it emerges that: - (i) It is the power to revoke the transfer that has to be seen and not the person at whose instance such revocation can be done. (ii) The provisions of section 63 of the Act defining "revocable transfer" will apply and consequently income has to be brought to tax only in the hands of the beneficiary/transferor. iii) The section does not say the deed of transfer must confer or vest an unconditional or an exclusive power of revocation in the transferor. What emerges from out of the above discussion is that the beneficiaries need to be identifiable and the Trust Deed must contain provisions that vest the power of revocation. There is nothing in the section to read that such a power should be unconditional. As mentioned earlier, the Trust Deed and the Deed of Assignm....
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....39;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 in the Trust Property, consisting of the Loan, Interest and other benefits, which is clear evidence that charge is created as the PTC holders have a direct interest in the property, which are the receivables from Yes Bank. Therefore, there it is a clear case of diversion at source by overriding title. The Recital A of the Deed of Assignment also states that the PTC's represent undivided interest of the holder of the PTC in the receivable. (ii) As per clause (ie) of Securities Contract (Regulation) Act, 1956, a PTC is an instrument issued by a SPV (assessee, in this case) which possesses any receivable (in Loan of Yes Bank) assigned to the assessee and acknowledging the beneficial interest of the investor (Mutual Funds) in the receivables. This indicates a direct interest of the PTC holder in the receivables which proves that in the case on hand there is a diversion of income by overriding ti....
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....y 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 source by overriding title, but one of application of the income and therefore, the income cannot be said to be diverted at source. In support of this contention, the learned Senior Counsel of Revenue referred to the 'Information Memorandum' showing the inflow and outflow of funds and the bank statements reflecting the receipts credited in the accounts of the assessee and then given to the PTC holders. Reference was also made to the return of income for A.Y. 2009-10 to argue that the assessee had added distribution to beneficiaries as a line item and the full amount of Profit before Tax was shown as distribution. On this basis, it was argued by Revenue that the assessee got the income and thereafter applied the same by making it over to the PTC holders. If it was not the income of the assessee, then the assessee should not have shown it in its return of income at all. Revenue, therefore, contended that the above facts es....
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....ed 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 was not diverted by overriding title on the specific wording of the document that the amount was to be paid by the assessee from the income of the assessee and therefore the cited decision is not applicable in the present case on hand. (v) CIT vs. Sunil J. Kinariwala 259 ITR 10 (SC) This decision turned on its peculiar facts and is not applicable to the case under consideration. (vi) Associated Power Co. Ltd. vs. CIT (218 ITR 195) (SC) In this case the Hon'ble Apex Court held that there was no diversion of income as the assessee is in control of the money and merely because restriction was put on use of the money could not make any difference. Since this case is factually different from that of the case on hand, it is not applicable. (vii) Vellore Electric Corpn. Ltd. vs. CIT (SC) 227 ITR 557 Follows Associated Power Co. Ltd. (viii) Performing Right Society Ltd & Another vs. CIT (SC) 106 ITR 11 In this cited case the Hon&#....
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....party 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 Revenue are based on the fact that the moneys are received by the assessee trust and then passed on to the PTC holders. As held by the Hon'ble Apex Court in the case of CIT vs. Tollygunge Club Ltd. (supra) every receipt in the hands of the assessee need not be its income and it is only when it bears the character of income at the time when it reaches the hands of the assessee that it becomes exigible to tax. In the case on hand, even at the initial stage, even before the money flows to the assessee, it was always clearly intended to be passed on to and only to the beneficiaries, i.e., the PTC holders in proportion to their interest in the receivables (underlying assets). Therefore, merely because the moneys flow through the assessee, it cannot be automatically inferred that it is income in the hands of the assessee. The money was always intended to be passed on to the PTC holders and therefore, it can be said that only the PTC holders had a claim....
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....on 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 is to be received by different mutual funds as per each individual contract. (iii) The contributors wishing to subscribe to the PTCs have to make an application to the assessee and the allotment of PTC is at the discretion of the assessee. Therefore, there can be no question of mutual funds "coming together", since even after making an application there is no certainty of being allotted a PTC. (iv) The fact that the mutual funds can transfer the PTCs would show that they have not come together to join in common purpose, but each one has individually decided to invest and can transfer the PTC's of its own accord in so far as reference to other PTC holders. On the other hand, in case of an AOP, an AOP member cannot independently transfer its shares in the AOP. As the PTCs are purchased by the PTC holders, there can be no question of an AOP, as the transactions would be separate purchase transactions between each of the mutual funds and assessee trust and there is no coming....
