AI Drafter 
TaxTMI 
TaxTMI 
2020 (5) TMI 626
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd in consequence thereto in bringing to tax dividend income of Rs. 4,47,60,037/- as income from other sources and denying the benefit of exemption u/s 10(34) of Income-tax Act, 1961 (being dividend referred to in section 115-O of the Income-tax Act). 3. The learned CIT (Appeals) further erred in law in upholding the action of the Assessing Officer in exceeding his jurisdiction by not accepting a Scheme of Arrangement and amalgamation duly sanctioned by Hon'ble Punjab & Haryana High Court, pursuant to which the appellant trust got created, and the said scheme having been examined by the assessing authorities of the respective companies involved in amalgamation in their assessments completed u/s 143(3) of the Act. 4. Without prejudice to Grounds (1) & (2) & (3), the learned CIT(Appeals) ought to have quashed the assessment order passed u/s 143(3) by the Assessing Officer in the status of 'Trust" which is not a 'person' defined in section 2(31) of the Act, as against the status of 'AOP/BOI' declared in the return. The learned CIT (Appeals) further erred in treating this incurable defect as a bonafide mistake covered u/s 292B of the Act. 5. That the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of which are set out below: Name of the trust Settler Beneficiary Purpose of the trust Escorts Benefit & Welfare Trust EL EL To hold the equity shares of ECEL held by EL EFILL Benefit Trust EFILL EFILL To hold the equity shares held by EFILL in EL and Escorts Finance Limited Escotrac Benefit Trust Escotrac Escotrac To hold the equity shares held by Escotrac in EL and Escorts Finance Limited EFILL Benefit Trust and Escotrac Benefit Trust were also set up vide trust deeds dated February 14, 2012. It was further provided that upon the Scheme becoming effective, for operational convenience, the beneficial interest in EFILL Benefit Trust and Escotrac Benefit Trust would stand transferred and vested in the trustees of EBWT, and consequently, the EFILL Benefit Trust and the Escotrac Benefit Trust shall be deemed to have been dissolved / revoked.The Scheme was sanctioned by the Hon'ble High Court of Punjab & Haryana vide order dated September 5, 2012 and became effective upon filing of the same with the Registrar of Companies. Consequently, EBWT was allotted equity shares of EL as consideration of merger of ECEL with EL; and the investmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orts Limited is the real settlor, real trustee and real sole beneficiary as well. XII. In view of the discussions in the above paragraphs, it is clear that this impugned trust is not complying with the basic laws of trust. In substance too, this is not separate and legal entity guided by its deed of formation, but controlled and guided by board and promoters of M/s Escorts Ltd. The mere purpose seems to have control over the shares of the company through dubious means and to transfer the money to the company itself through a web of transactions in the name of exempted income." 4. The LDAO referred to the provisions of Section 3 of the Indian Trust Act, 1882. According to the LD AO,there cannot be a case where the creator of the trust would also be the sole beneficiary. There also cannot be a case where the creator of the trust would also be trustee and the sole beneficiary, because in that case a man cannot enforce a trust against himself. The AO also alleged of "tax evasion" on the appellant by referring to the receipt of shares by the trusts without consideration, non-payment of capital gains on the transfer and the receipt of exempt dividend by the impugned trust wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he powers, provisions discretions, rights and agreements contained in. the Escorts Benefit & Welfare Trust Deed on such terms and conditions as may be set out in the Escorts Benefit & Welfare trust Deed) and continued to be held by the Escorts Benefit & Welfare Trust on the Record date. 4.13 Notwithstanding anything contained in any other clause of the Scheme, in so far as the equity shares held by EFILL and Escotrac in Escorts and Escorts Finance Limited are concerned, EFILL and Escotrac shall individually, under, pursuant to and by virtue of this Scheme and simultaneous to all other steps/actions pursuant to this Scheme and on the effective date and without any further act or deed or matter of thing, transfer all the shares of Escorts and Escorts Finance Limited held by them on such date to the Board of Trustees of the EFILL Benefit Trust and the Escotrac Benefit Trust respectively to have and to hold EFILL and Escotrac's investment in share of Escorts and Escorts Finance Limited in trust together with all additions or accretions thereto in trust for the benefit of EFILL and Escotrac respectively and its successor or successors subject to the powers, provisi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation of trust with settler as sole-beneficiary. The cases in example mentioned above represent two large public- sector companies of which the Govt of India is the largest & controlling shareholder. There are other similar instances of large private sector companies where the Trusts came to hold their shares with these companies as sole beneficiaries