2020 (10) TMI 613 - AT - Income Tax

Taxation in the hands of the trust/AOP - Revenue recognition - quantification of the income of the assessee - section 167B applicable on the assessee or section 164 (1) - in this case investors/ contributors are also the beneficiaries and at the date of creation of trust, beneficiaries were not identifiable - assessee was created under the guidelines of the Reserve Bank of India for fast recovery of Non-Performing Assets of the Banks/FIs and principally derived income from Asset Reconstruction Activity and handling of Non-Performing Assets of Banks/financial institutions. As the assessee had receipts on account of sales made during the year on which no tax was paid - HELD THAT - A.O ought to have been guided by the RBI Circular No. RBI/2013-14/571 DNBS (PD) CC No. 38/SERC/26.03.002/2013-14, dated 23.04.2014, which though was issued after the relevant financial year, but could be referred for understanding the guiding principles laid down for recognition of revenue by ARCs. As observed by the CIT(A), and rightly so, the ARCs are supposed to recognize upside income only after full redemption of Security Receipts (SRs), except for the Management fees which is to be recognized on accrual basis. Redemption of the relevant SRs had not taken place till 31.03.2012, therefore, the CIT(A) had rightly concluded that no upside income/surplus could have been recognized in the hands of the assessee for the year under consideration. As for the management fees, we find, that no income on the said count had accrued to the assessee during the captioned year. We thus in the backdrop of our aforesaid observations concur with the view taken by the CIT(A), that as neither any upside income nor any management fess had accrued to the assessee during the year in question, therefore, its income was to be assessed at Rs. Nil. We uphold the view taken by the CIT(A), to the extent he had concluded that as there was a shortfall of recovery over purchase consideration till 31.03.2013 of ₹ 24.26 crores, and there was also no receipt of management fees as per the profit and loss account, hence no upside income could have been recognized in the hands of the assessee in terms of the guidelines laid down in the Circular No. RBI/2013-14/571 DNBS (PD) CC No.38/SERC/26.03.002/2013-14,dated 23.04.2014, issued by the RBI, therin providing the Uniform Accounting Standard for revenue recognition for ARCs, and also in the backdrop of the view taken by his predecessor while disposing off the appeal in the case of the ISARC SIDBI-2, a sister concern, for A.Y.2012-13, vide his order dated 08.02.2017 passed in Appeal No. CIT(A)-32/IT-211/23(1)(2)/15- 16. Accordingly, finding no infirmity in the view taken by the CIT(A), we uphold his order.

Summary

Issues Involved:
1. Applicability of Section 167B vs. Section 164(1) of the Income Tax Act.
2. Deletion of addition of ?1,04,37,543/- on grounds of non-consideration of the cost of purchases of assets sold.
3. Taxability of income in the hands of the trust/AOP.

Issue-wise Detailed Analysis:

1. Applicability of Section 167B vs. Section 164(1) of the Income Tax Act:
The Revenue challenged the CIT(A)'s decision that Section 167B applies instead of Section 164(1). The CIT(A) had relied on a previous decision involving a sister concern, ISARC SIDBI-2, for A.Y. 2012-13, where it was concluded that the trust was an AOP (Association of Persons) and not a trust. The CIT(A) upheld the AO's view that the assessee was an AOP since the contributors and beneficiaries were the same, making it an indeterminate trust. Consequently, the income was to be taxed at the maximum marginal rate under Section 167B. The Tribunal found no infirmity in the CIT(A)'s order, agreeing that the trust was an AOP and thus subject to the provisions of Section 167B.

2. Deletion of Addition of ?1,04,37,543/-:
The CIT(A) had deleted the addition made by the AO on the grounds that the AO did not consider the purchase cost of assets sold. The CIT(A) relied on the RBI Circular No. RBI/2013-14/571 DNBS (PD) CC No. 38/SCRC/26.03.001/2013-14, which provided guidelines for revenue recognition by ARCs. According to these guidelines, yield and upside income should be recognized only after the full redemption of the entire principal amount of Security Receipts. The CIT(A) observed that there was a shortfall of recovery over purchase consideration till 31.03.2013 of ?24.26 crores, and no management fees were received. Therefore, no upside income could be recognized, and the income was assessed at Rs. Nil. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO had not reduced the cost of acquisition of NPAs from the sale proceeds and that the RBI guidelines were correctly applied.

3. Taxability of Income in the Hands of the Trust/AOP:
The AO had assessed the income of the assessee at ?2,73,71,772/- under the head 'Income from business and profession'. The CIT(A), however, concluded that the assessee was a pass-through entity, and its income should be assessed at Rs. Nil, following the RBI guidelines and the precedent set in the case of ISARC SIDBI-2. The Tribunal agreed with the CIT(A) that the income should be assessed at Rs. Nil, as there was no upside income or management fees accrued during the year.

Separate Judgments Delivered:
The Tribunal delivered separate judgments for the appeals in ITA No. 929/Mum/2019, ITA No. 926/Mum/2019, and ITA No. 927/Mum/2019, all of which were dismissed based on similar reasoning and reliance on the precedent set in the case of ISARC SIDBI-2 and the RBI guidelines for revenue recognition by ARCs.

Conclusion:
The Tribunal upheld the CIT(A)'s orders in all the appeals, confirming that the income of the assessee trusts should be assessed at Rs. Nil, applying the RBI guidelines and treating the trusts as AOPs subject to the provisions of Section 167B of the Income Tax Act. The appeals filed by the revenue were dismissed.