2020 (2) TMI 112 - AT - Income Tax

Treating the assessee as Trust OR AOP - income liable to be taxed at the maximum marginal rate in view of section 161(1 A) as the captioned income is evidently business income - Computation of income of an assessee by AO under a head of income other than what was claimed - HELD THAT - As decided in own case 2017 (2) TMI 1122 - ITAT MUMBAI AO is competent to compute the income of an assessee under a head of income, other than what was claimed by the assessee, of course, after marshalling the facts properly and furnishing proper reasons. Merely by computing the interest accrued as income of the assessee instead of non taxable as claimed, the inter-se rights of the assessee under any other statutory framework does not get affected. There is no requirement under the Income Tax Act that the AO has to get an order of the court for income determination. The requirement u/s 281 of the Act to get a suit initiated to annul a transfer of property before effecting attachment is totally different and has no connection to this issue. The Income Tax Act is a self-contained Act and the AO is entitled to determine the head of income under which the income of a particular assessee is to be assessed. The decision of the Hon'ble Supreme Court in the case of Southern Technologies Ltd (2010 (1) TMI 5 - SUPREME COURT OF INDIA ) squarely applies to the facts of this case. The assessee's appeal on this issue is dismissed. Validity of trust - Holding the trust to be not a valid trust and consequently that section 161(l) of the Act is not applicable - whether all the transactions related to securitization are a facade worked out by the Bank and the assessee trust is not a valid trust? - The procedures and processes involved in the formation of a trust have been followed is not in doubt. RBI Guidelines itself contemplate the securitization process to be carried out by the originator; Yes Bank in this case. Therefore, no adverse inference can be drawn of the point strenuously put forth by the Revenue that the originator has been the guiding force of the securitization process. Most of the infirmities/defects pointed out in the documents by the Revenue is mainly on the point that all the securitization transactions were carried out between 16.05.2008 and 20.05.2008 whereas the loan agreement was signed on 21.05.2008. All the procedures and documents related to the securitization process was carried out on 20.05.2008. The insistence of Revenue that only the standard format agreement has to be reckoned and not the agreement dated 15.05.2008 does not appear to be tenable. Even assuming that the agreement dated 15.05.2008 was only in the nature of a letter of intent, it cannot be disputed that the lender, Yes Bank had full knowledge of the loan and had disbursed the amount. Therefore, it is very likely that Yes Bank had initiated the securitization process, pending signing of the standard format agreement. These are all standard documents that are signed up in such transactions. The reference to the agreement in the documents related to the securitization process needs to be understood in this perspective. Even assuming that minor infirmities exist in the documents, those can at best be characterized as procedural defects and this alone is not enough to disregard the documents totally. It is a settled principle that a legal document has to be viewed in its entirety and mistakes in some of the clauses cannot, by itself, negate the existence of the documents. CIT(A) was wrong in holding that the assessee trust was not a valid trust. All the necessary ingredients for the formation and existence of the trust have been fulfilled and all these documents, processes and money trail cannot be disregarded, only due to the marginal mistakes in the clauses in the documents and also the timing of signing of these documents. Accordingly we hold that the assessee Trust is a valid Trust. Ground of appeal No. 1 decided in favour of the assessee. Holding the trust was not a revocable trust/ contribution by beneficiaries was not a revocable transfer - In view of the discussion above and respectfully following the principles laid down in the above referred decision in the case of India Advantage Fund-VII 2015 (4) TMI 259 - ITAT BANGALORE and Milestone Army Navy Trust 2015 (12) TMI 1647 - ITAT MUMBAI 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. In this view of the matter, we allow this ground raised by the assessee Diversion by overriding title - amounts received by the assessee from Yes Bank under the Deed of Assignment - As held by the Hon'ble Apex Court in the case of CIT vs. Tollygunge Club Ltd. 1977 (3) TMI 1 - SUPREME COURT every receipt in the hands of the assessee need not be its income and it is only when it bears the character of income at the time when it reaches the hands of the assessee that it becomes exigible to tax. In the case on hand, even at the initial stage, even before the money flows to the assessee, it was always clearly intended to be passed on to and only to the beneficiaries, i.e., the PTC holders in proportion to their interest in the receivables (underlying assets). Thus merely because the moneys flow through the assessee, it cannot be automatically inferred that it is income in the hands of the assessee. The money was always intended to be passed on to the PTC holders and therefore, it can be said that only the PTC holders had a claim on the money, if not an absolute charge. Hence, the principle of diversion of income at the source by overriding title is attracted in this case. In view of the above finding of fact rendered by us, we are of the considered opinion that by the principle of diversion of income by overriding title, the receivables are the income of the PTC holders, in this case the beneficiaries of the assessee trust and therefore, whether the status of the trust is to be characterized as Trust or AOP, the income passes on to the beneficiaries. In this view of the matter, the ground of appeal at III raised by the assessee is allowed. Treating the status of the assessee as AOP - Revenue s main contention is that all the players in the securitization process have acted together and in unison and have carried out an adventure in the nature of trade to earn income, which is in the nature of business , thus all the stake holders have to be assessed together as AOP - All the Mutual Funds beneficiaries are shown to have purchased the PTCs separately and not together by a concerted action to earn income jointly. We find that the various averments made by Revenue that there has been some concerted and coordinated action on the part of the beneficiaries in completing the securitization process, has not travelled beyond the stage of suspicion and surmise and therefore in our view Revenue has not discharged the onus of establishing the existence of an AOP in the case on hand. Even otherwise, since we have already held that the assessee trust is a valid trust, the controversy regarding treating the assessee as AOP does not arise. Consequently, this ground raised by the assessee is allowed. Invalidity of assessment and the confirmation by the CIT(A) - Since we have held the assessee to be a valid Trust, there is no question of the assessee being assessed in the capacity of an AOP , and therefore there is no requirement for adjudicating this ground No. V as the same has been rendered infructuous and is accordingly dismissed. Enhancement of Income - Loan Agreement states that interest has to be computed on number of day basis using 365 days as a year basis. The above wordings cannot be stretched to mean that the interest has to be charged on day to day basis. Also, the Deed of Assignment under which the assessee is to receive the amount clearly provides that the assessee is entitled to receive the amounts on the 1st of the next month and to be passed on to the PTC holders in the proportion to the amount of their investments on the very next day. In view of the above clear provisions laid out in para 3.5 of the Loan Agreement and Deed of Assignment, we are of the considered view and hold that it is crystal clear that the interest for a particular month accrues on the first day of the next month as laid out in para 3.5 of the Loan Agreement and recital in the Deed of Assignment. Accordingly, ground No. VI of assessee s appeal is allowed. Disallowance of expenses on accrual basis (if enhancement is upheld) - In this ground, the assessee has raised an alternate ground that if the enhancement to the income is allowed, then the corresponding outgo (expenditure) for March, 2009 be allowed. Since we have already held that the enhancement of the assessee s income on the interest income made by the learned CIT(A) is not tenable, the claim for disallowance of expenses on actual basis is now rendered infructuous, as it does not survive for consideration. The ground of appeal No. VII being infructuous is accordingly dismissed.

