TaxTMI 
TaxTMI 
2021 (7) TMI 874
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....thout Prejudice to the above, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in (i) holding the appellant trust as indeterminate trust ignoring the submission made by the appellant in this regard. (ii) Considering the appellant trust as an 'AOP' engaged in the business of securitization of debts. Without prejudice to the above, the appellant takes the below mentioned Grounds of Appeal 2. Ground No. II - Rejection of books of the appellant a) On the facts and in the circumstances of the case and in law, the learned CIT(A) has grossly erred in rejecting the books of account in spite of the fact that the appellant has followed accrual method of accounting and no qualification thereof was made in the Audit Report. b) On the facts and in the circumstances of the case and in law, the Learned CIT(A) has further erred in holding the write back of balance in Security Receipts of Rs. 9,345,157 as income of the appellant, without appreciating the fact that the same was not real income of the appellant but was a write back of capital base. 3. Ground No. III - Disallowance of acqui....
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.... in incorrect)), levying interest u/s 2348 of the Act. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The appellant craves leave to add, alter, amend, modify or withdraw any of the above stated Grounds of Appeal at any time before or at, the time of hearing, of the appeal." 3. The brief facts of the case are that the assessee filed its return of income on 30.9.2009 declaring total income of Rs. Nil. The return was processed u/s 143(1) of the Act accepting the returned income. The case was selected for scrutiny. Notices u/s 143(2) & 142(1) of the I. T. Act, 1961 were issued and served upon the assessee. The assessee is an AOP in the nature of trust in the business of securitization of debts and processing of such bad debts mainly of bank and sick companies. The assessee has shown the interest income @ Rs. 94,030/- and realization over acquisition cost at Rs. 93,45,157/- against which the assessee has claimed expenses at Rs. 117.96 crores which includes acquisition expenses at Rs. 23.09 lakhs, protection, preservation & insurance expenses at Rs. 3.24 crores, management fees at Rs.....
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....t and also accepted that all the recoveries work step to tax in the hands of respective beneficiary with trustee petitioner and other security receipt holders. In the sister concern case titled as ITO-21(3)(2) Vs. M/s. Scheme A1 of ARCIL CPS 002 XI Trust (supra) has given the following finding:- "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 w....
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....ring the totality of the facts and the circumstances of the issue involved, it is held that the appellant Trust is a valid Trust." We have given a thoughtful consideration to the aforesaid observations of the CIT(A), and find ourselves to be in agreement with the view therein taken by 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 fu....
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....or assets to the transferor, or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets; (b) "transfer" includes any settlement, trust, covenant, agreement or arrangement." 9.4 Thus it is seen that under section 61 of the Act 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. Section 62 of the Act provides that if a transfer is irrevocable for a specified period then section 61 will not apply. Section 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) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets; (b) "transfer" includes any settlement, trust, covenant, agreement or arrangeme....
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.... 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 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, 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) ....
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....he beneficiaries need to be identifiable and the Trust Deed must contain provisions that vest the power of revocation. There is nothing in the section to read that such a power should be unconditional. As mentioned earlier, the Trust Deed and the Deed of Assignment contain clauses which indicate that the power of revocation has 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 respectfully 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 ....
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....foresaid view is fortified by the judgment of the Hon'ble High Court of Bombay in the case of Behramji Sorabji Lalkaka Vs. CIT (1948) (16 ITR 301) (Bom). In the aforesaid case, it was observed by the Hon‟ble High Court that the words "revocable transfer" are well understood in law and a transfer does not cease to be revocable because the power of 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 t....
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....m AOP as contemplated in Sec. 2(31)(v) of the Act, the requirement as was earlier laid down by the Hon‟ble Supreme Court in its various judgments that the various person as per their volition should have associated with the object of deriving income, profits or gains, had been dispensed with by the legislature, vide the "Explanation" to Sec. 2(31) of the Act, as had been made available on 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....
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....he hands of the assessee that it becomes eligible to tax. In the instant case, 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 appellant trust as per the trust deed and offer documents. Therefore, merely because the realization flows through 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 pas....
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....indeterminate trust once the names of beneficiaries of the appellant trust and their shares are known at the inception and proceeds are distributed as per their shares. This is not a case where discretion is given to the trustee to decide the allocation of the income every year or a right is given to the beneficiary to exercise the option to receive the income or not each year. Only in the latter situation, the trust will be regarded as discretionary 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, it 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....
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.... finding no infirmity in the view taken by the CIT(A) who had rightly concluded that the assessee is a determinate trust, we uphold the same. (F) Treatment of Write-back of Impairment provision of Rs. 59,76,25,576/-: (i) Observing, that the surplus as per the income and expenditure account of the assessee amounted to Rs. 59,56,60,595/-, the same was brought to tax by the A.O, rejecting the claim of the assessee that the same represented write back of impairment 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 year....
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....entry for reversal of impairment provision created in the earlier years without any corresponding amount payable by anybody or any possibility of receiving any benefit or money or money's worth. As discussed above, no reason or explanation has been given by the AO for taking this stand either in the assessment order or the remand report. There is no doubt that such write back can be made taxable only if such provisions created and claimed as deduction in earlier years and such deduction is written 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....