TaxTMI 
TaxTMI 
2025 (8) TMI 61
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.... 1961 following the impugned Circular No. 13/2014 issued by the respondent no. 1. 2. It is the case of the petitioner that the petitioner is a company incorporated under the Companies Act, 1956 and engaged in the business of rendering Portfolio Management Services, in accordance with the relevant guidelines/regulations issued by Securities and Exchange Board of India. (hereinafter referred to as "SEBI") 3. The petitioner states that the SEBI issued Alternative Investment Fund (hereinafter referred to as "AIF") Regulations, vide notification dated 21.05.2012. The said regulations classified AIF in three categories, i.e., Category I, II, III. It is the case of the petitioner that to float an AIF, Category III fund, Equity Intelligence floated the AIF services for the petitioner and acted as the settlor of the petitioner. The object of the petitioner, as stated in the Trust Deed is to act as an Alternative Investment Fund Category III in terms of Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (hereinafter referred to as "SEBI Regulations"). 4. It is stated that the petitioner launched a single open-ended scheme, namely, EQ India Fund, regi....
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....er is an investment trust and its beneficiaries are investors, each of whom has purchased a certain number of units in the Trust Fund and each of such units is known as "Net Asset Value" (hereinafter referred to as "NAV"). He stated that such value is preciously determined daily and intimated to the investors and also to SEBI on a periodic basis. He further submitted that this NAV has never been questioned by SEBI till date. According to him, this crucial factor has been completely disregarded by the respondent no. 2/BAR in its impugned order. 9. Briefly referring to sections 161 and 164 of the Act, he submitted that if the shares of the beneficiaries are ascertainable and determinable, their income is taxed at the normal rate, however, if the same shares are neither ascertainable nor determinable then the said income is taxed at the Maximum Marginal Rate. He submitted that in the assessment made by the AO, it was specifically held that the petitioner is a determinate Trust and such orders have become final. 10. Learned senior counsel submits that contrary to the said understanding of the AO and the petitioner, the impugned order passed by the respondent no. 2/BAR holds that ....
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....oked the doctrine of impossibility in order to buttress the aforesaid submission. In that, once the aforesaid regulations of SEBI read with section 12 of the SEBI Act prohibited any entity from acting as AIF or even further from receiving any investment unless and until it has first obtained the certificate of registration from SEBI, there could be no question of any AIF including the petitioner from having or containing the names of investors in the original Trust Deed. Moreover, according to him, the mere mentioning of the name of the investors prior to obtaining the certificate of registration would itself constitute a major violation of SEBI Regulations disentitling the petitioner from seeking registration. In view of the above, he contended that the mandate of Circular no. 13/2014 in contradistinction to the prohibition in SEBI Regulations and the SEBI Act would constitute the doctrine of impossibility. He thus contended that an entity cannot be expected to commit an act which was impossible in law. He relied upon the judgment of Cochin State Power & Light Corporation vs. State of Kerala: (1965) SCC OnLine SC 29 and Raj Kumar Dey vs. Tarapeda Dey: (1987) 4 SCC 398 in order to ....
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....ly contended that the Revenue cannot be permitted to take contrary stands in respect of different AIFs/Trusts performing the same function purely on the basis of such AIFs/Trusts being located in different States of the country. 16. He next contended that the impugned CBDT Circular no. 13/2014 is unreasoned and does not give any credible rationale as to why the non-mentioning of the investors in the original Trust Deed would make such AIF, 'indeterminate'. He stoutly contended that the said Circular of the year 2014 has completely ignored and overlooked the provisions of Regulations 3(1) and 6(3) of the SEBI Regulations read with section 12 of the SEBI Act which was promulgated in the year 2012 and was in force before the impugned Circular No. 12/2014 was issued. He vehemently contended while pointing out to para 6 of the impugned Circular that intriguingly the Circular states that it would not apply to the AIF/Trust situated in all those States where the High Court has taken or would take a contrary view. He contended that such a stand is unpalatable in law. According to learned senior counsel, the judgments are binding on the Revenue and it cannot take contradictory stands bas....
