TaxTMI 
TaxTMI 
2019 (9) TMI 766
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....ct) dated 24/03/2015 by the ld. Income Tax Officer-23(1)(2), Mumbai (hereinafter referred to as ld. AO). Since identical issues are involved in these appeals, they were heard together and are being disposed off by this consolidate order, for the sake of convenience. 2. The facts of ISARC 14/2010-2011 Trust is taken as the lead case with the consent of both the parties before us and the decision rendered thereon would apply with equal force for other assessees also hereinabove, except with variance in figures. 3. The assessee has raised the following grounds of appeal :- Under mentioned ground of appeal are without prejudice to one another 1. The CIT (A) Mumbai 32 erred in concluding that Section 61 to 63 of Income Tax Act does not apply to this assessee and further erred in assessing the trust at MMR of 30%. 2. The CIT (A) Mumbai 32 erred in considering that the share of beneficiaries are not specific. 3. The CIT (A) Mumbai 32 erred in rejecting the status of the assessee as Trust, which is created under the guidelines of RBI and under the provision of the SARFAESI Act 2002. 4. The CIT (A) Mumbai 32 erred in recognizing the legal p....
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.... the assets sold even after asked by the AO. c) On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in holding that as per the guidelines of the RBI, no upside income should be recognized till the full redemption of the entire principal security receipts and ignored the fact that as per the IT Act, the assessee has to offer for taxation any income which accrues or arises or deemed to accrue or arise in India during such year. 3. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the A.O. be restored. 4. The Appellant craves leave to add, delete, alter, amend and modify any or all grounds of appeal." 4. We find that the additional grounds raised by the assessee is only in support of the main ground already raised by the assessee that income is not taxable in the hands of the assessee. Since the additional ground raised is purely legal in nature and goes to the root of the matter, we are inclined to admit the same and take up for adjudication. 5. The brief facts are that the assessee is a specific trust formed under Indian Trust Act, 1882 under the guidelines of The Securitis....
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....s which have been agreed to be assigned to the Trustee by the Seller under the Assignment Agreement with ISARC as the Confirming Party. The Trust, pursuant to this scheme, issued Security Receipts to the prospective investors, representing undivided right, title and interest in the Assets acquired, and the remaining Trust Fund. The Security Receipt Holders shall receive returns on these Security Receipts, as specified in the Offer Document. 5.2. The entire process of activities carried out are as under:- a) Banks / Financial Institutions (FIs) announce sale of Non Performing Assets (NPAs) and provides a list of the financial assets which are to be sold to ARC. b) ARC, at its own cost, undertakes valuation, due diligence, etc. to arrive at a specified cost at which the NPAs can be acquired. c) ARC bids for acquiring NPAs after evaluating the analyzing the portfolio / NPA based on the Due Diligence report and makes an offer to the Bank / FI. d) The bank assigns the account to the highest bidder, provided the offer matches the reserve price fixed by Bank / FI. e) If offer by ARC is accepted, acquisition of NPAs can be done in two ways i.....
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....s (QIBs) as per section 7 of the SARFAESI Act. QIBs are FIs/ Insurance Companies / Banks / State Industrial Development Corporation, Trustee, SC / RC which has been granted registration u/s 3(4) of SARFAESI Act, or AMC / FII, etc. as defined in Section 2 of the SARFAESI Act. Therefore, all beneficiaries / investors are clearly identifiable / traceable / accountable / assessable. The details of the same are as under:- ISARC- UBI 1/2009-10 TRUST Selling Bank : United bank of India Details of Name, Ratio and Address of Beneficiaries Name of the Beneficiaries Ratio of Beneficiaries/ Investments Address United Bank of India 95% 11, Hemanta Basu Sarant, Kolkata - 700 001 India SME Asset Reconstruction Company Limited 5% C 11, G Block. MSME Development Centre- BKC, Bandra (E) ISARC SIDBI 2/2009-10 TRUST Selling Bank : Small Industrial Development Bank of India Name of the Beneficiaries Ratio of Beneficiaries/ Investments Address Small Industrial Development Bank of India 95% MSME Development Centre, Bandra Kurla Complex, Bandra (E) Mumbai - 400 051 India SME Asset Reconstruction Company Limited 5% C 11, G Block. MSME Dev....
