2018 (5) TMI 1588 - AT - Income Tax

Doctrine of diversion of income by overriding title - Tax liability on interest income of the trust - Held that - the assessee-trust was formed vide Trust Deed settled by IL&FS Trust Co. Ltd. (ITCL) - the beneficiaries to the trust were seven Mutual Funds - The beneficial interest of those Mutual Funds in the trust was proportionate to their contribution in the assessee-trust - since assessee was a revocable trust and contribution by beneficiaries was a revocable transfer, income would be taxed in the hands of the beneficiaries i.e. Mutual Funds - also money was always intended to be passed on to PTC holders, i.e. Mutual Funds - thus principle of diversion of income at source by overriding title was attracted - interest income was not liable to tax in the hands of the assessee -Decided in favor of assessee

Summary

Issues Involved:
1. Validity of the trust.
2. Revocability of the trust.
3. Diversion of income by overriding title.
4. Status of the appellant as an "Association of Person" (AOP).
5. Validity of the return of income filed.
6. Levy of interest under sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Trust:
The CIT(A) ruled that the appellant is not a valid trust on the grounds that all the essentials for a valid trust were not fulfilled. The AO noted that the assessee declared itself as a private trust created through a trust deed dated 16.05.2008 by its trustee, IDBI Trusteeship Services Ltd. The AO held the assessee as an AOP, not a trust, and therefore not falling under section 161(1) of the Act.

2. Revocability of the Trust:
The CIT(A) rejected the applicability of sections 61 to 63 of the Act to the contribution made by the beneficiary to the appellant, thereby holding that the trust was not revocable. The AO held that even if the plea of the assessee is considered, the tax liability would fall under section 161(1A) instead of 161(1).

3. Diversion of Income by Overriding Title:
The CIT(A) held that the income of the appellant is not diverted at source to the beneficiary/PTC holder, stating that an overriding title cannot be created by voluntary act of parties. The AO computed the income of the assessee at ?9,43,63,906/- under "Income from Business or Profession."

4. Status of the Appellant as an "Association of Person" (AOP):
The CIT(A) upheld the AO's decision that the status of the appellant is that of an AOP constituted by ITSSL Loan Trust, Canara Robeco Mutual Fund (beneficiary/PTC Holder), and IDBI Trusteeship Services Ltd. The CIT(A) observed that the activity of commercial lending of loan was an adventure in the nature of trade, and thus the interest earned was income from profits and gains, making the assessee a representative assessee under section 161(1A).

5. Validity of the Return of Income Filed:
The CIT(A) treated the income return filed by IL&FS Trust Company, not being the trustee of the appellant, as a valid return. The AO noted that the assessee claimed the ROI was filed wrongly by IL&FS Trust Company, but this claim was made only after issuance of notice under section 143(2).

6. Levy of Interest under Sections 234B and 234C of the Act:
The AO levied interest under sections 234B and 234C, which the appellant denied liability for. The CIT(A) directed the AO to grant deduction of the interest amount paid to the member under section 67A of the Act.

Judgment Analysis:
The Tribunal referred to the case of Indian Corporate Loan Securitisation Trust v. ITO, where it was held that since the trust was revocable and contributions by beneficiaries were revocable transfers, income would be taxed in the hands of the beneficiaries. The principle of diversion of income at source by overriding title was applied, meaning the interest income was not liable to tax in the hands of the assessee. The Tribunal found the facts of the present case identical to the Indian Corporate Loan Securitisation Trust case and ruled in favor of the assessee, allowing the appeal.

Conclusion:
The appeal filed by the assessee was allowed, and the appeal filed by the revenue was dismissed. The Tribunal held that the interest income was not liable to tax in the hands of the assessee, applying the principle of diversion of income at source by overriding title and considering the trust as revocable with contributions being revocable transfers.