TaxTMI 
TaxTMI 
2020 (5) TMI 626
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....ome 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 learned CIT (A) further erred in law in reversing the action of the Assessing Office....
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....are 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 investments/shares held by EFILL and Escotrac were transferred through their respective Trusts to EBWT, for the sole benefit of EL. 3. In this background, Fo....
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....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 without payment of taxes thereof. Thus, On 24th December 2018, the ld AO issued a final "Show Cause Notice" as under :- "I. Why the status of M/s Escorts Benefit & Welfare Trust as t....
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....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, provisions, decisions rights and agreements contained in the instrument (" the Trust Deed") establishing the aforesaid trusts ("the EFILL Benefit Trust" and "the Escotrac Benefit Trust") on such terms and conditions as may be set out in th....
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....vate 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 evade the tax? 1. The Scheme is duly sanctioned by the hon'ble Punjab & Haryana High Court and is now law unto itself. To question its existence & status today tantamount to contempt of Court'. 2. The Trust is not a party to the Scheme but is only a resultant entity. Th....
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....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 the payment/receipt, the net gainer being the Exchequer getting taxes by way of DDT. So therefore, there is no question of any objective to transfer money by way of exempted income to the settler company. 6. As the assessing authority of the assessee trust, you are constrained to compute the taxable income under the relevant heads of i....
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....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. In substances, this is not a separate and legal entity guided by its deed of formation, but controlled and guided by the board and promoters of Escorts Limited. The mere purpose of the seems to have control over shares of the Escorts Limited through dubious means and to transfer the money to the company itself through a web of transactions in names of exempted income. Thus the LD AO held that in the cas....
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....e 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 financial statements by M/s EL, name of the trust has been shown as the shareholder through the trustees. iv. That the sanction of the Amalgamation and arrangement Scheme by the Hon'ble High court means approval for the Trusts created thereunder. v. Those similar practices have been adopted by M/s Indian Oil Corporation, M/s Bharat Petroleum Corporation Ltd. by creating similar trusts in their respective amalgamation schemes. vi. That the appellant trust has b....
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....e 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, such bonafide mistake being covered u/s 292B of the Act. 13. Being aggrieved with the order of the Ld. CIT(A) the assessee is in appeal before us.The Ld. Authorized Representative submitted that :- (A) Validity of the Trust (under the Indian Trusts Act, 1882) That the interpretation of Section 3 of the Trust Act by the AO and thereafter by the Ld. CIT(A) was erroneous, in as much as they had equated an 'owner' to the author or settlor of the trust whereas the reference was to the 'trustee'. In other words the bar was not on the settlor being the sole benefici....
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....he 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 31.03.2016(Page 229 of the paper book). (viii) That in the final Show Cause Notice dated 24th December, 2018 the AO sought a response on a question framed as under (page 27 of the Assessment Order) "Why the status of M/s Escorts Benefit & Welfare Trust may not be rejected as prima facie this impugned trust is merely structure of colourable device to control the majority shareholding of Escorts Ltd. and to hoodwink the department to evade the tax?" (ix) According to the Ld. Counsel the submission before the Ld. CIT(A) on the aforesaid query finds place at page 6 of the order in the following words: "Companies often prefer to hold their own shares through trusts after merger(with themselves as beneficiary....
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....ate 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 treat the appellant as a 'representative assessee' within the meaning of Section 160(1)(iv) of the Act for raising the demand and collection of Govt. dues. ii. That the aforesaid status of 'representative assessee' was reaffirmed by the AO in his remand report to the Ld. CIT(A) (Page 39 of the order) in the following words: "Section 160(1)(iv) clearly states that trustee in the 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 assessee as the income earned by it for the benefit of Escorts Ltd. Therefore, in any view of the matter, the taxability of the impugned amounts lies in the hands of the impugned t....
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....ent 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 colourable device and that EL combined in itself the role of the settlor, the trustee as the sole beneficiary. The further arguments are summarized as under: i. That the statements of an ex-trustee and two current trustees had been recorded u/s 131 of the Act(pages 8 to 12 of the assessment order) in their capacity as "trustees" and not as "witnesses" vis-à-vis information which was already on record in the form of a court order sanctioning a Scheme of Amalgamation u/s 391 & 394 of the Companies Act. ii. That adverse conclusions drawn did not emanate from the questions/answers and were imaginary as would be apparent from the following chart of rebuttal submitted before the Ld. CIT(A): AO Assessee In the statement recorded on oath, none of the trustees knew why the Impugned trust was created and what the purpose of the creation of the impugned trust was. The trustees did not recollect the source of income of the impug....
