2024 (6) TMI 568 - AT - Income Tax

Status of the assessee as trust or AOP - contributors and beneficiaries were the same - Taxability of income in the hands of the Appellant Trust vs. beneficiaries - HELD THAT - We find that the Co-ordinate Bench of Tribunal in M/s. Scheme A1 of ARCIL CPS 002 XI Trust 2020 (9) TMI 465 - ITAT MUMBAI while deciding the similar issue as arising in the case of trust set up by the ARCIL pursuant to the provisions of SARFAESI Act and the guidelines of RBI to acquire financial assets of the borrowers classified as NPAs held that there is no prohibition on the settler in becoming a beneficiary of the trust and as per the provisions of section 9 of the Indian Trust Act 1882 every person capable of holding property may be a beneficiary of the trust while as per the section 7 of the Indian Trust Act 1882 any person competent to contract can become a settlor of the trust. Accordingly the Co-ordinate Bench held that the observation of the AO that the assessee trust was not a valid trust for the reason that its contributors and beneficiaries were the same clearly militates against the express provisions of the Indian Trust Act 1882. Status of the assessee is an AOP on the basis that the beneficiaries had associated and joined hands for a common purpose or action with QIBs for the sole purpose of the acquisition of NPAs and transferring those at a profit with motive of earning income/profit the Co-ordinate Bench held that there is nothing on record which would suggest that the beneficiary had agreed to associate for any common objective and the 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 allotment the Security Receipt which represented their undivided and proportionate interest in the corpus of the trust. Accordingly the Co-ordinate came to the conclusion that the AO 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 and therefore the assessee cannot be treated as an AOP. Taxability of income in the hands of the Appellant Trust vs. beneficiaries - Co-ordinate Bench supra rejected the findings of the AO that the income has to be taxed in the hands of the assessee and payment of taxes by the contributors would have no bearing on the basis that the money always intended to be passed on to and only to the beneficiaries i.e. the SR holders in proportion to their interest in the corpus of the assessee trust as per the trust deed and offer documents. Also held that the assessee trust is a determinate trust and neither any discretion has 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. Thus we are of the considered view that the assessee trust is a revocable trust and is not an AOP. Further the income is liable to be assessed in the hands of the beneficiaries as per the provisions of section 61 to 63 of the Act. Further since the respective shares were known since inception therefore the assessee could not be considered as an indeterminate trust. As a result the grounds no. 1 - 3 raised in assessee s appeal are allowed.

Issues Involved:
1. Taxability of income in the hands of the Appellant Trust vs. beneficiaries.
2. Taxation at maximum marginal rate.
3. Classification as an indeterminate trust and as an AOP.
4. Disallowance of protection, preservation, and insurance expenses.
5. Disallowance of management expenses.
6. Classification of interest income and other income.
7. Levy of interest u/s 234B.

Summary:

1. Taxability of Income:
The assessee contended that the income should be taxed in the hands of the beneficiaries, not the Appellant Trust, citing the revocable nature of the trust and provisions of Section 61 to 63 of the Income Tax Act, 1961. The AO held that the trust is an Association of Person (AOP) and not a valid trust, and thus taxable in its own hands. The Tribunal, referencing earlier decisions, concluded that the trust is revocable and income should be taxed in the hands of the beneficiaries as per Section 61 to 63.

2. Taxation at Maximum Marginal Rate:
The learned CIT(A) upheld the AO's decision to tax the income at the maximum marginal rate, ignoring the revocable nature of the trust. The Tribunal disagreed, stating that the trust is revocable and thus, the income should be taxed in the hands of the beneficiaries.

3. Classification as Indeterminate Trust and AOP:
The AO classified the trust as an indeterminate trust and an AOP, arguing that the beneficiaries (QIBs) contributed funds for a common purpose. The Tribunal found no evidence of a concerted effort by beneficiaries to earn income jointly and concluded that the trust is not an AOP but a valid revocable trust.

4. Disallowance of Protection, Preservation, and Insurance Expenses:
The learned CIT(A) confirmed the disallowance of Rs. 26,41,715/- for protection, preservation, and insurance expenses. The Tribunal did not address this issue directly, rendering it academic due to the primary findings on the nature of the trust.

5. Disallowance of Management Expenses:
The learned CIT(A) confirmed the disallowance of Rs. 76,907/- for management expenses. Similar to the previous point, the Tribunal did not address this issue directly due to the primary findings on the nature of the trust.

6. Classification of Interest Income and Other Income:
The learned CIT(A) held that interest income and other income were taxable as Income from Other Sources instead of Business Income. The Tribunal's primary findings on the nature of the trust rendered this issue academic.

7. Levy of Interest u/s 234B:
The learned CIT(A) confirmed the consequential levy of interest u/s 234B. The Tribunal allowed this ground, stating it is consequential in nature.

Conclusion:
The appeal by the assessee was allowed, with the Tribunal concluding that the assessee trust is a revocable trust and not an AOP. The income is to be assessed in the hands of the beneficiaries as per the provisions of section 61 to 63 of the Act. The grounds related to disallowances and classification of income were rendered academic and left open.

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