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....umpsum consideration of Rs. 5,31,09,000/-. The Trust issued Security Receipts to ISARC, who is 100% investor in the Trust. 6. The assessee trust offered Nil income for the Asst Year 2012-13 in its computation of total income with the following note attached thereon:- "Trust is set up under Indian Trust Act, 1882 and SARFAESI Act by India SME Asset Reconstruction Company Limited, a company duly registered under section 3 by Reserve Bank of India under SARFAESI Act. It is also the Trustee of the Trust. The object of the Trust is acquisition of non-performing assets / distressed financial assets for the purpose of reconstruction and realization. The investors in Security Receipts (SR) issued by the Trust have invested the amounts which transfer is revocable under the provisions of the Trust Deed and the Offer Document. In view of this, under the provisions of section 61 of the Income Tax Act, 1961, income / loss of the Trust is includible in the total income of the transferors i.e investors in Security Receipts. The realization from the non-performing / stressed assets is first utilized for redeeming the Security Receipts. Amount realized in excess of amount of Security Re....
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.... 1,422,346 23,426 TOTAL 1,422,346 23,426 TOTAL 1,422,346 23,426 SR Position As on 31st March 2012 Particulars SR's % No. of SR NAV Per SR (Amount in Rs.) SR Amount 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 Opening Balance Less: Partial Redemption during the year 53,109 53,109 53,109 - 1,000 237 1,000 - 53,109,000 12,581,120 53,109,000 - Closing Balance 100 53,109 53,109 763 1,000 40,527,880 53,109,000 Balance of Financial Asset as at 31st March 2012 (F.Y. 2011-12) (Amount in Rs) Particulars AS AT 31.03.2012 AS AT 31.03.2011 Opening Balance of Financial Asset 53,334,086 - Add Purchase of Financial Assets - 53,334,086 Acquisition Expenses during year 2,627,751 - Commission on Recovery 20,708 - 55,982,545 53,334,086 Less Receipt / Recovery during the year 16,596,986 Closing Balance of Financial Assets 39,385,559 53,334,086 6.3. In the Significant Accounting Policies and Notes to the Financial Statements of the assessee trust as at 31.3....
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.... c) Brief history of the activity carried out by the trust. d) Details of NPAs taken over by the trust. e) Details of Name and address of Beneficiaries of the trust. f) Specific reasoning for non-taxability of income of the trust since the shares of beneficiaries are known and accordingly the same is taxable only in their hands and not in the hands of the trust. g) Submission that no interest is received or paid during the year. h) Copy of Bank Statement and Bank Book. i) Specific submission that assessee trust is only a pass through entity and as such the receipt is not at all an income of the trust. j) Specific submission that since the beneficiaries of the Trust are definite and identifiable with definite shares, the question of making the trust liable for tax, does not arise. The assessee submitted that it being a specific trust with specified shares of each beneficiary, the beneficiaries are liable to income tax for the gains made and not the assessee. k) Details of income tax assessment particulars together with the PAN of the beneficiaries. l) The assessee requested the ld AO to make enquiries with the beneficiaries of the assessee trust, as to w....
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....erved that merely because the contributors had paid taxes in their returns with regard to the subject mentioned transactions with the assessee trust cannot exonerate the assessee trust from its taxation. The ld AO further observed that the assessee had not shown that the income earned by the beneficiaries have been offered for taxation by each of the beneficiaries in their respective returns of income at the correct rates. 8.2. The ld AO summarized his various observations in para 8 of his order as under:- a) Whereas in the case of the trust, settler, contributor and beneficiaries, all have to be independent and distinct. In the case of the assessee, the contributors are the beneficiaries themselves, therefore, the assessee cannot be treated as a trust, but as an AOP having 19 members in the form of QIBs and financial institution. b) After its creation, the so-called trust entered into contribution assignment through offer document dated 30.03.2011 for the sole purpose of taking NPAs for sale at a profit. Such an entity can be at best be classified as an AOP created jointly by several persons for earning profits. c) Capital contribution is a revocable ....
