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2021 (10) TMI 1270 - HC - Income TaxRecognition of TRUST - Taxability of the income accruing on the investments made or proposed to be made in the Indian portfolio companies by the Trust -taxability of income arising by virtue of revocable transfer of assets - Scope of AAR rulling - whether the capital contribution made / proposed to be made / transferred by ADIA to Green Maiden A 2013 Trust be treated as a revocable transfer for the purpose of Section 63 of the Act ? - Whether the entire income which may arise from the investments made by the Trust in Indian Companies (Portfolio companies) be chargeable to income-tax in the hands of ADIA as per Section 61 of the Act or be chargeable to income-tax in the hands of any other person as defined under the Act ? - as submitted trustee is entitled to receive income on behalf of the sole beneficiary, it should be considered as representative assessee of the sole beneficiary - reasoning given by AAR that the trust is registered in jersey, there is no treaty between India and Jersey and Section 61 and 63 of the Act would apply only to those trust which fall under the Indian Trust Act 1882 HELD THAT - Nothing in Section 61 requires involvement of a trust in revocable transfer. Section 61 is plain and simple in as much as, it provides for 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. Further Section 61 is not dependent on Section 63 of the Act. A transfer can be revocable transfer on its own merits without reference to Section 63 of the Act. Clause (a) of Section 63 of the Act merely extends the provisions of Section 61 of the Act to cases which might not otherwise be covered by Section 61 by extending the meaning of word revocable. The case of AAR that if the transaction does not qualify as a trust, the provisions of Section 63 and/or Section 61 are not applicable, is erroneous. In any event, under Section 63 there is no requirement that a trust covered by it must necessarily be an Indian trust falling under the Indian Trust Act. Such restriction which is not there in the Act cannot be imported into Sections 61 and 63 of the Act. As noted earlier, where such restriction is provided for the Act says so as noted in section 10(23FB) of the Act where it specifically provides that venture capital fund means a fund operating under the trust deed registered under the provisions of Registration Act, 1908. As can be seen from the definitions, the Trust created in terms of the deed of settlement is consistent with the requirements of both, the Indian Trusts Act as well as Trust (Jersey) Law, 1984 as to what constitutes a trust. Settlor cannot be a sole beneficiary - First of all the Act does not make any such provision. Secondly, there is no provision under the Indian Trust Act also which debars the settlor from being beneficiary. In the case of Bhavna Nalinkant Nanavati 2002 (1) TMI 48 - GUJARAT HIGH COURT the settlor of the trust was also the sole beneficiary in the Deed of Settlement.In the present instance, the settlor is not the trustee but is the sole beneficiary which is clearly permissible. AAR s view that Sections 60 to 64 are designed to overtake and circumvent the counter design by a taxpayer to reduce its tax liability by parting its property in such a way that the income should no longer be received by him but at the same time he retains certain powers over property/income - In the case at hand, if ADIA had invested the amount directly, the income derived from such investment would exempted under Article 24 of India-UAE DTAA. ADIA has not created the trust to avoid tax and that is not AAR's case either. AAR says if ADIA had directly invested they would not have been liable to pay tax. AAR failed to understand why would someone not invest directly if the returns on such investment would be exempt from tax. AAR fails to appreciate that ADIA routed its investment on certain instruments through the trust only for commercial expediency. According to AAR the assessee s representative could not satisfactorily answer the query as to why ADIA routed its investments in non-convertible debenture funds through Jersey route for investment in Indian market and ADIA itself being an FII registered with SEBI could have directly invested in Indian Portfolios and taken advantage of Article 24 of India-UAE treaty. But the fact is ADIA has explained in detail in its letter dated 13th November 2018 and letter dated 25th September 2019 to AAR, why it routed its investment in non convertible debentures through Jersey route for Indian market. As regards the ground that Section 160(1)(i) or 160(1)(iv) of the Act, provides that trustee can be representative assessee but in this case trustee being a resident of Jersey cannot be an agent of ADIA, in our view that is not sustainable as the Act does not provide anywhere that only trustee who is resident of India can be an agent under Section 160 of the Act. Act presupposes that a Foreign Trust is a trust for the purposes of the Act. In Vikramsinghjit of Gondal 2014 (5) TMI 286 - SUPREME COURT , the Apex Court has applied the provisions of Section 164 and 166 of the Act to tax the beneficiary of a trust settled in U.K. Even if, the trust is based out of Jersey and the trust is settled in Jersey, ADIA being the settlor and sole beneficiary of the trust and resident of UAE as per Article 24 of the India-UAE DTAA, the income which arises to it by virtue of investment in Indian Portfolio companies will be governed by the beneficial provisions of the India-UAE DTAA. As exemption under Article 24 of India-UAE DTAA would be attracted. Even if for a moment we say that for any reason the provisions of Section 61 are not applicable, then also the trustee can only be assessed in a representative capacity and, accordingly the provisions of Section 160(i)(iv) will be applicable. Therefore, even if the income is taxed in the hands of the trustee in terms of Section 161(1), it will be taxed in the like manner and to the same extent as the beneficiary. Once again, ADIA is the sole beneficiary of the trust, the income assessed in the hands of the trustee will take colour of that of ADIA s income and thereby, the benefit of India-UAE DTAA must be granted. So long as the settlor has a right to reassume power over the assets settled, the same would amount to revocable transfer. In the facts of the case at hand, ADIA could reassume the power and hence the contribution to the trust was a revocable transfer thereby making the income arising to the trust taxable in the hands of ADIA which was exempt under Article 24 of India-UAE DTAA. The tax liability of a trust has to be determined by applying the provisions of the Act alongwith the provisions of India-UAE DTAA and not apply the law as applicable in Jersey. The ruling dated 18th March 2020 has to be quashed. The income that accrues to the trust would not be chargeable to tax in India either by virtue of application of Section 61 read with Section 63 or on an application of Section 161 of the Act conjointly with the provisions of Article 24 of the India-UAE DTAA. Since we have quashed the Ruling dated 18th March 2020 of the AAR, the steps taken in furtherance of the Ruling order passed therein are also quashed and set aside.
