2020 (6) TMI 303 - HC - Income Tax

Reopening of assessment - change of status - Independent entity for tax purposes by the tax authorities in India - statutory trust is converted into LLC Limited Liability Company - AICFL sought an advance ruling from AAR on the question as to whether it was entitled to carry forward accumulated capital loss ? - HELD THAT - From the AAR application it came to the knowledge of the Assessing Officer that the loss claimed as set off under Section 74 and the claim of carry forward of loss by the assessee for the assessment year 2011-12 are not losses incurred by the assessee; rather those are losses incurred by Aberdeen Delaware Business Trust Asia Pacific Inc Japan Fund which is a different person being a trust fund or sub-trust. Respondent No.1 observed that carry forward and set off of loss is a privilege given by the Act to an assessee who has suffered the loss. Therefore, loss incurred by one assessee cannot be claimed to be carried forward or allowed to be set off by another assessee. It was on that basis that respondent No.1 issued the impugned notice under Section 148 re-opening the assessment for the assessment year 2011-12. It is quite apparent that the view taken by respondent No.1 which led to the formation of belief that income of the petitioner chargeable to tax has escaped assessment is totally erroneous being contrary to the ruling of AAR. It stood totally contradicted by the judgment of this Court in AICFL - contrary to the stand taken by the Revenue itself in the said writ proceeding. It was the stand of the Revenue that AICFL was not the assessee under the Act and it did not file return of income. Claiming of any carry forward of loss or set off of loss by AIFCL did not arise. On the other hand, it was the specific case of the Revenue that returns of income were filed by the three series (funds) i.e., the present three writ petitioners each of which are recognised as assessees under the Act. It was admitted by the Revenue that it is the series (funds) which would be entitled to carry forward the loss declared in the earlier returns of income to the assessment year 2011-12 and subsequent years, if otherwise eligible. In the reasons recorded by respondent No.1 it was precisely on the ground of change of status that the claim of the assessee i.e., the petitioner was found to be not acceptable which led to formation of the belief that income of the petitioner chargeable to tax had escaped assessment for the assessment year 201112. Therefore, the very foundation for formation of such belief is erroneous, which has been contradicted by this Court. In other words, after the judgment of this Court in AICFL, the very basis for re-opening the assessment no longer survived. Coming to the objection raised by learned standing counsel for the Revenue that in view of the fact that re-assessment order has been passed for the assessment year 2011-12 and assessment order for the assessment year 2012-13 petitioner should be relegated to the alternative remedy of appellate forum as provided under the statute, it is trite that if the Assessing Officer had no jurisdiction to initiate reassessment proceeding, the mere fact that subsequent orders have been passed would not render the challenge to jurisdiction infructuous. If the very basis for reopening assessment does not survive, orders on such re-opening would not survive too. The impugned notice under Section 148 of the Act issued by respondent No.1 for the assessment year 2011-12 cannot be sustained. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the petitioner is entitled to carry forward accumulated capital losses after reorganization from a trust to a Limited Liability Company (LLC).
2. Validity of the notice issued under Section 148 of the Income Tax Act for reassessment.
3. Legitimacy of the draft assessment orders for the assessment years 2011-12 and 2012-13.

Issue-Wise Detailed Analysis:

1. Entitlement to Carry Forward Accumulated Capital Losses:
The petitioner, originally a sub-trust under Aberdeen Delaware Business Trust, was reorganized into a sub-fund or 'series' of Aberdeen Institutional Commingled Funds, LLC (AICFL). The petitioner argued that under Delaware law, the conversion from a trust to an LLC did not create a new entity but continued the same entity. This conversion was accepted by both the US Securities and Exchange Commission and SEBI.

The Authority for Advance Rulings (AAR) ruled that under Indian income tax law, specifically Sections 70 to 79 of the Income Tax Act, there is no provision allowing one entity to carry forward and set off losses incurred by another entity. The AAR noted that while Delaware law may treat the trust and LLC as the same entity, Indian law does not have such deeming provisions. Therefore, the LLC, which had not filed any returns in India, could not carry forward the losses incurred by the trust.

However, the High Court held that in terms of Delaware law, AICFL as both a Trust and LLC continues to be the same entity, a position accepted in India. The Court clarified that the ruling of AAR would not impact the petitioners' ability to claim the benefit of carry forward of loss under Section 74 of the Act if they are otherwise entitled under the law.

2. Validity of Notice Issued Under Section 148:
The notice under Section 148 was issued for reassessment on the grounds that the petitioner's income chargeable to tax had escaped assessment. The petitioner argued that the reasons recorded for reopening the assessment were based on the erroneous belief that the petitioner, as a sub-fund of the LLC, was a different entity from the sub-trust and thus could not carry forward the losses.

The High Court found that the reasons recorded by the Assessing Officer were contrary to its earlier judgment in the case of AICFL. The Court had clarified that the change in status from a trust to an LLC did not affect the continuity of the entity for tax purposes. Therefore, the very foundation for the belief that income had escaped assessment was erroneous.

3. Legitimacy of Draft Assessment Orders:
The draft assessment orders for the assessment years 2011-12 and 2012-13 disallowed the petitioner's claim for set off and carry forward of losses on the premise that the petitioner, as a 'series' of the LLC, was a different entity from the sub-trust.

The High Court held that this view was a misreading of its earlier judgment and contradicted the stand taken by the Revenue in the AICFL case. The Court reiterated that the gains and losses of the petitioner in its earlier avatar as a sub-trust would not be denied solely due to the change in status to a 'series' of the LLC. Consequently, the draft assessment orders were rendered unsustainable.

Conclusion:
The High Court quashed the notice issued under Section 148 and all consequential orders for the assessment year 2011-12. It also interfered with the draft assessment order for the assessment year 2012-13 to the extent it disallowed the carry forward and set off of losses. The reliefs granted in Writ Petition No.2796 of 2019 were extended to the petitioners in Writ Petition Nos.2803 and 3525 of 2019, who were similarly placed. All three writ petitions were allowed without any order as to costs.