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....ive. 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 false statement under oath during the course of recording of his statement u/s. 131 of the I.T. Act,1961. This is entirely incorrect. The false statement is attributed to an alleged contradiction between the statements of Mr. Dave & Mr. Mathur. Pertinent to mention that Mr. Mathur's statement was recorded much after the statement of Mr. Dave was available with the Assessing Officer. Principles of natural justice demand that Mr. Mathur should have been confronted with the reply of his cotrustee if there was any contradiction or else he should have been given an opportunity to crossexamine the other trustee. None of this has been done and conclusion of misleading the department has been drawn arbitrarily without any opportunity and initiated proceedings against Mr. G B Mathur u/s 277. iii. That the tax authorities had picked up individual questions/answers in the statements to draw adverse conclusions, whereas it is settled law that a document had to be read and interpreted as a whol....
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....t 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 deliberately misled the department by giving the false statement. Prosecution proceedings have been initiated against Shri G.B. Mathur, trustee......." That since the statement of Shri Dave itself was recorded contrary to accepted legalnorms as already submitted anything stated by him could not in law form the basis for initiation of an action as extreme as prosecution against Shri Mathur. iv. According to the Ld. Counsel without prejudice to any other arguments, the statement of Shri Dave having been used against Shri Mathur without confronting him with the same and further denying him the opportunity to cross-examine Shri Dave, was required to be ignored. v. The Ld. Counsel for the appellant also referred to the order of the Ld. CIT(A) on the conclusions drawn by him in respect of the statements spanning paras 10.2.4 to 10.2.8 of his order, drawing specific attention to paras 10.2.7 and 10.2.8 which were in the following terms: "10.2.7 From the examination of facts and discussion as made above, it is noted that Sh. G.B. Mathur and Sh. Ajay....
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....are minimal for its functioning. These facts, in totality indirectly point out that the appellant has used property/facilities of M/s EL and thus were under control of M/s EL. In this given facts it can be seen that the appellant did not show any independent existence." vi. According to the Ld. Counsel the revenue being unable to find any illegality in the terms of the trust deed and the appointment of the trustees picked up issues as minor and irrelevant as the address, the incurring of nominal expenditure, the non-existence of a computer and expecting strangers with prior experience to be appointed as trustees without indicating the statutory provision or the rule which mandated so and debarred persons known to the settlor with impeccable qualifications to be appointed as trustees. The conclusion therefore that the trustees have not operated independently and that EL has combined in itself the role of the settlor, the Trustee and the sole beneficiary is baseless and not well founded. 14. The Ld. Departmental representative strongly supported the order passed by AO and the Ld. CIT (A). 15. We have carefully considered rival contentions and perused the orders of the lower autho....
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....tee or trustees, setting out the purpose or purposes of the trust, particulars as to the trustee or trustees, the beneficiary or beneficiaries and the trust property, is forwarded to the 3[Assessing] Officer,- (i) where the trust has been declared before the 1st day of June, 1981, within a period of three months from that day; and (ii) in any other case, within three months from the date of declaration of the trust. Explanation 2.-For the purposes of clause (v), "oral trust" means 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),] and which is not deemed under Explanation 1 to be a trust declared by a duly executed instrument in writing.] (2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act. 17. Section 161(1) of the Act deals with the liability of a representative assessee as under :- Liability of representative assessee. 161. (1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as ....
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....eneficiaries. Therefore, naturally the share cannot be in the name of the trust. Even otherwise, they are shows in the financial of the assessee and dividend income received therefore is shown as income. No doubt assessee being professional directors of the group or are independent persons may not be knowing each and everything about the trust, but they are trustees, they have the responsibility assigned to them in the Indian trust act as well as other regulatory laws including Income tax. However, that does not mean that they should know each thing, howsoever small it may be. That is neither the responsibility cast up on them by general nor any specific law. Undoubtedly, the trust is belonging to Escorts Ltd , it is the settlor and it is the beneficiary. However, that does not mean that it is the trustee also. The ld AO has not brought on record any evidence to show that Escorts Limited is the trustee of the assessee. Therefore, the allegation of ld AO that Escorts Limited is also the trustee is devoid of any merit and based on mere conjectures and surmises. Further the sole beneficiary is Escorts Limited and Settlor r of the trustis Escorts Limited is the major reason why the ld....
