TaxTMI 
TaxTMI 
2020 (9) TMI 465
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....ost and several other reasons discussed in the Assessment order?" 2. "Whether on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in ignoring the fact that the assessee actually earned the income on low cost NPAs purchased by it indicating thereby that it is engaged in business activity with a profit motive?" 3. "Whether on facts and circumstances of the case and in law, the Ld CIT(A) was justified in deleting the entire addition of Rs. 57,56,60,600/-, made on account of surplus from income and expenditure account holding that it is a result of write-back of impairment provision of Rs. 59,76,25,576/-, without appreciating the fact that there was interest income of Rs. 23,90,228/- and other (income of Rs. 4598/- and out of total assets of Rs. 460,OO,52,378/- assets of Rs. 96,91,64,749.71 were realized during AY 2013-14 and cumulatively over the years assets of Rs. 248,60,41,676.40 were realized while the acquisition expense during the year under consideration was merely Rs. 223.14?" 4. "Whether on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in not appreciating the action of the AO in holding that t....
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....sets that are classified as NPAs from the banks/FIs. The assessee had filed its return of income for A.Y. 2013-14 on 13.09.2013, declaring its total income at Rs. Nil. The return of income filed by the assessee trust was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings, it was observed by the A.O that the assessee trust that was set up for the purpose of liquidating/recovering/realizing the non-performing assets (NPAs) which were taken over by the assessee was registered under Sec. 3 of the SARFAESI Act, 2002 by the RBI, and had the following partners/members/shareholders: Sr. No. Name of the Shareholders Percentage of equity shares held 1. Asset Reconstruction Company (India) Ltd. 5% 2. ICICI Bank Ltd. 95% Total Shareholding 100% As observed by the A.O, the assessee derived income from assets reconstruction activity and handling of non-performing assets of banks/financial institutions. After perusing the records the A.O called upon the assessee to explain as to on what basis it h....
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.... in trust) evidenced by the SRs issued to it. Subscription to SRs are governed by the terms and conditions mentioned in the transaction document ('trust deed etc.). The contributions of the SR holders are revocable. Therefore the income arising from revocable transfer shall be assessed in the hands of the contributors pursuant to section 61 of the Act. As per Section 61 all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. For the above purpose, section 63 defines "revocable transfer" and read as follows: For the purposes of sections 60, 61 and 62 and of this section, - (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 reassume power directly or indirectly over the whole or any part of the income or assets; (b) "transfer" includes any settlement, trust, covenant, agreement or arrangeme....
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....d the relevant Offer Document. 5.1.3 The Trustee shall accept Contributions under this Deed, only from Persons who are Qualified Institutional Buyers for the purpose of 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 the terms. 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 therein, for any reason, including but not limited to circumstances resulting from any adverse tax consequences (for either the Trust or the Security Receipts Holders) or any direction of any Statutory Authority, provided that no such revocation shall take effect unless the consent of the Security Holders holding security Receipts representi....
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....ansfer of asset, the income arising there on has to be assessed to tax in the hands of the transferor in view of the of the provisions of section 61 to section 63 of the Income Tax Act and plethora of decisions including the decision of the Mumbai High court. Submission on why trust not to be considered as AOP The word "associate" means, according to the Oxford Dictionary, "to join in common purpose, or to join in an action. " Accordingly, an association of persons is one in which two or more persons join in a common purpose or common action to earn the profit. The assessee has been incorporated as a "trust" under the provisions of the SARFAESI Act, 2002 read with RBI Guidelines. Thus, it is a statutorily formed entity. Relevant extract of the SARFAESI Act, 2002, is enclosed herewith. Accordingly, it is submitted that the assessee is a trust and not an AOP. The trust cannot be called an AOP as there is no inter se agreement between one contributory/beneficiary and the other contributory/beneficiary as each of them enter into separate contribution arrangement with the assessee. These Trusts have been formed under SARFAESI Act 2002 with the trustee....
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....t between one contributory/beneficiary and the other contributory/beneficiary as each of them had entered into a separate contribution agreement with the assessee trust which was just a pass through entity, was merely a facade with an ulterior motive to evade taxes. The A.O was of the view that the assessee had merely relied on the "form" of the transaction and the artificial device created by it to generate income and avoid taxability, while for the "substance" of the transaction was that the assessee had carried on business from the contributions of various beneficiaries with a common motive to earn income, which proved beyond doubt that in sum and substance the assessee was an AOP. On a perusal of the assessment order, we find, that the A.O had rejected the contentions of the assessee by summing up as under: "1. Whereas in the case of the trust, settlor, 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 members in the form of QIBs and financial institution. 2. After its creation, the so-....
