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2020 (9) TMI 465 - AT - Income TaxStatus of a trust/AOP - Valid status - assessee derived income from assets reconstruction activity and handling of non-performing assets of banks/financial institutions - HELD THAT - As observed by the CIT(A), all the necessary ingredients for the formation and existence of the trust had been fulfilled, and the RBI guidelines had duly been followed by the assessee trust. Interestingly, we find that in case the claim of the A.O that the assessee is not a valid trust and its creation was only a fa ade for evasion of taxes was to be accepted, then it would be imply that the trust does not exist at all. If that be so, then we concur with the CIT(A) that there would be no legal sanction to treat the trust as an AOP, as had been advocated by the A.O. Under such a situation, the only transaction that would subsist will be the direct investment by the beneficiaries in the financial assets, and therefore, the question of assessing the assessee trust as an AOP or under any other head of income would be totally out of question. Accordingly, in the backdrop of our aforesaid observations, we are of the considered view that the CIT(A) had rightly dislodged the aforesaid view of the A.O, and in the totality of the facts had correctly observed that the assessee is a valid trust. Holding the trust as a non-revocable trust - HELD THAT - No hesitation in observing that the income therein arising has to be brought to tax in the hands of the SR holders, i.e as per the provision of Sec. 61 to 63 of the Act. Insofar, the view taken by the A.O, that as the revocation of the contributions is conditional upon the consent of the contributors holding 75% of the units, we are afraid that the same would not render the contributions as irrevocable. Our aforesaid view is fortified by the judgment in the case of Behramji Sorabji Lalkaka Vs. CIT 1948 (3) TMI 41 - BOMBAY HIGH COURT . As observed by the Hon ble High Court that the words revocable transfer are well understood in law and a transfer does not cease to be revocable because the power of revocation cannot be exercised by the settlor without the consent of the named individuals or any of them. As observed by the Hon ble High Court, a transfer is nonetheless revocable even if it can be revoked only with the consent of any named person or persons. As such, on the basis of our aforesaid observations we are persuaded to subscribe to the view taken by the CIT(A), who had rightly concluded that the assessee trust is a revocable trust, and thus, the provisions of Sec. 61 to 63 of the Act would be applicable to it. Status of the trust as an AOP - HELD THAT - Beneficiaries who do not have any control over the activities carried on by the trustee in managing the trust, had made their respective investments based on the offer documents, and on the basis of their investments made in the trust were allotted the SRs which represented their undivided and proportionate interest in the corpus of the trust. We are unable to comprehend as to on what basis the A.O had concluded that the motive behind creation of the trust was the income earning asset reconstruction activity and handling of NPAs. On a perusal of the records, we find that the two beneficiaries viz. (i) ARCIL; and (ii) ICICI Bank Ltd., had made investments based on the offer document separately, and not jointly, on the basis of which they had been allotted the security receipts (SRs) representing their undivided and proportionate interest in the corpus of the trust. In our considered view, as the A.O had failed to place on record any material which would even remotely suggest that there was a concerted effort by the beneficiaries to earn income jointly, therefore his unsubstantiated view that the assessee was to be treated as an AOP cannot be sustained and has rightly been vacated by the CIT(A). Taxability of the Income at the right place and in right hands - HELD THAT - We are unable to accept the claim of the A.O that as the amounts are first realized/received in the books of the assessee trust, and then passed on to the SR holders, viz. ARCIL and ICICI bank, the same therefore was liable to be assessed as the income of the assessee trust. We concur with the view taken by the CIT(A) that merely because the realization flows through the assessee, it would not mean that it is the income in the hands of the assessee. As observed in case of CIT vs. Tollygunje Club Ltd. 1977 (3) TMI 1 - SUPREME COURT every receipt in the hands of an 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 eligible to tax. CIT(A) in the totality of the facts involved in the case before us, had rightly concluded, that as the principle of diversion of income at the source by overriding title is attracted, therefore, the receivable of NPAs were the income of the SR holders, irrespective of the fact that the same had flowed through the books of accounts of the assessee trust. Holding assessee trust as an indeterminate Trust (discretionary trust) - HELD THAT - We are in agreement with the view taken by the CIT(A) that as neither any discretion have been given to the trustee to decide the allocation of the income every year, nor any right is given to the beneficiary to exercise an option to receive the income or not each year, therefore, it cannot be held that the share of the beneficiaries were indeterminate. In our considered view, as the names of the beneficiaries of the assessee trust and their shares were known since inception i.e at the time of the formation of the trust as is evident from the minutes of the meeting dated 27.12.2007, therefore, it can safely be concluded that the assessee trust is a determinate trust i.e a non-discretionary trust. Accordingly, finding no infirmity in the view taken by the CIT(A) who had rightly concluded that the assessee is a determinate trust, we uphold the same. Treatment of Write-back of Impairment provision - HELD THAT - Reversal of the impairment provision created by the assessee in the earlier years in respect of the financial asset was merely a book entry without any corresponding amount payable by anybody or any possibility of receiving any benefit or money or money s worth. We are of a strong conviction that a write back of a provision can be made taxable only if the same was claimed as a deduction in the earlier year when it was created. We have perused the observations of the CIT(A), and are in agreement with the view therein taken by him. Accordingly, concurring with the view taken by the CIT(A) that the write-back of the impairment provision could not have been treated as the income of the assessee. - Decided against assessee.