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....0/-. It was pleaded that there was no income during Asst Year 2012-13 which could be chargeable to tax. 9.1. The ld CITA reiterated the observations of the ld AO and held that the ld AO was right in treating the assessee as an AOP and not a trust. The ld CITA observed that the provisions of section 164 of the Act cannot be applied in the present case in as much as taxability of AOP are governed by the provisions of section 167B of the Act. He observed that as per section 167B of the Act, where shares of members in AOP is indeterminate or unknown, in which case the tax is levied at maximum marginal rate. On the other hands, where the share of members in AOP is determinate or known, such income is computed in the hands of members of AOP as per provisions of section 67A of the Act. In the present case, the assessee has explained the basis of distribution of income as under:- "The Trust is not expected to retain the sales proceeds or the amounts recovered from NPAs, but distribute the same as per agreed priorities mentioned above, i.e for meeting expenses, payment of management fee, redemption of SRs, and distribution of surplus if any as profit in the form of 'yield' or 'u....
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....essee is a specific trust formed under Indian Trust Act, 1882 under the guidelines of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act in short) for the benefit of holders of Security Receipts (SRs) issued by the trust. The trust is set up in accordance with Clause 3(1)(xi) read with Clause 8(1) of The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003, issued by Notification dated 23.04.2003. As per the Offer Document issued in respect of Private Placement of Security Receipts issued by ISARC 14/2010-11 Trust (i.e the assessee herein) acting through the Trustee India SME Asset Reconstruction Company Ltd (ISARC) , it is found that ISARC is registered with the RBI as a Securitisation Company and an Asset Reconstruction Company (ARC in short) , pursuant to SARFAESI. ISARC proposed to acquire the assets by raising funds for such acquisition by the issue of Security Receipts to the prospective investors, upon contribution by them to the Trust. The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 require that any Secu....
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....he assets over a period of time. For asset management, ISARC receives management fee as an agreed % of the value of outstanding SRs. (h) The realization / recovery from resolution of the acquired NPAs are appropriated in agreed waterfall as under: (i) First to pay the expenses incurred (ii) Second to pay the accrued management fees (iii) Third to redeem the SRs (iv) Fourth to pay agreed yield, if any to SR Holders and (v) Finally, balance surplus to be shared as upside in the agreed ratio. 11.1.1. The process of activities carried out as detailed hereinabove are not in dispute. We find from the Trust Deed and its various clauses together with the process of activities carried out as detailed above that the assessee trust and ISARC are two different entities. Thus it could be safely concluded that the assessee cannot be treated as an AOP and is an independent trust formed for a specific purpose as detailed hereinabove. 11.2. We find that the predominant object of the trust is acquisition of non-performing assets / distressed financial assets for the purpose of reconstruction and realisation thereon. We find that the assesse....
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.... Trust means the trust declared, and accepted by the Trustee, pursuant to the terms and conditions contained in this Deed. f) The term 'Trust Account' is defined in the Trust Deed as under:- Trust Account means the bank account established by the Trustee in accordance with Section 2.4 (Trust Account) below. g) The term 'Trust Fund' is defined in the Trust Deed as under:- Trust Fund means the Initial Trust Fund, the Contributions, the Loans and other Financial Assets relating to the Borrower acquired by the Trust from time to time, the Trust Account and all sub accounts of the same, all investments of the Trust , all income and realizations including any Resolution Services Revenue and any other assets or property of the Trust. Clause 2.1. Declaration of Trust (a) The Declarant hereby declares, agrees, assures and confirms that the Declarant shall hereinafter HAVE AND HOLD a sum of Rs. 1000/- (Rupees One thousand only) (hereinafter referred to as the 'Initial Trust Fund') together with all additions or accretions thereto and the investments representing the same IN TRUST and subject to the powers, provisions, agreements and declarations here....