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....o be assessed accordingly. In particular, he invited attention to sub-section 1A, according to which, where any income in respect of which the person mentioned in clause (iv) of sub-section (1) of section 160 is liable as a "Representative Assessee" consists of, or includes, profits and gains of business tax, shall be charged on whole of income in respect of which such person is so liable at the Maximum Marginal Rate. He submitted that admittedly, in the present case none of the Investors were named or identifiable having not been mentioned in the original Trust Deed. Having regard thereto, according to him, the Circular No. 13/2014 would be squarely applicable and the petitioner would be charged to tax at the Maximum Marginal Rate. 21. Learned senior standing counsel copiously referred to the Private Placement Memorandum particularly to Section X respecting "Tax Considerations" in order to support his submission that even the petitioner clearly understood its liability and taxability as a "Representative Assessee" under section 161 of the Act and had cautioned the investors to invest in terms thereof. 22. So far as the reliance of the petitioner on the judgment referred to a....
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....ed 22.09.1980. REJOINDER BY THE PETITIONER: 24. Mr. S. Ganesh, learned senior counsel reiterates that the impugned order of respondent no. 2/BAR premises its reasoning totally on the provisions of Circular No. 13/2014 to conclude that the petitioner is 'indeterminate' as investors are not named in the original Trust Deed without applying its mind independently to the submissions made by the petitioner before it. According to him, the respondent no. 2/BAR completely ignored and overlooked the provisions of Circular dated 22.09.1980 and more importantly did not even consider the fact that the Circular No. 13/2014 does not, even remotely, refer to the Circular of the year 1980. 25. He submitted that the SEBI Regulations, read harmoniously and holistically, would mandate that investments cannot be accepted by a Trust unless it is first registered under the Registration Act, 1908 subsequent to which it was mandatory to get itself registered under the provisions of SEBI Regulations. According to him, unless the above procedure and provisions are complied with by any Trust, similar to the petitioner, the question of naming or identifying any investor or ascertaining their shares ....
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....ere able to manipulate the arrangements in such a manner that a discretionary trust was converted into a specific trust whenever it suited them tax-wise. In order to prevent such manipulation, the Finance Act has inserted Explanation 1 in section 164 to provide as under : a. any income in respect of which the court of wards, the administrator-general, the official trustee, receiver, manager, trustee or mutawalli appointed under a wakf deed is liable as a representative assessee or any part thereof shall be regarded as not being specifically receivable on behalf or for the benefit of any one person unless the person on whose behalf or for whose benefit such income or such part thereof is receivable during the previous year is expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and is identifiable as such on the date of such order, instrument or deed. [For this purpose, it is not necessary that the beneficiary in the relevant previous year should be actually named in the order of the court or the instrument of trust or wakf deed, all that is necessary is that the beneficiary should be identifiable with reference to the orde....
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....-1980] - provisions of section 164(1) will not apply to a discretionary trust in which none of the beneficiaries has any other taxable income and none of them is beneficiary in any other trust [clause (i) of the proviso to sub-section (1) of section 164 substituted w.e.f. 1-4-1980] - benefit of concessional tax treatment will be withdrawn if the person declaring such trust has declared any other trust by will [clause ii) of the proviso to sub-section (L) of section 164 amended w.e.f. 1-4-1980] - where the property is held under trust in part only for charitable or religious purposes and the income which is applicable to other purposes is receivable on behalf of beneficiaries whose shares are indeterminate or unknown, the tax chargeable would be the aggregate of the tax on that part of the income which is applicable to charitable or religious purposes, to the extent it is not exempt under section 11, at the rates applicable to an AOP; and the tax on the income which is applicable to other purposes would be at the rate applicable to the highest slab of income of an AOP as specified in the Finance Act of the relevant assessment year [sub-section (3) of secti....
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....hose benefit such income or such part thereof is receivable are indeterminate or unknown (such income, such part of the income and such persons being hereafter in this section referred to as "relevant income", "part of relevant income" and "beneficiaries", respectively), [tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate :] (2) xxx xxx xxx (3) In a case where the relevant income is derived from property held under trust in part only for charitable or religious purposes [or is of the nature referred to in sub-clause (iia) of clause (24) of section 2] and either the relevant income applicable to purposes other than charitable or religious purposes (or any part thereof) [is not specifically receivable on behalf or for the benefit of any one person or the individual shares of the beneficiaries in the income so applicable are indeterminate or unknown, the tax chargeable on the relevant income shall be the aggregate of- (a) the tax which would be chargeable on that part of the relevant income which is applicable to charitable or religious purposes (as reduced by the income, if any, which is exempt under section ....