Issues Involved:
1. Applicability of India-UAE DTAA to income accruing to a trust established by ADIA. 2. Taxability of income arising from investments made by the trust in Indian portfolio companies. 3. Interpretation of Sections 61, 63, 160, and 161 of the Income Tax Act, 1961 concerning a foreign trust. 4. Validity of the ruling by the Authority for Advance Ruling (AAR) denying the benefit of India-UAE DTAA to ADIA. 5. Whether the settlor can be the sole beneficiary of a trust. Detailed Analysis: 1. Applicability of India-UAE DTAA to Income Accruing to a Trust Established by ADIA: The court examined whether the income accruing to the trust, established by ADIA and managed by ETL as trustee, could benefit from the India-UAE DTAA. ADIA, a public institution of Abu Dhabi, claimed exemption under Article 24 of the India-UAE DTAA. The court noted that ADIA is a resident of UAE and entitled to invoke the DTAA for determining its tax liability in India. The court emphasized that the trust was a revocable trust, with ADIA being both the settlor and sole beneficiary, and thus, the income should be treated as accruing to ADIA and exempt under the DTAA. 2. Taxability of Income Arising from Investments Made by the Trust in Indian Portfolio Companies: The court scrutinized the AAR’s ruling that the income from investments made by the trust in Indian debt portfolios was taxable in India. The AAR had concluded that since the trust was registered in Jersey, with no treaty between India and Jersey, the income was taxable under Indian law. The court disagreed, highlighting that the trust's income should be taxed in the hands of ADIA due to the revocable nature of the trust, thereby making the income exempt under the India-UAE DTAA. 3. Interpretation of Sections 61, 63, 160, and 161 of the Income Tax Act, 1961 Concerning a Foreign Trust: The court analyzed the applicability of Sections 61 and 63, which deal with the taxability of income arising from revocable transfers. The court concluded that the provisions of these sections are not restricted to Indian trusts and can apply to foreign trusts as well. The court emphasized that Section 61 provides for taxing income arising from revocable transfers in the hands of the transferor, and Section 63 extends this to include any settlement or trust. The court also noted that Section 160(1)(iv) allows trustees to be assessed in a representative capacity, further supporting the applicability of these sections to the trust in question. 4. Validity of the Ruling by the Authority for Advance Ruling (AAR) Denying the Benefit of India-UAE DTAA to ADIA: The court found several flaws in the AAR’s ruling. The AAR had denied the benefit of the India-UAE DTAA based on the trust being registered in Jersey and the absence of a treaty between India and Jersey. The court rejected this reasoning, stating that the trust’s income should be taxed in the hands of ADIA under Section 61, making it exempt under the DTAA. The court also criticized the AAR for relying on a proposed amendment to the Finance Bill, 2020, which was introduced post-hearing and not put to ADIA for submissions. 5. Whether the Settlor Can Be the Sole Beneficiary of a Trust: The court addressed the AAR’s view that a settlor cannot be the sole beneficiary of a trust. The court disagreed, citing the case of Bhavana Nalinkant Nanavati, where the Gujarat High Court held that a settlor could be the sole beneficiary. The court emphasized that there is no provision in the Indian Trust Act or the Income Tax Act that prohibits the settlor from being the sole beneficiary. The court concluded that ADIA, as the settlor and sole beneficiary, was permissible and did not invalidate the trust. Conclusion: The court quashed the AAR’s ruling dated 18th March 2020, stating that the income accruing to the trust would not be chargeable to tax in India by virtue of the application of Section 61 read with Section 63 or Section 161 of the Income Tax Act, conjointly with Article 24 of the India-UAE DTAA. The court ordered that the steps taken in furtherance of the AAR’s ruling be set aside. The petitions were disposed of with no order as to costs.
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