2019 (9) TMI 766 - AT - Income Tax

Association of person (AOP) - assessment of trust - HELD THAT - In an ideal condition Trusts are created by a Settlor and the Settlor ought to contribute its assets / property in the Trust called the Trust Property for the benefits of the persons, referred to as the beneficiaries. Here there is no trust property to which the trustee needs to manage. A trustee is appointed to manage the affairs of the trust. Thus in the case of a real trust, the Settlor, Trustee and the beneficiaries would never be the same persons. In the instant case, the settler and the beneficiaries are the same and identical. This so called trust has been created for the sole motive to the benefit of the settler / contributor. AO observed that the investors comprising of two or more persons had come together for contribution of sufficient funds into an entity in order to invest in the specific entities with a sole intention to earn profits and accordingly the said entity should be construed as an Association of Persons (AOP) and not Trust. Hence the AO observed that the assessee is not entitled for exemption from tax. AO observed that the trust created herein is a special purpose vehicle for doing commercial transactions and further observed that the trust is not a revocable trust within the meaning of sections 61 to 63 of the Income Tax Act. Accordingly, AO invoked the provisions of section 161(1A) of the Act by treating the assessee as an AOP as against the status of Trust claimed by the assessee. AO observed that merely because the contributors had paid taxes in their returns with regard to the subject mentioned transactions with the assessee trust cannot exonerate the assessee trust from its taxation. The ld AO further observed that the assessee had not shown that the income earned by the beneficiaries have been offered for taxation by each of the beneficiaries in their respective returns of income at the correct rates. We find from the details of income offered by ISARC (Security Receipt Holders) for taxation as detailed in the table hereinabove during the financial yea₹ 2012-13 to 2017-18, that those Security Receipt Holders had duly considered the gains arising from realisation of acquired NPAs as their income / gains in their respective returns in the year of redemption of Security Receipts. In view of the aforesaid observations, it could be safely concluded that the trust is revocable and hence the observations made by the lower authorities contrary to this is dismissed. In any case, we find that the AO had not even bothered to deduct the purchase consideration of acquired NPAs in the sum of ₹ 5,31,09,000/- while determining the income, which had been rightly granted relief by the ld CITA. We hold that the assessee cannot be taxed as an AOP and that the shares of each beneficiaries are determinate and known and accordingly the income shall be taxed only in the hands of such beneficiaries and not in the hands of the assessee trust. Accordingly, the grounds raised by the assessee in this regard are allowed and grounds raised by the revenue in this regard are dismissed.

Issues Involved:
1. Applicability of Sections 61 to 63 of the Income Tax Act.
2. Determination of the share of beneficiaries.
3. Status of the assessee as a Trust under RBI guidelines and SARFAESI Act.
4. Recognition of the legal position of the Trust and its treatment as an AOP.
5. Taxation of the Trust's income and the applicability of Section 167B versus Section 164(1) of the Income Tax Act.
6. Deduction of purchase consideration for acquired NPAs.
7. Revenue recognition principles as per RBI guidelines.

Detailed Analysis:

1. Applicability of Sections 61 to 63 of the Income Tax Act:
The assessee argued that the income/loss of the Trust should be included in the total income of the investors in Security Receipts under Section 61 of the Income Tax Act, as the transfer is revocable. The Tribunal found that the Trust is a revocable trust, and hence, the income/loss should be taxed in the hands of the beneficiaries, not the Trust.

2. Determination of the Share of Beneficiaries:
The Tribunal observed that the beneficiaries/investors are clearly identifiable and their shares are determinate and known. The Trust Deed and Offer Document specified the distribution mechanism, ensuring that the shares of the beneficiaries are ascertainable. This aligns with the precedent set by the Bangalore Tribunal and the Karnataka High Court.

3. Status of the Assessee as a Trust under RBI Guidelines and SARFAESI Act:
The Trust was formed under the Indian Trust Act, 1882, and the SARFAESI Act, 2002, for the benefit of Security Receipt holders. The Tribunal noted that the Trust was created under statutory guidelines and is a Special Purpose Vehicle (SPV) for managing non-performing assets (NPAs). Therefore, it should not be treated as an Association of Persons (AOP).

4. Recognition of the Legal Position of the Trust and its Treatment as an AOP:
The Assessing Officer (AO) treated the Trust as an AOP, arguing that the settlor, contributors, and beneficiaries were the same. However, the Tribunal held that the Trust and ISARC are distinct entities. The Trust was not created as a colorable device to evade tax but was formed under statutory guidelines. Thus, the Trust should not be treated as an AOP.

5. Taxation of the Trust's Income and Applicability of Section 167B versus Section 164(1) of the Income Tax Act:
The AO applied Section 161(1A) and taxed the Trust at the maximum marginal rate, treating it as an AOP. The Tribunal, however, concluded that the income should be taxed in the hands of the beneficiaries, as the shares are determinate and known. The Tribunal also dismissed the AO's reliance on Circular No. 13/2014, which was already considered in similar cases.

6. Deduction of Purchase Consideration for Acquired NPAs:
The Tribunal agreed with the Commissioner of Income Tax (Appeals) [CIT(A)] that the Trust is eligible for the deduction of the purchase consideration of ?5,31,09,000 for acquired NPAs. The AO's failure to deduct this amount while determining the income was incorrect.

7. Revenue Recognition Principles as per RBI Guidelines:
The Tribunal referred to the RBI Circular No. RBI/2013-14/571, which states that yield and upside income should be recognized only after the full redemption of Security Receipts. Since the redemption had not occurred by 31.03.2012, no income should be recognized in the hands of the Trust for that year.

Conclusion:
The Tribunal ruled that the assessee Trust should not be treated as an AOP and that the income should be taxed in the hands of the beneficiaries, not the Trust. The shares of the beneficiaries are determinate and known. The Trust is a revocable trust, and the income/loss is includible in the total income of the Security Receipt holders. The Tribunal also upheld the deduction of the purchase consideration for acquired NPAs and adhered to the RBI guidelines on revenue recognition. The appeals of the assessee were partly allowed, and those of the revenue were dismissed.

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