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.... case may be, and is identifiable as such on the date of such order, instrument or deed ; ii) the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is received shall be deemed to be indeterminate or unknown unless the individual shares of the persons on whose behalf or for whose benefit such income or such part thereof is receivable, are expressly stated in the order of the court or the instrument of trust or wakf deed, as the case may be, and are ascertain-able as such on the date of such order, instrument or deed. Explanation 2 : In this section, "maximum marginal rate" means the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an association of persons as specified in the Finance Act of the relevant year.] (emphasis supplied) From a perusal of the aforesaid provisions and explanations as also the amendments noted above, it is clear that the portion underlined of the copy of the Finance Act, 1980 placed on record on behalf of the petitioner in sub para (a) of para 4 of clause 30.3 of the Circular No. 281/1980 regardin....
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....tegory III AIFs, to necessarily mention the name of the beneficiaries on the original Trust Deed whereas, the SEBI Regulations prohibited any investment to be obtained from the beneficiaries before obtaining certificate of registration from it, under the aforesaid provisions. This procedure was contended to be contrary to the doctrine of impossibility. 33. On the other hand, on behalf of the Revenue, there were really no contrary submissions urged against the aforesaid contentions. We have carefully considered the submissions made on behalf of the petitioner in respect of the aforesaid submissions. In that context, it would be appropriate to extract Regulation 3(1), Regulation 4(c) and Regulation 6 of the SEBI Regulations read with provisions of section 12 of the SEBI Act which read thus- "SEBI Regulations Registration of Alternative Investment Funds. 3. (1) On and from the commencement of these regulations, no entity or person shall act as an Alternative Investment Fund unless it has obtained a certificate of registration from the Board: Provided that an existing fund falling within the definition of Alternative Investment Fund which is not r....
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....ciple approval to the applicant: Provided that the applicant shall comply with clause (c) or clause (d) of regulation 4, as the case may be, within six months from the date of grant of in-principle approval and upon compliance with the same, the Board may grant a certificate of registration under sub-Regulation (2). (5) An Alternative Investment Fund that has been granted in-principle approval may accept commitments from investors but shall not accept any monies till it is granted registration under sub-regulation (2) of this regulation.] SEBI Act 12. Registration of stock-brokers, sub-brokers, share transfer agents, etc.-(1) No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the [regulations] made under this Act: Provided that a person buying or selling securities or ot....
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.... under those provisions. It is pertinent to observe that Regulation 3(1) of the SEBI Regulations and section 12(1) and 12(1C) of the SEBI Act commence with a negative covenant indicating the strict application of the said provisions. In other words, the said Regulations and the Section restrict the functioning of the petitioner Trust save and except in the manner as provided under the said Section and the Regulations. Thus, unless and until a Trust registers the original Trust Deed, firstly under the provisions of Registration Act, 1908 and secondly, obtains the certificate of registration under the provisions of SEBI Act and Regulations, it cannot accept any funds or investment from a beneficiary. Significantly, sub-Regulation (5) of Regulation 6 of the SEBI Regulations respecting the "Procedure for grant of Certificate" clearly specifies that if an AIF has been granted in-principle approval under sub-Regulation (4) of Regulation 6, it may accept commitments from investors but shall not accept any money till it is granted registration under sub-Regulation (2) of Regulation 6. This itself would indicate, manifestly, that no AIF can accept any commitment or investment from any inves....
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....eatment in cases of AIFs being noncharitable trusts where the investors name and beneficial interest are not explicitly known on the date of its creation - such information becoming available only when the funds starts accepting contributions from the investors. 3. Board has been requested to clarify whether the income of such funds would be taxable in the hands of the Trustees of the AIF in the capacity of a 'Representative Assessee' (as defined u/s 160(i)(iv) of the Act) or in the hands of investors (i.e. contributors of funds). 4. The matter has been examined. In the situation where the trust deed either does not name the investors or does not specify their beneficial interests, provisions of sub-section (1) of section 164 would come into play and the entire income of the Fund shall become liable to be taxed at the Maximum Marginal Rate of income-tax in the hands of the trustees of such AIFs in their capacity as 'Representative Assessee'. It is also clarified that in such cases, provisions of section 166 of the Act need not be invoked in the hands of the investor, as corresponding income has already been taxed in the hands of the 'Representa....
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....in para 6 also noted that the said clarification "would not be operative in the area falling in the jurisdiction of a High Court which has taken or takes a contrary decision on the issue." To say the least, para 6 appears to be baffling and contrary to the well settled judicial principles of law. An issue of law, settled by a Constitutional Court, neither challenged nor set aside by a higher Constitutional Court, would be binding upon the Revenue authorities all over the country and cannot be implemented State specific or area specific. Moreover, it appears that the said paragraph has been deliberately inserted keeping in view the judgments in the case of India Advantage Fund (supra) and TVS Shriram Growth Fund (supra) as relied upon by the petitioner. 39. There is no cavil that the judgement of the Division Bench of the Madras High Court in TVS Shriram Growth Fund (supra) was challenged by the Revenue before the Hon'ble Supreme Court by way of an SLP which was dismissed, though on account of low tax effect. It is trite that the ratio decidendi of the Division Bench judgment in India Advantage Fund (supra) would hold the field in so far as the interpretation of the controversy i....