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....oncerted 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 and conjectures, without any basis. For making an investment decision, the mutual funds had only to decide whether the rate of interest of 9.18% was a reasonable rate of return for their investment or not. On the issue of the activity being in the nature of business, it was submitted that in the present case, none of the attributes of trade is present. The assessee (i) receives fixed income, akin to bank interest; (ii) the assessee is holding on to the asset till maturity, with no intention what so ever to resell the asset; (iii) the interest received is immediately paid over to the contributors (Mutual Funds) as mandated in the Assignment Deed and cannot be utilised for doing any further activity. Therefore, the activity of the assessee is akin to holding debentures/bank fixed deposits and cannot be called business. 9.5 Both the parties relied on certain judicial pronouncements and tried to distinguish the judicial pronouncements relied on by the other party, on merits. 9.6.1 We have heard the r....
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.... 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." 10.2.1 In this ground the assessee contends that the assessment order for A.Y. 2009-10 showing the status of the appellant as AOP is invalid. It is submitted that the assessment order holding the assessee to be an AOP is invalid, when the return of income filed by the assessee was not in the status of AOP. Assailing the action of the AO and learned CIT(A) in holding the assessee as "AOP" and assessing it in such status, the learned senior counsel of the assessee contended that the AO and learned CIT(A) do not have the jurisdiction and powers to change the characterization of the head of income of the assessee as "AOP" when the assessee has filed its return of income in the capacity of "Trust". It is submitted that the return of income for A.Y. 2009-10 was filed in Form ITR-5, which enables the following to file returns under: 1 - Firm, 2 - A local authority, 3 - cooperative bank, 4 - co-operative society, and 5 -Any other AOP / BOP, artificial juridical person (residual category). The PAN issued to the appellant....
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....ion 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 Trust. 10.3.1 Per contra, on the change of status of the assessee by the AO, the learned standing counsel for Revenue contends that the return must be treated as filed, i.e. in the status of AOP. It was submitted that if there was no ITR Form available for the status of Trust then the assessee should not have filed return of income. It was further contented that if the status of the trust is that of its beneficiary, then the Form applicable to beneficiary should have been filed. It was also submitted that the status of the assessee cannot be of individual, as the status of trust depends on status of beneficiary. 10.3.2 On the learned CIT(A) changing the constitution of AOP, Revenue contends that it is not open to the assessee to argue that the CIT(A) should have quashed the order. Power of CIT(A) is coterminous with that of AO. With respect to Ashok Kumar Bharati's (supra) decision, it was contended that the issue in that case was issue of jurisdiction under section 148 of the Act and has no relevance in this cas....
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.... 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 accordingly, the enhancement of Rs. 23456003/- be deleted." 11.2.1 In the course of appellate proceedings, the learned CIT(A) observed that the interest receipts have not been accounted for as per the accrual concept, due to which the interest income accruing in March, 2009 has not been accounted for. The learned CIT(A) issued an enhancement notice and added the interest income pertaining to the period March 2 to March 31, 2009 amounting to Rs. 23,84,493/-. 11.2.2 Before us, the learned Senior Counsel for the assessee submitted that under the terms of the loan advanced by Yes Bank to HPCL, HPCL was liable to pay monthly interest on the first day of the succeeding month. Under the Deed of Assignment executed by Yes Bank in favour of the assessee, the assessee was entitled to received the inflows (interest) from Yes Bank on such 1st day of the next succeeding month. The assessee was accordingly entitled to receive relevant inflows (interest) on 1st April, 2009; being the interest for March 2009. The interest for March 2009 accrued on 1st April....
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....nue, the decision of the Hon'ble High Court applies to interest on securities and would not be applicable to interest on loan. 11.4.1 In rejoinder to the averments by Revenue, the learned senior counsel for the assessee countered the claims of Revenue, stating that the concerned para 3.5 of the Loan Agreement has been misunderstood. It was submitted that this para only gives the basis to compute the interest and it does not say anywhere that interest would accrue on day to day basis. The import of para 3.5 which stipulated that interest was to be computed on the number of days basis using 365 days as a year basis was that interest for different months would be different depending on the number of days in month, i.e. interest for the month of January or March (31 days) will be higher than for February (28 days) or April (30 days) as opposed to equal for each month. The assessee also referred to the Deed of Assignment under which the assessee is entitled to receive the amount clearly provides that the assessee is entitled to receive the amounts on the 1st of the next month. 11.4.2 In rejoinder by the learned counsel of the assessee to the judicial pronouncements relied upon by ....