in a scheme' of amalgamation. The present trustees namely, Mr. Ajay Sharma & Mr. G B Mathur who appeared before you in response to notices u/s 131 have stated that they were not the trustees as on the date of creation of the trust. They also stated that there is no day-today transaction in the trust except for one-time receipt of dividend in a year, which is remitted back to the settler. Accordingly, the adverse inferences drawn by you are not justified. Adverting to the points raised in your show cause notice we have to submit as below: - I. Why the status of M/s Escorts Benefit & Welfare Trust as trust may not be rejected as prima facie this impugned trust is merely structure of colourable device to control the majority shareholding of the Escorts Limited and to hoodwink the department to evad....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not survive. 5. The status of the Trust cannot be rejected merely on assumptions and surmises. There has to be a specific reason not mere apprehension to reject the legal status of the Trust that is created under a Court sanctioned scheme of amalgamation. II. Why the dividend income may not be taxed as income from other sources u/s. 56 of the Act in the hands of the M/s Escorts Benefit & Welfare Trust as representative assessee under section 161 of the income Tax Act as prima facie this so called dividend is arrangements of sham transactions to evade the taxes with the objective of transfer the money to the company itself through a web of transactions in the name of exempted income. 1. It is indeed very unfortunate to call the Scheme as arrangement of sham transactions to evade taxes particularly so when the scheme is sanctioned by the Hon'ble Court. 2 Your show cause query does not mention a single instance of tax evasion. The dividend is exempted whosoever receives it once DDT is paid by the company as per section 115-0. In this case, Escorts is the payer of the dividend and the recipient through the trust, which effectively neutralizes th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng thereto are subject matter of scrutiny by CAG and Hon'ble Parliament. The execution and implementation of is thus secured. Whereas in the present case, the assessee has miserably failed to establish the parity with Maharatna Trusts. Further, at the cost of repetition it is stated that the way the present trusts have been implemented give strong rise to suspicion of a colourable device which the above facts proved while the assessee had not been able to dispel it at all." 7. Referring to the provisions of Section 3 of the Trusts Act the ld AO held that :- "10.5.2"It is again reiterated that the basic point is missed by the assessee. The issue is not having sole beneficiary but the issue is having settlor as sole beneficiary." 10.5.3.1 "This provision requires that the creation of Trust is reposing of confidence or in other words it is an obligation arising out of confidence reposed by the settlor -owner of a property in the person to whom the properties are entrusted for the benefit of another." He held that trust has been created in violation of provision of section 3 of the Indian Trust Act and the basic tenets of the trust are missing in this case. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on 31.12.2018 determining taxable income of Rs. 4,47,60,037/- as against the return filed showing Nil income. In nutshell, he denied the exemption u/s 10 (34) of the act on dividend income. 11. Assessee being aggrieved with the order of assessment preferred an appeal before the Ld. CIT (A) raising following issues :- i. That the AO passed the order u/s 143(3) of the Act in the status of Trust as against AOP/BOI shown by the appellant in the return of income. There is no status as 'trust' as per section 2(31) of the Act. ii. That the amount of Rs. 4,47,60,037/- received by the appellant was in the nature of dividend on which DDT has been paid @ 15% and thus the same was exempt under the provisions of Income Tax Act. Reliance was placed upon the provisions of section 10(34) r.w.s. 115-O of the Act. iii. That the shares of M/s EL have been held by the appellant in a Demat account which has been opened in the name of the Trustees (Dr. S.A. Dave and Sh. Pritam Singh) as in case of the private trust, the Demat account has to be opened in the name of the trustees. Further, in the regulatory filing of share holding pattern with the stock exchanges and in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. v. That since the statements recorded of the trustees did not involve any third party, the right of cross-examination did not arise vis-a-vis the statements of Dr. S.A. Dave(erstwhile trustee) and Shri G.B. Mathur(current trustee). vi. Reliance on the creation of similar trust by M/s Indian Oil Corporation Ltd., M/s BPCL and other public sector undertakings are misplaced as the facts are different. vii. Merely because DDT has been paid the amount of dividend will not become exempt in the hands of the receiver where the nature of the transaction has to be examined. viii. That the shares of EL have not been transferred to the appellant in accordance with the scheme sanctioned and since the amount of Rs. 4,47,60,037/- has not been received by it as a valid shareholder, it cannot be treated as dividend. ix. As