TaxTMI 
TaxTMI 
TaxTMI 
2025 (8) TMI 61
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....espondent 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, registered with SEBI for investment in listed equity shares. Pursuant to it....
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....urchased 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 if the names of the beneficiaries are not set out in the original Trust Deed then suc....
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....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 support the aforesaid submission based on doctrine of impossibility. 14. Predicated on the....
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....nt 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 based on the location of the AIF/Trust inasmuch as it would not only result in anomaly but also inco....
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.... 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 above is concerned, Mr. Rai forcefully submitted that the facts on the basis whereof the Tamilnadu Urban Develop....
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....ned 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 is impermissible. 26. Learned senior counsel stated that, peculiarly the CBDT Circular No. 13/2014 on the one hand con....
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....nipulation, 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 order of the court or the instrument of trust or wakf deed on the date of such order, instrument or deed;] b. the individual shares of the persons on whose behalf or for whose benefit such i....
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....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 section 164 amended w.e.f. 1-4-1980] - benefit of the proviso will be available in respect of that part of the income which is not applicable to the charitable or religious purposes if none of the beneficiaries has any other taxable income and none of them is be....
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....he 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 11) as if such part (or such part as so reduced) were the total income of an association of persons ; and (b) the tax on that part of the relevant income which is applicable to purposes other than charitable or religious purposes, and which is either not specifically receivable on behalf or for the benefit of any ....
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....eivable, 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 regarding insertion of Explanation 1 in Section 164 of the Act, is conspicuous by its absence both in the amending Act as also the section 164 and its Explanation on the statute book of the Income Tax Act, 1961. Thus, it appears that though such a portion may have been a part of the Circular yet was not made a part of the Finance Act, 1980. That apart, Clause 30.4 of the Circular no. 281/1980 dated 22.09.1980 ....
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....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 registered with the Board may continue to operate for a period of six months from commencement of these regulations or if it has made an application for registration under sub-regulation (5) within the said period of six months, till the disposal of such application: Provided further that the Board may, in special cases, extend the said period up to a maximum of twelve months from the date of such commencement: Provided further that e....
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....ulation.] 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 otherwise dealing with the securities market as a 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 immediately before the establishment of the Board for which no registration certificate was necessary prior to such establishment, may continue to do so for a period of three months from such establishment or, if he has made an application for such registration within th....
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....t 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 investor or beneficiary unless and until it is first registered in terms of Regulation 4(c) of the SEBI Regulations under the provisions of Registration Act, 1908 and thereafter be granted certificate of registration under Regulation 6 of the SEBI Regulations. If this were to be the manner and procedure stipulated under the SEBI Act and the Regulations framed thereunder, we are unable to appreciate as to how and in what manner would a Category III AIF entity like the petitioner specify or mention the names of the investors or beneficiaries in the original Trust Deed at the time of registration. Thus, there is force in the submissions of Mr. Ganesh on t....
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....eir 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 'Representative Assessee' in accordance with sub-section (1) of section 164 of the Act. 5. However, in cases of funds where names of the beneficiaries and their interests in the Fund are determined i.e. stated in the trust deed, the tax on whole of the income of the Fund - consisting of or including profits and gains of business, would be leviable upon the Trustees of such AIF, being 'Representative Assessee' at the Maximum Marginal Rate in accordance with sub-section (1A) of section 161 of the Act. 6. The clarification given above shall 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. 7. The c....
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....nd (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 involved in the present case is concerned i.e. whether Category III AIF would be taxable at the Maximum Marginal Rate at the hands of the "Representative Assessee" under the provisions of Explanation 1 section 164 of the Act on account of the fact that the original Trust Deed did not mention the name of the investors or the beneficial interest of the investors. This issue was also settled by the Karnataka High Court in India Advantage Fund (supra). In fact, the judgment rendered by the Division bench of the Karnataka High Court was relied upon by the Madras High Court in TVS Shriram Growth Fund (supra) against which an SLP was filed and was dismissed. 40. If this Court were to uphold the clarification issued un....
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....bed 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 circumstances, the giving of the requisite notice of 18 months in respect of the option of purchase on the expiry of December 2, 1960, was impossible from the very commencement of Section 6. The performance of this impossible duty must be excused in accordance with the maxim, lex non cogitia ad impossibile (the law does not compel the doing of impossibilities), and sub-section (4) of Section 6 must be construed as not being applicable to a case where compliance with it is impossible. We must therefore, hold that the State Electricity Board was not required to give the notice under sub-section (4) of Section 6 in respect of its option of purchase on the expiry of 25 years." (emphasis supplied) Raj Kumar Dey (supra) "6... The ot....
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....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 assessed for the income arising from the trust and whether it is determinative or indeterminate can the trust be assessed once over again. The third issue would be whether merely because the names of the beneficiaries are not mentioned in the trust deed, but shown as beneficiaries and are identifiable and having been assessed whether the trust can be assessed again. In fact, the Tribunal ought to have followed the decision of the Division Bench of this court in the case of P. Sekhar Trust (supra). However, the same has been distinguished by the Tribunal in the case of TVS Investments I Fund v. ITO (2017) 57 ITR (Trib) 133 (Chennai) by observing that the said judgment is not applicable to the facts of the case because in it, the beneficiaries are incorporated on the day of the ins....
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....ct 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 year. Though the trust may receive the income, the extent to which the same can be taxed is to the extent to which tax would be leviable and recoverable from the beneficiaries. Section 161 of the Act specifically provides that the tax to be levied on the representative assessee and to be recovered from him is to be 'in the like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him'. (emphasis supplied) 17. Section 164 of the Act gets attracted only when the shares of the beneficiaries are unknown, which is manifest from the marginal heading of that section itself, viz., 'Charge of tax where the share of the beneficiaries unknown'. That section comes into play only where any income or any part thereof is not specifically receivable on behalf of o....
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....r 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 to 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. 11. Under the circumstances, we cannot accept the contention of the Revenue that the shares were non-determinable or the view taken by the Tribunal is perverse. On the contrary, we do find that the view taken by the Tribunal is correct and would not call for interference so far as determinability of the shares of the beneficiaries are concerned. 12. Once the shares of the beneficiaries are found to be determinable, the income is to be taxed of that respective sharer or the beneficiaries in the hands of the beneficiary and not in the hands of the tr....
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....4 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 27.06.2024 of the respondent no. 2/BAR unsustainable and is accordingly set aside. 45. So far as the CBDT Circular No. 13/2014 is concerned we direct that the same be read down in the manner as constructed and interpreted by us hereinabove. 46. So far as the objection regarding non-maintainability of the present writ petition on the premise that a statutory appeal under section 245W of the Act is available to the petitioner, we are not quite convinced with the said submission. This is for the reason that existence of an alternate efficacious remedy though may bar exercise of discretionary jurisdiction under Article 226 of the Constitution of India, 1950, however, is not a complete prohibition to exercise judicial review in such cases where it is deemed appropriate by the High Court. In the present case, though statutory appeal is available, yet, since the impugned order of BAR overlooks and ignores th....