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....ets to any other trust / scheme, in accordance with the terms of this Deed. 2.7.2. ................... Clause 3.7. Distribution of Amounts Received by the Trustee 3.7.1. All amounts deposited in the Trust Account shall be utilized by the Trustee to make the following payments in the following order:- (a) Firstly, for payment of all statutory and regulatory dues, if any. (b) Secondly, for the servicing of any debt incurred by the Trust. (c) Thirdly, for payment of Reimbursable Costs and Expenses incurred by the Trustee and Chargeable Interests thereon, in accordance with Section 3.6. (Expenses Chargeable to the Trust Fund) on the date on which the Trustee makes a claim on the Trust Fund for such Reimbursable Costs and Expenses incurred by the Trustee and Chargeable Interests thereon, and any fees or remuneration of the Trustee in accordance with Section 4.9. (Trustees Remuneration) , when due; and (d) Finally, on each Payment Date, for payment of the amounts to be distributed amongst the Security Receipt Holders, listed in the Register of Security Receipt Holders, as on the Record Date corresponding to such Payment Date,....
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....SARFAESI and only upon the following conditions precedent being satisfied: (a) All the Transaction Documents are duly and validly executed ; and (b) The Trust Account is duly established. 5.1.4. This Deed shall take effect on the Commencement Date and continue in full force and effect until full redemption / extinguishment of all the Security Receipts issued pursuant to this Deed, in accordance with their terms. Clause 5.2. Revocation of Contributions 5.2.1. The Security Receipt Holders shall be entitled to revoke the Contributions made by them, at any time during the term of this Deed, in accordance with the terms and conditions contained herein, for any reason, including but not limited to circumstances resulting from any adverse tax consequences (for either the Trust or the Security Receipt Holders) or any direction of any Statutory Authority, provided that no such revocation shall take effect unless the consent of the Security Receipt Holders holding Security Receipts representing not less than 75% of the total face value of the then outstanding Security Receipts, issued pursuant to this Deed has been obtained. In this behalf, provid....
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....come or not including the transactions with the assessee trust. We are inclined to appreciate the arguments of the ld AR that the investors had also paid their taxes in their respective returns and again taxing the same in the hands of the assessee trust would amount to double taxation. The Security Receipt Holders have invested in Security Receipts issued by the trust which is a revocable transfer under the provisions of the Trust Deed and Offer Document. In view of this, under the provisions of Section 61 of the Act, income / loss of the trust is includible in the total income of the Security Receipt Holders and that the trust is only a pass through entity. 11.5. We find that the assessee had explained the basis of distribution of income as under:- "The Trust is not expected to retain the sales proceeds or the amounts recovered from NPAs, but distribute the same as per agreed priorities mentioned above, i.e for meeting expenses, payment of management fee, redemption of SRs, and distribution of surplus if any as profit in the form of 'yield' or 'upside' to the SR holders pro-rata of their holdings. Thus the Trust is never left with any funds after distribution." It ....
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....ct, 1882. The trust was to facilitate investment by the contributors who should be resident in India and achieve returns to such contributors. The trust deed provides that the contributors to the fund will also be its beneficiaries. The initial contribution was Rs. 10,000/-. The trustee had power to appoint investment managers to manage the trust fund. The Settlor was to be appointed as the investment manager. The terms of the appointment of the Settlor as investment manager are set out in an investment management agreement dated 25-9-2006 between the assessee represented by the Trustee and Settlor. The Settlor as investment manager issued memorandum to prospective investors on a confidential basis for them to consider an investment in mezzanine Fund. An investor who wishes to contribute to the fund enters into a separate and individual contribution agreement with the trust, the trustees acting on behalf of the trust and the Settlor acting in his capacity as investment manager. In the return of income, income was declared at Rs. 1.84 crores. However, by way of note, it was mentioned that in pursuance to the provisions of sections 61 to 63 of the Act, the income has been included in....
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....ment of share of the beneficiaries, we find that Article 6.5 of the Trust Deed clearly specifies the manner in which the income of the Assessee is to be distributed. The said clause details formula with respect to the share of each beneficiary. As rightly contended on behalf of the Assessee it is not the requirement of law that trust deed should actually prescribe the percentage share of the beneficiary in order for the trust to be determinate. It is enough if the shares are capable of being determined based on the provisions of the trust deed. In the case of the Assessee the trustee have no discretion to decide the share of each beneficiary and are bound by the provisions of the trust deed and is duty bound to follow the distribution mechanism specified in the trust deed. The further aspect that may require consideration in the present case is with regard to the clause in the Trust Deed which authorises addition of further contributors to the trust at different points of time in addition to initial contributors. From this clause can it be said that share income of the beneficiaries cannot be determined or known from the trust deed. On the above aspect, we find the AAR in the case ....