Issues Involved:
1. Validity of the trust and whether it was a colorable device to evade taxes. 2. Whether the trust is a revocable or non-revocable trust. 3. Status of the trust as an Association of Persons (AOP). 4. Taxability of income at the right place and in the right hands. 5. Determination of the trust as a discretionary or determinate trust. 6. Treatment of the write-back of impairment provision. Issue-wise Detailed Analysis: (A) Validity of the Trust and Allegation of Tax Evasion: The A.O. argued that the trust was not valid as the contributors were also the beneficiaries, implying a facade to evade taxes. The CIT(A) refuted this, citing Sections 7 and 9 of the Indian Trust Act, 1882, which do not prohibit a settlor from being a beneficiary. The CIT(A) concluded that all necessary ingredients for the formation and existence of the trust were fulfilled, and the RBI guidelines were followed. Therefore, the trust was valid, and the argument that it was a facade for tax evasion was rejected. (B) Revocable or Non-revocable Trust: The A.O. considered the trust non-revocable because contributions could only be revoked with 75% consent of the contributors, and contributors had no control over the income. The CIT(A) disagreed, emphasizing the provisions of Sections 61 and 63 of the Income Tax Act, which define revocable transfers. The trust deed allowed revocation, making the trust revocable. Consequently, the income should be taxed in the hands of the SR holders (beneficiaries), not the trust. (C) Status as an Association of Persons (AOP): The A.O. claimed the trust should be treated as an AOP, formed for a common purpose of earning income. The CIT(A) found no evidence of a common objective among beneficiaries. The beneficiaries made separate investments and had no control over the trustee's activities. Thus, the trust could not be considered an AOP, and the A.O.'s view was unsubstantiated. (D) Taxability of Income at the Right Place and in the Right Hands: The A.O. insisted that income should be taxed in the hands of the trust, despite beneficiaries paying taxes on their shares. The CIT(A) held that the income was intended to be passed to the beneficiaries from the outset, invoking the principle of diversion of income by overriding title. Thus, the income should be taxed in the hands of the SR holders, not the trust. (E) Determination as Discretionary or Determinate Trust: The A.O. argued that the trust was indeterminate as the beneficiaries' shares were not specified. The CIT(A) noted that the trust deed and minutes of the meeting dated 27.12.2007 specified the beneficiaries and their shares, which remained unchanged. Since the beneficiaries' shares were known and proceeds were distributed accordingly, the trust was determinate (non-discretionary). (F) Treatment of Write-back of Impairment Provision: The A.O. taxed the surplus from the income and expenditure account, considering it as income. The CIT(A) clarified that the write-back of the impairment provision was a book entry for reversal of provisions created in earlier years, not real income. As the provision was never allowed as a deduction, its reversal could not be considered taxable income. Conclusion: The CIT(A) found the trust valid, revocable, and determinate, rejecting the A.O.'s claims of it being an AOP or a facade for tax evasion. The income was to be taxed in the hands of the SR holders, and the write-back of impairment provision was not taxable income. The ITAT upheld the CIT(A)'s order, dismissing the revenue's appeal.
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