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2017 (6) TMI 1331 - AT - Income TaxAssessment of trust - Determinate trust or indeterminate trust - Assessment in hands of the beneficiaries - Whether income from deposit was not correctly admitted in the hands of the beneficiaries or not admitted it has to be assessed in the hands of the assessee trust? - DR argued that the assessee is a registered Venture Capital Fund and is a pass through Trust and can be extended only to the extent of income earned on VCU investments since the assessee being a SEBI registered VCU is squarely covered by the provisions of Sec.10(23FB) r/w Sec.115(U) - Whether the income is from investment in Venture Capital Undertaking or not makes no difference in the case of determinate trust? - HELD THAT - In the instant case the assessee has created a trust which was registered and the beneficiaries have been identified by the contribution agreement(PPM) and their shares are also ascertainable with respect to contributions and the units. As in case M/S. P. SEKAR TRUST 2009 (4) TMI 38 - MADRAS HIGH COURT considered the issue regarding identification of beneficiaries at the time of formation of the Trust and expressed view that even after execution of the trust deed if the beneficiaries are identifiable and their shares are ascertainable it is sufficient compliance to hold the trust as determinate Trust. In the assessee s case the beneficiaries are identifiable with PPM and their shares are ascertainable as discussed earlier in this order. The facts of the case are similar to that of India advantage Fund 2014 (10) TMI 614 - ITAT BANGALORE - we hold that the assessee s Trust is a determinate trust and the appeal of the assessee is on this issue is allowed. Whether interest income of the trust should be assessed in the hands of the beneficiaries but not in the hands of the assessee? - Section 115U mandates that the nature of income which is received by the VCC or VCF from the Venture Capital undertaking and further distributed to the investor shall be taxable in the hands of the investor by treating the same nature of income like long term capital gain short term capital gains dividend or other income such as interest etc. and accordingly be taxed as per the provisions as applicable under different heads of the income. Hence section 115U prescribes the principle of pass through by treating the VCC or VCF as a pass through vehicle and further grants some concession in the shape of non-applicability of provisions of Chapter XIV-D XII E or XVII B. Assessee is duty to bound to furnish the correct information regarding the income paid or credited to the beneficiary from each source which required to be included by the beneficiary under the same head as if the beneficiary has derived income from investment in venture capital under taking as per Rule 12C and Sec.115U of IT Act. The assessee in the P L account did not apportion the expenditure relating to other income and the income relating to venture capital income. It is necessary to bifurcate the expenditure incurred for various sources of income to include in the hands of the beneficiaries to club under the various heads correctly since expenditure relating to exempt income is not allowable. Entire issue requires further verification from the assessing officer to compute the correct income under the head Interest income which required to be assessed as income from other sources and the dividend income and Long term capital gains. We set aside the entire matter back to the file of the assessing officer to examine the issue in the light of the above discussion and decide the issue afresh on merits. The assessee is also directed to collect information from the beneficiaries regarding the inclusion of income relating to the TSGF and submit the same to the AO for early completion of the assessment. Appeal of the assessee allowed for statistical purposes. Set off of the proportionate amount of expenditure relating to interest income in case the pass through status is not allowed with regard to interest income - HELD THAT - We have set aside the issue of determining the income from other sources and allocation of expenses with regard to venture capital income in the earlier paragraphs. Therefore this issue also stands remitted to be file of the Assessing Officer to decide the correct income under the head Income from other sources to be passed on to the beneficiaries or to assessee in the hands of the assessee in the representative capacity. Therefore this ground of appeal is allowed for statistical purposes. Grant of credit for taxes deducted at source - HELD THAT - It is the duty of the AO to allow the credit for taxes paid or collected by the Department. In this case it appears that the AO has not allowed the credit for the taxes deducted at source. We direct the AO to allow the credit for taxes paid. This ground of appeal is allowed. Rectification u/s 154 - CIT(A) has changed the determinate trust to indeterminate trust by u/s.154 - HELD THAT - The debatable issues which require verification and legal interpretation are not permissible to decide under section 154 and only the mistakes apparent from the record are permitted to decide under section 154. The issue on hand is not mistake apparent from record and the issue of law which require verification of several aspects both on law and facts. Therefore we set aside the order of the Ld CIT(A) and allow the assessee s appeal. However the issue relating to pass through of correct income is stands remitted to the file of the AO as discussed in earlier paragraphs. Disallowance u/s 40A - assessee is a trust carrying on the business of Venture Capital Fund and appointed the TVS Investments Capital Funds Ltd. as the manager and paid the above amount to TVS Capital Fund Investment which is a sister concern of the assessee - HELD THAT - In the assessee s case the income is only from three segments income from other sources dividend income and capital gains. There is no income to be computed under the head profits and gains of business or provision. Therefore we are of the considered opinion that the CIT(A) rightly held that the disallowance contemplated under Chapter-III of IT Act cannot be under taken while computing the income under Chapter-IV of the IT Act. Therefore we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. Disallowance u/s.40(a)(i) - legal and professional fee for non-deduction of tax at source - HELD THAT - As decided by us in the earlier paragraph the AO cannot make disallowances contemplated by the Chapter-III of IT Act while computing the income under Chapter IV of IT Act or in the income which does not form part of total income. Therefore we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. The appeal of the Revenue on this ground is dismissed.