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....nto between the Assessee and each beneficiary. There is no inter se arrangement between one contributory/ beneficiary and the other contributory/beneficiary as each of them enter into separate contribution arrangement with the Assessee. Therefore it cannot be said that two or more beneficiaries joined in a common purpose or common action and therefore the tests for considering the Assessee as AOP was satisfied. The beneficiaries have not set up the Trust. Therefore it cannot be said that the beneficiaries have come together with the object of carrying on investment in mezzanine funds which is the object of the trust. The beneficiaries are mere recipients of the income earned by the trust. They cannot therefore be regarded as an AOP. Ground No.8 raised by the Revenue is therefore held to be without any merit. 69. Another reason assigned by the AO for treating the status of the Assessee as AOP was that in the return of income filed by the Assessee the status was shown in return of income. In this regard it is not in dispute before us that the form of return of income as it existed for the relevant assessment year did not contain a clause for filing return of income ....
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....ce the assessing officer was justified in invoking the provisions of section 164(1) of the Act and make the assessee liable to be assessed at the maximum marginal rate in the status of AOP. Hence, it is not relevant whether the necessary ingredients for formation of an AOP are fulfilled by the assessee or not?" Held as under:- 6. As such, in our view the matter should rest as the finding of fact for the simple reason that whether the Trust Deed provides for shares of the beneficiaries which are determinable or non-determinable would vary from facts to facts of each Trust including that of the deed of trust etc. Such finding of fact can be arrived at after interpretation of the terms and conditions of the Trust Deed as well as the other facts and circumstances which may be germane to reach the conclusion on the finding of fact. If the matter is to rest on the question of finding of fact, in our view, such question of finding of fact would be outside the scope of judicial review in the present appeals which would be limited to substantial questions of law. 10. In our view, the contention is wholly misconceived for three reasons. One is that by no interpretative p....
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....decided. Hence, we find that the other questions which are raised in the appeals, as such, would not arise nor would be required to be considered. 15. In view of the above, all appeals are dismissed. 11.12. We also find that the Hon'ble Jurisdictional High Court in the case of PCIT vs M/s Milestone Army Navy Trust in ITA No. 1826 of 2016 dated 27.2.2019 had subsequently followed the aforesaid decision of Hon'ble Karnataka High Court, wherein the entire order is reproduced hereunder:- 1 The Revenue is in Appeal against the order dated 23/12/2015 of the Income Tax Appellate Tribunal (in short "the Tribunal"), raising the following questions for our consideration: "(i) Whether on the facts and circumstances of the case and in Law, the Hon'ble ITAT erred in holding that the income of the assessee is taxable in the hands of contributors and not in the hands of the AOP? (ii) Whether on the facts and circumstances of the case and in Law, the Hon'ble ITAT erred in holding that activities of the assessee are not commercial in nature even though the assessee has not carried out any activity in the spirit of Trust?" 3 The Respondent Asse....
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....o. 3459/Mum/2017 is dismissed. 12. The decision rendered hereinabove is for the assessee ISARC -14/2010-11 Trust and the same would apply for other assessees also listed in the cause list hereinabove except with variance in figures and in the name of beneficiaries. 13. To sum up, all the appeals of the assessee are partly allowed and all the appeals of the revenue are dismissed. Order pronounced in the open court on this 04/09/2019 ============= Document 1 DETAILS OF ASSETS TAKENOVER BY EACH TRUST: ISARC acquires Non Performing Loan Assets together with all its rights, title and interest and any underlying security interest, pledges and/or guarantees from seller banks/financial institutions (FI). Details of accounts acquired by trusts are given below: Name of the Trust ISARC UBI 1/2009-10 Trust ISARC-SIDBI 2/2009-10 Trust ISARC-12/2010-11 Trust ISARC BOB 1/2009-10 Trust - ISARC-14/2010-11 Trust Number of Name of the Bank/FI Accounts 2 168 20 14 16 United Bank of India SIDBI UCO Bank Bank of Baroda. UCO Bank Document 2 INCOME OFFERED BY ISARC (Security Receipts Holders) FOR TAXATION YEILD BOOKED ....