the appellant has been found to be an invalid trust as per the provisions of the Trust Act it could not be held to be a "representative assessee" of EL. x. That the appellant shall be assessed as an "AOP/BOI" as prescribed u/s 2(31) of the Act as against the status of "Trust" accorded inadvertantly in the assessment order, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and the receipt by Escorts Ltd. as the sole beneficiary nullified each other whereas the DDT deposited by Escorts Ltd. was a gain to the revenue. (iv) To the same effect were the submissions with reference to the observations of the AO that the trust was a colourable device. (v) That as per the provisions of Section 47(iii) of the Act, the transfer of a capital asset under an irrevocable trust did not constitute a "transfer" and therefore not liable to capital gains. (vi) That the AO had recorded as a fact that the name of the trust did not appear in the list of shareholders as per the website of the Ministry of Corporate Affairs(MOA) but referred to Mr. S.A. Dave as the shareholder, without appreciating or even considering the depository system of shares, whereby shares owned by a private trust are held in the name of a trustee only (Refer FAQ 22 issued by NSDL at page 213 of the paper book). (vii) That in the regulatory filing before the stock exchanges, the shares had been declared as held by the trustee Shri S.A. Dave(refer page 228 of the paper book). To the same effect was the depiction in the Balance Sheet of Escorts Ltd. as at 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tled to the benefit of Section 10(34). According to the Ld. Counsel the term 'member' as per Section 2(55)(iii) of the Companies Act, 2013 meant: "every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository." and which by interpretation denoted that before becoming a "member" one had to be a "shareholder". iv. That if the interpretation of the AO was to be accepted, than every entity, falling in sub-clause (iii) of Section 2(55) of the Companies Act would become taxable in respect of the dividend received and the provisions of Section 10(34) would become otiose. v. In support of the submissions made reliance was placed on the judgment of the jurisdictional High Court in the case of Pr.CIT vs. Haryana State Industrial and Infrastructure Development Corporation Ltd. reported in (2019) 108 Taxmann.com 540(P&H) and the judgment of the Hon'ble Bombay High Court in the case of Pr. CIT v Smt. Kayan Jamshid Pandole reported in (2018) 100 Taxmann.com 284(Bom). (D) Representative Assessee On this issue the ld AR submitted that :- i. That the AO had himself decided to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (4) Income-tax Officer vs. Deepak Family Trust No. 1[1989] 28 ITD 249 (AHD.) ITAT Ahmedabad viii. That the Ld. CIT(A) had erroneously reversed the stand of the AO without any ground having been raised before him in the appeal, the limited grievance being that the income should have been assessed in the hands of the appellant u/s 161(1) of the Act. (E) Statements of Trustees The learned counsel at the outset contended that the statements of an ex-trustee namely Shri S.A. Dave a super senior citizen and two current trustees i.e. Shri G.B. Mathur and Shri Ajay Sharma had been recorded in an inordinate hurry without allowing Shri Dave to refer to his papers as requested and picking up words and sentences from his statement to draw an adverse inference against Shri Mathur resulting in the initiation of proceedings for prosecution u/s 277 of the Act against him, without confronting him with the statement of Shri Dave, in violation of the principles of natural justice. According to the Ld. Counsel, the statements were not holistically interpreted, the sole motive being to find minor technical distinctions in the statements to hold that the Trust was a colourabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... & wanted to refer to papers before answering. Mr.Ajay Sharma referred to the financial statements filed during assessment. Mr.G.B. Mathur specifically & correctly replied to the question. No such specific question was asked. The questions were mainly in the context of creation of EFILL Benefit Trust and Escotrac Benefit Trust, which were subsequently consolidated with the appellant trust after amalgamation. The statement of none of the trustee reflects this. There is no specific question/answer, which matches with this observation. None of the question/answer reflects this view. No such question/answer reflects this. The trust is duly registered, and the trustees are holding assets and property of the trust in their name(s). This cannot be possible without implicit consent of the trustee(s). Moreover, no such question/answer is reflected in any of the statements. None of the question/answer reflects this view, which is entirely imaginary and presumptive. One of the trustees, Sh. G.B. Mathur deliberately misled the department by giving the false statement. Prosecution proceedings have been initiated against Sh. GB Mathur, Trustee for giving the fals....