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2020 (5) TMI 626 - AT - Income TaxExemption u/s 10(34) - assessee's status of an Association of Persons AOP declaring income of Rs. Nil by claiming the dividend as exempt u/s 10(34) - whether the Trust was created in violation of the provisions of the Indian Trusts Act and was therefore not a separate legal entity guided by its deed of formation? - settlor was also the sole beneficiary of trust - HELD THAT - Undoubtedly, the trust is belonging to Escorts Ltd , it is the settlor and it is the beneficiary - that does not mean that it is the trustee also. AO has not brought on record any evidence to show that Escorts Limited is the trustee of the assessee. Therefore, the allegation of ld AO that Escorts Limited is also the trustee is devoid of any merit and based on mere conjectures and surmises. Further the sole beneficiary is Escorts Limited and Settlor of the trustis Escorts Limited is the major reason why the ld AO is refusing to recognize the above trust. Honorable Gujarat High court has answered it in BHAVNA NALINKANT NANAVATI 2002 (1) TMI 48 - GUJARAT HIGH COURT where the settlor was also the sole beneficiary was held to be a valid trust. Revenue did not show us any bar in the trust act where the settlor cannot be beneficiary of that trust. Assessee also submitted identical structures in case of Mahartana Companies, which were not found be violating Trust Act. Therefore, we do not find any infirmity in the Escorts Limited being the settlor and sole beneficiary of the trust. Assessment of the trustee in Representative capacity in terms of provision of section 160 and 161 of The Income tax Act - In the present case, the income on behalf of the beneficiary i.e. M/s Escorts Ltd. is received by the assessee. Therefore it is liable to be assessed as a representative assesse as the income earned by it for the benefit of Escorts Ltd. On appeal, the ld CIT (A) reversed the position. CIT(A) has misconstrued the issue. All that the appellant had contended was that the AO having accepted the status of a representative assessee, should have carried the matter to its logical conclusion by exempting the dividend income u/s 10(34) of the Act, in conformity with the provisions of Section 161(1) of the Act and which was the contention before us as well. Coming to the issue of dividend which is interconnected, the same has been subjected to dividend distribution tax, being a dividend referred to in Section 115-O - Considering the taxability of the said dividend in the case of EL the beneficiary, the same would not be taxable since the dividend was exempt u/s 10(34) of the Act. There is no reason for the ld AO to treat it as any other receipt other than dividend and then to tax it as income from other sources. Admittedly, in this case the dividend is subject to dividend distribution tax. According to section 10 (34 ) of the act same is exempt. As per the depository system of holding shares, the shares owned by a private trust are held in a demat account in the names of the trustee/trustees which in the present case was Shri S.A. Dave and the same depiction appeared in the audited accounts for the relevant period - requirements of a shareholder receiving the dividend also stood satisfied in the case of the appellant and benefit of the exemption u/s 10(34) would be available as it would be in the hands of the beneficiary i.e. EL. Appellant s alternative submission that irrespective of the treatment in the assessment, the benefit of the exemption u/s 10(34) of the Act cannot be denied and that the colour of the receipt would not change in the absence of any statutory provision has substantial merit - Revenue could not show us any provision in the act, which can change the characterization of dividend receipt as income from other sources. Such rights are probably available the ld AO, if at all, u/s 98 of the act only in case of impermissible avoidance arrangement. Such is not the case in the impugned appeal. Thus, In our opinion the AO was not justified in changing the nature of the receipt, which continued to remain a dividend irrespective of whatever view was expressed in the assessment. Hence, we hold that the appellant was required to be assessed in the status of a representative assessee and consequently to the same tax treatment as would have been accorded to the beneficiary vis exemption u/s 10(34) in respect of the dividend. Appellant contends that the AO cannot go behind the scheme of arrangement and amalgamation duly sanctioned by the High Court, more so when the tax authorities assessing the amalgamating companies have completed their assessment u/s 143(3) of the Act without demur -The income of the assessee is required to be assessed by the Assessing officer as defined u/s 2(7A) of The Income Tax Act according to the provisions and procedures enshrined there in. The schemes of merger, amalgamation and corporate restructuring may grant certain relief or concession to the parties, but it cannot be said that even if they are in violation of the tax lawsit should be accepted by revenue as it is. Thus merely because schemes of corporate restructuring sanctioned by the high court or any other authority does not prevent assessing office in assessing the Income of the assessee. Off course, necessary relief granted may be allowed by him. In conclusion, Ground No.3 is disposed-off in terms indicated. Conclusions drawn from the statements of the trustees recorded u/s 131 and allegation of tax evasion thus creation of the trust being a colorable device - Adverting to the view expressed by the AO and the Ld. CIT(A) that the trustees have acted on a notional basis and that the real trustee is EL along with being the settlor and the sole beneficiary, at the outset , we hold that the appellant trust was formed with the sole object of holding the shares of EL on behalf of the sole beneficiary i.e. EL. The single pay out on account of dividend was directly credited to the bank account of the trust and by the same mode paid over to the sole beneficiary. In other words other than bank charges and audit fee, there was no likelihood of any other expenditure being incurred such as the one contemplated by the Ld. CIT(A) in Para 10.2.8 of his order. The same logic would apply to the non-existence of any other asset and in our opinion the allegation that the facilities of M/s EL have been utilized, is an assumption, there being no legal basis for an adverse view on the common address of the appellant trust and M/s EL. Admittedly even as per the revenue the creation of an identical trust with similar clauses has been accepted and in our view there is no reason to draw adverse inferences in the case of the assessee about the appellant trust not being an irrevocable trust or the trustees, acting on a notional basis or EL acting in the capacity of a trustee also.In view of the discussion, aforesaid Ground No. 6 in the appeal is allowed.