Summary

Issues Involved:
1. Validity of the Trust.
2. Characterization of the Trust as a revocable or irrevocable trust.
3. Diversion of income by overriding title.
4. Status of the assessee as an Association of Persons (AOP).
5. Validity of assessment order and enhancement of income by the CIT (A).
6. Deduction of expenses and computation of interest under sections 234B and 234C of the IT Act.

Detailed Analysis:
1. Validity of the Trust:
The primary issue was whether the assessee trust was a valid trust or not. The Revenue argued that the trust was not genuine and all transactions were orchestrated by Yes Bank, making the trust a facade. The Tribunal held that the trust was valid as all necessary legal requirements for its formation were fulfilled. The Tribunal noted that the trust had complied with the RBI Guidelines on Securitization and that minor procedural defects in documentation did not negate the trust's validity.

2. Characterization of the Trust as a Revocable or Irrevocable Trust:
The Tribunal examined whether the trust was revocable, which would affect the taxability of income. The Tribunal found that the trust deed contained provisions allowing for revocation by the beneficiaries, making it a revocable trust. As a result, the income should be taxed in the hands of the beneficiaries, not the trust. The Tribunal relied on the principles laid out in the case of *India Advantage Fund VII* and other judicial precedents to conclude that the trust was revocable.

3. Diversion of Income by Overriding Title:
The Tribunal addressed whether the income was diverted at source by overriding title to the PTC holders (beneficiaries). The Tribunal found that the PTCs represented an undivided interest in the receivables and that the structure of the securitization process indicated a direct link between the PTC holders and the receivables. Therefore, the income was diverted by overriding title and should be taxed in the hands of the beneficiaries.

4. Status of the Assessee as an Association of Persons (AOP):
The Revenue contended that the trust should be treated as an AOP, arguing that all parties acted in concert to earn income. The Tribunal disagreed, noting that the mutual funds had independently subscribed to the PTCs and did not act together to form an AOP. The Tribunal held that the trust was not an AOP and should be treated as a valid trust.

5. Validity of Assessment Order and Enhancement of Income by the CIT (A):
The Tribunal examined the validity of the assessment order, which characterized the assessee as an AOP. The Tribunal held that since it had already determined the assessee to be a valid trust, the question of treating it as an AOP did not arise. The Tribunal also addressed the enhancement of income by the CIT (A), holding that the interest income for March 2009 accrued on 1st April 2009 and should not be included in the income for the assessment year 2009-10.

6. Deduction of Expenses and Computation of Interest under Sections 234B and 234C:
The Tribunal addressed the issue of deduction of expenses, noting that since the enhancement of income was not upheld, the question of corresponding expenses became moot. The Tribunal also upheld the charging of interest under sections 234B and 234C as mandatory and directed the AO to recompute the interest while giving effect to the order.

Conclusion:
The Tribunal concluded that the assessee was a valid trust, the income was diverted by overriding title to the beneficiaries, and the trust was revocable. Consequently, the income should be taxed in the hands of the beneficiaries. The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing a comprehensive analysis of each issue based on legal principles and judicial precedents.