Issues Involved:
1. Determination of whether the assessee is a determinate trust or an indeterminate trust. 2. Taxability of the income of the assessee as a pass-through entity under Section 161(1) of the IT Act. 3. Disallowance under Section 40A(2)(b) related to payments made to TVS Capital. 4. Non-deduction of tax at source on professional fees under Section 40(a)(i). 5. Credit for taxes deducted at source. Detailed Analysis: 1. Determination of Whether the Assessee is a Determinate Trust or an Indeterminate Trust: The primary issue was whether the assessee, a Venture Capital Fund registered with SEBI, is a determinate trust or an indeterminate trust. The assessee argued that it is a determinate trust with identifiable beneficiaries and ascertainable shares as per the Trust Deed. The Tribunal noted that the Trust Deed provided clear definitions and mechanisms for identifying beneficiaries and determining their shares, referencing clauses such as 1.1.10, 1.1.4, and 3.5 of the Trust Deed. The Tribunal relied on precedents, including the ITAT Bangalore's decision in India Advantage Fund VII and the Karnataka High Court's affirmation, which held that the identity and shares of beneficiaries must be determinable from the trust deed. The Tribunal concluded that the assessee's trust is a determinate trust as the beneficiaries are identifiable and their shares ascertainable, thus qualifying under Section 161(1) of the IT Act. 2. Taxability of the Income of the Assessee as a Pass-Through Entity under Section 161(1): The Tribunal examined whether the income of the assessee should be taxed in the hands of the beneficiaries or the trust itself. The assessee contended that as a determinate trust, its income should pass through to the beneficiaries. The Tribunal agreed, noting that the income from Venture Capital Undertakings (VCU) is exempt under Section 10(23FB) and taxable in the hands of the beneficiaries under Section 115U. The Tribunal emphasized that the income must be correctly attributed to the beneficiaries, and any discrepancies in reporting, such as misclassification of interest income, should be rectified. The Tribunal remanded the matter to the Assessing Officer (AO) to verify the correct income distribution and ensure compliance with Section 115U. 3. Disallowance under Section 40A(2)(b) Related to Payments Made to TVS Capital: The AO had disallowed payments made to TVS Capital under Section 40A(2)(b), considering them excessive. However, the Tribunal noted that the assessee's income is not computed under the head "Profits and Gains of Business or Profession" but under other sources like interest and capital gains. Therefore, disallowance under Section 40A(2)(b) was not applicable. The Tribunal upheld the CIT(A)'s decision to delete the disallowance. 4. Non-Deduction of Tax at Source on Professional Fees under Section 40(a)(i): The AO disallowed professional fees for non-deduction of tax at source under Section 40(a)(i). The Tribunal observed that such disallowances apply to business income, whereas the assessee's income falls under other heads. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the disallowance. 5. Credit for Taxes Deducted at Source: The assessee argued for the credit of taxes deducted at source. The Tribunal directed the AO to allow the credit for taxes paid, emphasizing the duty to appropriately credit taxes deducted at source. Conclusion: The Tribunal concluded that the assessee is a determinate trust, and its income should be passed through to the beneficiaries as per Section 161(1). The disallowances under Sections 40A(2)(b) and 40(a)(i) were deleted, and the AO was directed to allow credit for taxes deducted at source. The matter was remanded to the AO to verify the correct income distribution among beneficiaries.
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