Issues Involved:
1. Validity of the Trust under the Indian Trusts Act, 1882. 2. Allegations of tax evasion. 3. Status of the appellant as a 'representative assessee'. 4. Taxability of dividend income. 5. Examination of the scheme of arrangement and amalgamation. 6. Violation of principles of natural justice in recording trustees' statements. Analysis of the Judgment: 1. Validity of the Trust under the Indian Trusts Act, 1882: The AO and CIT(A) contended that the trust was invalid as the settlor (Escorts Limited) was also the sole beneficiary, which they argued violated Section 3 of the Indian Trusts Act, 1882. However, the tribunal found that there is no provision in the Trusts Act that prohibits the settlor from being the sole beneficiary. It cited the Gujarat High Court's judgment in Bhavna Nalinkant Nanavati vs. Commissioner of Gift Tax, which upheld the validity of a trust where the settlor was also the sole beneficiary. The tribunal concluded that the trust was valid. 2. Allegations of Tax Evasion: The AO alleged that the trust was a colorable device to evade taxes, pointing to the receipt of shares without consideration and the non-payment of capital gains tax. The tribunal found no evidence of tax evasion, noting that the dividend was subject to Dividend Distribution Tax (DDT) and that the trust’s income was exempt under Section 10(34) of the Income Tax Act. The tribunal emphasized that the AO failed to demonstrate any specific instances of tax evasion. 3. Status of the Appellant as a 'Representative Assessee': The AO initially treated the appellant as a 'representative assessee' under Section 160(1)(iv) for raising the demand and collection of government dues. The tribunal held that the AO should have followed through with this status and exempted the dividend income under Section 10(34) of the Act, in line with Section 161(1), which mandates that the tax treatment of a representative assessee should be the same as that for the beneficiary. 4. Taxability of Dividend Income: The AO denied the exemption under Section 10(34) and taxed the dividend income as "income from other sources" under Section 56. The tribunal found this unjustified, noting that the dividend was subject to DDT and therefore exempt under Section 10(34). The tribunal emphasized that the AO could not change the nature of the receipt, which remained a dividend and was exempt in the hands of the beneficiary (Escorts Limited). 5. Examination of the Scheme of Arrangement and Amalgamation: The tribunal noted that the scheme was sanctioned by the Punjab & Haryana High Court and that the AO could not go behind the court-sanctioned scheme. The tribunal found no inconsistencies with Section 2(1B) of the Income Tax Act and emphasized that the AO should assess the income according to the provisions of the Act, allowing necessary reliefs granted by the scheme. 6. Violation of Principles of Natural Justice in Recording Trustees' Statements: The tribunal found that the AO and CIT(A) had drawn adverse inferences from the trustees' statements without considering the context or allowing the trustees to refer to relevant documents. It noted that the trustees were fulfilling their duties and that the statements were not holistically interpreted. The tribunal held that the adverse conclusions drawn by the AO and CIT(A) were based on surmises and conjectures rather than reality. Conclusion: The tribunal allowed the appeal in part, holding that the trust was valid, the dividend income was exempt under Section 10(34), and the appellant should be assessed as a 'representative assessee'. It also found that the AO and CIT(A) had violated principles of natural justice in recording the trustees' statements and that the scheme of arrangement and amalgamation should be respected.
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