2020 (2) TMI 312 - AT - Income Tax

Treatment of assessee as trust or AOP - whether profit on sale of shares should be treated as long term capital gains or business income ? - HELD THAT - Settler trustee and beneficiary are three separate and distinct entities. Hence we hold that the assessee should be assessed in the capacity of trust only. We also find that the settler i.e Infrastructure Leasing and Financial Services Ltd. and beneficiary i.e. IL FS Financial Services Ltd. are two separate and distinct entities in the present case. We find that the observations of taxability of trust and income being offered to tax in the hands of the beneficiary are all inter-dependent based on the outcome of the status of the assessee which we have already held to be taxed only in the status of trust and not as AOP. There is no dispute with regard to the fact that the long term capital gain of subject mentioned shares of Rs. 27, 38, 484/-has been duly offered to tax in the hands of the beneficiary i.e. IL FS Financial Services Ltd. and the same has been assessed accordingly by the Income Tax department u/s.143(3) of the Act vide order dated 12/03/2013. Similarly the interest income of Rs. 8, 630/- was also duly offered to tax in the hands of the beneficiary and assessed as such. Hence both these incomes cannot be taxed in the hands of the assessee. Taxable of income on sale of investments as long term capital gains / business income - we find that the same had been elaborately dealt hereinabove by the ld. CIT(A) as held appellant trust has got contribution only from one institution namely IL FS Financial Services Ltd. as Class P Beneficiary and also there is only one transaction of sale of shares of Multi Commodity Exchange. In my opinion such investment in a single company held for long term cannot be assessed as business income hence the treatment of such income as LTCG is accepted - thus it does not require any interference.

Summary

Issues Involved:
1. Status of the assessee: Trust vs. Association of Persons (AOP)
2. Deletion of addition of Rs. 7,95,15,873/-
3. Applicability of Section 161(1A) of the Income Tax Act
4. Taxability of income: Long Term Capital Gains (LTCG) vs. Business Income
5. Taxability of income in the hands of the trust vs. the beneficiary

Detailed Analysis:

1. Status of the Assessee: Trust vs. Association of Persons (AOP)

The primary issue was whether the assessee should be assessed as a Trust or an AOP. The assessee argued that it was a revocable trust with distinct entities as settlor, trustee, and beneficiary. The Tribunal found that the settlor, Infrastructure Leasing & Financial Services Ltd., and the beneficiary, IL & FS Financial Services Ltd., were distinct legal entities. The Tribunal concluded that the assessee satisfied the criteria for being assessed as a trust and not as an AOP.

2. Deletion of Addition of Rs. 7,95,15,873/-

The Revenue challenged the deletion of the addition made by the AO, which was based on treating the assessee as an AOP. The Tribunal upheld the CIT(A)’s decision, which had deleted the addition by recognizing the assessee as a trust and not as an AOP. The Tribunal noted that the entire income had already been taxed in the hands of the beneficiary, IL & FS Financial Services Ltd.

3. Applicability of Section 161(1A) of the Income Tax Act

The AO had argued that even if the assessee was a valid trust, the income should be taxed at the maximum marginal rate under Section 161(1A) as business income. The Tribunal, however, found that the provisions of Section 61 to 63 of the Act were applicable, making the income taxable in the hands of the beneficiary and not the trust. The Tribunal agreed with the CIT(A) that the trust was revocable, and thus the income should be clubbed with the beneficiary's income.

4. Taxability of Income: Long Term Capital Gains (LTCG) vs. Business Income

The AO had treated the income from the sale of shares as business income. The Tribunal, however, upheld the CIT(A)’s finding that the income should be treated as LTCG. The trust's objective was to make long-term investments for capital appreciation, and there was only one transaction of sale of shares. This indicated that the income was from investment and not business activities.

5. Taxability of Income in the Hands of the Trust vs. the Beneficiary

The Tribunal confirmed that the income from the trust had already been offered to tax in the hands of the beneficiary, IL & FS Financial Services Ltd. The LTCG of Rs. 27,38,484/- and interest income of Rs. 8,630/- were included in the beneficiary's total income and assessed accordingly. Therefore, the same income could not be taxed again in the hands of the trust.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)’s decision to treat the assessee as a trust and not as an AOP. The income from the trust was correctly taxed in the hands of the beneficiary, and the income from the sale of shares was rightly treated as LTCG. The Tribunal found no infirmity in the CIT(A)’s detailed and reasoned order. The appeal of the Revenue was thus dismissed.