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....onstituted, or if constituted, does not elect to purchase the undertaking". It is common case that the State Electricity Board was duly constituted. But the State Government claims that the State Electricity Board did not elect to purchase the undertaking. For this purpose, the State Government relies upon the deeming provisions of sub-section (4) of Section 6, and contends that as the Board did not send to the State Government any intimation in writing of its intention to exercise the option as required by the sub-section, the Board must be deemed to have elected not to purchase the undertaking. Now, the effect of sub-section (4) read with sub-section (2) of Section 6 is that on failure of the Board to give the notice prescribed by sub-section (4), the option vested in the Board under sub-section (1) of Section 6 was liable to be divested. Sub-section (4) of Section 6 imposed upon the Board the duty of giving after the coming into force of Section 6 a notice in writing of its intention to exercise the option at least 18 months before the expiry of the relevant period. Section 6 came into force on September 5, 1959, and the relevant period expired on December 3, 1960. In the circum....
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.... trust deed was executed if one is to connect the same with the quantum. The real test is whether shares are determinable even when or after the trust is formed or may be in future when the trust is in existence. In the facts of the present case, even the assessing authority found that the beneficiaries are to share the benefit as per their investment made or to say in other words, in proportion to the investment made. Once the benefits are to be shared by the beneficiaries in proportion to the investment made, any person with reasonable prudence would reach the conclusion that the shares are determinable. Once the shares are determinable amongst the beneficiaries, it would meet the requirement of the law, to come out from the applicability of section 164 of the Act." TVS Shriram Growth Fund (supra) 18. The broad issues which would fall for consideration are whether the assessee-trust is a determinative trust or indeterminate trust. The Assessing Officer came to the conclusion that it is an indeterminate trust, as the list of beneficiaries has not been specifically set out in the deed of trust. The other issue would be whether if in case, the beneficiaries are ass....
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....g to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income ; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in Chapter XV, be 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.. .. 12. ........... 13. ........... 14. ........... 15. ........... 16. Thus, the scheme of the Act, the statutory provisions, as well as the line of judgments referred to above clearly state that though section 5 referred to total income of the person whose income is being assessed and the charge of Income-tax under section 4 of the Act is on the total income, what could be taxed in the hands of the representative assessee is only the income which the beneficiaries could be said to have received or to be deemed to have received in India or in whose favour the income has accrued or arises or is deemed to accrue or arise to him in India ; or accrues or arises to him outside India during the relevant ....
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....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. 7. ......... 8. ......... 9. ......... 10. In our view, the contention is wholly misconceived for three reasons. One is that by no interpretative process the Explanation to section 164 of the Act, which is pressed in service can be read for determinability of the shares of the beneficiary with the quantum on the date when the trust deed is executed and the second reason is that the real test is the determinability of the shares of the beneficiary and is not dependent upon the date on which the trust deed was executed if one is to connect the same with the quantum. The real test is whether shares are determinable even when even or after the trust is formed or may be in future when the trust is in existence. In the facts of the present case, even the assessing authority found that the beneficiaries are to share the benefit as per their investment made or to say in other words, in proportion to the investment made. Once the benefits are to be sha....
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....terminable. Consequently, on such reasoning, the Karnataka High Court concluded that once the shares were determinable, it would meet the requirement of law to come out of the applicability of section 164 of the Act. We respectfully concur with such reasoning. Thus, the said submission is unmerited and untenable both on law as well as on facts. 43. Mr. Rai, learned senior standing counsel for the Revenue had referred to other provisions of the Act, however, in view of the above restricted examination of the lis in respect of the construction and interpretation of the provisions of section 164 and the extant CBDT Circulars, it would not be necessary to advert to those provisions. 44. On a scrutiny of the impugned order of the BAR we find that it has not only overlooked the law settled by the Madras and Karnataka High Courts but has also not considered that para 6 of the CBDT Circular no. 13/2014 is contrary to the well settled principles of law, which we find abhorrent and baffling. Ergo, in view of the ratio decidendi in the judgements of India Advantage Fund (supra) and TVS Shriram Growth Fund (supra) coupled with our own analysis above, we find the impugned order dated 27.0....