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....e relied on the order passed by the CIT(A). 6. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements that had been pressed into service by them. We shall hereinafter deal with the observations of the CIT(A) in context of the multiple issues on the basis of which the A.O had rejected the claim of the assessee and brought its surplus income to tax, as under: (A) The trust was a colourable device to evade taxes: (i) On a perusal of the records, we find that the A.O had observed, that in a trust the three constituents i.e settlor, contributors and beneficiaries should be independent and distinct, whereas in the instant case the contributors were themselves the beneficiaries. Accordingly, the A.O held a conviction that the assessee had created a smokescreen in the name of trust with an ulterior motive to evade taxes. Rebutting the aforesaid view of the A.O, we find that the CIT(A) had observed as under: "8.3 I have carefully considered the aforesaid arguments of the Ld AR and find merit in it. Section 9 of the Indian Trust Act. 1882 defi....
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....y him. As observed by the CIT(A), as per Sec. 9 of the Indian Trust Act, 1882, there is no prohibition on the settlor in becoming a beneficiary of the trust. In fact, as provided in Sec. 9 of the Indian Trust Act, 1882, every person capable of holding property may be a beneficiary of the trust. Further, as per Sec. 7 of the Indian Trust Act, 1882, any person competent to contract can become a settlor of the trust. In the backdrop of our aforesaid observations we concur with the CIT(A) that the observations of the A.O that the assessee trust was not a valid trust, for the reason, that its contributors and beneficiaries were the same, clearly militates against the express provisions of the Indian Trust Act, 1882, and thus, cannot be accepted. As a matter of fact, we find that as observed by the CIT(A), all the necessary ingredients for the formation and existence of the trust had been fulfilled, and the RBI guidelines had duly been followed by the assessee trust. Interestingly, we find that in case the claim of the A.O that the assessee is not a valid trust and its creation was only a façade for evasion of taxes was to be accepted, then it would be imply that the trust does no....
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....on 61 of the Act all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to incometax as the income of the transferor and shall be included in his total income. Section 62 of the Act provides that if a transfer is irrevocable for a specified period then section 61 will not apply. Sect ion 63 defines as to what is "transfer" and "revocable transfer" for the purpose of sections 61 & 62 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 ) i t , 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. In this regard, I agree with the Ld. AR that the provisions of the I.T. Act nowhere state that if the transfer is 'explicitly revocable, the provisions of sect ion 61 and sect ion 63 would not apply. I have also careful ly gone through the relevant clauses of the trust deed, as highlighted by the Ld. AR. The s....
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....s Deed has been obtained, in this behalf, provided that a notice of not less than 60 days of the intention to revoke the contribution is given to the Trustee. 5.2.2 In the event that the Trustee, at any time during the term of this Deed, faces any adverse tax consequence or upon any direction of any Statutory Authority the Trustee shall have the right to call upon the Security Receipt Holders to revoke their Contributions and thereupon the Security Receipt Holders shall be obliged to revoke their Contribution. 5.2.3 In the event that the Contributions are revoked in terms of this Section 5.2, the Trust Fund shall automatically stand transferred and shall automatically and without any further act deed or writing operate as an assignment vesting the Trust Fund jointly in favour of each of the Security Receipt Holders (in proportion to their Contributions) or to any person designated by the Security Receipt Holders in this behalf provided that the Trustee has received payment of all amounts due or accrued to the Trustee in full, in accordance with the terms of the Deed. Upon such transfer all the provisions of the relevant Financing Documents and the Assignment Agree....
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....as been granted. Incidentally, we find that these principles on revocable transfer have been followed by the Coordinate Bench of Mumbai Tribunal in the case of M/s. Milestone Army Navy Trust, ITA No. 4067/Mum/2014, dated 23/12/2015. 7.6.5 In view of the discussion above and respect fully following the principles laid down in the above referred decision of the Bangalore Bench of the Tribunal in the case of India Advantage Fund-VII (supra) and the Mumbai Bench of ITAT in Milestone Army Navy Trust (supra) we hold that the assessee Trust is a revocable Trust and contribution by beneficiaries is a revocable transfer. Having held thus, it follows that the income shall be taxed in the hands of the beneficiaries. i.e. the Mutual Funds who purchase the PTCs from the assessee trust. 9.6 Considering the fact as highlighted above and respectfully following the decision of superior authorities, it is held that the appellant trust is a revocable trust and the provisions of section 61 to 63 of the I.T. Act will be applicable to it. Hence, contribution by beneficiaries is a revocable transfer implying that the income will be taxed in the hands of the beneficiaries and not the app....
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....f revocation cannot be exercised by the settlor without the consent of the named individuals or any of them. As observed by the Hon"ble High Court, a transfer is nonetheless revocable even if it can be revoked only with the consent of any named person or persons. As such, on the basis of our aforesaid observations we are persuaded to subscribe to the view taken by the CIT(A), who had rightly concluded that the assessee trust is a revocable trust, and thus, the provisions of Sec. 61 to 63 of the Act would be applicable to it. (C) Status of the trust as that of an AOP: As is discernible from the assessment order, the A.O had observed that since the beneficiaries had associated and joined hands for a common purpose or action through offer dated 27.12.2007 with QIBs for the sole purpose of acquisition of NPAs, and therein transferring those at a profit with a motive of earning income, profits and gains out of the same, therefore, they were liable to be assessed in the status as that of a AOP. The CIT(A) dislodging the aforesaid view of the A.O had observed as under: "10.3 Upon careful consideration of the facts on record and various judicial decisions, I find that a comm....
