2013 (3) TMI 350 - HC - Income Tax

Recovery of Outstanding demand u/s 177(3) to the extent of share of investment in a securitization trust, called the Indian Corporate Loan Securitization Trust 2008 Series 24 - whether the Petitioner has, prima facie, a serious triable case to urge on the basis of which a stay can be sought on the enforcement of the notice pending disposal of the appeals by the CIT (A) being preferred by the trusts who have been assessed under Section 143(3) - Held that - Foundation of the notice is Section 177(3) where every person who was at the time of such discontinuance or dissolution a member of the association of persons shall be jointly and severally liable for the amount of tax, penalty or other sum payable. As the previous judgment of this Court in UTI Mutual Fund (2012 (3) TMI 333 - BOMBAY HIGH COURT) notes there are two Division Bench judgments in CIT v. Marsons Beneficiary Trust (1990 (7) TMI 37 - BOMBAY HIGH COURT) and L.R. Patel Family Trust v. ITO (2003 (3) TMI 85 - BOMBAY HIGH COURT) in which it has been held that a beneficiary of a trust cannot be construed as having set up the trust or having authorized the trustees to carry on the business. Thus the law laid down indicates that the beneficiaries who are named in the trust as recipients of the income of the trust cannot be considered as an association of persons. If that be the position, prima facie, the question as to whether Section 177(3) would apply to the Petitioner raises a serious issue for consideration. Whether Section 161(1A) lays down only the rate of tax without affecting the basic principle underlying Section 161(1) - Held that - The nature of the controversy in the present case is adverted in order to elucidate that the questions on which there is a controversy, which is still to be resolved, involves serious triable issues. The contention of the Petitioner, prima facie, cannot be rejected out of hand particularly having regard to the fact that the earlier judgment of this Court for Assessment Year 2009-10 also took the same position. Moreover, the issue as to whether the income in question is business income is a matter which would have to be determined. Finally, on this aspect of the matter, it may be necessary also to note the submission of the Petitioner with reference to the provisions of Section 161 which stipulate that all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income tax as the income of the transferor and shall be included in his total income. Section 63(a)(i) stipulates when a transfer shall be deemed to be revocable and the contention of the Petitioner is that in the case of a revocable transfer of assets, the income as in the present case would be income in the hands of the transferor which is exempt under Section 10(23D). The Appeals for Assessment Year 2009-10 are pending, the Court being informed that the Appeals are in the course of being heard. In this view of the matter, and for the reasons which indicated already in the earlier judgment of this Court in UTI Mutual Funds (supra) and for the reasons indicated in this judgment, a prima facie case raising serious triable issues has been made out for stay of the enforcement of the demand in the hands of the Petitioner in pursuance of the impugned notices dated 25 February 2013. Also direct that pending the disposal of the appeals which have been filed by the trusts for Assessment Year 2010-11 and for a period of six weeks thereafter, no coercive steps shall be taken against the assessee for the recovery of the demand in pursuance of the impugned notices dated 25 February 2013 calling upon the Petitioner to pay an outstanding demand under the provisions of Section 177(3).

Issues Involved:
1. Validity of the order passed by the Income Tax Officer under Section 177(3) of the Income Tax Act, 1961.
2. Classification of the trust as an Association of Persons (AOP) and the resultant tax implications.
3. Enforcement of tax demand against the petitioner as a contributor/beneficiary of the trust.
4. Applicability of Section 161(1A) and Section 10(23D) concerning the tax liability of the petitioner.
5. Consideration of financial hardship and prima facie case for stay of enforcement of the tax demand.

Detailed Analysis of the Judgment:

1. Validity of the Order under Section 177(3):
The petitioner challenged the order passed by the Income Tax Officer on 25 February 2013, which called upon the petitioner to pay an outstanding demand under Section 177(3) of the Income Tax Act, 1961. The court noted that the foundation of the notice dated 25 February 2013 is Section 177(3), which provides for joint and several liability for tax, penalty, or other sums payable by members of an association of persons upon discontinuance or dissolution of the business. The court observed that the previous judgment in UTI Mutual Fund v. Income Tax Officer indicated that the trust itself cannot be regarded as an association of persons, raising a serious issue for consideration regarding the applicability of Section 177(3) to the petitioner.

2. Classification of the Trust as an AOP:
The assessment order treated the trust as an AOP, holding that the interest income should be taxed as "income from business and profession." The court referenced previous judgments, including CIT v. Marsons Beneficiary Trust and L.R. Patel Family Trust v. ITO, which held that beneficiaries of a trust cannot be construed as having set up the trust or authorized the trustees to carry on business. Therefore, the trust cannot take on the character of an AOP. This classification was a crucial point of contention, and the court noted that this issue raises a serious triable question.

3. Enforcement of Tax Demand Against the Petitioner:
The petitioner argued that no order of assessment had been passed against it since its income is exempt under Section 10(23D). The demand against the trust was sought to be enforced in the hands of the petitioner as a contributor and beneficiary. The court observed that the Revenue made a hasty attempt to recover the demand from the petitioner without allowing it to take reasonable recourse to legal remedies. The court found that the petitioner had a serious issue to urge regarding the legitimacy of the demand raised upon it.

4. Applicability of Section 161(1A) and Section 10(23D):
The court considered whether Section 161(1A), which overrides Section 161(1), would affect the basic principle that tax should be levied on the representative assessee in the like manner and to the same extent as would be leviable upon the person represented by him. The petitioner contended that since its income is exempt under Section 10(23D), no tax could be levied or recovered under Section 161(1). The court noted that this issue involves serious triable questions that need careful consideration at the appellate stage.

5. Consideration of Financial Hardship and Prima Facie Case for Stay:
The court emphasized that in considering whether a stay of demand should be granted, it is necessary to consider not only financial hardship but also whether a strong prima facie case raising serious triable issues has been made out. The court found that the petitioner had made out a strong prima facie case, and calling upon the petitioner to deposit the amount would result in undue hardship. The court expressed disapproval of the Revenue's attempt to brush aside a binding decision of the court in a similar matter for the previous year.

Conclusion:
The court directed that pending the disposal of the appeals filed by the trusts for Assessment Year 2010-11 and for a period of six weeks thereafter, no coercive steps shall be taken against the petitioner for the recovery of the demand. The observations in the judgment are confined to the disposal of the application for stay and shall not prejudice the rights and contentions of the parties in the pending appeals. The petition was disposed of with no order as to costs.

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