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hur He was appointed as a trustee of EBWT on 2nd September 2014, prior to which he was the company secretary of Escorts Ltd. for several years. Although he was not associated with the amalgamating companies in any manner, he was authorized by their respective Boards of Directors to carry out all necessary actions along with others in connection with the scheme of amalgamation. His signatures on the Trust Deeds of the respective trusts were as a witness and not as a party. The questions to Mr. G.B. Mathur were generally related to the trusts other than the appellant trust, and which were created by the amalgamating companies with whom Mr. Mathur had no relationship. He rightly answered that everything pertaining to the said trusts had been completed before he became a trustee. That when the statement of Mr. Mathur was recorded on 21.12.2018, the statement of Shri Dave was available having been recorded on 19.12.2018. Mr. Mathur was not confronted with the statement of Shri Dave or allowed opportunity of cross-examination but faulted in the following terms with reference to the statement of Shri Dave(reply to Q.No.8) "One of the trustees Shri G.B. Mathur de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lation to staff. However, ongoing through the income and expenditure statement of the appellant it is noted that the appellant has claimed expenses of Rs. 28,750/- for audit fees and Rs. 1,470/- for bank charges. Besides this no other expenses has been incurred. It shows that the appellant has not maintained any staff for the execution of its activities whereas Dr. S.A. Dave has referred some expenses in relation to staff. Therefore, it shows that Dr. Dave was not actually aware about the actual state of affairs of the appellant. It is also unrealistic to assume that the appellant could have carried out its activities without deploying any staff at its disposal or without incurring any expense on necessities such as consumption of paper, stationary item etc. It is relevant to mention here that in the return of income the appellant has mentioned its address as 15/5, Mathura Road, Faridabad. It is the corporate address of M/s Escorts Ltd. also. From the balance sheet of the appellant it is noted that it is not having any fixed asset like computer/accessories etc. at its disposal which are bare minimal for its functioning. These facts, in totality indirectly point out that the appella....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r manager (including any person, whatever his designation, who in fact manages property on behalf of another) appointed by or under any order of a court, receives or is entitled to receive, on behalf or for the benefit of any person, such Court of Wards, Administrator-General, Official Trustee, receiver or manager; (iv) in respect of income which a trustee appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees; ^2 [(v) in respect of income which a trustee appointed under an oral trust receives or is entitled to receive on behalf or for the benefit of any person, such trustee or trustees. Explanation 1.-A trust which is not declared by a duly executed instrument in writing [including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913),] shall be deemed, for the purposes of clause (iv), to be a trust declared by a duly executed instrument in writing if a statement in wri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....maintenance, and such trust is the only trust so declared by him. 2[***] (2) Where any person is, in respect of any income, assessable under this Chapter in the capacity of a representative assessee, he shall not, in respect of that income, be assessed under any other provision of this Act. 18. Firstly, we come to the issue who is the settlor of the trust , who is the trustee and who is the beneficiary. Importantly the ld AO has examined the trustee and he found that trustees do not have much idea about the functioning of the trust. They do not have real property in the hands of those trustees. It is interesting to note that in Para no 6 at page no 59 of 63 of the assessment order, the ld AO himself has stated that Shri S A Dave , who is the trustee of this trust was the highest shareholder of the company M/s Escorts Limited having 37300031 shares along with Shri Pritam singh Jointly. Therefore, it is apparent that trust is highest holder of shares of Escorts Limited in the name of trustees. Thus there was no real property in the name of the assessee trust is devoid of any merit. The shares are always registered in the name of the trustees and not in the name o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ably from this proposition that there would have to be as many assessments on the trustee as there are beneficiaries with determinate and known shares, though, for the sake of convenience, there may be only one assessment order specifying separately the tax due in respect of the wealth of each beneficiary. Secondly, the assessment of the trustee would have to be made in the same status as that of the beneficiary whose interest is sought to be taxed in the hands of the trustee. Hon Supreme court further referred N.V. Shanmugham and Co. v. CIT [1971] 81 ITR 310 (SC)to hold that the amount of tax payable by the trustee would be the same as that payable by each beneficiary in respect of his beneficial interest, if he were assessed directly. Further Hon Supreme court in Arundhati Balkrishna v. CIT [1989] 177 ITR 275, at pages 278-79 