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....ses on accrual basis (if enhancement is upheld) 12.1 In this regard assessee has raised the following grounds: - "a. CIT(A) erred in not allowing expense by way of interest / return on investment payable to the PTC holders on the same basis as applied by him for charging to tax the interest income on receivables. b. The CIT(A) failed to appreciate and ought to have held that: i. Whatever income is receivable by the Trust is all payable by the Trust to the beneficiaries; and ii. There cannot be double standards for charging of income and for allowance of expense. c. The Appellant prays that if enhancement of income by way of interest on receivables is upheld, then the corresponding expense be also allowed as a deduction." 12.2 In this ground, the assessee has raised an alternate ground that if the enhancement to the income is allowed, then the corresponding outgo (expenditure) for March, 2009 be allowed. Since we have already held that the enhancement of the assessee's income on the interest income made by the learned CIT(A) is not tenable, the claim for disallowance of expenses on actual basis is now rendered infructuous, as it does not survive for consideration. The gr....
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....xercise has been carried out before entertaining the claim of the assessee made during appellate proceeding, which is not in consonance with rule 46A of the IT Rules. (2) Without prejudice to the above, the Ld. CIT(A) grossly erred in allowing deduction of Rs. 48,86,795/-, comprised in the sum of Rs. 20,61,55,310/- on the ground that the same represented premium allowable as an expense even though it formed part of total consideration of Rs. 300,55,82,700/- paid for purchasing loan of Rs. 300 crores from Yes Bank Ltd. as capital asset. (3) Without prejudice to the above, the Ld. CIT(A) grossly erred in allowing deduction of Rs. 20,12,68,515/- comprised in the sum of Rs. 20,61,55,310/- as allowable expenses as investor payouts even though the said sum represented distribution and application of accrued interest income of Rs. 23,84,28,493/- and not a sum incurred in earning the said accrued interest income and also without noting that the expenses is also disallowable u/s 40(ba) of the Act, since the CIT(A) has held the assessee as an association of person. (4) Without prejudice to the above, on the facts and in the circumstances of the case and in law, even if the trust is hel....
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....Birla Vs. CWT (208 ITR 958 (Bom) 7. The Hon'ble ITAT Mumbai in the case of Pradeep G. Vora vide ITA No. 2187/Mum/2006 pronounced on 30.05.2014 examined the issue of admission of additional ground in detail vide para Nos. 3.1, 3.2 and 3.3 of the order. In paragraph No. 3.1, it is held that the power of the Tribunal to allow an additional plea/additional evidence originates from the principle that substantial justice should not suffer because of non consideration of an additional ground or an additional evidence. The Hon'ble Tribunal vide para 3.3 concluded as under: "We would like to sum up the discussion by holding that both on principle and on precedent, there is no reason why the Tribunal must be precluded from handling a point, whether of law or fact _ which relate to an assessment, which appertains to the assessee's assessment merely because nobody else had handled it before or because it had not occurred either to the assessee or to the Department to raise and urge that point at earlier stages of the proceedings. In the matter under appeal it is not the case of the DR that necessary facts for deciding the controversy involved in the additional plea are not avai....
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.... 3rd October, 2016 The Modified Additional G. No. 3 dated 30th September, 2016 was filed by the Department with further modifications made in ink after the verification by the Assessing Officer. RA also urged that he wants to press the G. No. 2 which he had submitted as not pressed on 28th September, 2016. 8 4th October, 2016 RA urged to press G. No. 1 of the Department appeal which he had submitted as not pressed on 28th September, 2016. 9 5th October, 2016 RA filed an application dated 5th October, 2016 stating the series of different stands taken by the Revenue as set out at S. No. 1 to 8 above, annexing the consolidated grounds of department appeal. 10 25th October, 2016 RA filed a separate application dated 24th October, 2016 praying for admission of additional grounds of appeal. In the application, Department has sought admission of the Additional G. No. 3 as originally filed and not re-modified Additional G. No. 3." 16.3. At the outset of the hearing the learned senior counsel for the assessee submitted that, even assuming that the additional grounds raised by Revenue are admitted, if grounds No. II, III or IV or the assessee's appeal are decided in its f....