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.... the statute vide the Finance Act, 2002, w.e.f 01.04.2002. As per the "Explanation" to Sec. 2(31) of the Act, an AOP shall be deemed to be in existence, whether or not it was formed or established with the object of deriving income, profits or gains. However, in the case before us, we find, that the CIT(A) had rightly observed that there is nothing on record which would suggest that the beneficiary had agreed to associate for any common objective. In fact, the beneficiaries who do not have any control over the activities carried on by the trustee in managing the trust, had made their respective investments based on the offer documents, and on the basis of their investments made in the trust were allotted the SRs which represented their undivided and proportionate interest in the corpus of the trust. We are unable to comprehend as to on what basis the A.O had concluded that the motive behind creation of the trust was the income earning asset reconstruction activity and handling of NPAs. On a perusal of the records, we find that the two beneficiaries viz. (i) ARCIL; and (ii) ICICI Bank Ltd., had made investments based on the offer document separately, and not jointly, on the basis of....
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....the appellant, it does not mean that it is income in the hands of the appellant. The money was always intended to be passed on to the SR holders and therefore, it can be said that only the SR holders had a right on the realized money. Hence, in my opinion, the principle of diversion of income at the source by overriding title is attracted in this case too. Accordingly, the receivables of NPAs are the income of the SR holders, irrespective of whether it flows through the books of accounts of the appellant trust." We have deliberated at length on the aforesaid issue and are unable to persuade ourselves to subscribe to the view taken by the A.O. In our considered view, at the initial stage, even before the money flows to the assessee, it was always intended to be passed on to and only to the beneficiaries, i.e the SR holders in proportion to their interest in the corpus of the assessee trust as per the trust deed and offer documents. We are unable to accept the claim of the A.O that as the amounts are first realized/received in the books of the assessee trust, and then passed on to the SR holders, viz. ARCIL and ICICI bank, the same therefore was liable to be assessed as the income....
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....cretionary trust . The AO has also mentioned that the trust cannot be considered as determinate trust because the trust can issue security receipts to any qualified institutional participants who are interested in making such investment in such business. In this regard, i t is observed from the provisions of the trust deed that the beneficiaries are SR holders which are known at all times. The Ld AR has brought the attention of undersigned the clause 5.1.2 of the Trust Deed. The same is reproduced herein. "5.1.2 Upon the making of the Contribution, each Security Receipt Holder shall be entitled to the undivided right, title and interest in the Trust Fund evidenced by the Security Receipts issued to it, on the terms and conditions contained in the Security Receipts and the relevant Offer Document." Thus, it is clear that each SR holder shall be entitled to the undivided right, title and interest in the Trust Fund evidenced by the SRs issued to it. Hence, the shares of the beneficiaries are determinate at the time of drawing the Trust deed. As stated above, the position as to whether the beneficiaries are identifiable or not and whether their shares are known or not are requ....
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....pairment provision of Rs. 59,76,25,576/-. Shorn of any reasoning as to why the write-back of impairment provision was being treated as income of the assessee trust, the A.O had concluded that the same was to be assessed as the income of the assessee. In fact, as observed by the CIT(A), even in the remand report no justification was given by the A.O as to how the write-back was being treated by him as the income of the assessee trust. On the contrary, the assessee had assailed the aforesaid treatment of the impairment provision of Rs. 59,76,25,576/- as its income by the A.O. It was the claim of the assessee that it had merely passed a "book entry" for reversal of impairment provision created in the earlier years in respect of the financial asset i.e the loan taken from the banks, and the same had no bearing on its income for the year under consideration. In fact, it was the claim of the assessee that in case the income was to be taxed in the hands of the assessee trust, then the reversal of the provision for impairment of Rs. 59,76,25,576/- was also required to be reduced from the computation of income as the same represented a mere "book entry", and was not in the nature of any "re....
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....tten back in the subsequent years. According to the Ld. AR such provision of diminution in value of asset was never allowed in any of the years. This is evident from the fact that the appellant has not claimed any carry forward of losses in any of the earlier years. The only conclusion that can be drawn from it is that the same would not be taxable in the year of reversal. The income and expenditure account of different years reflecting provisions for impairment of asset as brought on record are: Assessment year (Provision created/write back) A.Y. 2008-09 - A.Y. 2009-10 - A.Y. 2010-11 (944,554,938) A.Y.2011-12 (970,821,329) A.Y.2012-13 (495,945,440) A.Y.2013-14 597,625,576 Total (913,696,131) 14. 8 In view of the above, it is held that the provision written back of Rs . 59,76,25,576/- in respect of the impairment of the asset will not partake the character of taxable income of the appellant trust . This is notwithstanding the fact that even otherwise there is no taxable income in the hands of the appellant being a revocable and determinate trust as contemplated u/s 61 to 63 of the I.T. Act and discussed in the preceding parag....