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.... the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and he is liable to assessment in his own name in respect of that income ; but any such assessment is deemed to be made upon him in his representative capacity only, and the tax is levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. And section 166 of the Act clarifies that the provisions relating to the liability of a representative assessee will not prevent either the direct assessment of the person on whose behalf or for whose benefit income is receivable, or the recovery from such person of the tax payable in respect of such income. The Income-tax Officer has the option to proceed either against the trustee or against the beneficiary, but in either case, the income to be assessed must be in the same sum. What the trustee receives as the income pertaining to the beneficiary is received by him under an obligation to pass on that income to the beneficiary." 20. Further Hon Supreme court in case of CIT vs. Smt. Kamalini Khatau[1994] 209 ITR 1....
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....is interconnected, the same has been subjected to dividend distribution tax, being a dividend referred to in Section 115-O of the Act. Considering the taxability of the said dividend in the case of EL the beneficiary, the same would not be taxable since the dividend was exempt u/s 10(34) of the Act. There is no reason for the ld AO to treat it as any other receipt other than dividend and then to tax it as income from other sources. Admittedly, in this case the dividend is subject to dividend distribution tax. According to section 10 (34 ) of the act same is exempt as under : (34) any income by way of dividends referred to in section 115-O : 25[Provided that nothing in this clause shall apply to any income by way of dividend chargeable to tax in accordance with the provisions of section 115BBDA;] 22. The claim of the ld AO is that this is the income distributed by Escorts Limited as dividend on its shares held by the assessee trust , which has been paid to the assessee trust for the benefit of Escorts Limited. Therefore, the ld AO held it to be a tax evasion devise. We note that ld AO has forgotten the facts that in fact Escorts Limited pays dividend distribution tax on such d....
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....ve of the treatment in the assessment, the benefit of the exemption u/s 10(34) of the Act cannot be denied and that the colour of the receipt would not change in the absence of any statutory provision has substantial merit. Revenue could not show us any provision in the act, which can change the characterization of dividend receipt as income from other sources. Such rights are probably available the ld AO, if at all, u/s 98 of the act only in case of impermissible avoidance arrangement. Such is not the case in the impugned appeal. Thus, In our opinion the AO was not justified in changing the nature of the receipt, which continued to remain a dividend irrespective of whatever view was expressed in the assessment. Hence, we hold that the appellant was required to be assessed in the status of a 'representative assessee' and consequently to the same tax treatment as would have been accorded to the beneficiary vis exemption u/s 10(34) in respect of the dividend of Rs. 4,47,60,037/-. The addition on the said account is accordingly deleted. 26. As a consequence of the directions aforesaid, the latter part of Ground No.2 whereby the taxability of the dividend is challenged is allowed with....
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.... of corporate restructuring sanctioned by the high court or any other authority does not prevent assessing office in assessing the Income of the assessee. Off course, necessary relief granted may be allowed by him. In conclusion, Ground No.3 is disposed-off in terms indicated. 29. Taking up Ground No. 6 which encompasses two issues (1) conclusions drawn from the statements of the trustees recorded u/s 131 of the Act and (2) allegation of tax evasion thus creation of the trust being a "colorable device".We must observe at the outset that both the AO and the Ld. CIT(A) have stressed more on the statements of the trustees to draw adverse inferences, basing these on surmises and conjectures rather than reality. The ld AO has held that trustees do not know the object and purposes of the trust or other minute facts about the operation of the trust. This issue has already been discussed us , therefore does not deserves repletion. The ld AO has picked up 'words and phrases" from the statements rather than considering them as a whole. The ld AO totally ignored that the trustee have attended the meetings, holding the property and have fulfilled their duties as the trustees. Coming to the st....
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....order. The same logic would apply to the non-existence of any other asset and in our opinion the allegation that the facilities of M/s EL have been utilized, is an assumption, there being no legal basis for an adverse view on the common address of the appellant trust and M/s EL. 30. Further In Para 10.1 of his order the Ld. CIT(A) makes certain observations to draw a conclusion that the appellant trust is not irrevocable and for the said purpose refers to Para 4.6 of the trust deed which states as follows: "4.6.2 The Trustees will be bound to follow the terms and conditions and such other stipulations as may be intimated to them by way of written instructions for selling, pledging, mortgaging, encumbering or creating lien of any kind on the EL shares." 31. We cannot accept argument of the revenue that the aforesaid clause is repugnant to the creation of an 'irrevocable trust' and that the sole beneficiary is barred from giving any instructions, when the trust itself is created for its benefit. A reference is made to the trust deed in the case of Indian Oil Corporation which contains the following clause (b): (Page 186 of the Paper Book) (b) "The Trustees shall, within the t....