held that "Turning to the additional question referred to the High Court for the assessment year 1964-65, it seems to us clear that what is assessable in the hands of the assessee must be the income of the trust received by it on behalf of the assessee. It is apparent from section 161(1) of the Income-tax Act, 1961, that a representative assessee, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts namely M/s Escotrac Benefit Trust and M/s EFILL Trust stood dissolved as a result of the order of the court on the ground of "operational convenience".Thus, the ld AO accepted the status of a "representative assessee" for raising the demand and collecting Govt. dues, which is the purpose behind the provisions referred to Sections 160(1)(iv) and 161(1). Then again the AO reaffirmed the same in a remand report before the ld CIT (A) that "Section 160(1)(iv) clearly states that trustee in receipt of the income on behalf of the beneficiary can be treated as representative assessee. In the present case, the income on behalf of the beneficiary i.e. M/s Escorts Ltd. is received by the assessee. Therefore it is liable to be assessed as a representative assesse as the income earned by it for the benefit of Escorts Ltd. On appeal, the ld CIT (A) reversed the position. Thus, it is apparent that Ld. CIT(A) has misconstrued the issue. All that the appellant had contended was that the AO having accepted the status of a representative assessee, should have carried the matter to its logical conclusion by exempting the dividend income u/s 10(34) of the Act, in conformity with the provisions of Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h specifies the liability of a 'representative assessee' as being co-terminus with that of the beneficiary nothing less and nothing more. 23. Further the ld AO has interpreted the term 'Member' vide Section 2(55) of the Companies Act, 2013 in a restricted manner although it is a term wider than the term 'shareholder' as defined in Section 2(22) of the Income Tax Act. The AO and the CIT(A) have failed to gauge that a 'Member' has necessarily to be a 'shareholder' if one were to read clause (iii) of Section 2(55) of the Companies Act, 2013 defining the term "member" as under: "every person holding shares of the company and whose name is entered as a beneficial owner in the records of the depository". 24. Further as per the depository system of holding shares, the shares owned by a private trust are held in a demat account in the names of the trustee/trustees which in the present case was Shri S.A. Dave and the same depiction appeared in the audited accounts for the relevant period. (Page 213, 228 & 229 of the Paper Book). In other words the requirements of a shareholder receiving the dividend also stood satisfied in the case of the appellant and benefit of the exemptio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax Act, 1961, the provisions of Section 2(1B) of the Income-tax Act, 1961 shall prevail and the Scheme shall stand modified to the extent necessary to comply with Section 2(1B) of the Income-tax Act, 1961. Such modifications will, however, not affect the other clauses of the Scheme." 28. Nothing has been brought on record by the revenue to show any such inconsistency, although there is a general discussion but not specific in the order of the AO on the provisions of Section 2(1B) of the Act. There is also no challenge to the factual submission on behalf of the appellant as to the tax assessments of the entities involved in the amalgamation. We are however, of the view that in a given case the tax authorities are entitled to examine the Scheme for probable tax implications, which apparently have not been pinpointed in the present case, as the subsequent discussion on the remaining grounds would show. The income of the assessee is required to be assessed by the Assessing officer as defined u/s 2(7A) of The Income Tax Act according to the provisions and procedures enshrined there in. The schemes of merger, amalgamation and corporate restructuring may grant certain relief or concess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g companies with which Mr. Mathur had no relationship.It is also observed and specifically adverted to by the Ld. Counsel that when the statement of Mr. Mathur was recorded on 21.12.2018, the statement of Shri Dave was already available having been recorded on 19.12.2018 The said statement was not confronted to Mr. Mathur but who thereafter was faulted for misleading the department with a false statement vis-à-vis certain averments made by Shri Dave resulting in consequences as extreme as prosecution.Considering the facts before us and the legal position connected thereto, the statement of Shri Dave as far as it implicates Mr. Mathur is required to be ignored.Adverting to the view expressed by the AO and the Ld. CIT(A) that the trustees have acted on a "notional basis" and that the real trustee is EL along with being the settlor and the sole beneficiary, at the outset , we hold that the appellant trust was formed with the sole object of holding the shares of EL on behalf of the sole beneficiary i.e. EL. The single pay out on account of dividend was directly credited to the bank account of the trust and by the same mode paid over to the sole beneficiary. In other words other ....